<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 1-2275
THE SEAGRAM COMPANY LTD.
(Exact name of registrant as specified in its charter)
Canada None
- --------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
------------------
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 (the "Form 10-K") as set forth below and in the
pages attached hereto. The Form 10-K, as amended by this Form 10-K/A Amendment
No. 1, is referred to herein as the "Amended 10-K."
Cover Page.
The Cover Page of the Form 10-K is hereby amended to delete the
incorporation by reference of the registrant's Annual Report to Shareholders for
the fiscal year ended June 30, 1998 into Parts I and II of the Form 10-K.
Items 1 and 2. Business and Properties.
The fourth sentence of the first paragraph under Items 1 and 2 is hereby
amended to read as follows: "For information as to revenues, operating income
and identifiable assets by business segment, see Note 14 of Notes to
Consolidated Financial Statements included in Exhibit 99(a) to the Amended Form
10-K."
The first paragraph under "Spirits and Wine--Marketing and Distribution" is
hereby amended to delete the third, fourth, fifth, sixth and seventh sentences
thereof in their entirety and substitute therefor the following four sentences:
"The Corporation's revenues from the Asia-Pacific region, as a percentage of
total spirits and wine revenues, declined from 19% in the fiscal year ended June
30, 1997 to 12% in the fiscal year ended June 30, 1998. During the fiscal year
ended June 30, 1997, the Corporation's operations in Asia generated an operating
loss. See "Management's Discussion and Analysis" on pages 1 to 17 of Exhibit
99(a) to the Amended Form 10-K. (This geographic information, which is derived
from a geographic breakdown used by management to measure the performance of
marketing affiliates, includes unconsolidated companies in revenues and
operating income and assigns sales to the region in which the purchaser is
located and is before one-time charges. The geographic data contained in Note 14
of the Notes to the
<PAGE> 2
2
Consolidated Financial Statements for the fiscal year ended June 30, 1998
include the Company's other operations, and are based upon the location of
the legal entity which invoices the sale.)".
The seventh sentence of the first paragraph under "Spirits and
Wine--Marketing and Distribution" is hereby amended to read as follows: "See
Note 14 of the Notes to Consolidated Financial Statements included in Exhibit
99(a) to the Amended Form 10-K for information as to sales and other income,
operating income and total assets by geographic area."
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The first paragraph under Item 5 is hereby amended to read as follows:
"Information as to the number of holders of record of the Corporation's common
shares, the markets on which such common shares are traded, the quarterly high
and low prices for such common shares on Canadian and New York stock exchanges
and the quarterly dividends declared with respect thereto during the fiscal
years ended June 30, 1998 and June 30, 1997, the five-month transition period
ended June 30, 1996 and the fiscal year ended January 31, 1996 is incorporated
herein by reference to the Management's Discussion and Analysis section
captioned "Return to Shareholders" on pages 16 and 17 of Exhibit 99(a) to the
Amended Form 10-K."
Item 6. Selected Financial Data.
Item 6 is hereby amended to read as follows: "Selected financial data for
the fiscal years ended June 30, 1998 and June 30, 1997 and for the five-month
transition period ended June 30, 1996 and for each of the three fiscal years
ended January 31, 1996, 1995 and 1994 are incorporated herein by reference to
the Financial Summary on page 48 of Exhibit 99(a) to the Amended Form 10-K."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 7 is hereby amended to read as follows: "Management's discussion and
analysis of financial condition and results of operations is incorporated herein
by reference to pages 1 to 17 of Exhibit 99(a) to the Amended Form 10-K."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 7A is hereby amended to read as follows: "Quantitative and qualitative
disclosures about market risk are incorporated herein by reference to page 15 of
Exhibit 99(a) to the Amended Form 10-K."
Item 8. Financial Statements and Supplementary Data.
Item 8 is hereby amended to read as follows: "The Consolidated Financial
Statements, together with the report thereon of PricewaterhouseCoopers LLP dated
August 12, 1998, except as to Note 1, which is as of August 25, 1998, and the
supplementary quarterly data are incorporated herein by reference to pages 18 to
47 of Exhibit 99(a) to the Amended Form 10-K."
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Item 14 is hereby amended to delete Exhibit 13 (pages 26-65 of the Report
to Shareholders for the fiscal year ended June 30, 1998) as an Exhibit to the
Form 10-K and to add as Exhibit 99(a) the registrant's revised Consolidated
Financial Statements and revised Management's Discussion and Analysis. Exhibit
99(a) is filed as an Exhibit to this Form 10-K/A.
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3
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SEAGRAM COMPANY LTD.
By /s/ Neal B. Cravens
--------------------
Neal B. Cravens
Senior Vice President, Finance
Date: October 30, 1998
<PAGE> 4
4
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
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.
23 Consent of PricewaterhouseCoopers LLP, independent accountants
99(a) Revised Financial Statements and Revised Management's
Discussion & Analysis
<PAGE> 1
Exhibit 12(a)
The Seagram Company Ltd.
and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
(millions)
<TABLE>
<CAPTION>
Five-Month
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended Fiscal Years Ended January 31,
Description June 30, 1998 June 30, 1997 June 30,1996 1996 1995 1994
----------- ------------- ------------- ------------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations, before tax $1,611 $ 726 $ (6) 240 297 347
Add (deduct):
Equity in net earnings of 50%
owned affiliates 22 67 35 36 4 6
Dividends from less than 50% owned
affiliates 10 12 9 4 -- --
Fixed charges 424 392 181 420 432 374
Interest capitalized, net of amortization (2) (2) (4) (2) (1) --
------- ------- ------- ------- ------- --------
Earnings available for fixed charges $ 2,065 $ 1,195 $ 215 $ 698 $ 732 $ 727
======= ======= ======= ======= ======= ========
Fixed charges:
Interest expense $ 357 $ 326 $ 151 $ 378 $ 408 $ 351
Proportionate share of 50% owned
companies fixed charges 18 16 8 6 -- --
Portion of rent expense deemed to
represent interest factor 49 50 22 36 24 23
------- ------- ------- ------- ------- --------
Fixed charges $ 424 $ 392 $ 181 $ 420 $ 432 $ 374
======= ======= ======= ======= ======= ========
Ratio of earnings to fixed charges 4.87 3.05 1.19 1.66 1.69 1.94
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 12(b)
Joseph E. Seagram & Sons, Inc.
and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
(millions)
<TABLE>
<CAPTION>
Five-Month
Transition
Fiscal Fiscal Period Fiscal Years Ended January 31,
Year Ended Year Ended Ended ------------------------------
Description June 30, 1998 June 30, 1997 June 30, 1996 1996 1995 1994
----------- ------------- ------------- ------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations, before tax $ 18 $ 124 $( 37) $ 82 $ 172 $ 169
Add (deduct):
Fixed charges 182 172 70 165 183 165
Interest capitalized, net of amortization -- (1) -- -- (1) --
----- ----- ----- ----- ----- -----
Earnings available for fixed charges $ 200 $ 295 $ 33 $ 247 $ 354 $ 334
===== ===== ===== ===== ===== =====
Fixed charges:
Interest expense $ 170 $ 159 $ 65 $ 145 $ 163 $ 146
Portion of rent expense deemed to
represent interest factor 12 13 5 20 20 19
----- ----- ----- ----- ------- -----
Fixed charges $ 182 $ 172 $ 70 $ 165 $ 183 $ 165
===== ===== ===== ===== ===== =====
Ratio of earnings to fixed charges 1.10 1.72 - (a) 1.50 1.93 2.02
===== ===== ===== ===== ===== =====
</TABLE>
(a) Fixed charges exceeded earnings by $33 million for the Transition Period
ended June 30, 1996.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of The Seagram Company Ltd. Registration Statement on Form S-4
(Number 333-61535), Registration Statements on Form S-3 (Numbers 2-99681,
33-42959, 33-42877, 33-67772, 333-4134, 333-4136, and 333-62921) and the
Registration Statements on Form S-8 (Numbers 33-27194, 33-2943, 33-49096,
33-60606, 33-99122 and 333-19059) of our report dated August 12, 1998, except as
to Note 1, which is as of August 25, 1998, which appears on page 46 of Exhibit
99(a) to The Seagram Company Ltd.'s Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, as amended.
PricewaterhouseCoopers LLP
New York, New York
October 30, 1998
<PAGE> 1
EXHIBIT 99(a)
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company has entered into several significant transactions during the last
two years, which have realigned the Company's assets and have impacted or will
impact the comparability of its financial statements.
SALE OF TROPICANA: On August 25, 1998, the Company completed the sale of
Tropicana Products, Inc. and the Company's global juice business ("Tropicana")
for cash proceeds of approximately $3.3 billion. As a result of this
transaction, the Company's Consolidated Financial Statements and Management's
Discussion and Analysis report the results of Tropicana as discontinued
operations for all periods presented.
ACQUISITION OF POLYGRAM: On June 22, 1998, the Company announced that it had
signed definitive agreements with Koninklijke Philips Electronics N.V.
("Philips") and PolyGram N.V. ("PolyGram") to acquire PolyGram in a transaction
valued at approximately $10.4 billion. The agreements call for the Company to
pay $8.4 billion in cash and to issue a maximum of approximately 47.9 million
common shares (12 percent of outstanding common shares after the transaction).
The acquisition, which is subject to the receipt of certain regulatory
approvals, is expected to close during the second quarter of the Company's
fiscal year ending June 30, 1999.
PURCHASE OF USA NETWORKS AND COMBINATION WITH USA NETWORKS, INC.: On October 21,
1997, Universal Studios, Inc. ("Universal") acquired Viacom Inc.'s 50 percent
interest in USA Networks, including the Sci-Fi Channel, for $1.7 billion in
cash. On February 12, 1998, Universal sold its acquired 50 percent interest in
USA Networks to USA Networks, Inc. ("USAi"), formerly HSN, Inc., and contributed
its original 50 percent interest in USA Networks and the majority of its
television assets, including substantially all of its domestic operations and 50
percent of the international operations of USA Networks, to USAi for $1.3
billion in cash and a 45.8 percent equivalent equity interest in USAi. The
Company recognized a gross gain of $583 million on the transaction, before
taking into consideration the effect of the USAi transaction on its remaining
television assets. As a result of this transaction, which represented the
Company's exit from the domestic television production and distribution
business, certain remaining televisions assets were impaired and various related
contractual obligations became adverse purchase commitments. The fair value of
these items was determined based on expected future cash flows. The impairment
losses and adverse purchase commitments arising from the USAi transaction
aggregated $223 million and are reflected in the net gain of $360 million ($222
million after-tax).
SALE OF TIME WARNER SHARES: On February 5, 1998, the Company sold 15 million
shares of Time Warner Inc. ("Time Warner") for pretax proceeds of $958 million.
On May 27, 1998, the Company sold its remaining 11.8 million shares of Time
Warner common stock for pretax proceeds of $905 million. The aggregate after-tax
gain on the sale of the shares in 1998 was $602 million and after-tax net
proceeds were $1.5 billion. On May 28, 1997, the Company sold 30 million shares
of Time Warner common stock for pretax proceeds of $1.39 billion. The Company
had an after-tax gain of $100 million and after-tax net proceeds of $1.33
billion on the 1997 transaction.
SALE OF PUTNAM BERKLEY: On December 16, 1996, the Company completed the sale of
The Putnam Berkley Group, Inc. ("Putnam"), the book publishing division of
Universal, for $330 million in cash. The Company had a $64 million pretax gain
on the sale but no after-tax gain due to the write-off of goodwill allocated to
Putnam, which has no associated tax benefit.
SALE OF THE 156 MILLION DUPONT EQUITY WARRANTS: On July 24, 1996, the Company
sold its 156 million equity warrants of E.I. du Pont de Nemours and Company
("DuPont") to DuPont for $500 million in cash. The Company had an after-tax gain
of $39 million and after-tax net proceeds of $479 million.
Effective June 30, 1996, the Company changed its fiscal year-end from January 31
to June 30. The financial results for the twelve months ended June 30, 1997
represent the first full fiscal year on the new basis. The financial results for
the period from February 1, 1996 to June 30, 1996 (the "Transition Period") are
also included in this Report. Results for the Transition Period are not
necessarily indicative of operations for a full year.
1
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For each period presented, there is an analysis of total Company and business
segment results prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") which includes reported revenues and operating income. The
discussion also includes reported revenues and operating income for the three
lines of business within the entertainment segment -- filmed entertainment,
music and recreation and other.
The discussion will also include as supplemental information attributed revenues
and attributed earnings before interest, taxes, depreciation and amortization
("EBITDA"). These amounts include the Company's proportionate share of the
revenues and EBITDA, respectively, of its unconsolidated companies. Attributed
revenues and EBITDA are non-GAAP financial metrics utilized by management and
are intended solely to provide additional information to investors. The
adjustment for unconsolidated companies eliminates the proportionate share of
the revenues or EBITDA of the unconsolidated companies to reconcile to reported
revenues or operating income.
The Company believes attributed revenues and EBITDA provide additional
information for understanding the underlying business results. The Company also
believes EBITDA is an appropriate measure of the Company's operating
performance, given the goodwill associated with the Company's acquisitions.
However, attributed revenues and EBITDA should be considered in addition to, not
as a substitute for, reported revenues, operating income, net income, cash flows
and other measures of financial performance in accordance with generally
accepted accounting principles.
The following detailed analysis of operations should be read in conjunction with
the Consolidated Financial Statements of the Company included herein.
2
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EARNINGS SUMMARY
<TABLE>
<CAPTION>
FIVE MONTHS
U.S. DOLLARS IN MILLIONS TWELVE MONTHS ENDED JUNE 30, ENDED JUNE 30,
EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1996 1995
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REPORTED REVENUES $ 9,474 $ 10,354 $ 9,915 $ 4,112 $ 1,989
OPERATING INCOME
Spirits and Wine 464 663 324 176 200
Entertainment 209 194 100 (28) 27
Corporate (120) (138) (125) (55) (19)
-------- -------- -------- -------- --------
OPERATING INCOME 553 719 299 93 208
Interest, net and other 228 147 238 99 56
Gain on sale of Time Warner shares 926 154 -- -- --
Gain on USAi transaction 360 -- -- -- --
Provision (benefit) for income taxes 638 331 35 (33) 54
Minority interest charge (credit) 48 12 14 (5) 3
Equity in (Losses)/Earnings of
Unconsolidated Companies (45) 62 88 35 12
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS $ 880 $ 445 $ 100 $ 67 $ 107
Income from discontinued Tropicana
operations, after tax 66 57 42 18 10
Discontinued DuPont activities -- -- -- -- 3,232
-------- -------- -------- -------- --------
NET INCOME $ 946 $ 502 $ 142 $ 85 $ 3,349
======== ======== ======== ======== ========
EARNINGS PER SHARE-BASIC
Income from continuing operations $ 2.51 $ 1.20 $ .26 $ .18 $ .29
Discontinued Tropicana operations, after
tax .19 .16 .11 .05 .03
Discontinued DuPont activities, after
tax -- -- -- -- 8.67
-------- -------- -------- -------- --------
NET INCOME $ 2.70 $ 1.36 $ .37 $ .23 $ 8.99
======== ======== ======== ======== ========
EARNINGS PER SHARE-DILUTED
Income from continuing operations $ 2.49 $ 1.20 $ .26 $ .18 $ .29
Discontinued Tropicana operations, after
tax .19 .15 .11 .05 .03
Discontinued DuPont activities, after
tax -- -- -- -- 8.60
-------- -------- -------- -------- --------
NET INCOME $ 2.68 $ 1.35 $ .37 $ .23 $ 8.92
======== ======== ======== ======== ========
Net Cash (used for) provided by
operating activities $ (241) $ 664 $ 676 $ 315 $ (201)
Net Cash provided by (used for)
investing activities $ 699 $ 1,708 (811) $ (591) $ 2,127
Net Cash provided by (used for)
financing activities $ 159 $ (2,175) $ 240 $ 449 $ (1,531)
SUPPLEMENTAL INFORMATION:
Attributed Revenues $ 11,196 $ 11,763 $ 11,294 $ 4,779 $ 2,270
EBITDA 1,302 1,413 1,022 440 331
</TABLE>
- ------------------
Note: The Company's reported financial results for the five-month periods ended
June 30, 1996 and 1995 include six months of Universal (from January 1,
1996 to June 30, 1996) and one month of Universal (from the acquisition
date of June 5, 1995 to June 30, 1995), respectively.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1998 VS. FISCAL YEAR ENDED JUNE 30, 1997 The
Company's results in 1998 were 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 of $9.5 billion declined from $10.4 billion last
year. Excluding the unfavorable impact of foreign exchange and the contribution
of Putnam from last year, reported revenues declined five percent year-on-year.
Operating income was $553 million, after the charge for Asia, substantially
below the prior year which included a $64 million pretax gain on the sale of
Putnam. Excluding the charge for Asia this year and the contribution from Putnam
last year, operating income declined three percent year-on-year reflecting the
decline in spirits and wine operations and higher depreciation and amortization
expense. Spirits and wine operating income declined 21 percent, before the
charge for Asia. Entertainment operating income was almost double last year,
excluding the contribution of Putnam. Entertainment operating income for the
fiscal year ended June 30, 1998 includes $94 million of income from USA Networks
for the period from October 21, 1997 to February 12, 1998 when the Company owned
100
3
<PAGE> 4
percent of USA Networks. The incremental depreciation and amortization
principally results from higher goodwill amortization from October to February
related to the acquisition of the remaining 50 percent of USA Networks.
Corporate expenses decreased from $138 million to $120 million largely due to
reduced expenses associated with the Company's ongoing reengineering programs.
Attributed revenues of $11.2 billion declined from $11.8 billion last year.
Excluding the unfavorable impact of foreign exchange and the contribution of
Putnam from last year, attributed revenues declined two percent year-on-year.
EBITDA was $1.3 billion compared with $1.4 billion last year. Excluding the
charge for Asia this year and the contribution of Putnam last year, EBITDA
decreased two percent. Spirits and wine EBITDA declined 20 percent, before the
charge for Asia. Entertainment EBITDA was 24 percent above last year, excluding
the contribution of Putnam.
During the fiscal year ended June 30, 1998, the Company recognized pre-tax gains
on the USAi transaction ($360 million) and the sale of the remaining Time Warner
shares ($926 million). During the fiscal year ended June 30, 1997, the Company
had a pretax gain of $154 million on the sale of Time Warner shares.
In the fiscal year ended June 30, 1998, interest, net and other included net
interest expense of $255 million which was partially offset by $27 million of
dividend income from Time Warner and DuPont. In the fiscal year ended June 30,
1997, net interest expense of $247 million was offset by the pretax gain on the
sale of the DuPont warrants ($60 million) and $40 million of dividend income
from Time Warner and DuPont. The net interest expense increase largely reflects
a higher average debt balance, which is due to the funding of the Company's
purchase of the incremental 50 percent interest in USA Networks on October 21,
1997 and share repurchases pursuant to the Company's ongoing share repurchase
program, partially offset by the repayment of debt with the proceeds from the
USAi transaction and the sales of the Time Warner shares.
The underlying effective income tax rate for continuing operations (excluding
one-time items) for the fiscal year ended June 30, 1998 was 48 percent compared
with 43 percent in the prior fiscal year. The increase in the effective tax rate
results from reduced earnings in relatively low tax jurisdictions in Asia. The
income tax provision in fiscal 1998 also includes $138 million of taxes on the
gain on the USAi transaction, $324 million of taxes on the gain on the sale of
the remaining Time Warner shares and a $10 million benefit on the charge for
spirits and wine operations in Asia. The income tax provision in fiscal 1997
also included $21 million of taxes on the gain on the sale of the DuPont
warrants, $64 million of taxes on the gain on the sale of Putnam and $54 million
of taxes on the gain on the sale of Time Warner shares. The effective income tax
rate, including the one-time items, was 40 percent in fiscal 1998 compared with
46 percent in the prior year.
The minority interest charge in fiscal year 1998 includes $35 million associated
with the gain on the USAi transaction.
The equity in (losses)/earnings of unconsolidated companies declined from
earnings of $62 million to a loss of $45 million primarily due to the impact of
the USA Networks transactions, lower contributions from Cineplex/Odeon and our
spirits and wine joint venture affiliates in Asia and higher amortization
related to certain equity investments.
Income from continuing operations was $880 million or $2.51 per basic share and
$2.49 per share on a diluted basis in the fiscal year ended June 30, 1998,
compared with $445 million or $1.20 per share (basic and diluted) in the prior
fiscal year. Excluding the gain on the USAi transaction (after taxes and
minority interest), the after-tax gain on the sales of Time Warner shares, and
the after-tax charge for spirits and wine operations in Asia, income from
continuing operations in fiscal year 1998 was $141 million or $0.40 per share
(basic and diluted). In the fiscal year ended June 30, 1997, excluding the
after-tax gains on the sales of the DuPont warrants and Time Warner shares,
income from continuing operations was $306 million or $0.82 per share (basic and
diluted).
Income from discontinued Tropicana operations, after tax, was $66 million or
$0.19 per share (basic and diluted) in the fiscal year ended June 30, 1998,
compared with $57 million or $0.16 per basic share and $0.15 per share on a
diluted basis in the prior fiscal year. Reported revenues from discontinued
operations were $2.0 billion in the fiscal
4
<PAGE> 5
year ended June 30, 1998 and $1.9 billion in the prior fiscal year. Operating
income was $169 million in the fiscal year ended June 30, 1998 and $152 million
in the prior fiscal year. Results of discontinued operations include allocations
of consolidated interest expense totaling $39 million and $41 million in the
fiscal years ended June 30, 1998 and 1997, respectively. The allocations were
based on the ratio of net assets of discontinued operations to consolidated net
assets.
Net income including discontinued operations was $946 million or $2.70 per basic
share and $2.68 per diluted share in the fiscal year ended June 30, 1998,
compared with $502 million or $1.36 per basic share and $1.35 per diluted share
in the prior fiscal year.
SPIRITS AND WINE
<TABLE>
<CAPTION>
FIVE MONTHS
TWELVE MONTHS ENDED JUNE 30, ENDED JUNE 30,
U.S. DOLLARS IN MILLIONS 1998 1997 1996 1996 1995
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REPORTED REVENUES* $ 4,525 $ 4,870 $ 4,905 $ 1,805 $ 1,697
------- ------- ------- ------- -------
Operating Income before charges $ 524 $ 663 $ 598 $ 176 $ 200
Charge for Asia (60) -- -- -- --
Reengineering charge -- -- (274) -- --
------- ------- ------- ------- -------
OPERATING INCOME $ 464 $ 663 $ 324 $ 176 $ 200
------- ------- ------- ------- -------
Equity in earnings of unconsolidated
companies $ 1 $ 14 $ 14 $ 6 $ 7
SUPPLEMENTAL INFORMATION:
Attributed Revenues $ 4,757 5,249 $ 5,343 $ 2,007 $ 1,904
Adjustment for unconsolidated
companies (232) (379) (438) (202) (207)
------- ------- ------- ------- -------
Reported Revenues $ 4,525 $ 4,870 $ 4,905 $ 1,805 $ 1,697
EBITDA $ 590 $ 810 $ 472 $ 244 $ 265
Adjustment for unconsolidated
companies (7) (24) (24) (11) (10)
Depreciation and amortization (119) (123) (124) (57) (55)
------- ------- ------- ------- -------
Operating Income $ 464 $ 663 $ 324 $ 176 $ 200
</TABLE>
- ------------------
*Reported revenues include excise taxes of $754 million, $793 million, and $766
million in the twelve months ended June 30, 1998, 1997 and 1996, respectively
and $288 million and $311 million in the five month periods ended June 30, 1996
and 1995, respectively.
SPIRITS AND WINE
As a result of the sale of Tropicana, the results of The Seagram Beverage
Company, which were formerly included in the results of the Tropicana Beverage
Group, are now reported in the spirits and wine segment for all periods
presented. The Seagram Beverage Company produces and markets coolers, beers and
mixers in the United States. The results of The Seagram Beverage Company are not
material to the total spirits and wine segment.
Spirits and wine revenues were adversely affected by difficult market conditions
in Asia Pacific and the impact of unfavorable foreign exchange. Reported
revenues declined seven percent to $4.5 billion. Excluding the impact of
unfavorable foreign exchange, reported revenues would have declined four percent
versus last year. Operating income declined 30 percent to $464 million after the
$60 million charge for Asia. Excluding the impact of unfavorable foreign
exchange and the charge for Asia, operating income would have decreased 10
percent. Operating income, before the charge, as a percent of reported revenues
declined from 13.6 percent to 11.6 percent reflecting the shortfall in the Asian
market where predominantly higher margin products are sold.
In fiscal year 1998 cost of goods sold, before the charge, as a percent of
reported revenues was unchanged at 52.7 percent. Selling, general and
administrative expenses, before the charge, as a percent of reported revenues
increased to 35.7 percent from 33.7 percent as reductions in overhead and brand
spending did not fully compensate for the rapid revenue decline in Asia. Total
brand spending declined 12 percent, or approximately three percent at constant
5
<PAGE> 6
exchange rates, primarily due to the volume shortfall. However brand equity
spending rose four percent as the Company continued to invest for future growth
by supporting its brands in key markets. The brand equity growth reflects an
increased emphasis on the consumer and is focused behind core strategic brands
in North America, particularly Crown Royal Canadian Whisky and ABSOLUT Vodka,
and in Europe.
Spirits and wine case volumes (including volumes from our unconsolidated
companies in Asia) decreased one percent in fiscal year 1998 as the performance
of the Company's global brands was mixed. Volumes in North America were strong,
in particular for Crown Royal Canadian Whisky, for which shipments grew seven
percent, and Captain Morgan Rum, for which volumes increased 22 percent. ABSOLUT
VODKA, which the Company distributes in major international markets, had a four
percent increase in shipments. Shipments of several global brands declined due
to the market conditions in Asia, including Chivas Regal Scotch Whisky, Martell
Cognac and Royal Salute Scotch Whisky.
The equity in earnings of unconsolidated companies declined from $14 million to
$1 million due to the impact of the situation in Asia on our joint ventures in
Korea and Thailand.
Attributed revenues were nine percent weaker than last year at $4.8 billion.
EBITDA decreased 27 percent to $590 million or 20 percent, before the charge for
Asia, to $650 million. The $160 million EBITDA decrease, before the charge, is
due to lower revenues and margins in Asia and the impact of unfavorable foreign
exchange. Excluding the impact of unfavorable foreign exchange, attributed
revenues would have declined five percent and EBITDA would have decreased 10
percent versus last year. The decline in revenues in Asia is due to lower
shipments in order to deliberately reduce distributor inventories, particularly
in Greater China, and diminished consumer demand. Margins in Asia deteriorated
as demand has shifted away from imported products to less expensive locally
produced spirits. EBITDA for the Americas increased nine percent, driven by
North America which had higher revenues and margin increases due to improved mix
and sustained price increases. EBITDA in Latin America was essentially even with
last year. EBITDA for Europe & Africa declined one percent, but would have
increased seven percent excluding the impact of unfavorable foreign exchange.
Key growth markets in Europe included the U.K. and Spain.
In the fiscal year ended June 30, 1998, revenues and operating income generated
in North America accounted for 43 percent and 65 percent of total revenues and
operating income, respectively. Europe & Africa accounts for 34 percent of
spirits and wine revenues and 26 percent of operating income. Reflecting the
difficult market conditions this year, Asia Pacific's contribution declined to
12 percent of the total revenues and it had an operating loss. Latin America
accounts for the remaining 11 percent of both revenues and operating income.
(This geographic breakdown, which is used by management to measure the
performance of marketing affiliates, includes unconsolidated companies, assigns
sales to the region in which the purchaser is located and is before one-time
charges. The geographic data contained in Note 14 of the Notes to the
Consolidated Financial Statements for the fiscal year ended June 30, 1998
include the Company's other operations, and are based upon the location of the
legal entity which invoices the sale.)
As a result of the economic and currency crises in Asia, the Company recorded a
$60 million charge related to its operations in Asia in the second quarter of
the fiscal year ended June 30, 1998. The charge was comprised of approximately
$30 million for increased bad debt reserves, $15 million for severance and
related costs, and the remainder for other asset write-downs. After giving
effect to this charge, operating income was $464 million compared with $663
million in the prior fiscal year and EBITDA was $590 million compared with $810
million in the prior fiscal year. While the situation in Asia continues to be
difficult, the Company does not presently anticipate any further material change
in its spirits and wine results in fiscal year 1999 (as compared with fiscal
year 1998) due to the Asian currency and economic situation.
Depreciation and amortization of assets was $96 million in fiscal year 1998 and
$101 million in fiscal year 1997. Amortization of goodwill was $23 million and
$22 million in the fiscal years 1998 and 1997, respectively. Spirits and wine
capital expenditures were $170 million and $187 million in fiscal years 1998 and
1997, respectively. Total assets were $5,015 million at June 30, 1998.
6
<PAGE> 7
ENTERTAINMENT
<TABLE>
<CAPTION>
SIX MONTHS
FIVE MONTHS ENDED
TWELVE MONTHS ENDED JUNE 30, ENDED JUNE 30, JUNE 30,
U.S. DOLLARS IN MILLIONS 1998 1997 1996 1996 1995 1995
- ------------------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REPORTED REVENUES
Filmed Entertainment $ 2,793 $ 3,168 $ 2,982 $ 1,400 $ 140
Music 1,461 1,427 1,172 527 82
Recreation and Other 695 825 856 380 70
------- ------- ------- ------- -------
Subtotal $ 4,949 $ 5,420 $ 5,010 $ 2,307 $ 292
Gain on sale of Putnam -- 64 -- -- --
------- ------- ------- ------- -------
REPORTED REVENUES 4,949 $ 5,484 $ 5,010 $ 2,307 $ 292
------- ------- ------- ------- -------
Operating Income (loss)
Filmed Entertainment $ 229 $ 157 $ 181 $ 79 $ 20
Music (44) (58) (103) (87) 1
Recreation and Other 24 31 22 (20) 6
------- ------- ------- ------- -------
Subtotal 209 130 100 (28) 27
Gain on sale of Putnam -- 64 -- --
------- ------- ------- ------- -------
OPERATING INCOME $ 209 $ 194 $ 100 $ (28) $ 27
------- ------- ------- ------- -------
Equity in (Losses)/Earnings
of Unconsolidated Companies $ (46) $ 48 $ 74 $ 29 $ 5
SUPPLEMENTAL INFORMATION:
Attributed Revenues
Filmed Entertainment $ 3,926 $ 3,917 $ 3,671 $ 1,740 $ 193 $ 1,556
Music 1,529 1,500 1,205 537 85 589
Recreation and Other 984 1,097 1,075 495 88 448
------- ------- ------- ------- ------- -------
ATTRIBUTED REVENUES $ 6,439 $ 6,514 $ 5,951 $ 2,772 $ 366 $ 2,593
Gain on sale of Putnam -- 64 -- -- --
Adjustment for unconsolidated
companies (1,490) (1,094) (941) (465) (74)
------- ------- ------- ------- -------
REPORTED REVENUES $ 4,949 $ 5,484 $ 5,010 $ 2,307 $ 292
EBITDA
Filmed Entertainment $ 463 $ 373 $ 379 $ 176 $ 37 $ 89
Music 90 72 24 (24) 11 75
Recreation and Other 159 158 147 44 18 75
------- ------- ------- ------- ------- -------
EBITDA 712 603 550 196 66 $ 239
Gain on sale of Putnam -- 64 -- -- --
Adjustment for unconsolidated
companies (213) (207) (206) (99) (19)
Depreciation and amortization (290) (266) (244) (125) (20)
------- ------- ------- ------- -------
OPERATING INCOME $ 209 $ 194 $ 100 $ (28) $ 27
</TABLE>
- ------------------
Note: The Company's reported financial results for the five-month periods ended
June 30, 1996 and 1995 include six months of Universal (from January 1, 1996 to
June 30, 1996) and one month of Universal (from the acquisition date of June 5,
1995 to June 30, 1995), respectively. Universal's results for the six months
ended June 30, 1995 are provided for comparative purposes.
ENTERTAINMENT
In the fiscal year ended June 30, 1998, Universal contributed $4.9 billion to
reported revenues, 10 percent less than the $5.5 billion contributed in the
prior fiscal year. Operating income increased to $209 million compared with $194
million in fiscal year 1997, which included the $64 million gain on the sale of
Putnam. Excluding the operating contribution of Putnam and the gain on the sale
in the prior fiscal year, reported revenues decreased six percent, while
operating income almost doubled. Operating income for the fiscal year ended June
30, 1998 includes $94 million of income from USA Networks for the period from
October 21, 1997 to February 12, 1998 when the Company owned
7
<PAGE> 8
100 percent of USA Networks. (Income for the period in fiscal years 1998 and
1997 when the Company owned 50 percent of USA Networks and for the period in
fiscal year 1998 when the Company owned a 45.8 percent equivalent share of USAi
is included in the equity earnings from unconsolidated companies below operating
income.) Excluding the contribution of Putnam, operating income as a percent of
reported revenues increased from 2.0 percent to 4.2 percent. Total costs, which
consist primarily of production and manufacturing costs, distribution and
selling expenses, artists' costs and participations, labor and amortization, as
a percent of reported revenues declined from 98.0 percent to 95.8 percent in
fiscal year 1998.
The equity in (losses)/earnings of unconsolidated companies declined from
earnings of $48 million to a loss of $46 million primarily due to the impact of
the USA Networks transactions, a lower contribution from Cineplex/Odeon and
higher amortization related to certain equity investments.
Filmed Entertainment In fiscal year 1998, reported revenues decreased 12
percent. The motion picture group revenues, which accounted for approximately
two-thirds of the $2.8 billion of reported revenues, declined substantially due
to the disappointing box office performance of releases in fiscal year 1998,
including A Simple Wish, Primary Colors and Mercury Rising.
Operating income increased to $229 million which included $94 million of income
from USA Networks for the period when the Company owned 100 percent of USA
Networks. Operating income as a percent of reported revenues increased from 5.0
percent to 8.2 percent. Total costs, which consist primarily of production and
manufacturing costs, distribution and selling expenses, participation costs and
amortization, as a percent of reported revenues declined from 95.0 percent to
91.8 percent. The increase in operating income as a percent of reported revenues
and the decrease in total costs as a percent of reported revenues reflects
higher film library sales at improved margins and a one-time charge associated
with the termination of The Bubble Factory production deal in the prior year.
In fiscal year 1998, attributed revenues were essentially even with the prior
year. As a result of the USA Networks and USAi transactions, fiscal year 1998
attributed revenues and EBITDA include 50 percent of USA Networks from July 1,
1997 to October 21, 1997, 100 percent of USA Networks from October 22, 1997 to
February 11, 1998 and the Company's 45.8 percent equivalent share of the
earnings of USAi thereafter. Attributed revenues were even with the prior
period, in spite of the decline in reported revenues, because of higher
attributed revenues related to the Company's investment in USAi this year versus
USA Networks last year. EBITDA increased 24 percent to $463 million. EBITDA
benefited from the USA Networks and USAi transactions as well as the strong
performance of the USA cable networks, which had higher advertising and
affiliate revenues. The television group performance improved due to the
transfer of domestic television production and distribution to USAi, which
resulted in lower expenses and deficits for Universal. Motion picture group
operating results declined due to the box office performance of current
releases, which more than offset higher library sales and profitability.
Music In fiscal year 1998, reported revenues increased two percent. Major albums
in release in 1998 included those by Chumbawamba, K-Ci & JoJo, Trisha Yearwood
and Smashmouth. In addition, the Company benefited from its significant
investment internationally with the success of Aqua, a group from Denmark whose
album Aquarium sold 8.9 million units in the 1998 fiscal year. The Company has
also developed local artists including Rosana in Spain, Claudinho and Buchecha
in Brazil and Molotov in Mexico.
The operating loss for music declined from $58 million to $44 million. Total
costs, which consist primarily of manufacturing, distribution and selling
expenses, artists' costs and amortization, as a percent of reported revenues
decreased due to a better mix of releases on wholly owned labels. Attributed
revenues increased two percent and EBITDA increased 25 percent to $90 million.
Recreation and Other Reported revenues for recreation and other declined 16
percent. Operating income declined to $24 million. The comparison is impacted by
the sale of Putnam during fiscal year 1997. Excluding the contribution of Putnam
from the prior fiscal year, reported revenues increased three percent, and
operating income increased from $9 million to $24 million. Excluding the
contribution of Putnam from the prior fiscal year, total costs, which consist
8
<PAGE> 9
primarily of labor, selling expenses, costs of merchandise and amortization and
depreciation, as a percent of reported revenues decreased from 98.7 percent to
96.5 percent. The operating income increase is attributable to improved
performance at Spencer Gifts, which benefited from new store openings and a
slight increase in comparable store sales, and the Universal Studios new media
group, which had strong video game sales, principally Crash Bandicoot 2.
Attributed revenues declined 10 percent but, excluding the contribution of
Putnam from the prior fiscal year, rose four percent. EBITDA was essentially
even at $159 million but increased 21 percent excluding the contribution of
Putnam from the prior fiscal year. The EBITDA growth is primarily due to
stronger results at Universal Studios Florida and improved contribution from new
media ventures reflecting the success of the Crash Bandicoot 2 video game. At
Universal Studios Florida, a 50 percent-owned joint venture, per capita spending
rose three percent, largely due to an increase in the price of admission. Paid
attendance declined two percent. However, total turnstile attendance rose nine
percent, driven by a promotion for second-day-free admission. The promotion
resulted in higher revenues and margins at the theme park. EBITDA at Universal
Studios Hollywood was lower as a 13 percent decline in paid attendance more than
offset a three percent increase in per capita spending. The attendance shortfall
was caused by the impact of El Nino, as well as difficult comparisons with the
prior year which benefited from the opening of Jurassic Park-The Ride in June
1996.
ENTERTAINMENT CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
TWELVE MONTHS ENDED JUNE 30, JUNE 30,
U.S. DOLLARS IN MILLIONS 1998 1997 1996 1996
- ------------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Filmed Entertainment $ 94 $ 44 $ 52 $ 33
Music 31 47 37 24
Recreation and Other 115 115 180 79
---- ---- ---- ----
$240 $206 $269 $136
</TABLE>
- ------------------
Note: Capital expenditures for the five-month period ended June 30, 1996 include
six months of Universal (from January 1, 1996 to June 30, 1996).
FISCAL YEAR ENDED JUNE 30, 1997 VS. COMPARABLE PERIOD ENDED JUNE 30, 1996
Reported revenues of $10.4 billion increased from $9.9 billion in the prior
period. Excluding the contribution of Putnam which was sold in December 1996,
reported revenues increased five percent year-on-year.
Operating income, including a $64 million pretax gain on the sale of Putnam, was
$719 million, up substantially from the prior year which included the $274
million pretax reengineering charge for spirits and wine operations. Excluding
the contribution of Putnam from both years and the reengineering charge last
year, operating income rose 16 percent year-on-year reflecting the growth in
operations which was partially offset by higher depreciation and amortization
and higher corporate expenses. Spirits and wine operating income, excluding the
reengineering charge in the prior period, was 11 percent higher and
entertainment operating income, excluding the contribution of Putnam, was 48
percent above the prior year. The incremental depreciation and amortization
principally resulted from higher goodwill amortization related to the Interscope
Records and Multimedia Entertainment acquisitions. The increase in corporate
expenses to $138 million is largely due to the increase in the market value of
the Company's shares during the fiscal year ended June 30, 1997 which resulted
in the recognition of additional expenses, as the expense associated with
certain stock-based compensation is marked-to-market each period. During fiscal
year 1997 the stock price rose from $33.625 at June 30, 1996 to $40.25 at June
30 1997, while in the comparable period, the stock price declined slightly from
$34.625 at June 30, 1995 to $33.625 at June 30, 1996.
Attributed revenues of $11.8 billion increased from $11.3 billion in the prior
period. Excluding the contribution of Putnam, attributed revenues increased five
percent year-on-year. EBITDA was $1.4 billion compared with $1.0 billion in the
prior period. Excluding the contribution of Putnam and the $274 million pretax
reengineering charge
9
<PAGE> 10
for spirits and wine operations in the prior period, EBITDA increased 10
percent. Spirits and wine EBITDA, excluding the reengineering charge in the
prior period, was nine percent higher. Entertainment EBITDA was 13 percent above
the prior period, excluding the contribution of Putnam.
During the fiscal year ended June 30, 1997 the Company recognized a pretax gain
on the sale of Time Warner shares of $154 million. Interest, net and other in
the fiscal year ended June 30, 1997 was net of the pretax gain on the sale of
the DuPont warrants ($60 million). Net interest expense of $247 million was also
partially offset by $40 million of dividend income from Time Warner and DuPont.
In the twelve months ended June 30, 1996, net interest expense of $277 million
was partially offset by $39 million of dividend income.
The underlying effective income tax rate for continuing operations (excluding
one-time items) for the fiscal year ended June 30, 1997 was 43 percent compared
with 52 percent in the comparable prior period. The income tax provision in
fiscal 1997 also included $21 million of taxes on the gain on the sale of the
DuPont warrants, $64 million of taxes on the gain on the sale of Putnam and $54
million of taxes on the gain on the sale of Time Warner shares. In the
comparable prior period, the income tax provision included a $73 million benefit
on the reengineering charge and a $67 million benefit related to a settlement
with the U.S. government regarding the recognition of a capital loss on the
Company's 1981 exchange of shares of Conoco Inc. for common stock of DuPont.
Upon disallowance of the loss by the U.S. Tax Court in the fiscal year ended
January 31, 1995, the Company had increased its income tax provision
accordingly. Subsequently, in June 1996, the Company and the I.R.S. reached a
settlement whereby a portion of the original loss was allowed. The $67 million
tax benefit recorded in the period ended June 30, 1996 reflects that settlement.
The equity in earnings of unconsolidated companies declined from $88 million to
$62 million.
Income from continuing operations was $445 million or $1.20 per share (basic and
diluted) in the fiscal year ended June 30, 1997, compared with $100 million or
$0.26 per share (basic and diluted) in the comparable prior period. Excluding
the after-tax gains on the sales of the DuPont warrants and Time Warner shares,
income from continuing operations in fiscal year 1997 was $306 million or $0.82
per share (basic and diluted). In the comparable prior period, excluding the
reengineering charge and the benefit associated with the tax settlement, income
from continuing operations was $234 million or $0.63 per basic share and $0.61
on a diluted basis.
Income from discontinued Tropicana operations, after tax, was $57 million or
$0.16 per basic share and $0.15 per diluted share in the fiscal year ended June
30, 1997, compared with $42 million or $0.11 per share (basic and diluted) in
the comparable prior period. Reported revenues from discontinued operations were
$1.9 billion in the fiscal year ended June 30, 1997 and $1.8 billion in the
comparable prior period. Operating income was $152 million in the fiscal year
ended June 30, 1997 and $120 million in the comparable prior period. Results of
discontinued operations include allocations of consolidated interest expense
totaling $41 million and $38 million in the twelve months ended June 30, 1997
and 1996, respectively. The allocations were based on the ratio of net assets of
discontinued operations to consolidated net assets.
Net income including discontinued operations was $502 million or $1.36 per basic
share and $1.35 per diluted share in the fiscal year ended June 30, 1997,
compared with $142 million or $0.37 per share (basic and diluted) in the
comparable prior period.
SPIRITS AND WINE
Reported revenues declined one percent to $4.87 billion. Excluding the impact of
unfavorable foreign exchange, revenues would have been essentially even with the
comparable prior period. Spirits and wine case volumes (including volumes from
our unconsolidated companies in Asia) decreased two percent in fiscal year 1997
as the performance of the Company's global brands was mixed. Operating income of
$663 million was substantially higher than the prior period of $324 million,
which included the $274 million reengineering charge. Excluding this charge from
the prior year, operating income increased 11 percent. The foreign exchange
impact on operating income was negligible. Operating income as a percent of
reported revenues increased to 13.6 percent from 12.0 percent in the
10
<PAGE> 11
prior period excluding the reengineering charge. In fiscal year 1997 cost of
goods sold as a percent of reported revenues declined to 52.7 percent from 55.5
percent in the prior year excluding the reengineering charge. Selling, general
and administrative expenses as a percent of reported revenues increased to 33.7
percent from 32.5 percent in the prior year excluding the reengineering charge.
The operating results were driven largely by strong North American performance
and reflected benefits from reengineering and other cost saving initiatives.
The equity in earnings of unconsolidated companies were $14 million in each
period.
Attributed revenues were two percent weaker than the comparable prior period at
$5.2 billion. EBITDA increased nine percent to $810 million from $746 million
before the reengineering charge. The $64 million EBITDA increase, before the
reengineering charge in the prior period, reflected significant growth in the
Americas and was driven by strong volumes in North America and improvement in
key Latin American markets. EBITDA for Europe & Africa declined seven percent
primarily due to the difficult conditions in the German and Italian markets. In
Asia Pacific, EBITDA declined five percent.
In connection with a program to better position its spirits and wine operations
to achieve its strategic growth objectives, the Company recorded a pretax charge
of $274 million in the three months ended December 31, 1995. The charge related
to the Company's global spirits and wine manufacturing, financial, marketing and
distribution systems and includes rationalization of facilities in the U.S. and
Europe and other costs related to the redesign of processes associated with the
fulfillment of customer orders and the organizational structure under which the
spirits and wine business operates. The components of the $274 million charge
reflected approximately a $100 million provision for severance costs, $104
million for asset writedowns/impairments and $70 million for facility
rationalization, including lease terminations, and other reengineering programs.
Substantially all of the actions and cash outlays associated with the charge
were completed by June 30, 1997 and were in accordance with the original plans
contemplated by the Company.
ENTERTAINMENT
In the fiscal year ended June 30, 1997, Universal contributed $5.5 billion to
reported revenues, up nine percent from the $5.0 billion contributed in the
comparable prior period. Operating income, including the $64 million gain on the
sale of Putnam, almost doubled to $194 million in fiscal year 1997. Excluding
the operating contribution of Putnam and the gain on the sale, reported revenues
and operating income increased 12 percent and 48 percent, respectively. The
revenue and income growth largely resulted from an improved music contribution.
The equity in earnings of unconsolidated companies declined from $74 million to
$48 million due to the impact of the Brillstein-Grey investment and start-up
losses associated with Interplay and Sega GameWorks.
Filmed Entertainment In fiscal year 1997, reported revenues increased six
percent. Operating income decreased 13 percent to $157 million. Operating income
as a percent of reported revenues declined from 6.1 percent to 5.0 percent.
Total costs as a percent of reported revenues increased from 93.9 percent to
95.0 percent. The decrease in operating income as a percent of reported revenues
and the increase in total costs as a percent of reported revenues is primarily
due to a one-time charge associated with the termination of The Bubble Factory
production deal and to increased goodwill amortization relating to the
Multimedia Entertainment acquisition. Attributed revenues increased seven
percent while EBITDA declined slightly to $373 million. The motion picture group
was down, despite the successful theatrical release of The Nutty Professor, Liar
Liar and The Lost World: Jurassic Park, due to several disappointing releases
and the charge associated with the termination of The Bubble Factory production
deal. The television group's results were essentially even with the prior
comparable period.
Music Reported revenues increased 22 percent. The results reflect a considerably
improved chart position. Major albums in release in 1997 included those by No
Doubt, Bush, BLACKstreet, The Wallflowers, Counting Crows and Nirvana. The
operating loss for Music improved from a loss of $103 million to a loss of $58
million. Total costs as a percent of reported revenues decreased due to a
significant increase in the revenues and profitability of new albums
11
<PAGE> 12
which was partially offset by continued expansion in international markets.
Attributed revenues increased 24 percent and EBITDA tripled to $72 million.
Recreation and Other Reported revenues for recreation and other decreased four
percent and operating income increased to $31 million. Excluding the
contribution of Putnam from both periods, reported revenues increased 19 percent
and operating income increased from a loss of $5 million to income of $9
million. Excluding the contribution of Putnam from both periods, operating
income as a percent of reported revenues increased to 1.3 percent, while total
costs as a percent of reported revenues declined to 98.7 percent from 100.9
percent. Attributed revenues increased two percent or over 20 percent excluding
the contribution of Putnam from both periods. EBITDA increased seven percent or
22 percent excluding the contribution of Putnam from both periods. The
recreation group's strong growth was driven by the successful opening of two new
attractions: Jurassic Park-The Ride at Universal Studios Hollywood in June 1996,
and Terminator 2: 3-D at Universal Studios Florida, its 50 percent-owned joint
venture, in May 1996. Attendance and per capita spending rose at both theme
parks.
TRANSITION PERIOD VS. COMPARABLE PERIOD ENDED JUNE 30, 1995 Revenues were
significantly higher than the comparable prior period reflecting the timing of
the closing of the Universal acquisition in June 1995. Operating income declined
to $93 million in the Transition Period reflecting a substantial increase in the
depreciation and amortization expense associated with the Universal acquisition.
Spirits and wine operating income declined 12 percent to $176 million while
Universal had an operating loss of $28 million. EBITDA increased 33 percent to
$440 million in the Transition Period. Entertainment EBITDA was $196 million
compared with $66 million in the prior period, which represented one month of
Universal results.
Interest, net and other in the Transition Period was $99 million, $43 million
higher than in the five months ended June 30, 1995. The prior period was net of
$76 million of interest income largely earned from the temporary investment of
the full proceeds from the DuPont redemption from April 1995 until the funding
of the Universal acquisition in June 1995.
The income tax provision in the Transition Period included the $67 million
benefit related to a settlement with the U.S. government regarding the 1981
exchange of shares of Conoco Inc. for common stock of DuPont. Excluding this tax
benefit, the effective income tax rate was in excess of 100 percent and was
significantly higher than the prior period rate of 36 percent because of the
non-deductibility of the goodwill amortization associated with the Universal
acquisition and lower taxable earnings.
The equity in earnings of unconsolidated companies was $35 million in the
Transition Period compared to $12 million in the prior period.
Income from continuing operations was $67 million or $0.18 per share (basic and
diluted) in the Transition Period. Excluding the $67 million benefit associated
with the tax settlement, income from continuing operations was breakeven. In the
five months ended June 30, 1995, income from continuing operations was $107
million or $0.29 per share (basic and diluted).
Income from discontinued Tropicana operations, after tax, was $18 million or
$0.05 per share (basic and diluted) in the Transition Period, compared with $10
million or $0.03 per share (basic and diluted) in the five months ended June 30,
1995. Reported revenues from discontinued operations were $762 million in the
Transition Period and $622 million in the five months ended June 30, 1995
comparable prior period. Operating income was $51 million in the Transition
Period and $36 million in the five months ended June 30, 1995. Results of
discontinued operations include allocations of consolidated interest expense
totaling $15 million and $17 million in the five months ended June 30, 1996 and
1995, respectively. The allocations were based on the ratio of net assets of
discontinued operations to consolidated net assets.
Due to the redemption of most of the Company's DuPont shares on April 6, 1995,
the Company discontinued accounting for its investment in DuPont under the
equity method effective February 1, 1995. Earnings related to the DuPont
investment are presented as discontinued activities in the prior period and
include a $3.2 billion after-tax gain
12
<PAGE> 13
on the redemption of the 156 million shares and $68 million of after-tax
dividend income earned on such shares prior to the redemption transaction.
Net income including discontinued operations was $85 million or $0.23 per share
(basic and diluted) in the Transition Period compared with $3.3 billion or $8.99
per basic share and $8.92 per diluted share for the five-month period ended June
30, 1995.
SPIRITS AND WINE
In the Transition Period, spirits and wine reported revenues grew six percent to
$1.8 billion largely driven by improvement in Europe. In the Transition Period,
operating income declined 12 percent to $176 million. Operating income as a
percent of reported revenues declined from 11.8 percent to 9.8 percent. Cost of
goods sold as a percent of reported revenues declined slightly from 55.9 percent
to 55.5 percent. Selling, general and administrative expenses as a percent of
reported revenues increased from 32.3 percent to 34.7 percent.
The equity in earnings of unconsolidated companies declined slightly to $6
million in the Transition Period.
In the Transition Period, attributed revenues increased five percent to $2.0
billion. EBITDA decreased eight percent to $244 million.
The operating performance primarily reflects a decline in North America, which
more than offset improvement in Europe & Africa and a substantial recovery in
several Latin American affiliates. In North America our performance was impacted
by a reduction in distributor inventory levels and the timing of brand spending.
Asia Pacific's results were essentially unchanged. Spirits and wine case volumes
rose almost four percent in the Transition Period, as most of the Company's key
premium brands grew.
ENTERTAINMENT
In the Transition Period, which includes Universal results from January 1, 1996
to June 30, 1996, Universal contributed $2.3 billion to reported revenues and
had an operating loss of $28 million, after significant amortization and
depreciation expense. In the period ended June 30, 1995, the Company's results
included one month of Universal from the acquisition date of June 5, 1995 until
June 30, 1995. During that time, Universal had reported revenues of $292 million
and operating income of $27 million. In order to provide a basis of comparison,
the discussion that follows is based upon supplemental information of Universal
results for the six months ended June 30, 1996 compared with the results for the
six months ended June 30, 1995. Reported revenues and operating income are not
presented due to inconsistent asset basis pre and post the Universal
acquisition.
Filmed Entertainment In the six-month period ended June 30, 1996, reported
revenues were $1.4 billion and operating income was $79 million. Attributed
revenues rose 12 percent and EBITDA almost doubled to $176 million versus the
prior period. The motion picture group was driven by higher worldwide profits
from prior year releases, particularly Babe and Casper. The television group had
improved results mainly because of the cancellation of several series which were
in a deficit position. EBITDA of USA Networks (50 percent-owned at June 30,
1996) was essentially even with the prior period.
Music In the six-month period ended June 30, 1996, reported revenues were $527
million and operating income was a loss of $87 million. Attributed revenues
declined nine percent while EBITDA was a loss of $24 million compared to income
of $75 million in the comparable prior period. The music results reflect
difficult comparisons with the prior period as the six months ended June 30,
1995 included significant carryover business from the very strong fourth quarter
of 1994. Operating income and EBITDA were affected by a substantial investment
program in 1996, which included increased spending for international expansion
and investment in new artists and label ventures including Universal Records and
Rising Tide/Nashville, and the acquisition of a 50 percent interest in
Interscope Records.
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<PAGE> 14
Recreation and Other Reported revenues were $380 million and recreation and
other had an operating loss of $20 million in the Transition Period. Attributed
revenues increased 10 percent but EBITDA declined from $75 million to $44
million. Attendance and per capita spending at both theme parks were higher in
the period ended June 30, 1996 than the prior period. This is due in part to the
successful openings of Terminator 2: 3-D at Universal Studios Florida, the
Company's 50 percent-owned joint venture, in May 1996 and Jurassic Park-The Ride
at Universal Studios Hollywood in June 1996. Recreation EBITDA was down
substantially due largely to higher marketing spending and the timing of that
spending in advance of the new attractions which opened comparatively late in
the period.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK
The Company's financial position strengthened during the fiscal year ended June
30, 1998. Total current assets increased to $7.0 billion at June 30, 1998 from
$6.1 billion at June 30, 1997. The increase is primarily due to additional cash
and short-term investments of $684 million resulting from the proceeds received
from the USAi transaction and the sale of the remaining Time Warner shares,
offset in part by the use of funds for share repurchases. Current liabilities of
$4.7 billion at June 30, 1998 were $1.6 billion higher than at June 30, 1997
largely due to an increase in short-term borrowings to fund the $1.7 billion
acquisition of the incremental 50 percent share of USA Networks. Shareholders'
equity was $9.3 billion at June 30, 1998 compared to $9.4 billion at June 30,
1997. The Company's total long- and short-term debt, net of cash and short-term
investments, increased to $2.7 billion at June 30, 1998 from $2.2 billion at
June 30, 1997. The Company's ratio of net debt to total capitalization
(including minority interest) increased from 16 percent to 19 percent,
reflecting the higher debt outstanding.
In the fiscal year ended June 30, 1998, operating activities used cash of $241
million, following net cash provided of $664 million in the fiscal year ended
June 30, 1997. The increased cash requirements in the 1998 fiscal year reflect
reduced income from continuing operations (excluding the gains on the USAi
transaction and the Time Warner share sales) and higher working capital
requirements. The net cash used for operating activities is partially offset by
significant non-cash charges such as depreciation and amortization of assets and
amortization of excess of cost over fair value of assets.
Net cash provided by investing activities was $699 million in fiscal year 1998.
The net cash provided includes gross proceeds from the USAi transaction ($1.3
billion) and the sales of 26.8 million Time Warner shares ($1.9 billion). These
cash proceeds were partially offset by the acquisition of the incremental 50
percent interest in USA Networks ($1.7 billion) and capital expenditures of $410
million: spirits and wine - $170 million and entertainment - $240 million. In
addition, $386 million of cash was used for sundry investments including
investments in Doosan Seagram Co., Ltd., the Company's spirits and wine
affiliate in Korea, Port Aventura, a theme park located in Spain, and Loews
Cineplex Entertainment Corporation. In fiscal year 1997, net cash provided by
investing activities was $1.7 billion and included gross proceeds from the sale
of 30 million Time Warner shares ($1.39 billion), the sale of the DuPont
warrants ($500 million) and the sale of Putnam ($330 million). These cash
proceeds were partially offset by capital expenditures of $393 million: spirits
and wine-$187 million and entertainment-$206 million.
In the fiscal year ended June 30, 1998, the Company made dividend payments of
$231 million and used $753 million to repurchase its common shares. Financing
activities reflect an increase in short-term borrowings of $1.1 billion used to
finance the acquisition of the incremental 50 percent interest in USA Networks.
The net result of the cash used for operating activities and the cash provided
by investing activities and financing activities, was net cash provided by
continuing operations of $617 million. In the fiscal year ended June 30, 1998,
the discontinued Tropicana operations provided cash of $67 million resulting in
an aggregate increase of $684 million in cash and short-term investments. In the
fiscal year ended June 30, 1997, continuing operations provided net cash of $197
million and discontinued Tropicana operations provided net cash of $16 million,
reflected as a $213 million increase in cash and short-term investments.
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
14
<PAGE> 15
and earn a distribution fee, which is variable and contingent upon the films'
performance. In addition, the Company has the option to purchase the films at
certain future dates.
The Company's working capital position is reinforced by available credit
facilities of $3 billion. These facilities are used to support the Company's
commercial paper borrowings and are available for general corporate purposes.
The acquisition of PolyGram will be partially financed through the sale of
Tropicana, the after-tax proceeds of which are expected to be approximately $3
billion. The Company expects to obtain the remaining funds for the acquisition
from commercial bank borrowings, the issuance of commercial paper and/or the
sale of debt securities, the terms of which have yet to be determined. The
Company believes its access to external capital resources together with
internally-generated liquidity will be sufficient to satisfy existing
commitments and plans, and to provide adequate financial flexibility.
The Company is exposed to changes in financial market conditions in the normal
course of its business operations due to its operations in different foreign
currencies and its ongoing investing and funding activities. Market risk is the
uncertainty to which future earnings or asset/liability values are exposed due
to operating cash flows denominated in foreign currencies and various financial
instruments used in the normal course of operations. The Company has established
policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to such risks.
The Company is exposed to changes in interest rates primarily as a result of its
borrowing and investing activities which include short-term investments and
borrowings and long-term debt used to maintain liquidity and fund its business
operations. The Company continues to utilize U.S. dollar-denominated commercial
paper to fund seasonal working capital requirements in the U.S. and Canada. The
Company also borrows in different currencies from other sources to meet the
borrowing needs of its affiliates. The nature and amount of the Company's
long-term and short-term debt can be expected to vary as a result of future
business requirements, market conditions and other factors.
The Company's operating cash flows denominated in foreign currency as a result
of its international business activities and certain of its borrowings are
exposed to changes in foreign exchange rates. The Company continually evaluates
its foreign currency exposure (primarily British pound, French franc, German
mark and Swiss franc), based on current market conditions and the business
environment. In order to mitigate the effect of foreign currency risk, the
Company engages in hedging activities. The magnitude and nature of such hedging
activities are explained further in Note 10 to the financial statements.
The Company employs a variance/covariance approach in its calculation of Value
at Risk (VaR), which measures the potential losses in fair value or earnings
that could arise from changes in market conditions, using a 95 percent
confidence level and assuming a one-day holding period. The VaR, which is the
potential loss in fair value, attributable to those interest rate sensitive
exposures associated with the Company's exposure to interest rates at June 30,
1998 and the average VaR for the year then ended was $11 million. This exposure
is primarily related to long-term debt with fixed interest rates. The VaR, which
is the potential loss in earnings associated with the Company's exposure to
foreign exchange rates, primarily to hedge cash flow exposures denominated in
foreign currencies, was $12 million at June 30, 1998 and the average VaR for the
year then ended was $5 million. These exposures include intercompany trade
accounts, service fees, intercompany loans, third party debt and firm
commitments related to the acquisition of PolyGram. The Company is subject to
other foreign exchange market risk exposure as a result of non-financial
instrument anticipated foreign currency cash flows which are difficult to
reasonably predict, and have therefore not been included in the Company's VaR
calculation.
YEAR 2000 ISSUE
The Company has a comprehensive program to address Year 2000 readiness in its
internal systems and with its customers and suppliers. The Company's program
addresses its most critical internal systems first and targets to have them Year
2000-compliant by July 1, 1999, the first day of the Company's fiscal year 2000.
These activities are
15
<PAGE> 16
intended to encompass all major categories of information technology and
non-information technology systems in use by the Company, including
manufacturing, sales, finance and human resources. The costs incurred to date
related to these programs have not been material. The Company currently
estimates that the total costs of its Year 2000 readiness programs, excluding
redeployed resources, will not exceed $50 million. The total cost estimate does
not include potential costs related to any customer or other claims or the costs
of internal software or hardware replaced in the normal course of business. The
total cost estimate is based on the current assessment of the Company's Year
2000 readiness needs and is subject to change as the program progresses.
The Company is communicating with its major customers, suppliers and financial
institutions to determine the extent to which the Company is vulnerable to those
third parties' failure to remedy their own Year 2000 issues. While some of the
Company's major suppliers and customers contacted have confirmed that they
anticipate being Year 2000-compliant on or before December 31, 1999, most of the
customers, suppliers and financial institutions contacted have only indicated
that they have Year 2000 readiness programs.
The Company currently expects that the Year 2000 issue will not pose significant
operational problems. However, delays in the implementation of new systems, a
failure to fully identify all Year 2000 dependencies in the Company's systems
and in the systems of its suppliers, customers and financial institutions, or a
failure of such third parties to adequately address their respective Year 2000
issues could have a material adverse effect on the Company's business, financial
condition and results of operations. Therefore, the Company's Year 2000 Program
includes the development of contingency plans for continuing operations in the
event such problems arise. However, there can be no assurance that such
contingency plans will be sufficient to handle all problems which may arise.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The statements herein relating to matters that are not historical facts are
forward-looking statements that are not guarantees of future performance and
involve risks and uncertainties, including but not limited to future global
economic conditions, foreign exchange rates, the actions of competitors and
other factors beyond the control of the Company including, in the case of the
Year 2000 issue, the actions of customers, suppliers and financial institutions.
QUARTERLY HIGH AND LOW SHARE PRICES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30, FIVE MONTH PERIOD
ENDED JUNE 30,
1998 1997 1996
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
New York Stock Exchange
First Quarter US$ 41 1/8 US$ 33 15/16 US$ 38 3/8 US$ 30 7/8 US$ 38 3/8 US$ 31 3/4
Second Quarter 37 5/8 30 1/4 41 7/8 35 1/4 36 3/8 32 1/2
Third Quarter 39 3/4 31 7/16 42 3/4 38
Fourth Quarter 46 11/16 36 13/16 41 7/8 35 3/4
Canadian Stock Exchange
First Quarter C$ 56.70 C$ 46.45 C$ 52 1/4 C$ 42 1/4 C$ 52 1/2 C$ 43 1/8
Second Quarter 52.30 43.25 57 2/5 47 1/2 49 3/4 44 2/5
Third Quarter 56.50 44.70 57 3/10 51 9/10
Fourth Quarter 67.50 52.65 58 1/10 50
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
1996
HIGH LOW
---- ---
<S> <C> <C>
New York Stock Exchange
First Quarter US$ 32 3/8 US$ 25 5/8
Second Quarter 36 3/4 26 3/4
Third Quarter 38 1/8 34 1/4
Fourth Quarter 39 1/2 34 1/4
Canadian Stock Exchange
First Quarter C$ 45 1/4 C$ 35 1/2
Second Quarter 50 36 1/4
Third Quarter 52 46 1/4
Fourth Quarter 53 1/4 46 7/8
</TABLE>
RETURN TO SHAREHOLDERS
The Company had 7,167 registered shareholders at August 15, 1998. The Company's
common shares are listed on the New York, Toronto, Montreal, Vancouver and
London Stock Exchanges. Closing prices at June 30, 1998, on the New York and
Toronto Stock Exchanges were $40.94 and C$59.95, respectively.
16
<PAGE> 17
In the fiscal year ended June 30, 1998, the Company paid dividends of $0.165 per
share per quarter. In the fiscal year ended June 30, 1997, the Company paid
dividends of $0.15 per share in the first quarter and $0.165 per share in each
of the final three quarters. In the Transition Period and the year ended January
31, 1996, dividends paid were $0.15 per share per quarter. Dividends paid to
shareholders totaled $231 million and $239 million in fiscal years 1998 and
1997, respectively, $112 million in the Transition Period and $224 million in
the year ended January 31, 1996.
17
<PAGE> 18
18
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Transition Period Fiscal Year
Fiscal Years Ended Ended Ended
June 30, June 30, January 31,
U.S. Dollars in Millions, Except Per Share Amounts 1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 9,474 $ 10,354 $ 4,112 $ 7,787
Cost of revenues 5,525 6,262 2,626 4,755
Selling, general and administrative expenses 3,396 3,373 1,393 2,597
------------------------------------------------------------
Operating income 553 719 93 435
Interest, net and other 228 147 99 195
Gain on sale of Time Warner shares 926 154 -- --
Gain on USAi transaction 360 -- -- --
------------------------------------------------------------
1,611 726 (6) 240
Provision (benefit) for income taxes 638 331 (33) 121
Minority interest charge (credit) 48 12 (5) 22
Equity (losses) earnings from unconsolidated companies (45) 62 35 47
------------------------------------------------------------
Income from continuing operations 880 445 67 144
------------------------------------------------------------
Income from discontinued Tropicana operations, after tax 66 57 18 30
------------------------------------------------------------
Discontinued DuPont activities:
Dividends, after tax - - - 68
Gain on redemption of 156 million shares, after tax - - - 3,164
------------------------------------------------------------
- - - 3,232
------------------------------------------------------------
Net Income $ 946 $ 502 $ 85 $ 3,406
------------------------------------------------------------
------------------------------------------------------------
EARNINGS PER SHARE - BASIC
Income from continuing operations $ 2.51 $ 1.20 $ .18 $ .38
Discontinued Tropicana operations, after tax .19 .16 .05 .08
Discontinued DuPont activities, after tax - - - 8.67
------------------------------------------------------------
Net Income $ 2.70 $ 1.36 $ .23 $ 9.13
------------------------------------------------------------
------------------------------------------------------------
EARNINGS PER SHARE - DILUTED
Income from continuing operations $ 2.49 $ 1.20 $ .18 $ .38
Discontinued Tropicana operations, after tax .19 .15 .05 .08
Discontinued DuPont activities, after tax - - - 8.54
------------------------------------------------------------
Net Income $ 2.68 $ 1.35 $ .23 $ 9.00
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 19
19
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, June 30,
U.S. Dollars in Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and short-term investments at cost $ 1,174 $ 490
Receivables, net 2,155 1,781
Inventories 2,555 2,584
Film costs, net of amortization 175 387
Deferred income taxes 282 512
Prepaid expenses and other current assets 630 377
--------------------------
TOTAL CURRENT ASSETS 6,971 6,131
--------------------------
Common stock of DuPont 1,228 1,034
Common stock of USAi 306 -
Common stock of Time Warner - 1,291
Film costs, net of amortization 1,272 991
Artists' contracts, advances and other entertainment assets 761 645
Property, plant and equipment, net 2,733 2,559
Investments in unconsolidated companies 3,437 2,097
Excess of cost over fair value of assets acquired 3,076 3,355
Deferred charges and other assets 661 610
Net assets of discontinued Tropicana operations 1,734 1,734
--------------------------
$ 22,179 $ 20,447
--------------------------
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings and indebtedness payable within one
year $ 1,653 $ 239
Accrued royalties and participations 702 726
Payables and accrued liabilities 2,068 1,818
Income and other taxes 286 304
--------------------------
TOTAL CURRENT LIABILITIES 4,709 3,087
--------------------------
Long-term indebtedness 2,225 2,478
Accrued royalties and participations 421 339
Deferred income taxes 2,598 2,426
Other credits 995 844
Minority interest 1,915 1,851
Shareholders' Equity
Shares without par value 848 809
Cumulative currency translation adjustments (499) (427)
Cumulative gain on equity securities, after tax 699 781
Retained earnings 8,268 8,259
--------------------------
TOTAL SHAREHOLDERS' EQUITY 9,316 9,422
--------------------------
$ 22,179 $ 20,447
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Approved by the Board
<TABLE>
<S> <C>
/s/ EDGAR M. BRONFMAN /s/ C.E. MEDLAND
Edgar M. Bronfman C.E. Medland
Director Director
</TABLE>
<PAGE> 20
20
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
U.S. Dollars in Millions 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 880 $ 445 $ 67 $ 144
Adjustments to reconcile income from continuing operations
to net cash provided:
Depreciation and amortization of assets 289 290 134 201
Amortization of excess of cost over fair value of assets
acquired 127 103 50 64
Gain on sale of Time Warner shares, DuPont warrants and
Putnam, before tax (926) (278) - -
Gain on USAi transaction, before tax (360) - - -
Minority interest charged (credited) to income 48 12 (5) 22
Equity in earnings of unconsolidated companies less than
dividends received 101 45 11 18
Sundry (69) 145 12 15
Changes in assets and liabilities:
Receivables, net (324) (238) 540 (145)
Inventories 14 6 (65) (130)
Film costs, net of amortization (246) (306) (102) (42)
Prepaid expenses and other current assets (278) (59) (60) (30)
Artists' contracts, advances and other entertainment
assets (88) (2) 1 66
Payables and accrued liabilities (53) 357 (248) 115
Income and other taxes payable 46 156 56 (106)
Deferred income taxes 447 (53) (4) 26
Other credits 151 41 (72) 4
-----------------------------------------------------
(1,121) 219 248 78
-----------------------------------------------------
Net cash (used for) provided by operating activities (241) 664 315 222
-----------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (410) (393) (245) (349)
Proceeds from sale of Time Warner shares, DuPont warrants
and Putnam 1,863 2,217 - -
Acquisition of 50% interest in USA Networks (1,700) - - -
Proceeds from USAi transaction 1,332 - - -
Investment in Interscope Records - - (200) -
Investment in Brillstein-Grey Entertainment - - (81) -
Discontinued DuPont activities:
Dividends, net of taxes paid - - - 68
Proceeds from redemption of shares, net of taxes paid - - - 7,729
Purchase of 80 percent interest in Universal - - - (5,523)
Sundry investments (386) (116) (65) (14)
-----------------------------------------------------
Net cash provided by (used for) investing activities 699 1,708 (591) 1,911
-----------------------------------------------------
FINANCING ACTIVITIES
Dividends paid (231) (239) (112) (224)
Issuance of shares upon exercise of stock options and
conversion of LYONs 86 107 20 72
Shares purchased and retired (753) (416) (68) (18)
Increase in long-term indebtedness 41 3 36 214
Decrease in long-term indebtedness (37) (29) (341) (251)
Increase (decrease) in short-term borrowings and
indebtedness payable within one year 1,053 (1,601) 914 (1,595)
-----------------------------------------------------
Net cash provided by (used for) financing activities 159 (2,175) 449 (1,802)
-----------------------------------------------------
Net cash provided by continuing operations 617 197 173 331
-----------------------------------------------------
Net cash provided by (used for) discontinued Tropicana
operations 67 16 (126) (249)
-----------------------------------------------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS $ 684 $ 213 $ 47 $ 82
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 21
21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shares Without Cumulative Cumulative
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> <C>
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 $239 tax 444
Shares issued - exercise of stock options 3,243 98
- conversion of LYONs 296 9
Shares purchased and retired (11,317) (23) (393)
--------------------------------------------------------------
JUNE 30, 1997 365,281 809 (427) 781 8,259
Fiscal year ended June 30, 1998
Net income 946
Dividends paid ($.66 per share) (231)
Change in currency translation adjustments (72)
Change in market value of equity securities, net
of $44 tax benefit (82)
Shares issued - exercise of stock options 2,751 84
- conversion of LYONs 48 2
Shares purchased and retired (20,948) (47) (706)
--------------------------------------------------------------
JUNE 30, 1998 347,132 $ 848 $ (499) $ 699 $ 8,268
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 22
22
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE SEAGRAM COMPANY LTD. operates in two global business segments: spirits and
wine and entertainment. The spirits and wine businesses are engaged principally
in the production and marketing of distilled spirits, wines, coolers, beers and
mixers. The entertainment company, Universal Studios, Inc. ("Universal"),
produces and distributes motion picture, television and home video products and
recorded music; and operates theme parks and retail stores.
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 19. 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 spirits and wine segment
use the local currency as the functional currency. For affiliates in countries
considered to have a highly inflationary economy, inventories and property,
plant and equipment are translated at historical exchange rates and translation
effects are included in net income. Affiliates outside the U.S. operating in the
entertainment segment principally use the U.S. dollar as the functional
currency.
INVENTORIES Inventories are stated at cost, which is not in excess of market,
and consist principally of spirits and wines. The cost of spirits and wines
inventories is determined by either the last-in, first-out (LIFO) method or the
identified cost method. The cost of music, 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 from the
Company's library are licensed for domestic and foreign syndication, cable or
pay television and 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. 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. Generally, abandoned story and
<PAGE> 23
23
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.
Recorded Music Revenues from the sale of recorded music, net of provision for
estimated returns and allowances, are recognized upon shipment. Advances to
established recording artists and direct costs associated with the creation of
record masters 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.
Artists' contracts and music catalogs are amortized on an accelerated basis over
14 and 20 years, respectively. The acceleration results in 80 percent of
artists' contracts being amortized within the first eight years and 50 percent
of music catalogs being amortized within the first five years. Copyrights are
amortized on a straight-line basis over 20 years.
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 Company's common shares 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 currency forwards and
options to hedge firm commitments and 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.
<PAGE> 24
24
COMPREHENSIVE INCOME The Company will adopt FAS 130, Reporting Comprehensive
Income, in its fiscal year beginning July 1, 1998. The consolidated statement of
shareholders' equity will be expanded to include all components of comprehensive
income required to be disclosed in accordance with FAS 130.
START-UP COSTS The Accounting Standards Executive Committee recently issued SOP
98-5, Reporting on the Costs of Start-Up Activities, which is effective for the
Company's fiscal year beginning July 1, 1999. SOP 98-5 requires that costs of
start-up activities and organization costs be expensed as incurred. Initial
adoption of this SOP should be reported as a cumulative effect of a change in
accounting principle. The Company is still evaluating the impact of adopting
this pronouncement.
RECLASSIFICATIONS Certain prior period amounts in the financial statements and
notes have been reclassified to conform with the current year presentation.
<PAGE> 25
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DISCONTINUED TROPICANA OPERATIONS
Discontinued Tropicana operations is composed of the business of Tropicana
Products, Inc. and the Company's global fruit juice business ("Tropicana").
Tropicana produces, markets and distributes Tropicana, Dole* and other branded
fruit juices and juice beverages. On August 25, 1998, the Company completed the
sale of Tropicana for approximately $3.3 billion in cash. Proceeds from the sale
will be used to partially fund the acquisition of PolyGram N.V. ("PolyGram")
described in Note 2, currently scheduled to close during the second quarter of
the Company's fiscal year ending June 30, 1999.
Commencing in June 1998, the Company, together with its subsidiaries and
affiliates, began transferring to Tropicana Products, Inc. all shares of
subsidiaries and other assets and liabilities of the Company's juice business
that had not previously been owned by Tropicana Products, Inc. Certain assets
relating to the business of Tropicana which, in the aggregate, are not material
to Tropicana's business continue to be held by the Company or its affiliates
after the closing date, pending receipt of consents or approvals or satisfaction
of other applicable requirements necessary for the transfer of such assets.
Summarized below is the Tropicana financial information:
<TABLE>
<CAPTION>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,986 $ 1,916 $ 762 $ 1,695
Cost of revenues 1,394 1,314 515 1,257
Selling, general and administrative expenses 423 450 196 336
-----------------------------------------------------
Operating income 169 152 51 102
Interest expense 39 41 15 40
Provision for income taxes 64 54 18 32
-----------------------------------------------------
Income from discontinued operations $ 66 $ 57 $ 18 $ 30
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense above represents allocations based on the ratio of net assets
of discontinued operations to consolidated net assets.
<TABLE>
<CAPTION>
June 30,
Millions 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 546 $ 588
Noncurrent assets 1,622 1,551
-------------------------
$ 2,168 $ 2,139
-------------------------
-------------------------
Current liabilities $ 322 $ 285
Noncurrent liabilities 112 120
Shareholders' equity 1,734 1,734
-------------------------
$ 2,168 $ 2,139
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
On May 19, 1995, Tropicana acquired the worldwide juice and juice beverage
business of Dole Food Company, Inc. ("Dole") for $276 million. The transaction
excluded Dole's canned pineapple juice business. The reported operating results
for the fiscal year ended January 31, 1996 reflect the results of operations of
the acquired business from the acquisition date. The acquisition has been
accounted for under the purchase method of accounting and is included in
discontinued Tropicana operations presented in the consolidated results of the
Company. The cost of the acquisition has been allocated on the basis of the
estimated fair market value of the assets acquired and liabilities assumed. This
valuation resulted in $134 million of unallocated excess cost over fair value of
assets acquired which is being amortized over 40 years.
* The Dole brand name is licensed from Dole.
<PAGE> 26
26
NOTE 2 ACQUISITION OF POLYGRAM
On June 22, 1998, the Company announced that it had signed definitive agreements
with Koninklijke Philips Electronics N.V. ("Philips") and PolyGram to acquire
PolyGram in a transaction valued at approximately $10.4 billion. The Company has
agreed to make a tender offer for all issued shares, including Philips' 75
percent interest in PolyGram and publicly-held shares, for NLG115, or
approximately U.S. $57 per share in cash or, at the shareholders' election, for
a mixture of cash and the Company's common shares, based on an exchange ratio of
1.3772 Company shares for each PolyGram share. The agreements relating to this
proposed transaction call for the Company to issue a maximum of approximately
47.9 million common shares (12 percent of the common shares outstanding after
the transaction), or $2 billion in value. Philips has agreed to tender all its
PolyGram shares into the Company's tender offer, acquire as many of the
Company's shares as may be available to it in the tender offer (taking into
account the election by the public shareholders), and hold its shares of the
Company for no less than two years.
The PolyGram transaction, which is subject to the receipt of certain regulatory
approvals, is expected to close during the second quarter of the Company's
fiscal year ending June 30, 1999.
NOTE 3 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, 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 Studios Holding I Corp. ("Universal
Holding"), Matsushita Electric Industrial Co., Ltd. ("Matsushita"), declined to
contribute the additional capital required to fund its proportionate share of
this acquisition. As a result, the Company's ownership of Universal Holding has
increased from 80 percent to approximately 84 percent.
On February 12, 1998, Universal sold its acquired 50 percent interest in USA
Networks to USAi and contributed its original 50 percent interest in USA
Networks and the majority of its television assets, including substantially all
of its domestic operations and 50 percent of the international operations of USA
Networks, to USANi LLC (the "LLC") in a transaction ("USAi 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 represented a 10.7 percent interest
in USAi at the transaction date, and a 45.8 percent interest (118,633,171 shares
at June 30, 1998) in the LLC (a subsidiary of USAi) which is exchangeable for
USAi common stock and Class B common stock. Universal recognized a gross gain of
$583 million, before taking into consideration the effect of the USAi
transaction on its remaining television assets. As a result of this transaction,
which represented Universal's exit from the domestic television production and
distribution business, certain remaining television assets were impaired and
various related contractual obligations became adverse purchase commitments. The
fair value of these items was determined based on expected future cash flows.
The impairment losses and adverse purchase commitments arising from the USAi
transaction aggregated $223 million and have been reflected in the net gain of
$360 million ($222 million after tax). 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 June 30, 1998 is accounted for at market value ($178 million at June 30,
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.
<PAGE> 27
27
The unaudited condensed pro forma results of operations data presented below
assume that both the purchase of the acquired 50 percent interest in USA
Networks and the USAi 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 fiscal years ended June 30, 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.
Pro Forma Income Statement Data
<TABLE>
<CAPTION>
Years Ended
June 30,
(Millions, Except Per Share Amounts) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 9,109 $ 10,102
--------------------------
Income from continuing operations $ 874 $ 427
Income from discontinued Tropicana operations 66 57
--------------------------
Net income $ 940 $ 484
--------------------------
--------------------------
EARNINGS PER SHARE - BASIC
Income from continuing operations $ 2.50 $ 1.16
Income from discontinued Tropicana operations 0.19 0.15
--------------------------
Net income $ 2.69 $ 1.31
--------------------------
--------------------------
EARNINGS PER SHARE - DILUTED
Income from continuing operations $ 2.47 $ 1.14
Income from discontinued Tropicana operations 0.19 0.15
--------------------------
Net income $ 2.66 $ 1.29
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE 4 TIME WARNER INC. ("TIME WARNER") INVESTMENT
On February 5, 1998, the Company sold 15 million shares of Time Warner common
stock for pretax proceeds of $958 million. On May 27, 1998, the Company sold its
remaining 11.8 million shares of Time Warner common stock for pretax proceeds of
$905 million. The aggregate gain on the sale of the shares was $926 million
($602 million after tax).
On May 28, 1997, the Company sold 30 million shares of Time Warner common stock
for pretax proceeds of $1.39 billion. The gain on the sale of the shares in the
fiscal year ended June 30, 1997 was $154 million ($100 million after tax) in
accordance with the specific identification method.
NOTE 5 DUPONT SHARE REDEMPTION AND REMAINING DUPONT INVESTMENT
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 $1.23 billion at June 30, 1998. 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.
<PAGE> 28
28
NOTE 6 ACQUISITION OF INTEREST IN UNIVERSAL HOLDING
On June 5, 1995, the Company completed its purchase of an 80 percent interest in
Universal Holding, the indirect parent of Universal, from Matsushita for $5.7
billion. Matsushita retained a 20 percent interest in Universal Holding. During
the fiscal year ended June 30, 1998, Matsushita's ownership of Universal Holding
was diluted to approximately 16 percent as described in Note 3.
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 Holding acquisition and the redemption of 156 million shares of
DuPont common stock occurred at the beginning of the period presented. The
unaudited condensed pro forma income statement data were prepared based upon the
historical consolidated income statement of the Company for the fiscal year
ended January 31, 1996, and of Universal Holding for the five months ended May
31, 1995, adjusted to reflect purchase accounting. Financial results for
Universal Holding 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 Holding 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.
Pro Forma Income Statement Data
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31,
Millions, Except Per Share Amounts (Unaudited) 1996
- -------------------------------------------------------------------
<S> <C>
Revenues $ 9,665
---------------------
Income from continuing operations $ 124
Discontinued Tropicana operations 30
---------------------
Net income $ 154
---------------------
---------------------
EARNINGS PER SHARE - BASIC
Income from continuing operations $ .33
Discontinued Tropicana operations .08
---------------------
Net income $ .41
---------------------
---------------------
EARNINGS PER SHARE - DILUTED
Income from continuing operations $ .33
Discontinued Tropicana operations .08
---------------------
Net income $ .41
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The above pro forma presentation excludes the $3.2 billion after-tax gain on the
redemption of the DuPont shares.
NOTE 7 SALE OF PUBLISHING GROUP
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 pretax 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.
NOTE 8 INVESTMENTS IN UNCONSOLIDATED COMPANIES
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.
<PAGE> 29
29
Entertainment Segment Significant investments at June 30, 1998 include USANi
LLC, primarily engaged in electronic retailing, network and first run
syndication television production, domestic distribution of its and Universal's
television production and operation of the USA Network and Sci-Fi Channel cable
networks (45.8 percent equity interest); Loews Cineplex Entertainment
Corporation, primarily engaged in theatrical exhibition of motion pictures in
the U.S. and Canada (26 percent owned); United International Pictures, a
distributor of theatrical product outside the U.S. and Canada (33 percent
owned); Cinema International BV, primarily engaged in marketing of home video
product outside the U.S. and Canada (49 percent owned); Cinema International
Corporation and United Cinemas International, both engaged in theatrical
exhibition of motion pictures in territories outside the U.S. and Canada (49
percent owned); Brillstein-Grey Entertainment (49.5 percent owned) which owns 50
percent of Brillstein-Grey Communications, a producer of network television
series; Universal City Florida Partners, which owns Universal Studios Florida, a
motion picture and television theme tourist attraction and production facility
in Orlando, Florida (50 percent owned); Universal City Development Partners,
which has begun development on land adjacent to Universal Studios Florida of an
additional themed tourist attraction, Universal Studios 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 (24 percent owned); Port
Aventura, a theme park located in Spain (37 percent owned); SEGA GameWorks,
which designs, develops and operates location-based entertainment centers (27
percent owned); and Interplay Productions, an entertainment software developer
(30 percent owned).
Spirits and Wine Segment Significant investments at June 30, 1998 include
Seagram (Thailand) Limited, an importer and distributor of spirits and wines (49
percent owned) and Kirin-Seagram Limited, engaged in the manufacture, sale and
distribution of distilled beverage alcohol and wines in Japan (49 percent
owned).
Summarized financial information, derived from unaudited historical financial
information, is presented below for the Company's investments in unconsolidated
companies.
Summarized Balance Sheet Information
<TABLE>
<CAPTION>
June 30, June 30,
Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 1,651 $ 1,402
Noncurrent assets 10,415 2,569
--------------------------
Total assets $ 12,066 $ 3,971
--------------------------
Current liabilities $ 1,718 $ 1,186
Noncurrent liabilities 3,738 1,427
Equity 6,610 1,358
--------------------------
Total liabilities and equity $ 12,066 $ 3,971
--------------------------
Proportionate share of net assets
of unconsolidated companies $ 2,884 $ 627
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
Approximately $700 million (1997 - $1.5 billion) of the cost of the Universal
Holding acquisition was allocated to the investment in unconsolidated companies
and is being amortized on a straight-line basis over 40 years.
<PAGE> 30
30
Summarized Statement of Operations
<TABLE>
<CAPTION>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,561 $ 4,782 $ 2,134 $ 2,730
Earnings before interest and taxes 366 351 191 208
Net income 173 229 130 132
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The equity (losses) earnings of unconsolidated companies in the Consolidated
Statement of Income includes goodwill amortization related to unconsolidated
companies of $81 million, $62 million, $23 million and $22 million for the
fiscal years ended June 30, 1998 and 1997, the Transition Period ended June 30,
1996 and the fiscal year ended January 31, 1996, respectively, principally in
the entertainment segment. Additionally, operating income for the fiscal year
ended June 30, 1998 includes $94 million of income from USA Networks for the
period from October 21, 1997 to February 12, 1998 when the Company owned 100% of
USA Networks as described in Note 3.
NOTE 9 LONG-TERM INDEBTEDNESS AND CREDIT ARRANGEMENTS
Long-term Indebtedness
<TABLE>
<CAPTION>
June 30, June 30,
Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9% Debentures due December 15, 1998 (C$200 million)* $ 156 $ 156
Unsecured term bank loans, due 1998 to 1999, with a weighted
average interest rate of 4.81% 155 190
6.5% Debentures due April 1, 2003 200 200
8.35% Debentures due November 15, 2006 200 200
8-3/8% Guaranteed Debentures due February 15, 2007 200 200
7% Guaranteed Debentures due April 15, 2008 200 200
8-7/8% Guaranteed Debentures due September 15, 2011 223 223
9.65% Guaranteed Debentures due August 15, 2018 249 249
9% Guaranteed Debentures due August 15, 2021 198 198
8.35% Debentures due January 15, 2022 199 199
6.875% Debentures due September 1, 2023 200 200
6% Swiss Franc Bonds due September 30, 2085 (SF 250 million) 164 171
Sundry 167 131
-------------------------
2,511 2,517
Indebtedness payable within one year (286) (39)
-------------------------
$ 2,225 $ 2,478
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</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 $3.0 billion and have varying terms
of up to five years. At June 30, 1998, short-term borrowings comprised $1,367
million of bank borrowings bearing interest at market rates.
Interest expense on long-term indebtedness was $226 million and $218 million in
the fiscal years ended June 30, 1998 and 1997, respectively, $96 million in the
Transition Period ended June 30, 1996, and $236 million in the fiscal year ended
January 31, 1996. Annual repayments and redemptions of long-term indebtedness
for the five fiscal years subsequent to June 30, 1998 are: 1999 - $286 million;
2000 - $28 million; 2001 - $1 million; 2002 - $0; and 2003 - $200 million.
Joseph E. Seagram & Sons, Inc. ("JES"), the Company's U.S. spirits and wine
subsidiary, has outstanding $9 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
<PAGE> 31
31
the Company's common shares (303,930 shares at June 30, 1998). The Company has
guaranteed the LYONs on a subordinated basis.
In addition, the Company has unconditionally guaranteed JES's 8-3/8 percent
Guaranteed Debentures due February 15, 2007, 7 percent Guaranteed Debentures due
April 15, 2008, 8-7/8 percent Guaranteed Debentures due September 15, 2011, 9.65
percent Guaranteed Debentures due August 15, 2018 and 9 percent Guaranteed
Debentures due August 15, 2021.
Summarized below is the JES financial information:
<TABLE>
<CAPTION>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,144 $ 2,114 $ 706 $ 2,506
Cost of revenues 1,356 1,320 483 1,632
Income (loss) from continuing operations (8) 76 55 48
Discontinued Tropicana operations (17) 11 2 (5)
Discontinued DuPont activities, after tax - - - 3,232
-------------------------------------------------------
Net Income (loss) $ (25) $ 87 $ 57 $ 3,275
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 1,821 $ 821
Noncurrent assets 12,201 12,662
---------------------------
$ 14,022 $ 13,483
---------------------------
Current liabilities $ 843 $ 542
Noncurrent liabilities 3,922 3,798
Shareholders' equity 9,257 9,143
---------------------------
$ 14,022 $ 13,483
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE 10 FINANCIAL INSTRUMENTS AND EQUITY SECURITIES
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, third-party debt and firm commitments related
to the acquisition of PolyGram. 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, 1998, 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
<PAGE> 32
32
notional amounts totalling $7,309 million ($781 million at June 30, 1997). The
notional amounts of these contracts, which mature at various dates through
February 2001, are summarized below:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
Millions Buy Sell Buy Sell
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Canadian dollar $ 168 $ - $ 164 $ -
British pound 47 59 - 126
U.S. dollar - - - 244
French franc 34 5 - 131
Belgian franc - 62 - -
Japanese yen - 18 - 38
Italian lira - 18 - 22
German mark 6,800 11 - 9
Spanish peseta - 19 - -
Other currencies 31 37 25 22
---------------------------------------------
$ 7,080 $ 229 $ 189 $ 592
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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 of cash and short-term
investments, which is comprised primarily of time deposits, approximates 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, 1998 June 30, 1997
Carrying Fair Carrying Fair
Millions Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 1,174 $ 1,174 $ 490 $ 490
Foreign currency exchange contracts 169 50 (10) (13)
Short-term debt 1,653 1,653 239 239
Long-term debt 2,225 2,477 2,478 2,680
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 33
33
EQUITY SECURITIES
The following is a summary of available-for-sale securities comprised of the
common stock of DuPont and USAi at June 30, 1998 and of DuPont and Time Warner
at June 30, 1997:
<TABLE>
<CAPTION>
June 30, June 30,
Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost $ 457 $ 1,124
Gross unrealized gain 1,077 1,201
Fair value 1,534 2,325
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
The Financial Accounting Standards Board recently issued FAS 133, Accounting for
Derivative Instruments and Hedging Activities, which is effective for the
Company's fiscal year beginning July 1, 1999. FAS 133 requires an entity to
recognize all derivatives as either assets or liabilities on the balance sheet
and to measure those instruments at fair value. The Company is still evaluating
the impact of adopting this pronouncement.
NOTE 11 COMMON SHARES, EARNINGS PER SHARE AND STOCK OPTIONS
The Company is authorized to issue an unlimited number of common and preferred
shares without nominal or par value. At June 30, 1998, 37,921,849 common shares
were potentially issuable upon the conversion of the LYONs and the exercise of
employee stock options. Basic net income per share was based on the following
weighted average number of shares outstanding during the fiscal period ended
June 30, 1998 - 349,874,259; June 30, 1997 - 369,682,224; June 30,
1996 - 373,857,915; and January 31, 1996 - 373,116,794. Diluted net income per
share was based on the following weighted average number of shares outstanding
during the fiscal period ended June 30, 1998 - 353,604,553; June 30,
1997 - 374,268,746; June 30, 1996 - 377,562,104; and January 31,
1996 - 378,683,450.
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.
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 on the following page:
<TABLE>
<CAPTION>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
Millions, Except Per Share Amounts 1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income:
As reported $ 946 $ 502 $ 85 $ 3,406
Pro forma 892 469 73 3,383
Basic earnings per common share:
As reported $ 2.70 $ 1.36 $ .23 $ 9.13
Pro forma 2.55 1.27 .19 9.07
Diluted earnings per common share:
As reported $ 2.68 $ 1.35 $ .23 $ 9.00
Pro forma 2.52 1.26 .19 8.94
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</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
<PAGE> 34
34
assumptions for the fiscal years ended June 30, 1998 and June 30, 1997, the
Transition Period ended June 30, 1996 and the fiscal year ended January 31,
1996, respectively: dividend yields of 1.8, 1.6, 1.8 and 1.9 percent; expected
volatility of 25, 24, 22 and 20 percent; risk-free interest rates of 5.6, 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 years ended
June 30, 1998 and 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 $10.92, $12.18, $9.70 and $9.23,
respectively. The weighted average fair value of options granted during the
fiscal year ended June 30, 1998 and Transition Period ended June 30, 1996 for
which the exercise price exceeded the market price on the grant date was $7.44
and $6.91, respectively.
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> <C>
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
Granted 8,160,909 38.32
Exercised (2,751,832) 26.14
Cancelled (752,284) 38.53
------------------------------
BALANCE, JUNE 30, 1998 37,617,919 33.49
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
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 1,514,947 1.4 $ 18.82 1,514,947 $ 18.82
$20 - $30 8,611,070 4.2 27.09 8,251,070 27.07
$30 - $40 26,177,602 8.3 35.65 11,742,442 33.60
$40 - $50 814,300 7.9 47.20 311,668 47.43
$50 - $60 500,000 9.6 52.28 - -
----------- -----------
37,617,919 21,820,127
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 35
35
NOTE 12 INCOME TAXES
The following tables summarize the sources of pretax income and the resulting
income tax expense.
Geographic Components of Pretax Income
<TABLE>
<CAPTION>
Transition Fiscal
Fiscal Years Ended Period Ended Year Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. $ 1,192 $ 136 $ (192) $ (9)
Canada 51 77 (16) 16
Other jurisdictions 368 513 202 233
---------------------------------------------------
Income (loss) from continuing operations, before tax 1,611 726 (6) 240
Discontinued Tropicana operations 130 111 36 62
Discontinued DuPont activities - - - 5,283
---------------------------------------------------
Income before tax $ 1,741 $ 837 $ 30 $ 5,585
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Components of Income Tax Expense
<TABLE>
<CAPTION>
Transition Fiscal
Fiscal Years Ended Period Ended Year Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) applicable to:
Continuing Operations $ 638 $ 331 $ 34 $ 121
1981 transaction* - - (67) -
Discontinued Tropicana operations 64 54 18 32
Discontinued DuPont activities - - - 2,051
---------------------------------------------------
Total income tax expense (benefit) $ 702 $ 385 $ (15) $ 2,204
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</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.
<PAGE> 36
36
Components of Income Tax Expense Continued
<TABLE>
<CAPTION>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current
Continuing operations
Federal $ 134 $ 184 $ (9) $ (7)
State and local (20) 35 3 15
1981 transaction* - - (105) -
Other jurisdictions 77 165 81 87
---------------------------------------------------------
191 384 (30) 95
Discontinued Tropicana operations 58 53 - 44
Discontinued DuPont activities - - - 612
---------------------------------------------------------
249 437 (30) 751
---------------------------------------------------------
Deferred
Continuing operations
Federal 351 (25) (26) 43
State and local 34 (19) (2) (2)
1981 transaction* - - 38 -
Other jurisdictions 62 (9) (13) (15)
---------------------------------------------------------
447 (53) (3) 26
Discontinued Tropicana operations 6 1 18 (12)
Discontinued DuPont activities - - - 1,439
---------------------------------------------------------
453 (52) 15 1,453
---------------------------------------------------------
Total income tax expense (benefit) $ 702 $ 385 $ (15) $ 2,204
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</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.
Components of Net Deferred Tax Liability
<TABLE>
<CAPTION>
June 30, June 30,
Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basis and amortization differences $ 572 $ 498
DuPont share redemption 1,540 1,540
DuPont and USAi investments (1997 - DuPont and Time Warner) 516 420
Unremitted foreign earnings 94 59
Other, net 80 27
-------------------------
Deferred tax liabilities 2,802 2,544
-------------------------
Deferred revenue (60) (132)
Employee benefits (28) (103)
Tax credit and net operating loss carryovers (60) (49)
Valuation, doubtful accounts and return reserves (234) (260)
Other, net (136) (128)
-------------------------
Deferred tax assets (518) (672)
Valuation allowance 32 42
-------------------------
(486) (630)
-------------------------
Net deferred tax liability $ 2,316 $ 1,914
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 37
37
The Company has U.S. tax credit carryovers of $32 million; $13 million of which
has no expiration date and $19 million of which have expiration dates through
2009. The valuation allowance arises from uncertainty as to the realization of
certain U.S. tax credit carryovers. If realized, these benefits would be applied
to reduce the Universal unallocated excess purchase price. In addition, the
Company has approximately $78 million of net operating loss carryovers; $16
million of which has no expiration date and $62 million of which have expiration
dates through 2011.
Effective Income Tax Rate - Continuing Operations
<TABLE>
<CAPTION>
Transition Fiscal
Fiscal Years Ended Period Ended Year Ended
June 30, June 30, January 31,
1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. statutory rate 35% 35% 35% 35%
1981 transaction - - 1,115 -
State and local 1 2 (43) 5
Dividends received deduction -- - (1) 78 (4)
Goodwill amortization 1 8 (296) 16
Other 3 2 (339) (2)
--------------------------------------------------------
Effective income tax rate - continuing operations 40% 46% 550% 50%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</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.
NOTE 13 BENEFIT PLANS
PENSION
Pension costs were $29 million and $46 million for the fiscal years ended June
30, 1998 and June 30, 1997, respectively, $25 million for the Transition Period
ended June 30, 1996 and $41 million for the fiscal year ended January 31, 1996.
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 years
ended June 30, 1998 and 1997, 10 percent for the Transition Period ended June
30, 1996 and 10.75 percent for the fiscal year ended January 31, 1996. Discount
rates of 7.0 and 7.75 percent were used in determining the actuarial present
value of the projected benefit obligation at June 30, 1998 and 1997,
respectively. The assumed rates of increase in future compensation levels were
4.25 to 5.25 percent for the fiscal year ended June 30, 1998, 5.0 to 6.0 percent
for the fiscal year ended June 30, 1997 and the Transition Period ended June 30,
1996 and 4.5 to 5.5 percent for the fiscal year ended January 31, 1996. 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.
The majority of the pension arrangements for the Company's employees of
affiliates outside the U.S., the U.K. and Canada are either insured or
government sponsored. In those affiliates outside of the U.S. where defined
benefit plans exist (U.K., Canada and France), the net periodic pension cost was
$8 million and $6 million for the fiscal years ended June 30, 1998 and 1997,
respectively, $3 million for the Transition Period ended June 30, 1996 and $6
million for the fiscal year ended January 31, 1996. At June 30, 1998, the
present value of these plans' projected benefit obligation was $360 million,
$307 million of which was for vested benefits; the fair value of plan assets was
$415 million.
<PAGE> 38
38
Net Cost of U.S. Defined Benefit Pension Plans
<TABLE>
<CAPTION>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service cost - benefits earned during the period $ 13 $ 14 $ 5 $ 12
Interest cost on Projected Benefit Obligation 45 45 18 44
Return on plan assets
Actual gain (127) (145) (46) (171)
Deferred actuarial gain 50 78 22 124
Net amortization and deferral (4) 2 2 3
-------------------------------------------------------
Net pension (income) cost $ (23) $ (6) $ 1 $ 12
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Status of U.S. Defined Benefit Pension Plans
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Millions Benefits Exceed Assets Benefits Exceed Assets
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Actuarial present value of:
Vested Benefit Obligation $ (527) $ (103) $ (422) $ (81)
---------------------------------------------------------------------
Accumulated Benefit Obligation $ (540) $ (106) $ (442) $ (84)
---------------------------------------------------------------------
Projected Benefit Obligation $ (558) $ (123) $ (498) $ (107)
Plan assets at fair value, principally equity securities 832 - 741 -
---------------------------------------------------------------------
Plan assets in excess of (less than) Projected Benefit
Obligation 274 (123) 243 (107)
Deferred net actuarial (gain) loss (177) 49 (175) 34
Unamortized prior service cost 13 (1) 4 4
Unamortized transition obligation - 1 - 2
Recognition of minimum liability - (32) - (17)
---------------------------------------------------------------------
Prepaid (accrued) pension cost $ 110 $ (106) $ 72 $ (84)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</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>
Transition Fiscal Year
Fiscal Years Ended Period Ended Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service cost - benefits earned during the period $ 2 $ 2 $ 1 $ 2
Interest cost on accumulated postretirement benefit
obligation 11 11 5 12
Amortization of prior service cost (4) (3) (2) (3)
-------------------------------------------------------
Net postretirement benefit cost $ 9 $ 10 $ 4 $ 11
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
39
The accumulated postretirement benefit obligation, included in other credits in
the accompanying balance sheet, comprises the following:
<TABLE>
<CAPTION>
June 30, June 30,
Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retirees $ 112 $ 100
Fully eligible active plan participants 26 23
Other active plan participants 30 29
Unrecognized:
Actuarial gain 4 16
Prior service cost 19 22
--------------------------
Accrued postretirement benefit obligation $ 191 $ 190
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
Future benefit costs were estimated assuming medical costs would increase at an
8.25 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, 1998 by $6 million
($4 million after tax), with an increase in pretax expense of $1 million for the
fiscal year ended June 30, 1998. The weighted average discount rates used to
estimate the accumulated postretirement benefit obligation were 7.0 and 7.75
percent at June 30, 1998 and 1997, respectively.
<PAGE> 40
40
NOTE 14 BUSINESS SEGMENT AND GEOGRAPHIC DATA
Business Segment Data
<TABLE>
<CAPTION>
Spirits
and
Millions Wine(1) Entertainment Corporate(2) Total(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, 1998
Revenues $ 4,525 $ 4,949 $ - $ 9,474
Depreciation and amortization of assets 96 186 7 289
Amortization of goodwill 23 104 - 127
Operating income (expense) 464 209 (120) 553
Identifiable assets 5,015 13,163 2,267 20,445
Capital expenditures 170 240 - 410
JUNE 30, 1997
Revenues $ 4,870 $ 5,484 $ - $ 10,354
Depreciation and amortization of assets 101 185 4 290
Amortization of goodwill 22 81 - 103
Operating income (expense) 663 194 (138) 719
Identifiable assets 5,290 10,586 2,837 18,713
Capital expenditures 187 206 - 393
JUNE 30, 1996 (TRANSITION PERIOD)
Revenues $ 1,805 $ 2,307 $ - $ 4,112
Depreciation and amortization of assets 46 86 2 134
Amortization of goodwill 11 39 - 50
Operating income (expense) 176 (28) (55) 93
Identifiable assets 5,551 10,269 3,694 19,514
Capital expenditures 108 136 1 245
JANUARY 31, 1996
Revenues $ 4,792 $ 2,995 $ - $ 7,787
Depreciation and amortization of assets 100 97 4 201
Amortization of goodwill 24 40 - 64
Operating income (expense) 359(3) 160 (84) 435
Identifiable assets 5,659 9,997 3,755 19,411
Capital expenditures 173 175 1 349
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes discontinued Tropicana operations.
(2) Includes (i) corporate expenses and assets not identifiable with either
business segment, and (ii) DuPont and Time Warner holdings, which
represented 54%, 82%, 90% and 91% of corporate assets at June 30, 1998, 1997
and 1996 and January 31, 1996, respectively.
(3) Includes a $274 million charge related to reengineering activities.
The Company will adopt FAS 131, Disclosures about Segments of an Enterprise and
Related Information, in its fiscal year beginning July 1, 1998. To comply with
the disclosure requirements in FAS 131, in addition to the segments above, the
Company will also disclose the components of the entertainment segment, namely
filmed entertainment, music and recreation and other.
<PAGE> 41
41
Geographic Data
<TABLE>
<CAPTION>
Revenues(1,2)
Unrelated Inter- Operating Total
Millions Parties company Income(2) Assets(2,3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, 1998
U.S. $ 5,210 $ 325 $ (24) $ 13,289
Europe 3,033 360 484 4,698
Asia Pacific 426 - (107) 501
Latin America 518 26 32 342
Canada 287 228 168 387
-------------------------------------------------------
$ 9,474 $ 939 $ 553 $ 19,217
-------------------------------------------------------
-------------------------------------------------------
JUNE 30, 1997
U.S. $ 5,396 $ 54 $ (29) $ 11,208
Europe 3,434 390 502 3,947
Asia Pacific 757 - 30 514
Latin America 480 27 37 355
Canada 287 235 179 364
-------------------------------------------------------
$ 10,354 $ 706 $ 719 $ 16,388
-------------------------------------------------------
-------------------------------------------------------
JUNE 30, 1996 (TRANSITION PERIOD)
U.S. $ 2,070 $ 31 $ (176) $ 10,923
Europe 1,480 176 219 4,161
Asia Pacific 303 - (11) 419
Latin America 144 13 22 288
Canada 115 61 39 404
-------------------------------------------------------
$ 4,112 $ 281 $ 93 $ 16,195
-------------------------------------------------------
-------------------------------------------------------
JANUARY 31, 1996
U.S. $ 3,728 $ 56 $ 7 $ 10,468
Europe 2,806 456 247 4,357
Asia Pacific 646 - 30 453
Latin America 406 29 16 324
Canada 201 212 135 382
-------------------------------------------------------
$ 7,787 $ 753 $ 435 $ 15,984
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</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 discontinued Tropicana operations.
(3) Excludes DuPont and Time Warner holdings.
NOTE 15 FISCAL YEAR CHANGE
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.
<PAGE> 42
42
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> <C> <C>
Revenues $ 1,989
---------------------
Operating income 208
Provision for income taxes 54
Income from continuing operations 107
Discontinued Tropicana operations, after tax 10
Discontinued DuPont activities, after tax 3,232
---------------------
Net income $ 3,349
---------------------
---------------------
EARNINGS PER SHARE Basic Diluted
--------------------- -------
Income from continuing operations $ .29 $ .29
Discontinued Tropicana operations, after tax .03 .03
Discontinued DuPont activities, after tax 8.67 8.60
--------------------- -------
Net income $ 8.99 $ 8.92
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE 16 REENGINEERING ACTIVITIES
In connection with a program to better position its spirits and wine operations
to achieve its strategic growth objectives, the Company recorded a pretax charge
of $274 million in the fiscal year ended January 31, 1996. The charge related to
the Company's global spirits and wine manufacturing, financial, marketing and
distribution systems and includes rationalization of facilities in the U.S. and
Europe and other costs related to the redesign of processes associated with the
fulfillment of customer orders and the organizational structure under which the
spirits and wine business operates. The components of the $274 million charge
reflected approximately a $100 million provision for severance costs, $104
million for asset write-downs/impairments and $70 million for facility
rationalization, including lease terminations, and other reengineering programs.
<PAGE> 43
43
NOTE 17 ADDITIONAL FINANCIAL INFORMATION
Income Statement and Cash Flow Data
<TABLE>
<CAPTION>
Transition Fiscal
Fiscal Years Ended Period Ended Year Ended
June 30, June 30, January 31,
Millions 1998 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST, NET AND OTHER
Interest expense $ 318 $ 285 $ 136 $ 338
Interest income (59) (34) (13) (102)
Dividend income (27) (40) (19) (38)
Capitalized interest (4) (4) (5) (3)
Gain on sale of DuPont warrants - (60) - -
--------------------------------------------
$ 228 $ 147 $ 99 $ 195
--------------------------------------------
EXCISE TAXES
(included in revenues and cost of revenues) $ 726 $ 748 $ 266 $ 749
CASH FLOW DATA
Interest paid, net $ 265 $ 252 $ 98 $ 222
Income taxes paid (refunded) $ 144 $ 85 $ (37) $ 1,039
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 44
44
Balance Sheet Data
<TABLE>
<CAPTION>
June 30, June 30,
Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECEIVABLES
Trade $ 1,994 $ 1,762
Other 487 328
-------------------------
2,481 2,090
Allowance for doubtful accounts and other valuation accounts (326) (309)
-------------------------
$ 2,155 $ 1,781
-------------------------
-------------------------
INVENTORIES
Beverages $ 2,239 $ 2,359
Materials, supplies and other 316 225
-------------------------
$ 2,555 $ 2,584
-------------------------
-------------------------
LIFO INVENTORIES
Estimated replacement cost $ 356 $ 342
Excess of replacement cost over LIFO carrying value (173) (181)
-------------------------
$ 183 $ 161
-------------------------
-------------------------
FILM COSTS, NET OF AMORTIZATION
THEATRICAL FILM COSTS
Released $ 353 $ 468
In process and unreleased 839 501
-------------------------
$ 1,192 $ 969
-------------------------
-------------------------
TELEVISION FILM COSTS
Released 223 368
In process and unreleased 32 41
-------------------------
255 409
-------------------------
$ 1,447 $ 1,378
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
Unamortized costs related to released theatrical and television films aggregated
$576 million at June 30, 1998. 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 88 percent of the unamortized
released film costs will be amortized under the individual film forecast method
during the three years ending June 30, 2001.
<PAGE> 45
45
<TABLE>
<CAPTION>
June 30, June 30,
Millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Land $ 553 $ 493
Buildings and improvements 1,467 1,425
Machinery and equipment 1,221 1,104
Furniture and fixtures 369 298
Construction in progress 301 262
-------------------------
3,911 3,582
Accumulated depreciation (1,178) (1,023)
-------------------------
$ 2,733 $ 2,559
-------------------------
-------------------------
PAYABLES AND ACCRUED LIABILITIES
Trade $ 449 $ 381
Other 1,619 1,437
-------------------------
$ 2,068 $ 1,818
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE 18 COMMITMENTS AND CONTINGENCIES
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.
NOTE 19 DIFFERENCES BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Differences between U.S. and Canadian GAAP for these financial statements are:
(i) The common stock of DuPont and USAi would be carried at cost under
Canadian GAAP, thereby reducing shareholders' equity by $699 million or
approximately eight percent at June 30, 1998. There is no effect on net
income.
(ii) Proportionate consolidation of joint ventures under Canadian GAAP would
increase assets and liabilities by approximately $1.1 billion and decrease
working capital by approximately $31 million at June 30, 1998. There is no
effect on net income.
(iii) Under Canadian GAAP, the assets and liabilities of the discontinued
Tropicana operations would be presented separately on the consolidated
balance sheet which would result in an increase of $434 million in both
total assets and total liabilities at June 30, 1998. There is no effect
on net income.
(iv) Other differences between U.S. and Canadian GAAP are immaterial.
<PAGE> 46
46
MANAGEMENT'S REPORT
The Company's management is responsible for the preparation of the accompanying
financial statements in accordance with generally accepted accounting
principles, including the estimates and judgments required for such preparation.
The Company has a system of internal accounting controls designed to provide
reasonable assurance that assets are safeguarded and financial records
underlying the financial statements properly reflect all transactions. The
system contains self-monitoring mechanisms, including a program of internal
audits, which allow management to be reasonably confident that such controls, as
well as the Company's administrative procedures and internal reporting
requirements, operate effectively. Management believes that its long-standing
emphasis on the highest standards of conduct and business ethics, as set forth
in written policy statements, serves to reinforce the system of internal
accounting controls. There are inherent limitations in the effectiveness of any
system of internal control, including the possibility of human error or the
circumvention or overriding of controls. Accordingly, even an effective internal
control system can provide only reasonable assurance with respect to financial
statement preparation.
The Company's independent accountants, PricewaterhouseCoopers LLP, review the
system of internal accounting controls to the extent they consider necessary to
evaluate the system as required by generally accepted auditing standards. Their
report covering their audits of the financial statements is presented below.
The Audit Committee of the Board of Directors, solely comprising Directors who
are not officers or employees of the Company, meets with the independent
accountants, the internal auditors and management to ensure that each is
discharging its respective responsibilities relating to the financial
statements. The independent accountants and the internal auditors have direct
access to the Audit Committee to discuss, without management present, the
results of their audit work and any matters they believe should be brought to
the Committee's attention.
<TABLE>
<S> <C>
/s/ EDGAR M. BRONFMAN /s/ C.E. MEDLAND
Edgar Bronfman, Jr. Robert W. Matschullat
President and Chief Executive Officer Vice Chairman and Chief Financial Officer
</TABLE>
August 12, 1998
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, 1998 and 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for the fiscal years
ended June 30, 1998 and 1997, the Transition Period ended June 30, 1996 and the
fiscal year 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, 1998 and 1997 and the results of their operations
and their cash flows for the fiscal years ended June 30, 1998 and 1997, the
Transition Period ended June 30, 1996 and the fiscal year 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
August 12, 1998, except as to Note 1, which is as of August 25, 1998
<PAGE> 47
47
QUARTERLY DATA
Fiscal 1998
<TABLE>
<CAPTION>
Fiscal Year
U.S. Dollars in Millions First Second Third Fourth Ended
Except for Share Amounts (Unaudited) Quarter Quarter Quarter Quarter 6/30/98(3)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,372 $ 3,009 $ 1,991 $ 2,102 $ 9,474
Operating income 260 231 47 15 553
Income from continuing operations, after tax 116 8 447(1) 309(2) 880
Income from discontinued Tropicana operations,
after tax 17 20 14 15 66
---------------------------------------------------------------
Net income $ 133 $ 28 $ 461 $ 324 $ 946
---------------------------------------------------------------
---------------------------------------------------------------
PER SHARE DATA
EARNINGS PER SHARE - BASIC
Continuing operations $ .32 $ .02 $ 1.30 $ .89 $ 2.51
Discontinued Tropicana operations, after tax .05 .06 .04 .04 .19
---------------------------------------------------------------
Net income $ .37 $ .08 $ 1.34 $ .93 $ 2.70
---------------------------------------------------------------
EARNINGS PER SHARE - DILUTED
Continuing operations $ .32 $ .02 $ 1.28 $ .88 $ 2.49
Discontinued Tropicana operations, after tax .05 .06 .04 .04 .19
---------------------------------------------------------------
Net income $ .37 $ .08 $ 1.32 $ .92 $ 2.68
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fiscal 1997
<TABLE>
<CAPTION>
Fiscal Year
U.S. Dollars in Millions First Second Third Fourth Ended
Except for Share Amounts (Unaudited) Quarter Quarter Quarter Quarter 6/30/97(3)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,366 $ 3,220 $ 2,302 $ 2,466 $ 10,354
Operating income 205 352 88 74 719
Income from continuing operations, after tax 148 142 20 135 445
Income from discontinued Tropicana operations,
after tax 18 19 7 13 57
----------------------------------------------------------------
Net income $ 166(4) $ 161 $ 27 $ 148(5) $ 502
----------------------------------------------------------------
----------------------------------------------------------------
PER SHARE DATA
EARNINGS PER SHARE - BASIC
Continuing operations $ .40 $ .38 $ .05 $ .36 $ 1.20
Discontinued Tropicana operations, after tax .05 .05 .02 .04 .16
----------------------------------------------------------------
Net income $ .45 $ .43 $ .07 $ .40 $ 1.36
----------------------------------------------------------------
EARNINGS PER SHARE - DILUTED
Continuing operations $ .40 $ .38 $ .05 $ .36 $ 1.20
Discontinued Tropicana operations, after tax .05 .05 .02 .04 .15
----------------------------------------------------------------
Net income $ .45 $ .43 $ .07 $ .40 $ 1.35
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a $281 million after-tax gain on the sale of Time Warner shares and
a $187 million gain on the USAi transaction, after tax and minority
interest.
(2) Includes a $320 million after-tax gain on the sale of Time Warner shares.
(3) For earnings per share data, each quarter is calculated as a discrete period
and the sum of the four quarters does not equal the full year amount.
(4) Includes a $39 million after-tax gain on the sale of DuPont warrants.
(5) Includes a $100 million after-tax gain on the sale of Time Warner shares.
<PAGE> 48
48
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Fiscal Years Transition
Ended Period Ended
June 30, June 30,
(U.S.$ in Millions, Except Per Share Amounts) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S>
INCOME STATEMENT
Revenues $ 9,474 $ 10,354 $ 4,112
Operating income 553 719 93
Interest, net and other 228 147 99
Gain on sale of Time Warner shares 926 154 -
Gain on USAi transaction 360 - -
Income from continuing operations before
cumulative effect of accounting change 880 445 67
Income from discontinued Tropicana
operations, after tax 66 57 18
Discontinued DuPont activities, after tax - - -
------------------------------------------------
Income before cum. effect of accounting
change 946 502 85
Cumulative effect of accounting change, after
tax - - -
------------------------------------------------
Net income $ 946 $ 502 $ 85
------------------------------------------------
------------------------------------------------
FINANCIAL POSITION
Current assets $ 6,971 $ 6,131 $ 6,307
Common stock of DuPont 1,228 1,034 651
Common stock of Time Warner - 1,291 2,228
Other noncurrent assets 12,246 10,257 10,328
Net assets of discontinued Tropicana
operations 1,734 1,734 1,693
------------------------------------------------
Total assets $ 22,179 $ 20,447 $ 21,207
------------------------------------------------
------------------------------------------------
Current liabilities $ 4,709 $ 3,087 $ 4,383
Long-term indebtedness 2,225 2,478 2,562
Total liabilities 10,948 9,174 10,163
Minority interest 1,915 1,851 1,839
Shareholders' equity 9,316 9,422 9,205
------------------------------------------------
Total liabilities & shareholders' equity $ 22,179 $ 20,447 $ 21,207
------------------------------------------------
------------------------------------------------
CASH FLOW DATA
Cash flow (used for) provided by operating
activities $ (241) $ 664 $ 315
Capital expenditures (410) (393) (245)
Other investing activities, net 1,109 2,101 (346)
Dividends paid (231) (239) (112)
PER SHARE DATA
EARNINGS PER SHARE - BASIC
Continuing operations $ 2.51 $ 1.20 $ .18
Discontinued Tropicana operations, after tax .19 .16 .05
Discontinued DuPont activities, after tax - - -
------------------------------------------------
Income before cum. effect of accounting
change 2.70 1.36 .23
Cumulative effect of accounting change, after
tax - - -
------------------------------------------------
Net income $ 2.70 $ 1.36 $ .23
------------------------------------------------
------------------------------------------------
EARNINGS PER SHARE - DILUTED
Continuing operations $ 2.49 $ 1.20 $ .18
Discontinued Tropicana operations, after tax .19 .15 .05
Discontinued DuPont activities, after tax - - -
------------------------------------------------
Income before cum. effect of accounting
change 2.68 1.35 .23
Cumulative effect of accounting change, after
tax - - -
------------------------------------------------
Net income $ 2.68 $ 1.35 $ .23
------------------------------------------------
------------------------------------------------
Dividends paid $ .66 $ .645 $ .30
Shareholders' equity 26.84 25.79 24.67
End of year share price
New York Stock Exchange (U.S.$) $ 40.94 $ 40.25 $ 33.63
Canadian Stock Exchange (Cdn$) 59.95 55.50 45.75
Average shares outstanding (thousands) 349,874 369,682 373,858
Shares outstanding at year end (thousands) 347,132 365,281 373,059
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<CAPTION>
Fiscal Years Ended January 31,
(U.S.$ in Millions, Except Per Share Amounts) 1996 1995 1994
<C> <C> <C> <C>
INCOME STATEMENT
Revenues $ 7,787 $ 4,994 $ 4,724
Operating income 435 614 622
Interest, net and other 195 317 275
Gain on sale of Time Warner shares - - -
Gain on USAi transaction - - -
Income from continuing operations before
cumulative effect of accounting change 144 170 249
Income from discontinued Tropicana
operations, after tax 30 24 34
Discontinued DuPont activities, after tax 3,232 617 96
-------------------------------------------
Income before cum. effect of accounting
change 3,406 811 379
Cumulative effect of accounting change, after
tax - (75) -
------------------------------------------------
Net income $ 3,406 $ 736 $ 379
------------------------------------------------
------------------------------------------------
FINANCIAL POSITION
Current assets $ 6,194 $ 3,938 $ 3,532
Common stock of DuPont 631 3,670 3,154
Common stock of Time Warner 2,356 2,043 1,769
Other noncurrent assets 10,230 1,773 1,754
Net assets of discontinued Tropicana
operations 1,549 1,270 1,220
------------------------------------------------
Total assets $ 20,960 $ 12,694 $ 11,429
------------------------------------------------
------------------------------------------------
Current liabilities $ 3,557 $ 3,865 $ 2,776
Long-term indebtedness 2,889 2,838 3,051
Total liabilities 9,788 7,174 6,428
Minority interest 1,844 11 -
Shareholders' equity 9,328 5,509 5,001
------------------------------------------------
Total liabilities & shareholders' equity $ 20,960 $ 12,694 $ 11,429
------------------------------------------------
------------------------------------------------
CASH FLOW DATA
Cash flow (used for) provided by operating
activities $ 222 $ 370 $ 370
Capital expenditures (349) (124) (118)
Other investing activities, net 2,260 (341) (1,556)
Dividends paid (224) (216) (209)
PER SHARE DATA
EARNINGS PER SHARE - BASIC
Continuing operations $ .38 $ .46 $ .67
Discontinued Tropicana operations, after tax .08 .06 .09
Discontinued DuPont activities, after tax 8.67 1.66 .26
------------------------------------------------
Income before cum. effect of accounting
change 9.13 2.18 1.02
Cumulative effect of accounting change, after
tax - (.20) -
------------------------------------------------
Net income $ 9.13 $ 1.98 $ 1.02
------------------------------------------------
------------------------------------------------
EARNINGS PER SHARE - DILUTED
Continuing operations $ .38 $ .46 $ .66
Discontinued Tropicana operations, after tax .08 .06 .09
Discontinued DuPont activities, after tax 8.54 1.64 .25
------------------------------------------------
Income before cum. effect of accounting
change 9.00 2.16 1.00
Cumulative effect of accounting change, after
tax - (.20) -
------------------------------------------------
Net income $ 9.00 $ 1.96 $ 1.00
------------------------------------------------
------------------------------------------------
Dividends paid $ .60 $ .58 $ .56
Shareholders' equity 24.91 14.79 13.43
End of year share price
New York Stock Exchange (U.S.$) $ 36.38 $ 28.75 $ 30.75
Canadian Stock Exchange (Cdn$) 49.75 40.50 40.63
Average shares outstanding (thousands) 373,117 372,499 373,051
Shares outstanding at year end (thousands) 374,462 372,537 372,489
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
