<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2275
THE SEAGRAM COMPANY LTD.
(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)
514-849-5271
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of April 30, 1999, there were 403,046,179 common shares without
nominal or par value issued and outstanding.
<PAGE> 2
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income and
Retained Earnings -
Quarter and Nine Months Ended
March 31, 1999 and 1998 1
Consolidated Balance Sheet -
March 31, 1999 and June 30, 1998 2
Consolidated Statement of Cash Flows -
Nine Months Ended March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
</TABLE>
<PAGE> 3
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(United States dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 3,215 $ 1,991 $ 8,789 $ 7,372
Cost of revenues 1,991 1,167 5,265 4,315
Selling, general and administrative expenses 1,387 777 3,322 2,519
Restructuring charge - - 405 -
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (163) 47 (203) 538
Interest, net and other 184 63 301 183
Gain on sale of Time Warner shares - 433 - 433
Gain on USAi transaction - 360 - 360
--------- --------- --------- ---------
(347) 777 (504) 1,148
Provision (benefit) for income taxes (93) 282 (18) 489
Minority interest (10) 33 (27) 48
Equity earnings (losses) from unconsolidated companies 45 (15) 129 (40)
--------- --------- --------- ---------
Income (loss) from continuing operations (199) 447 (330) 571
--------- --------- --------- ---------
Discontinued Tropicana Operations:
Income (loss) from discontinued operations (net
of taxes of $0 in 1999 and $11 and $49 for the quarter and
nine months ended March 31, 1998, respectively) - 14 (3) 51
Gain on sale of discontinued operations (net of taxes of $373) - - 1,072 -
--------- --------- --------- ---------
- 14 1,069 51
--------- --------- --------- ---------
NET INCOME (LOSS) (199) 461 739 622
Retained earnings at beginning of period 9,091 7,597 8,268 8,259
Dividends paid (66) (57) (181) (173)
Shares purchased and retired - - - (707)
--------- --------- --------- ---------
Retained earnings at end of period $ 8,826 $ 8,001 $ 8,826 $ 8,001
========= ========= ========= =========
Basic earnings (loss) per share $ (0.50) $ 1.34 $ 2.00 $ 1.77
========= ========= ========= =========
Diluted earnings (loss) per share $ (0.50) $ 1.32 $ 2.00 $ 1.76
========= ========= ========= =========
Dividends paid per share $ 0.165 $ 0.165 $ 0.495 $ 0.495
========= ========= ========= =========
Weighted average shares outstanding (thousands) 399,427 345,372 368,827 350,967
Dilutive potential common shares (thousands) - 3,502 - 3,232
--------- --------- --------- ---------
Adjusted weighted average shares outstanding (thousands) 399,427 348,874 368,827 354,199
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(United States dollars in millions)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and short-term investments at cost $ 970 $ 1,174
Receivables, net 3,060 2,155
Inventories 2,700 2,555
Film costs, net of amortization 332 175
Deferred income taxes 785 282
Prepaid expenses and other current assets 939 630
-------- --------
TOTAL CURRENT ASSETS 8,786 6,971
-------- --------
Common stock of DuPont 955 1,228
Common stock of USAi 440 306
Film costs, net of amortization 1,357 1,272
Artists' contracts, advances and other entertainment assets 3,336 761
Property, plant and equipment, net 3,109 2,733
Investments in unconsolidated companies 4,026 3,437
Goodwill and other intangibles 12,666 3,076
Deferred charges and other assets 884 661
Net assets held for sale and discontinued operations 140 1,734
-------- --------
$ 35,699 $ 22,179
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings and indebtedness payable within one year $ 2,347 $ 1,653
Accrued royalties and participations 2,189 702
Payables and accrued liabilities 4,021 2,068
Income and other taxes 239 286
-------- --------
TOTAL CURRENT LIABILITIES 8,796 4,709
Long-term indebtedness 7,073 2,225
Accrued royalties and participations 599 421
Deferred income taxes 3,434 2,598
Other credits 1,862 995
Minority interest 1,878 1,915
-------- --------
TOTAL LIABILITIES 23,642 12,863
-------- --------
Shareholders' Equity
Shares without par value (401,796,298 and 347,132,224 shares, respectively) 3,090 848
Cumulative currency translation adjustments (430) (499)
Cumulative gain on equity securities, net of tax 571 699
Retained earnings 8,826 8,268
-------- --------
TOTAL SHAREHOLDERS' EQUITY 12,057 9,316
-------- --------
$ 35,699 $ 22,179
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(United States dollars in millions)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31,
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations $ (330) $ 571
------- -------
Adjustments to reconcile income from continuing operations to net cash provided
Depreciation and amortization of assets 348 215
Amortization of goodwill 158 106
Gain on sale of Time Warner shares, before tax - (433)
Gain on USAi transaction, before tax - (360)
Minority interest in income (loss) of subsidiaries (27) 48
Equity earnings from unconsolidated companies (greater) less than dividends received (57) 89
Deferred income taxes 35 (21)
Sundry 36 (100)
Changes in assets and liabilities, net of effect of acquisitions and
dispositions:
Receivables 979 (149)
Inventories (104) (31)
Film costs, net of amortization (50) 9
Prepaid expenses and other current assets 31 (69)
Artists' contracts, advances and other entertainment assets 114 (106)
Payables and accrued liabilities 127 (327)
Income and other taxes (464) 406
Other credits (409) 170
------- -------
717 (553)
------- -------
Net cash provided by operating activities 387 18
------- -------
INVESTING ACTIVITIES
Proceeds from sale of Tropicana 3,288 -
Acquisition of PolyGram (8,607) -
Capital expenditures (314) (257)
Investment in USANi LLC (231) -
Acquisition of 50% interest in USA Networks - (1,700)
Proceeds from USAi transaction 1,332
Proceeds from the sale of Time Warner shares 958
Sundry investments 194 6
------- -------
Net cash (used for) provided by investing activities (5,670) 339
------- -------
FINANCING ACTIVITIES
Dividends paid (181) (173)
Issuance of shares upon exercise of stock options and conversion of LYONs 243 51
Shares purchased and retired - (753)
Increase in long-term indebtedness 4,845 5
Decrease in long-term indebtedness (226) (12)
Increase in short-term borrowings and indebtedness payable within one year 401 1,353
------- -------
Net cash provided by financing activities 5,082 471
------- -------
NET CASH (USED FOR) PROVIDED BY CONTINUING OPERATIONS (201) 828
NET CASH (USED FOR) PROVIDED BY DISCONTINUED OPERATIONS (3) 114
------- -------
NET (DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS $ (204) $ 942
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in
accordance with the requirements of Form 10-Q and, therefore, do not include all
information and notes necessary for a presentation of results of operations,
financial position and cash flows in conformity with generally accepted
accounting principles. These statements should be read in conjunction with the
consolidated financial statements and related notes in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998, as amended (the
"Form 10-K"). In the opinion of the Company, the unaudited interim financial
statements include all adjustments, comprising only normal recurring
adjustments, necessary for a fair presentation of operating results. Results of
operations for the nine months are not necessarily indicative of those expected
for the fiscal year.
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
2. Sale of Discontinued Tropicana Operations
Discontinued Tropicana Operations is comprised of the business of Tropicana
Products, Inc. and the Company's global fruit juice business ("Tropicana"). On
August 25, 1998, the Company completed the sale of Tropicana for $3,288 million
in cash, resulting in a pretax gain of $1,445 million ($1,072 million after tax)
reflected as Discontinued Tropicana Operations on the consolidated statement of
income and retained earnings. The operating results of Tropicana through August
25, 1998 are also included as Discontinued Tropicana Operations. Proceeds from
the sale were used to partially fund the acquisition of PolyGram N.V.
("PolyGram") described in Note 3.
3. Acquisition of PolyGram
In December 1998, the Company acquired 99.5% of the outstanding shares of
PolyGram, a global entertainment company, for approximately $8.6 billion in cash
and approximately 47.9 million common shares of the Company (approximately 12%
of the Company's outstanding common shares after the transaction). Substantially
all of the common shares were issued to Koninklijke Philips Electronics N.V.,
which had owned 75% of the PolyGram shares. The acquisition was accounted for
under the purchase method of accounting, and accordingly, the results of the
acquisition of PolyGram are included with the results of the Company from the
date of acquisition on December 10, 1998. The Company performed a preliminary
purchase price study related to its acquisition of PolyGram in order to assess
and allocate the purchase price among tangible and intangible assets acquired
and liabilities assumed, based on fair values at the acquisition date. As a
result of the study, approximately $2.8 billion of the purchase price was
recorded as artists contracts, catalogs and music publishing assets and $9.7
billion was recorded as goodwill and other intangibles, which are being
amortized over periods of fourteen to forty years.
As part of the reorganization of PolyGram, certain subsidiaries of PolyGram were
transferred to affiliates of the Company for fair market value. Matsushita
Electric Industrial Co., Ltd. ("Matsushita"), the indirect minority shareholder
in Universal Studios Holding I Corp. ("Universal Holding"), an entity which
indirectly owns Universal Studios, Inc. ("Universal"), declined to contribute
additional capital in connection with the acquisition of PolyGram and the
reorganization. As a result, the Company's ownership of Universal Holding has
increased from approximately 84% to approximately 91.9%. The shares of PolyGram
are currently held by Centenary Holding N.V., an entity in which the Company has
an indirect approximate 91.9% ownership interest with the remaining approximate
8.1% interest owned indirectly by Matsushita.
4
<PAGE> 7
The unaudited condensed pro forma results of operations data presented below
assume the PolyGram acquisition, the sale of Tropicana and the USA Transactions
(described below), occurred at the beginning of the earliest period presented.
The "USA Transactions" are (1) the acquisition on October 21, 1997 of an
incremental 50% interest in the USA Networks partnership for $1.7 billion and
(2) the sale on February 12, 1998 of a 50% interest in USA Networks to USA
Networks, Inc. ("USAi") and the contribution of the remaining 50% interest in
USA Networks, the majority of the television assets of Universal and 50% of the
international operations of USA Networks to USANi LLC in a transaction in which
Universal received a 10.7% interest in USAi and a 45.8 % exchangeable interest
in USANi LLC, each as of the transaction date.
These pro forma results of operations were prepared based upon the historical
consolidated statement of operations of the Company and of PolyGram for the nine
months ended March 31, 1999 and 1998, adjusted to reflect purchase accounting.
The unaudited pro forma information is not necessarily indicative of the
combined results of operations of the Company and PolyGram 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
(millions, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
Revenues $ 11,821 $ 11,343
Net (loss) income $ (155) $ 302
EARNINGS (LOSS) PER SHARE:
Basic $ (0.39) $ 0.76
Diluted $ (0.39) $ 0.75
</TABLE>
4. Restructuring Charge
In connection with management's plan to rationalize its entertainment operations
after the acquisition of PolyGram, the Company recorded a restructuring charge
in the second quarter of $405 million ($265 million after-tax). The charge
related entirely to the Company's existing global music and film production,
financial, marketing and distribution operations and includes severance,
rationalization of facilities and labels, termination of artists and
distribution contracts and costs related to exiting film production arrangements
and properties in development. Music operations account for the majority of the
charge.
The components of the $405 million charge are $126 million for severance and
other employee related costs, $128 million for facility rationalization and $151
million of contract termination and other costs. The severance and other
employee related costs provide for a reduction of approximately 1,200 employees
worldwide related to facility closures, duplicate position eliminations and
streamlining of operations related to cost reduction initiatives. The facility
rationalization costs provide for domestic and international lease terminations
and the write-off of the net book value of furniture, fixtures and equipment and
leasehold improvements for vacated properties. The costs of contract
terminations are comprised primarily of artist contracts, distribution
contracts, story property commitments and term deals. The cash and noncash
elements of the restructuring charge approximate $318 million and $87 million,
respectively. As of March 31, 1999, cash payments of approximately $47 million
have been made against the charge and approximately $11 million of noncash
elements utilized. The Company anticipates that severance activity, facility
rationalization and contract termination activities will be substantially
completed by December 31, 1999.
5
<PAGE> 8
5. Investment in DuPont and USAi
At March 31, 1999, the Company owned 16.4 million shares of the outstanding
common stock of E. I. du Pont de Nemours and Company ("DuPont"). The Company
accounts for the investment at market value. The underlying historical book
value of the DuPont shares is $187 million.
At March 31, 1999, the Company also owned 8.5 million shares of the outstanding
common stock of USAi . The investment, which the Company accounts for at market
value ($304 million at March 31, 1999), has an underlying cost of $187 million.
At March 31, 1999, the Company owned 6.7 million shares of USAi Class B common
stock which is carried at its historical cost of $136 million.
6. Comprehensive Income
Comprehensive income for the nine months ended March 31, 1999 was $680 million
comprised of net income of $739 million, foreign currency translation
adjustments of $69 million and unrealized holding losses on equity securities of
($128 million) (net of a tax benefit of $64 million). Comprehensive income for
the nine months ended March 31, 1998 was $675 million comprised of net income of
$622 million, foreign currency translation adjustments of ($88 million) and
unrealized holding gains on equity securities of $141 million (net of a tax
benefit of $179 million).
7. Supplementary Financial Statement Information
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
--------- --------
(millions)
<S> <C> <C>
INVENTORIES
Beverages $ 2,249 $ 2,239
Materials, supplies and other 451 316
------- -------
$ 2,700 $ 2,555
======= =======
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost $ 4,425 $ 3,911
Accumulated depreciation (1,316) (1,178)
------- -------
$ 3,109 $ 2,733
======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
EXCISE TAXES (included in revenues and cost of revenues) $183 $ 139 $648 $539
---- ----- ---- ----
</TABLE>
6
<PAGE> 9
8. Long-Term Debt and Debt Guarantees
Joseph E. Seagram & Sons, Inc. ("JES"), the Company's principal U.S. spirits and
wine subsidiary, has outstanding debt securities guaranteed by the Company. JES
issued Liquid Yield Option Notes ("LYONs"), which are zero coupon notes with no
interest payments due until maturity on March 5, 2006. Each $1,000 face amount
LYON may be converted, at the option of the holder, into 18.44 of the Company's
common shares (297,256 shares at March 31, 1999). The Company has guaranteed the
LYONs on a subordinated basis.
In addition, the Company has unconditionally guaranteed JES's 6.250% Senior
Notes due 2001, 6.400% Senior Notes due 2003, 6.625% Senior Notes due 2005, 8
3/8% Debentures due February 15, 2007, 7% Debentures due April 15, 2008, 6.800%
Senior Notes due 2008, 8 7/8% Debentures due September 15, 2011, 9.65%
Debentures due August 15, 2018, 7.500% Senior Debentures due 2018, 9% Debentures
due August 15, 2021, 7.600% Senior Debentures due 2028 and 8.000% Quarterly
Income Debt Securities due 2038 ("QUIDS"). On April 14, 1999, JES issued $250
million of 5.79% Senior Notes due 2001 which are also guaranteed by the Company.
With the exception of the summarized financial information for JES and its
subsidiaries presented below, the Company has not presented separate financial
statements and other disclosures related to JES because management has
determined that such information is not material to holders of JES debt
securities.
Summarized financial information for JES and its subsidiaries follows:
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues $496 $464 $1,679 $1,595
Cost of revenues $304 $301 $1,047 $1,010
Income from continuing operations $(45) $(13) $ 13 $ 39
Discontinued Tropicana operations - $ (2) - $ (18)
Net income $(45) $(15) $ 13 $ 21
</TABLE>
Consolidated Balance Sheet information for JES follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
-------- --------
(millions)
<S> <C> <C>
Current assets $ 1,680 $ 1,821
Noncurrent assets 17,680 12,201
-------- --------
$ 19,360 $ 14,022
======== ========
Current liabilities $ 1,643 $ 843
Noncurrent liabilities 8,644 3,922
Shareholder's equity 9,073 9,257
-------- --------
$ 19,360 $ 14,022
======== ========
</TABLE>
7
<PAGE> 10
9. Earnings Per Share and Common Shares
At March 31, 1999, there were 37,550,310 common shares potentially issuable upon
the conversion of the LYONs described in Note 8 and the exercise of outstanding
employee stock options. The dilutive effect on the Company's earnings per share
from the assumed issuance of these shares is reflected in Diluted earnings
(loss) per share on the income statement.
In the nine months ended March 31, 1999, the Company issued 6,759,929 common
shares upon the exercise of employee stock options, deferred compensation and
the conversion of LYONs and issued 47,904,145 common shares in partial payment
of the acquisition of PolyGram described in Note 3.
8
<PAGE> 11
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The Company operates in two global business segments: entertainment and spirits
and wine. The entertainment business segment produces and distributes recorded
music and motion picture, television and home video products; and operates theme
parks and retail stores. The spirits and wine business segment is engaged
principally in the production and marketing of distilled spirits, wines,
coolers, beers and mixers.
The analysis of total Company and business segment results is prepared in
accordance with U.S. generally accepted accounting principles ("GAAP") and
includes revenues and operating income. The discussion also includes revenues
and operating income for the three lines of business within the entertainment
segment: music, filmed entertainment and recreation and other.
The discussion will also include supplemental information concerning the
Company's proportionate share of the results of unconsolidated companies
reported as "Equity earnings from unconsolidated companies". When this
information is combined with the results from consolidated companies, the total
results are equivalent to the discussion of supplemental data regarding
attributed revenues and attributed earnings before interest, taxes, depreciation
and amortization presented in the Form 10-K. The Company believes this non-GAAP
financial information regarding its unconsolidated companies provides additional
information for understanding the underlying business results.
The supplemental information also includes earnings before interest, taxes,
depreciation and amortization ("EBITDA") from consolidated companies, which the
Company believes is an appropriate measure of the Company's operating
performance, given the significant goodwill associated with the Company's
acquisitions. However, EBITDA should be considered in addition to, not as a
substitute for, operating income, net income, cash flows and other measures of
financial performance in accordance with GAAP.
The discussion also includes pro forma financial information which illustrates
the effect of the acquisition of PolyGram and the USA Transactions as described
in Note 3, as if such transactions had been consummated on July 1, 1997.
9
<PAGE> 12
THE SEAGRAM COMPANY LTD.
(US$ IN MILLIONS EXCEPT PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Entertainment
Music $ 1,262 $ 327 $ 2,409 $ 1,096
Filmed Entertainment 786 665 2,141 2,333
Recreation & Other 188 140 618 544
------- ------- ------- -------
Entertainment 2,236 1,132 5,168 3,973
Spirits & Wine 979 859 3,621 3,399
------- ------- ------- -------
Total Revenues $ 3,215 $ 1,991 $ 8,789 $ 7,372
======= ======= ======= =======
Operating Income (Loss)
Entertainment
Music $ (87) $ (19) $ (80) $ (23)
Filmed Entertainment (115) 42 (119) 217
Recreation & Other 2 (8) 31 29
------- ------- ------- -------
Entertainment (200) 15 (168) 223
Spirits & Wine 69 52 438 374
Restructuring Charge - Entertainment - - (405) -
Corporate (32) (20) (68) (59)
------- ------- ------- -------
Total Operating Income (Loss) (163) 47 (203) 538
Interest, Net & Other 184 63 301 183
Gain on sale of Time Warner shares - 433 - 433
Gain on USAi Transaction - 360 - 360
Provision (benefit) for Income Taxes (93) 282 (18) 489
Minority Interest (10) 33 (27) 48
Equity Earnings (Losses) from Unconsolidated Companies 45 (15) 129 (40)
------- ------- ------- -------
NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS (199) 447 (330) 571
Income (loss) from Discontinued Operations - 14 (3) 51
Gain on Sale of Discontinued Operations - - 1,072 -
------- ------- ------- -------
NET INCOME (LOSS) $ (199) $ 461 $ 739 $ 622
======= ======= ======= =======
EARNINGS PER SHARE - Basic
Income (loss) from Continuing Operations $ (0.50) $ 1.30 $ (0.90) $ 1.63
Income (loss) from Discontinued Operations - 0.04 (0.01) 0.14
Gain on sale of Discontinued Operations - - 2.91 -
------- ------- ------- -------
$ (0.50) $ 1.34 $ 2.00 $ 1.77
======= ======= ======= =======
EARNINGS PER SHARE - Diluted
Income (loss) from Continuing Operations $ (0.50) $ 1.28 $ (0.90) $ 1.62
Income (loss) from Discontinued Operations - 0.04 (0.01) 0.14
Gain on sale of Discontinued Operations - - 2.91 -
------- ------- ------- -------
$ (0.50) $ 1.32 $ 2.00 $ 1.76
======= ======= ======= =======
Net cash provided by operating activities $ 176 $ 72 $ 387 $ 18
Net cash provided by (used for) investing activities $ 204 $ 2,243 $(5,670) $ 339
Net cash (used for) provided by financing activities $ (614) $(1,257) $ 5,082 $ 471
</TABLE>
10
<PAGE> 13
THE SEAGRAM COMPANY LTD.
PRO FORMA
(US$ IN MILLIONS EXCEPT PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
-------- -------- -------- --------
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C>
Revenues
Entertainment
Music $ 1,262 $ 1,214 $ 4,994 $ 4,661
Filmed Entertainment 786 777 2,588 2,739
Recreation & Other 188 140 618 544
-------- -------- -------- --------
Entertainment 2,236 2,131 8,200 7,944
Spirits & Wine 979 859 3,621 3,399
-------- -------- -------- --------
Total Revenues $ 3,215 $ 2,990 $ 11,821 $ 11,343
======== ======== ======== ========
Operating Income (Loss)
Entertainment
Music $ (87) $ (118) $ 121 $ (32)
Filmed Entertainment (115) (15) (194) 71
Recreation & Other 2 (8) 31 29
-------- -------- -------- --------
Entertainment (200) (141) (42) 68
Spirits & Wine 69 52 438 374
Corporate (32) (20) (68) (59)
-------- -------- -------- --------
Total Operating Income (Loss) (163) (109) 328 383
Interest, Net & Other 184 155 526 457
Gain on sale of Time Warner shares - 433 - 433
Gain on USAi transaction - 360 - 360
Provision for Income Taxes (93) 214 76 399
Minority Interest (10) 24 3 22
Equity Earnings (losses) from Unconsolidated
Companies 45 (15) 122 4
-------- -------- -------- --------
NET INCOME (LOSS) $ (199) $ 276 $ (155) $ 302
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE - Basic $ (0.50) $ 0.70 $ (0.39) $ 0.76
EARNINGS (LOSS) PER SHARE - Diluted $ (0.50) $ 0.70 $ (0.39) $ 0.75
</TABLE>
11
<PAGE> 14
SUPPLEMENTAL FINANCIAL INFORMATION
(US$ IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
REVENUES
-------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Entertainment
Music
Consolidated Companies $ 1,262 $ 327 $ 2,409 $ 1,096
Unconsolidated Companies 7 7 49 56
------- ------- ------- -------
Total 1,269 334 2,458 1,152
Filmed Entertainment
Consolidated Companies 786 665 2,141 2,333
Unconsolidated Companies 416 337 1,287 775
------- ------- ------- -------
Total 1,202 1,002 3,428 3,108
Recreation & Other
Consolidated Companies 188 140 618 544
Unconsolidated Companies 56 72 192 217
------- ------- ------- -------
Total 244 212 810 761
Entertainment
Consolidated Companies 2,236 1,132 5,168 3,973
Unconsolidated Companies 479 416 1,528 1,048
------- ------- ------- -------
TOTAL ENTERTAINMENT 2,715 1,548 6,696 5,021
------- ------- ------- -------
Spirits & Wine
Consolidated Companies 979 859 3,621 3,399
Unconsolidated Companies 35 31 115 175
------- ------- ------- -------
TOTAL SPIRITS & WINE 1,014 890 3,736 3,574
------- ------- ------- -------
Total Company
Consolidated Companies 3,215 1,991 8,789 7,372
Unconsolidated Companies 514 447 1,643 1,223
------- ------- ------- -------
TOTAL $ 3,729 $ 2,438 $10,432 $ 8,595
======= ======= ======= =======
</TABLE>
12
<PAGE> 15
SUPPLEMENTAL FINANCIAL INFORMATION
(US$ IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
EBITDA
----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Entertainment
Music
Consolidated Companies $ 106 $ 12 $ 208 $ 72
Unconsolidated Companies (1) 0 4 5
------- ------- ------- -------
Total 105 12 212 77
Filmed Entertainment
Consolidated Companies (97) 64 (67) 293
Unconsolidated Companies 93 51 278 93
------- ------- ------- -------
Total (4) 115 211 386
Recreation & Other
Consolidated Companies 22 10 92 83
Unconsolidated Companies 13 12 62 41
------- ------- ------- -------
Total 35 22 154 124
Entertainment
Consolidated Companies 31 86 233 448
Unconsolidated Companies 105 63 344 139
------- ------- ------- -------
TOTAL ENTERTAINMENT 136 149 577 587
------- ------- ------- -------
Spirits & Wine
Consolidated Companies 104 83 536 525
Unconsolidated Companies 0 0 5 2
Charge for Asia - - - (60)
------- ------- ------- -------
TOTAL SPIRITS & WINE 104 83 541 467
------- ------- ------- -------
Total Company
Consolidated Companies 135 169 769 973
Unconsolidated Companies 105 63 349 141
Charge for Asia - - - (60)
------- ------- ------- -------
TOTAL 240 232 1,118 1,054
Unconsolidated Companies Adjustment (105) (63) (349) (141)
Depreciation Expense (82) (59) (212) (174)
Amortization of Intangibles & Step-Up of Assets (186) (44) (294) (147)
Restructuring Charge - Entertainment - - (405) -
Corporate Expenses (30) (19) (61) (54)
------- ------- ------- -------
Operating Income (Loss) $ (163) $ 47 $ (203) $ 538
======= ======= ======= =======
</TABLE>
13
<PAGE> 16
SUPPLEMENTAL FINANCIAL INFORMATION
PRO FORMA
(US$ IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
REVENUES
--------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C>
Entertainment
Music
Consolidated Companies $ 1,262 $ 1,214 $ 4,994 $ 4,661
Unconsolidated Companies 7 7 49 56
------- ------- ------- -------
Total 1,269 1,221 5,043 4,717
Filmed Entertainment
Consolidated Companies 786 777 2,588 2,739
Unconsolidated Companies 416 396 1,287 1,134
------- ------- ------- -------
Total 1,202 1,173 3,875 3,873
Recreation & Other
Consolidated Companies 188 140 618 544
Unconsolidated Companies 56 72 192 217
------- ------- ------- -------
Total 244 212 810 761
Entertainment
Consolidated Companies 2,236 2,131 8,200 7,944
Unconsolidated Companies 479 475 1,528 1,407
------- ------- ------- -------
TOTAL ENTERTAINMENT 2,715 2,606 9,728 9,351
------- ------- ------- -------
Spirits & Wine
Consolidated Companies 979 859 3,621 3,399
Unconsolidated Companies 35 31 115 175
------- ------- ------- -------
TOTAL SPIRITS & WINE 1,014 890 3,736 3,574
------- ------- ------- -------
Total Company
Consolidated Companies 3,215 2,990 11,821 11,343
Unconsolidated Companies 514 506 1,643 1,582
------- ------- ------- -------
TOTAL $ 3,729 $ 3,496 $13,464 $12,925
======= ======= ======= =======
</TABLE>
14
<PAGE> 17
SUPPLEMENTAL FINANCIAL INFORMATION
PRO FORMA
(US$ IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
EBITDA
----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C>
Entertainment
Music
Consolidated Companies $ 106 $ 85 $ 722 $ 593
Unconsolidated Companies (1) 0 4 5
------- ------- ------- -------
Total 105 85 726 598
Filmed Entertainment
Consolidated Companies (97) 3 (131) 133
Unconsolidated Companies 93 77 278 199
------- ------- ------- -------
Total (4) 80 147 332
Recreation & Other
Consolidated Companies 22 10 92 83
Unconsolidated Companies 13 12 62 41
------- ------- ------- -------
Total 35 22 154 124
Entertainment
Consolidated Companies 31 98 683 809
Unconsolidated Companies 105 89 344 245
------- ------- ------- -------
TOTAL ENTERTAINMENT 136 187 1,027 1,054
------- ------- ------- -------
Spirits & Wine
Consolidated Companies 104 83 536 525
Unconsolidated Companies 0 0 5 2
Charge for Asia - - - (60)
------- ------- ------- -------
TOTAL SPIRITS & WINE 104 83 541 467
------- ------- ------- -------
Total Company
Consolidated Companies 135 181 1,219 1,334
Unconsolidated Companies 105 89 349 247
Charge for Asia - - - (60)
------- ------- ------- -------
TOTAL 240 270 1,568 1,521
Unconsolidated Companies Adjustment (105) (89) (349) (247)
Depreciation Expense (82) (76) (238) (228)
Amortization of Goodwill & Step-Up of Assets (186) (195) (592) (609)
Corporate Expenses (30) (19) (61) (54)
------- ------- ------- -------
Operating Income $ (163) $ (109) $ 328 $ 383
======= ======= ======= =======
</TABLE>
The results for the third quarter and nine months ended March 31, 1999 include
PolyGram results for the period from its acquisition by the Company on December
10, 1998. The following discussion will also address the results of the
underlying businesses on a pro forma basis for the nine months ended March 31,
1999 and the comparative three and nine month periods ended March 31, 1998, as
if the PolyGram acquisition and the USA Transactions had occurred at July 1,
1997.
During the quarter, music, recreation and other, and spirits and wine all showed
improvements which were offset by the disappointing performance of the filmed
entertainment business. Overall, revenues increased 61 percent in the quarter
and 19 percent in the nine months primarily due to the PolyGram acquisition and
to
15
<PAGE> 18
improved spirits and wine results. An operating loss of $163 million was
incurred in the quarter and a loss of $203 million in the nine months. The nine
months results include a $405 million pre-tax restructuring charge associated
with the integration of PolyGram into the existing music and film operations.
The restructuring charge is discussed in detail below. Operating income of $538
million in the nine months of the prior year included a $60 million charge for
Asia Pacific spirits and wine operations. Excluding the charges, operating
income declined 66 percent in the nine months. The decrease reflects higher
amortization and depreciation expense associated with the PolyGram acquisition
and the disappointing box office release of several motion pictures during the
period.
EBITDA from consolidated and unconsolidated companies for the quarter increased
three percent to $240 million on total revenues from consolidated and
unconsolidated companies of $3.7 billion. For the nine months the EBITDA
increase was six percent to $1,118 million on total revenues of $10.4 billion.
Excluding the $60 million charge for Asia Pacific spirits and wine operations
from last year's results, EBITDA from consolidated and unconsolidated companies
was essentially flat for the nine months.
Revenues increased eight percent in the quarter to $3.2 billion compared with
the prior year pro forma revenues. On a pro forma basis revenues increased four
percent in the nine months to $11.8 billion. Operating income for the quarter
was a loss of $163 million compared to a pro forma loss of $109 million in the
prior period and pro forma income of $328 million for the nine months versus
$383 million in the prior year period. EBITDA for the quarter was $135 million
compared to pro forma EBITDA of $181 million in the prior year quarter. For the
nine months, pro forma EBITDA decreased four percent. Excluding the $60 million
charge for Asia Pacific spirits and wine operations in the prior year, pro
forma EBITDA declined ninepercent. The decline in pro forma operating income
and EBITDA in the nine month period is primarily due to the poor performance of
the filmed entertainment business which more than offset improvements in all
other businesses.
Restructuring Charge
In connection with management's plan to rationalize its entertainment operations
after the acquisition of PolyGram, the Company recorded a restructuring charge
in the second quarter of $405 million ($244 million after taxes of $140 million
and minority interest of $21 million). The charge related entirely to the
Company's existing global music and film production, financial, marketing and
distribution operations and includes severance, rationalization of facilities
and labels, termination of artists' and distribution contracts and costs related
to exiting film production arrangements and properties in development. Music
operations account for the majority of the charge. The discussions of EBITDA and
pro forma results described throughout this management's discussion and analysis
exclude this restructuring charge.
The components of the $405 million charge are $126 million for severance and
other employee related costs, $128 million for facility rationalization and $151
million of contract termination and other costs. The severance and other
employee related costs provide for a reduction of approximately 1,200 employees
worldwide related to facility closures, duplicate position eliminations and
streamlining of operations related to cost reduction initiatives. The facility
rationalization costs provide for domestic and international lease terminations
and the write-off of the net book value of furniture, fixtures and equipment and
leasehold improvements for vacated properties. The costs of contract
terminations are comprised primarily of artist contracts, distribution
contracts, story property commitments and term deals. The cash and noncash
elements of the restructuring charge approximate $318 million and $87 million,
respectively. As of March 31, 1999, cash payments of approximately $47 million
have been made against the charge and approximately $11 million of noncash
elements utilized. The Company anticipates that severance activity, facility
rationalization and contract termination activities will be substantially
completed by December 31, 1999.
Entertainment
The entertainment segment contributed $2.2 billion to revenues in the quarter,
essentially double the prior year period and $5.2 billion in the nine months, an
increase of 30 percent over the prior year. The increase was primarily due to
the acquisition of PolyGram, partially offset by lower filmed entertainment
revenues for the nine months. An operating loss of $200 million was incurred in
the quarter compared to income of $15 million in the prior year and a loss of
$168 million for the nine months versus income of $223 million in the prior year
period. The decline in operating income was primarily due to increased
amortization and depreciation expense resulting from the PolyGram acquisition
and disappointing motion picture results. The prior year consolidated
16
<PAGE> 19
results include USA Networks from October 21, 1997 until February 12, 1998,
during which time the Company's interest was 100 percent. In the current year,
subsequent to the USA Transactions, the Company's interest is approximately 50
percent of USANi LLC, and the results are included in equity earnings in
unconsolidated companies. Equity in earnings from unconsolidated entertainment
companies increased to $46 million in the quarter and $129 million in the nine
months versus losses last year of $13 million for the quarter and $37 million
for the nine months. The increase in equity earnings reflects the improved
operating results in the businesses of USANi LLC and the impact of the USA
Transactions. In addition, the Company benefited from improved operating results
at Loews Cineplex Entertainment Corporation ("Loews Cineplex") in the nine-month
period year as compared to Cineplex Odeon Corporation (owned in the prior year).
Revenues increased five percent in the quarter to $2.2 billion compared with the
prior year pro forma revenues. Pro forma revenues increased three percent in the
nine months to $8.2 billion. Operating income for the quarter was a loss of $200
million compared to a pro forma loss of $141 million in the prior period and a
pro forma loss of $42 million for the nine months versus pro forma income of $68
million in the prior year period.
Music
Consolidated Operations
On an actual basis, revenues more than tripled in the third quarter and more
than doubled in the nine months. An operating loss of $87 million was incurred
in the quarter compared to a loss of $19 million in the prior period and a loss
of $80 million for the nine months versus a loss of $23 million in the prior
year period. EBITDA increased in the quarter from $12 million in the prior year
to $106 million in the current year and almost tripled on a nine-month basis.
The significant increases in revenues and EBITDA are largely due to the impact
of owning PolyGram from its acquisition on December 10, 1998. The decline in
operating income is primarily due to higher amortization and depreciation
expense resulting from the PolyGram acquisition.
On a pro forma basis Universal Music Group had a strong quarter. Revenues
increased four percent to $1.26 billion in the quarter and seven percent in the
nine months primarily due to improved sales of higher priced units. In the
quarter revenues were driven by solid performances from Andrea Bocelli, DMX,
Jay-Z, George Strait and Shania Twain. Operating income improved in the quarter
from a pro forma loss of $118 million in the prior year to an actual loss of $87
million in the current year, and on a nine-month pro forma basis from a loss of
$32 million last year to income of $121 million in the current year. EBITDA
increased 25 percent in the quarter and 22 percent in the nine months. These
improvements reflect progress in integrating PolyGram and Universal Music and
eliminating costs. The third quarter integration cost savings were largely
offset by substantial technology related expenses. In the fourth quarter,
scheduled releases include new albums from Jimmy Buffet, The Cranberries, K-Ci &
JoJo, Limp Bizket and Texas.
Unconsolidated Operations
The equity in earnings from unconsolidated companies was a loss of $1 million
for the quarter and income of $4 million for the nine months, which is flat
versus the prior year. Unconsolidated companies include Universal Concerts
Canada and Universal/PACE Amphitheaters Group, L.P., which are both concert
joint ventures and are immaterial to the Universal Music Group. In April 1999,
the Universal Music Group announced an Internet alliance with BMG Entertainment,
consisting of on-line music channels and an e-commerce site, getmusic.com. This
joint venture is expected to position Universal as a leader in shaping the music
industry on the Internet.
Filmed Entertainment
Consolidated Operations
Filmed Entertainment revenues increased 18 percent in the quarter but declined
eight percent in the nine months. Operating income decreased in the quarter from
income of $42 million in the prior year to a loss of $115 million in the current
year and on a nine-month basis from income of $217 million in the prior year to
a loss of $119 million in the current year. The prior year nine-month results
included operating income of $76 million for USA Networks from October 21, 1997
until February 12, 1998. In the current year the contribution
17
<PAGE> 20
of USANi LLC is included in equity from unconsolidated companies, not in
consolidated operations. The Motion Picture Group results declined because of
the disappointing box office performance of current year releases (primarily
Virus, edTV, Meet Joe Black and Babe: Pig in the City) and difficult comparisons
with last year's results which benefited from the carryover of a number of films
including Liar, Liar and The Lost World: Jurassic Park. International Television
and Library results declined year-on-year due to start-up costs relating to the
new international channels and lower television library sales. EBITDA from
consolidated companies declined from $64 million in the prior year to a loss of
$97 million in the quarter and on a nine-month basis from $293 million in the
prior year to a loss of $67 million in the current year. The prior year results
included $97 million of EBITDA related to USA Networks, which was consolidated
from October 21, 1997 until February 12, 1998. There is no contribution from USA
Networks in consolidated EBITDA in the current year.
On a pro forma basis, Filmed Entertainment includes the results of PolyGram
Filmed Entertainment in the Motion Picture Group and the prior year results
reflect the USA Transactions as though they had both occurred at July 1, 1997.
Revenues increased one percent in the quarter to $786 million as compared with
the pro forma results of the prior period, but declined six percent in the nine
months to $2.6 billion. The EBITDA loss for the quarter was $97 million compared
to pro forma income of $3 million in the prior year quarter and a pro forma loss
of $131 million for the current year nine months versus pro forma income of $133
million in the prior year. Operating income decreased in the quarter from a pro
forma loss of $15 million in the prior year to an actual loss of $115 million in
the current year and on a nine-month basis from pro forma income of $71 million
in the prior year to a pro forma loss of $194 million in the current year.
In the filmed entertainment business, the poor response to edTV materially
diminishes the outlook for the fourth quarter and the year. However, with the
success of Life and a promising slate for the remainder of the calendar year -
including The Mummy, Notting Hill and American Pie - management expects to
improve box office performance. Even though improved box office results are
expected, a loss is anticipated in the fourth quarter in line with the loss
reported for the third quarter, and it will be several quarters before the film
business returns to profitability.
Unconsolidated Operations
The equity in earnings from unconsolidated companies increased from $3 million
in the third quarter of the prior year to $56 million in the current quarter and
from a loss of $26 million for nine months in the prior year to income of $127
million in the current year. Revenues from unconsolidated companies increased 23
percent in the quarter and 66 percent in the nine months while EBITDA increased
82 percent in the quarter and tripled in the nine months. The significant
improvement is primarily due to improved operating results in the businesses of
USANi LLC combined with the impact of including their results in equity in
earnings from unconsolidated companies for all of the current year. In the prior
year, the Company owned 100 percent of USA Networks for the period October 21,
1997 until February 12, 1998, during which time the results were included in
consolidated operations, not equity in earnings from unconsolidated companies.
Additionally, the Company benefited from improved operating results at Loews
Cineplex in the nine-month period as compared to Cineplex Odeon Corporation
(owned in the prior year). In addition to USANi LLC and Loews Cineplex, the
unconsolidated companies principally include, United Cinemas International
Multiplex B.V., Cinema International Corporation N.V., Cinema International B.V.
and Brillstein-Grey Entertainment.
Recreation and Other
Consolidated Operations
The results for recreation and other improved significantly in the current year,
both on a quarterly and a nine-month basis. Revenues increased 34 percent in the
quarter and 14 percent in the nine months. Operating income improved in the
quarter to $2 million from a loss of $8 million in the prior year and increased
seven percent on a nine-month basis to $31 million. EBITDA more than doubled in
the quarter to $22 million and increased 11 percent in the nine months. These
increases primarily reflect the success of the Crash Bandicoot
18
<PAGE> 21
and Spyro video games and improved sales by Spencer Gifts, partially offset by
the weakness of Universal Studios Hollywood. Attendance at the theme park in
Hollywood declined one percent for the quarter and 10 percent for the nine
months, largely due to the impact of the Asian economic and currency crisis on
tourism. Fourth quarter attendance is expected to increase substantially, driven
by the opening of Terminator 2:3-D, a virtual adventure ride, in May. Per capita
spending at the park was essentially flat year-on-year.
Unconsolidated Operations
Equity in earnings from unconsolidated companies improved in the quarter from a
loss of $15 million in the prior year to a loss of $9 million in the current
year and on a nine-month basis from a loss of $15 million last year to a loss of
$2 million in the current year. Revenues from unconsolidated companies decreased
22 percent in the quarter and 12 percent in the nine months while EBITDA
increased eight percent and 51 percent in the quarter and nine months,
respectively. The improvement in the year-to-date results is primarily due to a
gain recognized by Sega GameWorks L.L.C., on the sale of its game sales
operation to Sega in the first quarter. In addition to Sega GameWorks, the
unconsolidated companies principally include Universal Studios Florida, Port
Aventura and Interplay Entertainment Corp. At Universal Studios Florida, paid
attendance increased one percent in the quarter and declined one percent
year-to-date, while per capita spending increased two percent in the quarter and
one percent year-to-date, principally driven by a higher admission price.
Management expects the new Islands of Adventure theme park in Orlando, Florida,
and Universal Studios Japan in Osaka to grow the Company's recreation business
significantly. Islands of Adventure is scheduled to have its grand opening on
Memorial Day weekend, Universal Studios Japan has already begun construction of
its infrastructure for its planned opening in summer 2001.
Spirits and Wine
Consolidated Operations
The spirits and wine segment performed strongly in the current quarter compared
with the prior year quarter which was severely impacted by market conditions in
Asia. Revenues increased 14 percent in the quarter and seven percent in the nine
months while operating income increased 33 percent in the quarter and 17 percent
in the nine months. Excluding a $60 million charge related to operations in Asia
in the prior year, operating income increased one percent in the nine months.
Asia Pacific's revenues more than doubled in the quarter and operating income
increased significantly compared to a very weak quarter last year. This resulted
primarily from resumed shipments into Greater China this year as well as the
impact of acquiring the remaining 50 percent of our affiliate in Korea. For the
nine months, Asia Pacific's revenues increased 65 percent and operating income
increased 33 percent, as the region continues to recover from the difficult
economic conditions experienced there after the first quarter last year.
Revenues and operating income in North America were six percent and four percent
higher in the quarter and five percent and six percent higher for the nine
months, respectively. These improvements reflect higher volumes and pricing,
partially offset by increased marketing investment. Europe's revenues increased
nine percent in the quarter and five percent in the nine months while operating
income decreased 35 percent in the quarter and increased two percent in the nine
months. The decline in third quarter operating income was primarily due to
Germany where lower volumes and margins on Mumm Sekt combined with higher
marketing spending reduced results. Revenues and operating income in Latin
America were essentially flat in the third quarter. In the nine months revenues
declined two percent and operating income decreased 10 percent. These declines
are due to the difficult economic conditions in the region, particularly in
Brazil. Operating income for total spirits and wine as a percentage of revenues,
increased from 6.1 percent to 7.0 percent in the quarter reflecting the
improvement in Asia Pacific where predominantly higher margin products are sold,
price increases and cost reductions.
In the nine months ended March 31, 1999, cost of goods sold as a percentage of
revenues increased to 53.2 percent from 52.1 percent the prior year. Selling,
general and administrative expenses as a percentage of revenues decreased to
34.2 percent from 35.4 percent due to slight reductions in both brand spending
and overhead expenses coupled with improved revenues. Total brand spending
increased five percent at constant exchange rates in the quarter but declined
one percent for nine months. Brand equity spending increased eight percent at
constant exchange rates in the quarter and three percent for the nine months.
19
<PAGE> 22
Spirits and wine case volumes, including unconsolidated companies, increased
nine percent in the quarter and two percent in the nine months. Volumes of key
brands remain very strong. In the quarter, Captain Morgan volumes increased 19
percent, ABSOLUT VODKA volumes increased 13 percent and Royal Salute case
volumes increased 200 percent off a relatively small base, reflecting improved
performance in Asia Pacific. Volumes of Crown Royal were flat year-on-year
compared with a very strong prior year quarter due to a buy-in prior to an April
1998 price increase. Chivas Regal volumes increased two percent reflecting
growth in North America and improvement in Asia Pacific but a decline in Latin
America. Martell volumes declined five percent largely due to Europe, which more
than offset a modest recovery in Asia.
EBITDA from consolidated companies increased 25 percent in the quarter and 15
percent in the nine months. Excluding the impact of the $60 million charge for
Asia Pacific from the prior year results, EBITDA would have increased two
percent in the nine months.
Unconsolidated Operations
The equity in earnings of unconsolidated companies was a loss of $1 million in
the quarter and breakeven for nine months compared to a loss of $2 million in
the prior year quarter and a loss of $3 million in the prior year nine months.
Revenues from unconsolidated companies increased by 13 percent in the quarter
and declined 34 percent in the nine months. EBITDA, at breakeven was unchanged
in the quarter and more than doubled in the nine months. The year-on-year
variances are primarily due to the entities that are included in unconsolidated
companies. In the current year, they are Kirin-Seagram Limited in Japan and
Seagram (Thailand) Limited. In the third quarter and nine months ended March 31,
1998 they also included Doosan Seagram Co., Ltd. in Korea. As a result of an
additional investment in Doosan Seagram Co., Ltd. at the end of June 1998, that
affiliate's results are now consolidated.
Corporate Expenses and Interest, Net and Other
Corporate expenses were $32 million in the current quarter as compared to $20
million in the prior year and $68 million for nine months compared to $59
million last year. The year-on-year variances are primarily due to increased
costs associated with certain stock-based compensation resulting from the change
in the market value of the Company's shares during the period. Interest, net and
other was $184 million in the current quarter and $63 million in the prior year
quarter and $301 million in the current nine months and $183 million in the
prior year nine months. The increase reflects the funding of the PolyGram
acquisition.
Net Income/(Loss)
A net loss of $199 million, or $0.50 per share (basic and diluted) was incurred
in the quarter compared with net income of $447 million or $1.34 per basic share
and $1.32 per diluted share in the prior year. In the nine months, which
includes the $1.1 billion after-tax gain on the sale of Tropicana, net income
was $739 million or $2.00 per share (basic and diluted). Net income from
continuing operations, excluding the entertainment restructuring charge, the
prior year charge for Asia Pacific spirits and wine operations, the gains on the
sale of Time Warner shares and USAi transaction and discontinued Tropicana
operations, was a loss of $86 million or $0.23 per share in the nine months
compared with income of $153 million or $0.44 per share in the prior year. The
net income decline primarily reflects the operating income shortfall and higher
interest expense associated with funding the PolyGram acquisition, which are
partially offset by higher equity earnings from unconsolidated companies.
Liquidity and Capital Resources
Current assets were $8.8 billion at March 31, 1999 as compared to $7.0 billion
at June 30, 1998 due primarily to an increase in net receivables, deferred
income taxes and prepaid and other current assets resulting from the
consolidation of the PolyGram balance sheet as at March 31, 1999. Current
liabilities at March 31, 1999 were $8.8 billion compared to $4.7 billion at June
30, 1998 due primarily to the acquisition of PolyGram. Shareholders' equity was
$12.1 billion at March 31, 1999 compared to $9.3 billion at June 30, 1998
primarily
20
<PAGE> 23
due to the $2 billion in shares issued as partial payment for the acquisition of
PolyGram. Net debt was $8.5 billion compared to $2.7 billion at June 30, 1998
reflecting an increase in both short and long-term borrowings used primarily to
finance the acquisition of PolyGram.
Net cash of $387 million was provided by operating activities in the nine months
ended March 31, 1999, an increase of $369 million compared to the prior year
period when net cash of $18 million was provided by operating activities. The
improvement resulted primarily from the collection of receivables and the timing
of payments of accounts payable and accrued liabilities.
Cash used for investing activities was $5.7 billion in the nine months ended
March 31, 1999. The $3.3 billion pre-tax proceeds from the Tropicana disposition
were more than offset by the use of $8.6 billion for the cash portion of the
acquisition of PolyGram, an additional investment in USANi LLC of $231 million
and capital expenditures of $314 million. In the prior year, cash provided by
investing activities was $339 million, primarily due to the $1.3 billion
proceeds from the USAi transaction combined with $958 million proceeds from the
sale of Time Warner shares, partially offset by the $1.7 billion acquisition of
the remaining 50 percent of USA Networks.
Financing activities in the nine months ended March 31, 1999 provided $5.1
billion as compared to $471 million in the nine months ended March 31, 1998.
Long-term debt of $4.8 billion was issued in the current year to finance the
PolyGram acquisition.
Cash used for discontinued Tropicana operations to the disposition date of
August 25, 1998 was $3 million as compared to the $114 million of cash provided
by the discontinued Tropicana operations in the nine months ended March 31,
1998.
The Company's working capital position is reinforced by credit facilities of
$6.6 billion. These facilities are used to support the Company's commercial
paper borrowings and are available for general corporate purposes. 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's Value at Risk ("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 March 31, 1999 has not changed
significantly as compared to December 31, 1998. There has been no significant
change to the Company's VaR which is the potential loss in earnings associated
with the Company's exposure to foreign exchange rates, as compared to June 30,
1998.
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 information technology systems first and,
with the exception of Universal Music Group systems described below, targets to
have more than 90% of them Year 2000-compliant by July 1, 1999, the first day of
the Company's fiscal year 2000. Implementation/roll-out of the Year 2000
compliant systems would continue through to September 30, 1999. The Company's
Year 2000 program activities are 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 Company is still completing its evaluation of the Year 2000 readiness of
Universal Music Group, which was formed in December 1998 after the acquisition
of PolyGram. The Company currently expects that critical information technology
systems at the Universal Music Group, which for this purpose includes PolyGram
Filmed Entertainment, will be Year 2000 compliant on or prior to December 31,
1999.
To date, the Company has incurred approximately $30 million in costs related to
its Year 2000 readiness program. Such costs are expensed as incurred. The
Company currently estimates that the total costs of its Year 2000 readiness
programs, including PolyGram, but excluding redeployed resources will not exceed
$75 million. The total cost estimate does not include the costs of internal
software or hardware replaced in the normal course
21
<PAGE> 24
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.
22
<PAGE> 25
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index filed with this Form 10-Q is on page 25.
(b) Current Reports on Form 8-K
1. A Current Report on Form 8-K dated December 10, 1998, as amended, was
filed to report under Item 2 the consummation of the Company's
acquisition of PolyGram and to file under Item 7 certain historical
financial statements of PolyGram.
2. A Current Report on Form 8-K dated April 7, 1999 was filed to report
under Item 5 and file under Item 7 a press release relating to (i) the
Company's sale of certain PolyGram Filmed Entertainment domestic assets
to USAi and (ii) the merger of October Films with a subsidiary of USAi.
The Company also reported the formation of an internet content alliance
by Universal Music Group and BMG Entertainment.
3. A Current Report on Form 8-K dated April 9, 1999 was filed to file under
Item 7 certain documents relating to the Company's Registration
Statement No. 333-62921.
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SEAGRAM COMPANY LTD.
(Registrant)
By: /s/ Robert W. Matschullat
-------------------------
Robert W. Matschullat
Vice Chairman and Chief Financial Officer
(Principal Accounting Officer)
Dated: May 13, 1999
24
<PAGE> 27
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.
27 Financial Data Schedule
25
<PAGE> 1
Exhibit 12(a)
THE SEAGRAM COMPANY LTD.
and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Fiscal Fiscal
Nine Months Ended Year Ended Year Ended
March 31, June 30, June 30,
1999 1998 1998 1997
------- ------- ------- -------
(millions)
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before tax $ (504) $ 1,148 $ 1,611 $ 726
Add (deduct):
Dividends from equity companies 75 49 56 107
Fixed charges 442 245 406 376
Interest capitalized, net of amortization (1) (1) (2) (2)
------- ------- ------- -------
Earnings available for fixed charges $ 12 $ 1,441 $ 2,071 $ 1,207
------- ------- ------- -------
Fixed Charges:
Interest Expense $ 393 $ 207 $ 357 $ 326
Portion of rent expense deemed to represent
interest factor 49 38 49 50
------- ------- ------- -------
Fixed Charges $ 442 $ 245 $ 406 $ 376
------- ------- ------- -------
Ratio of Earnings to Fixed Charges (a) 5.9x 5.1x 3.2x
======= ======= ======= =======
</TABLE>
(a) Fixed charges exceed earnings by $430 million for the nine months ended
March 31, 1999.
<PAGE> 1
Exhibit 12(b)
JOSEPH E. SEAGRAM & SONS, INC.
and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Fiscal Fiscal
Nine Months Ended Year Ended Year Ended
March 31, June 30, June 30,
1999 1998 1998 1997
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
Income from continuing operations before tax $ 19 $ 41 $ 17 $ 122
Add (deduct):
Dividends from equity companies 1 1 2 1
Fixed charges 226 122 182 172
Interest capitalized, net of amortization - - - (1)
----- ----- ----- -----
Earnings available for fixed charges $ 246 $ 164 $ 201 $ 294
----- ----- ----- -----
Fixed charges:
Interest Expense $ 217 $ 113 $ 170 $ 159
Portion of rent expense deemed to represent
interest factor 9 9 12 13
----- ----- ----- -----
Fixed Charges $ 226 $ 122 $ 182 $ 172
----- ----- ----- -----
Ratio of Earnings to Fixed Charges 1.1x 1.3x 1.1x 1.7x
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE SEAGRAM COMPANY LTD. FOR THE QUARTER ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 422
<SECURITIES> 548
<RECEIVABLES> 3,449
<ALLOWANCES> (389)
<INVENTORY> 2,700
<CURRENT-ASSETS> 8,786
<PP&E> 4,425
<DEPRECIATION> (1,316)
<TOTAL-ASSETS> 35,699
<CURRENT-LIABILITIES> 8,796
<BONDS> 7,073
0
0
<COMMON> 3,090
<OTHER-SE> 8,967
<TOTAL-LIABILITY-AND-EQUITY> 35,699
<SALES> 0
<TOTAL-REVENUES> 8,789
<CGS> 5,265
<TOTAL-COSTS> 5,265
<OTHER-EXPENSES> 3,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301
<INCOME-PRETAX> (504)
<INCOME-TAX> (18)
<INCOME-CONTINUING> (330)
<DISCONTINUED> 1,069
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 739
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
</TABLE>
