<PAGE> 1
FORM 10-Q
UNITED STATES
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 December 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)
514-987-5200
- --------------------------------------------------------------------------------
(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 January 31, 2000, there were 434,922,407 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 Six Months Ended December 31, 1999 and 1998 1
Consolidated Balance Sheet -
December 31, 1999 and June 30, 1999 2
Consolidated Statement of Cash Flows -
Six Months Ended December 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
</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 Six Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,970 $ 3,327 $ 8,613 $ 5,574
Cost of revenues 2,781 1,992 4,931 3,274
Selling, general and administrative expenses 1,682 1,149 3,103 1,935
Restructuring charge (credit) (59) 405 (59) 405
----------- ------------ ----------- -----------
Operating income (loss) 566 (219) 638 (40)
Interest, net and other expense 162 76 323 117
Gain on sale of businesses - - 98 -
----------- ------------ ----------- -----------
404 (295) 413 (157)
Provision (benefit) for income taxes (149) (12) (39) 75
Minority interest 16 (23) 20 (17)
Equity earnings from unconsolidated companies 20 34 85 84
----------- ------------ ----------- -----------
Income (loss) from continuing operations 557 (226) 517 (131)
Loss from discontinued Tropicana operations, after tax - - - (3)
Gain on sale of discontinued Tropicana operations, after tax - - - 1,072
Cumulative effect of change in accounting principle, after tax - - (84) -
----------- ------------ ----------- -----------
Net income (loss) 557 (226) 433 938
Retained earnings at the beginning of the period 8,511 9,375 8,707 8,268
Dividends paid (71) (58) (143) (115)
----------- ------------ ----------- -----------
Retained earnings at end of period $ 8,997 $ 9,091 $ 8,997 $ 9,091
=========== ============ =========== ===========
Basic earnings (loss) per share $ 1.29 $ (0.63) $ 1.00 $ 2.65
=========== ============ =========== ===========
Diluted earnings (loss) per share $ 1.27 $ (0.63) $ 0.99 $ 2.64
=========== ============ =========== ===========
Dividends paid per share $ 0.165 $ 0.165 $ 0.33 $ 0.33
=========== ============ =========== ===========
Weighted average shares outstanding (thousands) 433,532 359,693 433,187 353,526
Dilutive potential common shares (thousands) 4,821 - 5,984 2,350
----------- ------------ ----------- -----------
Adjusted weighted average shares outstanding (thousands) 438,353 359,693 439,171 355,876
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 4
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(United States dollars in millions)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,365 $ 1,533
Receivables, net of allowances 3,917 2,985
Inventories 2,470 2,627
Other current assets 1,510 1,736
------------- ------------
Total Current Assets 9,262 8,881
Investments 6,010 5,663
Film costs, net of amortization 1,043 1,251
Music catalogs, artists' contracts and advances 3,059 3,348
Property, plant and equipment, net 3,042 3,158
Goodwill and other intangible assets 11,933 11,871
Other assets 1,118 839
------------- ------------
$ 35,467 $ 35,011
============= ============
Liabilities and Shareholders' Equity
Short-term borrowings and current portion of long-term debt $ 686 $ 1,053
Payables and accrued liabilities 4,564 4,808
Accrued royalties and participations 2,607 2,285
------------- ------------
Total Current Liabilities 7,857 8,146
Long-term debt 7,656 7,468
Accrued royalties and participations 496 434
Deferred income taxes 2,820 2,698
Other liabilities 1,478 1,499
Minority interest 1,879 1,878
------------- ------------
Total Liabilities 22,186 22,123
------------- ------------
Shareholders' Equity
Shares without par value 4,617 4,575
Retained earnings 8,997 8,707
Accumulated other comprehensive income (333) (394)
------------- ------------
Total Shareholders' Equity 13,281 12,888
------------- ------------
$ 35,467 $ 35,011
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 5
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(United States dollars in millions)
<TABLE>
<CAPTION>
Six Months
Ended December 31,
1999 1998
-------- ----------
<S> <C> <C>
Operating Activities
Income (loss) from continuing operations $ 517 $ (131)
Adjustments to reconcile income (loss) from continuing operations to
net cash provided:
Depreciation and amortization of assets 360 171
Amortization of goodwill 171 67
Gain on sale of businesses (98) -
Minority interest in income (loss) of subsidiaries 20 (15)
Equity earnings from unconsolidated companies in excess
of dividends received (68) (47)
Deferred income taxes 39 44
Other 37 64
Changes in assets and liabilities, net of effect of acquisitions
and dispositions:
Receivables, net of allowances (1,128) 93
Inventories (57) (52)
Other current assets 283 (53)
Music catalogs, artists' contracts and advances 23 (39)
Payables and accrued liabilities 118 284
Other liabilities (91) (175)
-------- ----------
(391) 342
-------- ----------
Net cash provided by operating activities 126 211
-------- ----------
Investing Activities
Acquisition of PolyGram - (8,607)
Sale of Tropicana - 3,288
Sale of Champagne Operations 310 -
Sale of Universal Concerts 190 -
Investment in USANi LLC (242) (231)
Capital Expenditures (198) (216)
Other 35 (108)
-------- ----------
Net cash provided by (used for) investing activities 95 (5,874)
-------- ----------
Financing Activities
Dividends paid (143) (115)
Issuance of shares upon exercise of stock options and conversion
of LYONS 40 61
Issuance of Adjustable Conversion-rate Equity Security Units 75 -
Issuance of long-term debt 10 4,168
Repayment of long-term debt (4) (226)
(Decrease) increase in short-term borrowings and current
portion of long-term debt (367) 1,808
-------- ----------
Net cash (used for) provided by financing activities (389) 5,696
-------- ----------
Net cash (used for) provided by continuing operations (168) 33
-------- ----------
Net cash used for discontinued operations - (3)
-------- ----------
Net (decrease) increase in cash and cash equivalents (168) 30
Cash and cash equivalents at beginning of period 1,533 1,174
-------- ----------
Cash and cash equivalents at end of period $ 1,365 $ 1,204
========= ==========
</TABLE>
The accompanying notes are an integral part of these 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 U.S. generally accepted
accounting principles (GAAP). 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, 1999, 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 three and six 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. Pro Forma Financial Information
The unaudited condensed pro forma income statement data presented below assume
the PolyGram acquisition and the sale of Tropicana occurred at the beginning of
the 1998 fiscal year. The pro forma information is not necessarily indicative of
the combined results of operations of the Company that would have occurred if
the transactions had occurred on the dates previously indicated, nor is it
necessarily indicative of future operating results of the Company.
<TABLE>
<CAPTION>
Quarter Six Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Millions, except per share amounts Actual Pro forma Actual Pro forma
- ----------------------------------
Revenues $ 4,970 $ 5,028 $ 8,613 $ 8,606
Net income $ 557 $ 48 $ 433 $ 44
Earnings per share:
Basic $ 1.29 $ 0.12 $ 1.00 $ 0.11
Diluted $ 1.27 $ 0.12 $ 0.99 $ 0.11
</TABLE>
4
<PAGE> 7
3. Significant Transactions
Acquisition of PolyGram
During the second quarter, the Company completed its purchase price study
related to the purchase 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. The final allocation of purchase
price follows:
<TABLE>
<S> <C>
Millions
- --------
Identifiable intangible assets $ 2,774
Goodwill 9,616
Accrual for exit activities (510)
All other, net (1,080)
------------
$ 10,800
------------
</TABLE>
In connection with the integration of PolyGram and Seagram, management developed
a formal exit activity plan that was committed to by management and communicated
to employees shortly after the acquisition was consummated. The accrual for exit
activities consisted principally of facility elimination costs, contract
terminations and the severance or relocation of approximately 1,700 employees.
As at December 31, 1999, approximately $220 million of the accrual had been
utilized and approximately 1,300 employees had separated from the Company.
Disposition of Champagne Operations
On July 2, 1999, the Company completed the sale of its Mumm and Perrier-Jouet
Champagne operations for approximately $310 million in cash. The sale price
approximated book value and therefore no gain or loss was recognized. Through
agreement with the purchaser, Seagram has retained global distribution rights
for Mumm and Perrier-Jouet Champagnes for a ten-year period following the sale.
Disposition of Concert Operations
On September 10, 1999, the Company completed the sale of Universal Concerts,
Inc. for proceeds of approximately $190 million. This transaction resulted in
a pretax gain of $98 million ($55 million after tax).
4. Restructuring Charge
Management developed and committed to a formal plan that was communicated to
employees to restructure its music and filmed entertainment operations after the
acquisition of PolyGram. This plan resulted in a fiscal 1999 pre-tax
restructuring charge of $405 million. The charge related entirely to the
Company's existing global music and film production, financial, marketing and
distribution operations and includes severance, elimination of duplicate
facilities and labels, termination of artists' and distribution contracts and
costs related to exiting film production arrangements and properties in
development. The major components of the charge were:
<TABLE>
<CAPTION>
Filmed
Millions Music Entertainment Total
- -------- ------------ ------------- ----------
<S> <C> <C> <C>
Severance and other employee-related costs $ 111 $ 15 $ 126
Facilities and labels 124 4 128
Contract termination and other costs 78 73 151
------------ ------------- ----------
$ 313 $ 92 $ 405
------------ ------------- ----------
</TABLE>
5
<PAGE> 8
The severance and other employee-related costs provided 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 facilities and labels elimination costs provided for domestic
and international lease and label 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 were comprised primarily
of artists' contracts, distribution contracts, story property commitments and
filmed entertainment term deals. Many restructuring activities are complete or
near completion. Due to favorable settlement of certain contractual and employee
severance obligations, $59 million of the original restructuring accrual has
been credited to income at December 31, 1999. The utilization of the
restructuring charge through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Original Restructuring Utilized Balance at
Millions Accrual Credit Cash Non-cash December 31, 1999
- -------- ------- --------------- ---------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Severance and other employee-related costs $ 126 $ (12) $ (62) $ (2) $ 50
Facilities and labels 128 (35) (9) (17) 67
Contract termination and other costs 151 (12) (68) (11) 60
-------- --------------- ----------- ----------- -----------------
$ 405 $ (59) $ (139) $ (30) $ 177
-------- --------------- ----------- ----------- -----------------
</TABLE>
As part of the restructuring initiative, approximately 1,000 employees have
separated from the Company as of December 31, 1999. Remaining restructuring
activities relate principally to contractual obligations and severance payments
to be made in future periods. The Company anticipates that all restructuring
activities will be substantially completed by June 30, 2000.
5. Investment in DuPont and USAi
At December 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, which was $1,083 million at
December 31, 1999. The underlying historical book value of the DuPont shares is
$187 million.
At December 31, 1999, the Company owned 9.1 million shares of the outstanding
common stock of USA Networks, Inc. (USAi). The investment, which is accounted
for at market value ($502 million at December 31, 1999), has an underlying cost
of $211 million. At December 31, 1999, the Company also owned 6.7 million shares
of USAi Class B common stock which is carried at its historical cost of $136
million.
6
<PAGE> 9
6. Supplementary Financial Statement Information
<TABLE>
<CAPTION>
December 31, June 30,
Millions 1999 1999
- -------- -------------- -------------
<S> <C> <C>
Inventories
Beverages $ 2,049 $ 2,233
Materials, supplies and other 421 394
-------------- -------------
$ 2,470 $ 2,627
============== =============
Property, plant and equipment, net
Property, plant and equipment, at cost $ 4,499 $ 4,485
Accumulated depreciation (1,457) (1,327)
-------------- -------------
$ 3,042 $ 3,158
============== =============
</TABLE>
<TABLE>
<CAPTION>
Quarter Six Months
Ended December 31, Ended December 31,
Millions 1999 1998 1999 1998
- --------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Excise taxes (included in revenues and cost of revenues) $ 320 $ 282 $ 523 $ 465
========= ========== ========= ===========
</TABLE>
7. Comprehensive Income (Loss)
The components of the Company's total comprehensive income (loss) were as
follows:
<TABLE>
<CAPTION>
Quarter Six Months
Ended December 31, Ended December 31,
Millions 1999 1998 1999 1998
- -------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 557 $ (226) $ 433 $ 938
Currency translation adjustments (228) 1 (19) 118
Unrealized holding gain (loss) in equity securities, net of tax 168 27 80 (195)
----------- -------------- ----------- ------------
Total comprehensive income (loss) $ 497 $ (198) $ 494 $ 861
----------- -------------- ----------- ------------
</TABLE>
7
<PAGE> 10
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 (209,648 shares at December 31, 1999). The Company has guaranteed
the LYONs on a subordinated basis.
In addition, the Company has unconditionally guaranteed JES's 5.79% Senior Notes
due 2001, 6.25% Senior Notes due 2001, 6.4% Senior Notes due 2003, 6.625% Senior
Notes due 2005, 8.375% Debentures due 2007, 7% Debentures due 2008, 6.8% Senior
Notes due 2008, 8.875% Debentures due 2011, 9.65% Debentures due 2018, 7.5%
Senior Debentures due 2018, 9% Debentures due 2021, 7.6% Senior Debentures due
2028, 8% Quarterly Income Debt Securities due 2038 (QUIDS) and 7.5% Adjustable
Conversion-rate Equity Security Units.
Summarized financial information for JES and its subsidiaries is presented
below. Separate financial statements and other disclosures related to JES are
not provided because management has determined that such information does not
provide additional meaningful information to holders of JES debt securities.
<TABLE>
<CAPTION>
Quarter Six Months
Ended December 31, Ended December 31,
Millions 1999 1998 1999 1998
- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 733 $ 677 $ 1,291 $ 1,183
Cost of revenues $ 457 $ 423 $ 805 $ 743
Net income (loss) $ (32) $ 18 $ 32 $ 58
<CAPTION>
December 31, June 30,
1999 1999
------------ ----------
Current assets $ 1,870 $ 1,674
Noncurrent assets 18,271 18,602
------------ ----------
$ 20,141 $ 20,276
------------ ----------
Current liabilities $ 684 $ 1,099
Noncurrent liabilities 10,298 10,014
Shareholders' equity 9,159 9,163
------------ ----------
$ 20,141 $ 20,276
------------ ----------
</TABLE>
9. Earnings Per Share and Common Shares
At December 31, 1999, 53,379,741 common shares were potentially issuable upon
the conversion of the LYONs, the exercise of employee stock options, conversion
of deferred share units and the early settlement of the contracts to purchase
common shares under the Adjustable Conversion-rate Equity Security Units. Basic
net income per share was based on the following weighted average number of
shares outstanding during the quarters ended December 31, 1999 -- 433,532,153
and December 31, 1998 -- 359,692,824. During the quarter ended December 31,
1999, diluted net income per share was based on 438,353,156 weighted average
shares outstanding. Average shares of 2,105,706 were not included
8
<PAGE> 11
in the computation of diluted net income per share in the quarter ended December
31, 1998 because to do so would have been anti-dilutive.
In the quarter ended December 31, 1999, the Company issued 307,009 shares upon
the exercise of employee stock options, deferred compensation and the conversion
of LYONs.
10. Business Segment Information
The Company's four reportable segments are music, filmed entertainment,
recreation, and spirits and wine. Each of these reportable segments is a
strategic business unit that offers different products and services that are
marketed through different channels. They are managed separately because of
their unique customers, technology, marketing and distribution requirements. The
Company evaluates its segments and allocates resources to them based on several
performance measures, including operating earnings before interest, taxes,
depreciation and amortization from consolidated companies (EBITDA). While not a
standard measurement under GAAP, the Company believes EBITDA is an appropriate
measure of operating performance, given the goodwill associated with the
Company's acquisitions. However, EBITDA could be defined differently by other
companies and should be considered in addition to, not as a substitute for,
other measures of financial performance including revenues and operating income.
There are no intersegment revenues; however, corporate headquarters allocates a
portion of its costs to each of its operating segments. The Company does not
allocate interest income, interest expense, income taxes or unusual items to
segments.
Business Segment Data
<TABLE>
<CAPTION>
Filmed Spirits
Millions Music Entertainment Recreation and Wine Corporate Total
- --------- ----------- ------------- -------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
December 31, 1999
Revenues $ 2,036 $ 903 $ 273 $ 1,758 $ - $ 4,970
EBITDA $ 465 $ (20) $ 45 $ 304 $ - $ 794
Depreciation and amortization (173) (29) (25) (33) (3) (263)
Corporate expenses - - - - (24) (24)
Restructuring credit 40 19 - - - 59
----------- ------------- -------------- ------------ ---------- ----------
Operating income (loss) $ 332 $ (30) $ 20 $ 271 $ (27) $ 566
----------- ------------- -------------- ------------ ---------- ----------
Capital expenditures $ 37 $ 11 $ 16 $ 14 $ - $ 78
----------- ------------- -------------- ------------ ---------- ----------
Three Months Ended
December 31, 1998
Revenues $ 727 $ 737 $ 242 $ 1,621 $ - $ 3,327
EBITDA $ 81 $ (63) $ 36 $ 288 $ - $ 342
Depreciation and amortization (64) (16) (21) (33) (3) (137)
Corporate expenses - - - - (19) (19)
Restructuring charge (313) (92) - - - (405)
----------- ------------- -------------- ------------ ---------- ----------
Operating income (loss) $ (296) $ (171) $ 15 $ 255 $ (22) $ (219)
----------- ------------- -------------- ------------ ---------- ----------
Capital expenditures $ 22 $ 32 $ 30 $ 34 $ - $ 118
----------- ------------- -------------- ------------ ---------- ----------
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
Filmed Spirits
Millions Music Entertainment Recreation and Wine Corporate Total
- --------- ----------- ------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended
December 31, 1999
Revenues $ 3,448 $ 1,776 $ 482 $ 2,907 $ - $ 8,613
EBITDA $ 650 $ (58) $ 94 $ 460 $ - $ 1,146
Depreciation and amortization (362) (50) (50) (64) (5) (531)
Corporate expenses - - - - (36) (36)
Restructuring credit 40 19 - - - 59
----------- ------------- ---------- ---------- ----------- -----------
Operating income (loss) $ 328 $ (89) $ 44 $ 396 $ (41) $ 638
----------- ------------- ---------- ---------- ----------- -----------
Capital expenditures $ 89 $ 30 $ 30 $ 49 $ - $ 198
----------- ------------- ---------- ---------- ----------- -----------
Six Months Ended
December 31, 1998
Revenues $ 1,147 $ 1,355 $ 430 $ 2,642 $ - $ 5,574
EBITDA $ 102 $ 30 $ 70 $ 432 $ - $ 634
Depreciation and amortization (95) (34) (41) (63) (5) (238)
Corporate expenses - - - - (31) (31)
Restructuring charge (313) (92) - - - (405)
----------- ------------- ---------- ---------- ----------- -----------
Operating income (loss) $ (306) $ (96) $ 29 $ 369 $ (36) $ (40)
----------- ------------- ---------- ---------- ----------- -----------
Capital expenditures $ 34 $ 51 $ 64 $ 67 $ - $ 216
=========== ============= ========== ========== =========== ===========
</TABLE>
Geographic Data
The following table presents revenues by geographic area for the quarter and six
months ended December 31, 1999 and 1998. Revenues are classified based upon the
location of the customer. In addition to Canada, the Company's country of
domicile, individual countries are specified if revenues exceed 10 percent of
the total.
<TABLE>
<CAPTION>
Quarter Six Months
Ended December 31, Ended December 31,
Millions 1999 1998 1999 1998
- -------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Revenues
United States $ 2,142 $ 1,497 $ 3,922 $ 2,793
United Kingdom 601 439 980 603
Canada 129 87 242 161
Other countries 2,098 1,304 3,469 2,017
---------- ----------- -------- ----------
$ 4,970 $ 3,327 $ 8,613 $ 5,574
---------- ----------- -------- ----------
</TABLE>
10
<PAGE> 13
11. New Accounting Guidance
On July 1, 1999 the Company adopted the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants (AcSEC) Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities, which
required that costs of start-up activities be expensed as incurred. The adoption
of SOP 98-5 resulted in an $84 million after-tax charge in the six months ended
December 31, 1999, which was recorded as a cumulative effect of a change in
accounting principle. The cumulative effect is principally related to costs
associated with the expansion of our recreation operations.
11
<PAGE> 14
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
COMPARABILITY
The discussion presented below includes an analysis of total Seagram and
business segment results prepared in accordance with GAAP. Supplemental
financial data includes earnings before interest, taxes, depreciation and
amortization (EBITDA). Because of the significant goodwill associated with our
acquisitions, we believe EBITDA is an appropriate measure of operating
performance. However, you should note that EBITDA is not a substitute for
operating income, net income, cash flows and other measures of financial
performance as defined by GAAP and may be defined differently by other
companies. Investments in companies that are not consolidated with the results
of Seagram are reported as "equity earnings from unconsolidated companies". This
discussion includes, as supplemental financial data, information about our share
of the results of revenues and EBITDA related to these investments.
To enhance comparability, financial information for the quarter and six months
ended December 31, 1998 is also presented on a pro forma basis, which
illustrates the effect of the acquisition of PolyGram and the disposition of
Tropicana as if these transactions had occurred at the beginning of the 1998
fiscal year. We believe that pro forma results represent meaningful comparative
information for assessing earnings trends because the pro forma results include
comparable operations in each period presented. The discussion of the recreation
and spirits and wine business segments does not include pro forma comparisons,
since the pro forma adjustments did not impact those segments. The pro forma
results are not necessarily indicative of the combined results that would have
occurred had the events actually occurred at the beginning of our 1998 fiscal
year. We believe this information will help you to better understand our
business results.
Management's discussion and analysis of our results of operations and liquidity
should be read in conjunction with the accompanying financial statements, as
well as the consolidated financial statements and related notes in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999, as amended.
12
<PAGE> 15
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1999 1998 1998 1999 1998 1998
U.S. dollars in millions, except per share amounts (Actual) (Actual) (Pro forma) (Actual) (Actual) (Pro forma)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 4,970 $ 3,327 $ 5,028 $ 8,613 $ 5,574 $ 8,606
-------- ---------- -------- -------- --------- --------
Operating income (loss) 566 (219) 380 638 (40) 491
Interest, net and other expense 162 76 186 323 117 342
Gain on sale of businesses - - - 98 - -
Provision (benefit) for income taxes (149) (12) 156 (39) 75 169
Minority interest 16 (23) 19 20 (17) 13
Equity earnings from unconsolidated companies 20 34 29 85 84 77
-------- ---------- -------- -------- --------- --------
Income (loss) from continuing operations 557 (226) 48 517 (131) 44
Loss from discontinued Tropicana operations, after tax - - - - (3) -
Gain on sale of discontinued Tropicana operations, after tax - - - - 1,072 -
Cumulative effect of change in accounting principle, after tax - - - (84) - -
-------- ---------- -------- -------- --------- --------
Net income (loss) $ 557 $ (226) $ 48 $ 433 $ 938 $ 44
-------- ---------- -------- -------- --------- --------
Earnings per share - basic
Income (loss) from continuing operations $ 1.29 $ (0.63) $ 0.12 $ 1.19 $ (0.37) $ 0.11
Loss from discontinued operations - - - - (0.01) -
Gain on sale of discontinued operations - - - - 3.03 -
Cumulative effect of accounting change - - - (0.19) - -
-------- ---------- -------- -------- --------- --------
Net income (loss) $ 1.29 $ (0.63) $ 0.12 $ 1.00 $ 2.65 $ 0.11
-------- ---------- -------- -------- --------- --------
Earnings per share - diluted
Income (loss) from continuing operations $ 1.27 $ (0.63) $ 0.12 $ 1.18 $ (0.37) $ 0.11
Loss from discontinued operations - - - - (0.01) -
Gain on sale of discontinued operations - - - - 3.02 -
Cumulative effect of accounting change - - - (0.19) - -
-------- ---------- -------- -------- --------- --------
Net income (loss) $ 1.27 $ (0.63) $ 0.12 $ 0.99 $ 2.64 $ 0.11
-------- ---------- -------- -------- --------- --------
Net cash provided by operating activities $ 126 $ 211
Net cash provided by (used for) investing activities $ 95 $ (5,874)
Net cash (used for) provided by financing activities $ (389) $ 5,696
Supplemental financial data:
Revenues
Consolidated companies $ 4,970 $ 3,327 $ 5,028 $ 8,613 $ 5,574 $ 8,606
Unconsolidated companies 628 584 584 1,267 1,129 1,129
-------- ---------- -------- -------- --------- --------
$ 5,598 $ 3,911 $ 5,612 $ 9,880 $ 6,703 $ 9,735
-------- ---------- -------- -------- --------- --------
EBITDA
Consolidated companies $ 794 $ 342 $ 680 $ 1,146 $ 634 $ 1,084
Unconsolidated companies 126 121 121 268 244 244
-------- ---------- -------- -------- --------- --------
920 463 801 1,414 878 1,328
Adjustment for unconsolidated companies (126) (121) (121) (268) (244) (244)
Depreciation and amortization (263) (137) (281) (531) (238) (562)
Corporate (24) (19) (19) (36) (31) (31)
Restructuring (charge) credit 59 (405) - 59 (405) -
-------- ---------- -------- -------- --------- --------
Operating income (loss) $ 566 $ (219) $ 380 $ 638 $ (40) $ 491
-------- ---------- -------- -------- --------- --------
</TABLE>
13
<PAGE> 16
ACTUAL
Revenues increased 49 percent in the quarter and EBITDA from consolidated
companies more than doubled to $794 million. These increases primarily reflect
the acquisition of PolyGram and improvements in all business units. Operating
income was $566 million in the quarter compared with an operating loss of $219
million in the prior year. The prior year operating loss included a $405 million
($244 million after tax) restructuring charge associated with the integration of
PolyGram into the existing music and film operations. In the current quarter,
$59 million ($35 million after tax) of restructuring accruals were reversed due
to the favorable settlement of certain contractual and employee severance
obligations. Net income of $557 million or $1.29 per basic share and $1.27 per
diluted share was earned in the quarter compared with a net loss of $226 million
or $0.63 per share (basic and diluted) in the prior-year. Excluding the
restructuring activities, net income of $522 million or $1.21 per basic share
and $1.19 per diluted share was earned this quarter compared to net income of
$18 million or $0.05 per share (basic and diluted) last year.
On a six-month basis, revenues increased 55 percent and EBITDA from consolidated
companies increased 81 percent primarily reflecting the acquisition of PolyGram
and improved results in the music, recreation and spirits and wine businesses,
partially offset by results in our film business. Excluding the restructuring
activities discussed above, operating income increased 59 percent in the
six-month period. The fiscal 2000 six-month results include a $98 million gain
($55 million after tax) related to the sale of our concert operations for
approximately $190 million. During the period we also sold our Champagne
operations for $310 million, an amount which approximated the book value of
those operations. Net income of $433 million or $1.00 per basic share and $0.99
per diluted share was earned in the six months. Excluding the reversal of
restructuring accruals, the gain on the sale of our concert operations and an
$84 million cumulative effect of an accounting change related to start-up
activities, net income was $427 million or $0.99 per basic share and $0.97 per
diluted share. In the prior-year six months, net income of $938 million or $2.65
per basic share and $2.64 per diluted share included a $1.1 billion after-tax
gain on the sale of Tropicana and the $244 million after-tax restructuring
charge. Excluding the discontinued Tropicana operations and the restructuring
charge, we recognized net income of $113 million or $0.32 per share (basic and
diluted).
PRO FORMA
On a pro forma basis, revenues declined one percent in the quarter and were flat
in the six months, as increased revenues in the recreation and spirits and wine
businesses were offset by lower film and music revenues. Operating income,
excluding restructuring activities, increased 33 percent in the quarter and 18
percent in the six months while EBITDA from consolidated companies increased 17
percent in the quarter and 6 percent in the six months. These increases reflect
growth and increased profitability of our music, recreation and spirits and wine
businesses.
14
<PAGE> 17
BUSINESS SEGMENT RESULTS
MUSIC
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1999 1998 1998 1999 1998 1998
U.S. dollars in millions (Actual) (Actual) (Pro forma) (Actual) (Actual) (Pro forma)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,036 $ 727 $ 2,220 $ 3,448 $ 1,147 $ 3,732
Operating income before restructuring (charge) credit $ 292 $ 17 $ 246 $ 288 $ 7 $ 208
Restructuring (charge) credit 40 (313) - 40 (313) -
------- -------- --------- ------- --------- ---------
Operating income (loss) $ 332 $ (296) $ 246 $ 328 $ (306) $ 208
------- -------- --------- ------- --------- ---------
Equity earnings (losses) from unconsolidated companies $ (5) $ - $ (2) $ (2) $ 5 $ -
Supplemental financial data:
Revenues
Consolidated companies $ 2,036 $ 727 $ 2,220 $ 3,448 $ 1,147 $ 3,732
Unconsolidated companies 4 9 9 31 42 42
------- -------- --------- ------- --------- ---------
$ 2,040 $ 736 $ 2,229 $ 3,479 $ 1,189 $ 3,774
------- -------- --------- ------- --------- ---------
EBITDA
Consolidated companies $ 465 $ 81 $ 451 $ 650 $ 102 $ 616
Unconsolidated companies - - - 3 5 5
------- -------- --------- ------- --------- ---------
465 81 451 653 107 621
Adjustment for unconsolidated companies - - - (3) (5) (5)
Depreciation and amortization (173) (64) (205) (362) (95) (408)
Restructuring (charge) credit 40 (313) - 40 (313) -
------- -------- --------- ------- --------- ---------
Operating income (loss) $ 332 $ (296) $ 246 $ 328 $ (306) $ 208
------- -------- --------- ------- --------- ---------
</TABLE>
CONSOLIDATED OPERATIONS
Actual - Revenues, EBITDA and operating income show significant increases in the
quarter and six months reflecting the acquisition of PolyGram. Of the $3,448
million total year-to-date music revenues, 42 percent were generated in North
America, the European and African markets accounted for 43 percent, Asia Pacific
contributed 11 percent and Latin America generated the remaining four percent.
We continue to have a strong presence in key markets, including the U.S., U.K.,
France, Germany and Brazil, where we hold strong chart positions. In the
six-month period, over 50 percent of product sales were from new releases. Major
album sales in the six-month period included those by Shania Twain, Limp Bizkit,
Dr. Dre, Sting, Enrique Iglesias, Boyzone and the soundtrack from the Universal
feature film Notting Hill, among others. In the quarter, DMX and Jay-Z were also
among the top five sellers.
Pro forma - Revenues declined eight percent in both the quarter and six-month
period primarily due to the impact of unfavorable foreign exchange, label
consolidation and our effort to reduce unprofitable acts from our artist roster.
North American revenues increased nine percent in the quarter and five percent
in the six months, reflecting higher volume and average prices. International
revenues declined 17 percent in the quarter and 15 percent in the six months.
Excluding the impact of foreign exchange, however, revenues would have declined
11 percent, in both the quarter and six months. Operating income, excluding
restructuring activities, increased 19 percent in the quarter and 38 percent in
the six months. Excluding the impact of foreign exchange, EBITDA would have
increased eight percent in the quarter and 11 percent in the six months. These
improvements reflect higher volumes and cost savings in North America and a
strong performance in the U.K. and Germany also combined with cost savings. Our
cost savings program is progressing as anticipated as we proceed with the
integration of PolyGram. Evolving technology allows consumers to experience
music in new electronic mediums and formats. Through a variety of strategic
alliances and independent initiatives, we continue to invest resources in the
technology and electronic commerce areas, including Jimmy and Doug's Farm Club,
GetMusic, ARTISTdirect and others, as we believe that emerging technologies will
be strategically important to the future of the music business.
15
<PAGE> 18
UNCONSOLIDATED OPERATIONS
The equity in earnings from unconsolidated companies was a loss of $5 million in
the quarter and a loss of $2 million in the six months as income of $3 million
from concert operations that were sold in September 1999 was offset by losses of
$5 million from electronic commerce activities.
FILMED ENTERTAINMENT
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1999 1998 1998 1999 1998 1998
U.S. dollars in millions (Actual) (Actual) (Pro forma) (Actual) (Actual) (Pro forma)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 903 $ 737 $ 945 $ 1,776 $ 1,355 $ 1,802
Operating loss before restructuring (charge) credit $ (49) $ (79) $ (114) $ (108) $ (4) $ (79)
Restructuring (charge) credit 19 (92) - 19 (92) -
--------- ---------- -------- --------- ---------- ---------
Operating loss $ (30) $ (171) $ (114) $ (89) $ (96) $ (79)
--------- ---------- -------- --------- ---------- ---------
Equity earnings from unconsolidated companies $ 51 $ 44 $ 41 $ 114 $ 71 $ 69
Supplemental financial data:
Revenues
Consolidated companies $ 903 $ 737 $ 945 $ 1,776 $ 1,355 $ 1,802
Unconsolidated companies 469 464 464 910 871 871
--------- ---------- -------- --------- ---------- ---------
$ 1,372 $ 1,201 $ 1,409 $ 2,686 $ 2,226 $ 2,673
--------- ---------- -------- --------- ---------- ---------
EBITDA
Consolidated companies $ (20) $ (63) $ (95) $ (58) $ 30 $ (34)
Unconsolidated companies 112 107 107 209 185 185
--------- ---------- -------- --------- ---------- ---------
92 44 12 151 215 151
Adjustment for unconsolidated companies (112) (107) (107) (209) (185) (185)
Depreciation and amortization (29) (16) (19) (50) (34) (45)
Restructuring (charge) credit 19 (92) - 19 (92) -
--------- ---------- -------- --------- ---------- ---------
Operating loss $ (30) $ (171) $ (114) $ (89) $ (96) $ (79)
--------- ---------- -------- --------- ---------- ---------
</TABLE>
CONSOLIDATED OPERATIONS
Actual - In the quarter, revenues increased 23 percent, operating income,
excluding restructuring activities, improved from a loss of $79 million to a
loss of $49 million and EBITDA improved from a loss of $63 million to a loss of
$20 million. These results reflect the improved performance of the motion
picture group, driven by worldwide theatrical and cassette and DVD distribution
of several films, including American Pie, The Mummy, Notting Hill, Shakespeare
in Love and Patch Adams. In the six-month period, operating income, excluding
restructuring activities, declined from a loss of $4 million to a loss of $108
million and EBITDA declined from income of $30 million to a loss of $58 million.
Despite several strong theatrical releases in fiscal 2000, the declines were
caused by the disappointing box office performance of Mystery Men, End of Days
and For Love of The Game, as well as several disappointing films released
earlier in the calendar year.
Pro forma - Pro forma filmed entertainment includes the results of PolyGram
filmed entertainment. Revenues decreased four percent in the quarter and one
percent in the six months, largely driven by lower motion picture revenues due
to a decline in the sales of library product, partially offset by increased
revenues from television and networks. Operating income and EBITDA results
improved in the quarter but were down on a six-month basis for the reasons
discussed above.
UNCONSOLIDATED OPERATIONS
Unconsolidated companies principally include USANi LLC, Loews Cineplex
Entertainment Corporation, United Cinemas International Multiplex B.V. and
Cinema International Corporation. During the quarter and six months ended
December 31, 1999, equity in earnings from unconsolidated companies increased 16
and 61 percent, respectively, revenues from unconsolidated companies increased
one and four percent, respectively, and EBITDA from unconsolidated
16
<PAGE> 19
companies increased five and 13 percent, respectively. These increases reflect
significant improvement in the operating results of USANi LLC.
RECREATION
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
U.S. dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $ 273 $ 242 $ 482 $ 430
Operating income $ 20 $ 15 $ 44 $ 29
Equity earnings (losses) from unconsolidated companies $ (28) $ (11) $ (29) $ 7
Supplemental financial data:
Revenues
Consolidated companies $ 273 $ 242 $ 482 $ 430
Unconsolidated companies 97 49 236 136
-------- -------- --------- --------
$ 370 $ 291 $ 718 $ 566
-------- -------- --------- --------
EBITDA
Consolidated companies $ 45 $ 36 $ 94 $ 70
Unconsolidated companies 10 10 50 49
-------- -------- --------- --------
55 46 144 119
Adjustment for unconsolidated companies (10) (10) (50) (49)
Depreciation and amortization (25) (21) (50) (41)
-------- -------- --------- --------
Operating income $ 20 $ 15 $ 44 $ 29
-------- -------- --------- --------
</TABLE>
CONSOLIDATED OPERATIONS
During the quarter and six months ended December 31, 1999, our recreation
businesses performed well with revenues increasing 13 and 12 percent,
respectively, and operating income increasing 33 and 52 percent, respectively.
EBITDA also increased 25 percent for the quarter and 34 percent for the
six-month period. Revenue growth was due to increased management fees generated
from the expansion of Universal Studios Escape, increased attendance at
Universal City Hollywood, increased retail sales at Spencer Gifts, and a full
six months results of Wet'n Wild, which was purchased in September 1998. In
addition, operating income and EBITDA increased as the result of improved cost
management at Universal City Hollywood.
UNCONSOLIDATED OPERATIONS
Unconsolidated companies principally include Universal Studios Escape, Universal
Studios Japan, Universal Studios Port Aventura and SEGA GameWorks. Equity in
earnings from unconsolidated companies declined from a loss of $11 million in
the second quarter of last year to a loss of $28 million this year and on a
six-month basis from income of $7 million last year to a loss of $29 million
this year. These declines are partly due to increased depreciation and interest
expense at Universal Studios Escape since the opening of Universal Studios
Islands of Adventure and the pre-opening development costs at Universal Studios
Japan. In addition, the prior year six-month comparatives included a gain
recognized by Sega GameWorks on the sale of its game sales operation to Sega in
the first quarter. Revenues from unconsolidated companies doubled in the quarter
and increased 74 percent in the six months reflecting the opening of Universal
Studios Islands of Adventure, Hard Rock Live and CityWalk at Universal Studios
Escape. EBITDA from unconsolidated companies was flat in both the quarter and
six months as increased earnings at Universal Studios Escape were offset by
pre-opening development costs at Universal Studios Japan. At Universal Studios
Escape, EBITDA increased 27 percent in the quarter and 32 percent in the six
months reflecting a significant increase in attendance since the opening of the
new attractions discussed above, partially offset by the continued investment in
marketing and other non-recurring costs associated with the expansion.
17
<PAGE> 20
SPIRITS AND WINE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
U.S. dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $ 1,758 $ 1,621 $ 2,907 $ 2,642
Operating income $ 271 $ 255 $ 396 $ 369
Equity earnings from unconsolidated companies $ 2 $ 1 $ 2 $ 1
Supplemental financial data:
Revenues
Consolidated companies $ 1,758 $ 1,621 $ 2,907 $ 2,642
Unconsolidated companies 58 62 90 80
---------- ---------- ---------- ----------
$ 1,816 $ 1,683 $ 2,997 $ 2,722
---------- ---------- ---------- ----------
EBITDA
Consolidated companies $ 304 $ 288 $ 460 $ 432
Unconsolidated companies 4 4 6 5
---------- ---------- ---------- ----------
308 292 466 437
Adjustment for unconsolidated companies (4) (4) (6) (5)
Depreciation and amortization (33) (33) (64) (63)
---------- ---------- ---------- ----------
Operating income $ 271 $ 255 $ 396 $ 369
---------- ---------- ---------- ----------
</TABLE>
CONSOLIDATED OPERATIONS
During the quarter and six months ended December 31, 1999, spirits and wine
revenues increased eight and 10 percent, respectively, operating income
increased six and seven percent, respectively, and EBITDA increased six percent
in both periods. Adjusting for the sale of the Champagne operations, operating
income increased 13 percent in the quarter and 15 percent in the six months and
EBITDA increased 12 percent in the quarter and 13 percent in the six months.
Operating income (adjusted for the Champagne operations) as a percentage of
revenues for total spirits and wine improved from 14.7 to 15.4 percent in the
quarter and from 13.0 to 13.6 percent on a six-month basis. The improved
year-to-date results were driven by continued momentum in the global spirits and
wine business and volume growth across all four geographic regions. Of the
$2,907 million total year-to-date spirits and wine revenues, 42 percent were
generated in North America, the European and African markets accounted for 36
percent, Asia Pacific contributed 12 percent and Latin America generated the
remaining 10 percent. Total spirits and wine case volumes, including
unconsolidated companies, increased nine percent in the quarter and 10 percent
in the six months driven by growth in Crown Royal, Captain Morgan, ABSOLUT VODKA
(which is owned by V&S Vin & Sprit AB), Mumm Sekt and Royal Salute.
In the six-month period, cost of goods sold as a percentage of revenues
increased to 54.8 percent from 52.6 percent in the prior year period. Selling,
general and administrative expenses as a percentage of revenues decreased to
31.3 percent from 33.1 percent partially due to the timing and reduction of
overhead spending. At constant foreign exchange rates, global marketing expense
increased in excess of 20 percent in the six months, with a focus on our core
brands in anticipation of heightened trade activity related to the millennium.
Brand equity build increased in excess of 30 percent at constant exchange rates
as we continued to invest for future growth by supporting our brands in key
markets.
UNCONSOLIDATED OPERATIONS
The equity in earnings of unconsolidated companies was $2 million in both the
quarter and six months ended December 31, 1999, double that of the prior year
periods. Revenues from unconsolidated companies declined six percent in the
quarter but increased 13 percent in the six months while EBITDA was flat in the
quarter and increased 20 percent in the six months. The year-on-year variances
are primarily due to the entities that are included in unconsolidated companies.
In the current fiscal year there is only one spirits and wine unconsolidated
company, Kirin-Seagram Limited in Japan. In
18
<PAGE> 21
fiscal 1999, the unconsolidated companies also included Seagram (Thailand)
Limited for nine months to March 1999 at which time we increased our investment
in Thailand and began to consolidate that affiliate.
OTHER INCOME, EXPENSES AND TAXES
Corporate expenses were $24 million for the quarter and $36 million for the six
months, an increase of $5 million compared to the prior year periods, primarily
due to the timing of expenses. Interest, net and other in the quarter included
net interest expense of $168 million, offset by $6 million of dividend income
from DuPont. The increase of $86 million from the prior year reflects the
interest costs associated with funding the PolyGram acquisition. Our quarterly
tax provision is calculated based on an annual effective tax rate, excluding the
impact of certain transactions that occurred during the six month period. Our
effective annual rate is expected to approximate 30 percent, excluding the
impact of non-deductible goodwill associated with our acquisitions.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter we recorded an $84 million after-tax charge related to
the cumulative effect of a change in accounting principle. The change relates to
the treatment of costs related to start-up activities, which now must be
expensed as incurred. The cumulative effect is principally related to costs
associated with the expansion of our recreation operations. Beginning July 1,
1999, start-up costs are expensed as incurred and are not anticipated to have a
significant impact on our financial results.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK
Financial Position - Current assets of $9.3 billion at December 31, 1999 were
$381 million higher than at June 30, 1999, primarily due to a seasonality
increase in net receivables offset by decreases in all other current assets.
Current liabilities decreased $289 million to $7.9 billion at December 31, 1999,
primarily due to a decrease in short-term borrowings. Shareholders' equity was
$13.3 billion at December 31, 1999, $393 million above June 30, 1999. Our total
long- and short-term debt, net of cash and short-term investments was flat at
$7.0 billion. Our ratio of net debt to total capitalization (including minority
interest) remained unchanged at 32 percent.
Cash Flows from Operating Activities - Net cash provided by operating activities
totaled $126 million in the six months, a decrease of $85 million from the prior
year. Contributing to this unfavorable variance were higher working capital
requirements partially offset by an increase in income from continuing
operations.
Cash Flows from Investing Activities - Net cash provided by investing activities
was $95 million in the six-month period. The $310 million proceeds from the sale
of the Champagne operations together with $190 million proceeds from the sale of
Universal Concerts, Inc., were partially offset by an additional $242 million
investment in USANi LLC and capital expenditures of $198 million. The capital
expenditures by business segment were: Music $89 million, Filmed Entertainment
$30 million, Recreation $30 million, and Spirits and Wine $49 million. In the
prior year period, the net cash used for investing activities was $5.9 billion
comprised of $8.6 billion for the cash portion of the acquisition of PolyGram,
an additional investment in USANi LLC of $231 million, capital expenditures of
$216 million and other investments of $108 million partially offset by $3.3
billion pre-tax proceeds from the Tropicana disposition. The capital
expenditures by business segment were: Music $34 million, Filmed Entertainment
$51 million, Recreation $64 million, and Spirits and Wine $67 million.
Cash Flows from Financing Activities - Financing activities in the six months
used $389 million. A $367 million decrease in short-term borrowings, a $4
million repayment of long-term debt and dividend payments of $143 million were
partially offset by a $75 million supplemental issuance of Adjustable
Conversion-rate Equity Security Units and a $40 million issuance of shares upon
exercise of stock options and conversion of LYONs. In the prior year six-month
period, financing activities provided $5.7 billion primarily due to a $4.2
billion issuance of long-term debt to finance the PolyGram acquisition.
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<PAGE> 22
Working Capital - Our working capital position is reinforced by available credit
facilities of approximately $7.6 billion. These facilities are used to support
our commercial paper borrowings and are available for general corporate
purposes. We believe our 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.
International Exchange - We employ a variance/covariance approach in our
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 our exposure to interest rates at December
31, 1999 was $33 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 our exposure to foreign exchange rates, primarily to hedge cash
flow exposures denominated in foreign currencies, was $13 million at December
31, 1999. These exposures include intercompany trade accounts, service fees,
intercompany loans and third-party debt. We are 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
During the quarter, we continued our efforts to minimize potential business
disruption associated with the Year 2000 (Y2K) issue. Our overall plan to
address the Y2K issue is described more fully in our 1999 Annual Report on Form
10-K as supplemented by the Form 10-Q for the fiscal quarter ended September 30,
1999. The following is an update of the information included in that report.
Assessment, remediation, testing and validation of critical systems, review of
critical third-party vendors and customers, and contingency planning for
critical business processes were completed at December 31, 1999. Certain
remediation efforts related to non-critical systems and contingency planning
efforts for non-critical business processes will extend into 2000. To date, we
have not experienced any significant Y2K related failures of equipment or
facilities. It is possible, however, that Y2K failures may occur in the future
as the effects of Y2K are fully realized.
Of our anticipated $65 million in costs related to assessment and remediation of
IT and non-IT systems, approximately 90 percent of the estimated costs have been
incurred as of December 31, 1999. Our estimated costs do not include the costs
of redeployed internal resources or the costs of internally developed software
or hardware which is being replaced or developed in the normal course of
business. All costs associated with our plan will be funded through operations.
The costs of our Y2K remediation efforts are based upon management's best
estimates, which require assumptions about future events, availability of
resources and personnel, third-party remediation actions, and other factors.
Actual costs may differ from these estimates based on a number of factors,
including the availability and cost of resources to undertake remediation
activities and the scope and nature of the work required to complete
remediation.
While we have completed substantially all phases of our Y2K program relating to
critical systems, we continue to be dependent on third parties whose progress is
not within our control. As with many multinational companies, we continue to
believe that our most likely "worst case" scenario involves potential
disruptions in services from critical third parties such as governments,
vendors, customers and financial institutions. Such failures could have a
material adverse effect on our operations and at this time we cannot estimate
the likelihood or potential cost of such failures. In addition, while we believe
our Y2K program minimizes the likelihood of any significant business disruptions
in the future, delays in the implementation of new systems, a failure to fully
identify all embedded technology potentially affected by the Y2K issues and
unexpected failures of critical internal systems could have a material adverse
effect on our operations.
Statements concerning Y2K issues which contain more than historical information
may be considered forward-looking statements, which are subject to risks and
uncertainties. Actual results may differ materially from those expressed in the
20
<PAGE> 23
forward-looking statements, and our Y2K discussion should be read in conjunction
with our statement on forward-looking statements which appears below.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report contains statements that are "forward-looking statements," in that
they include statements regarding the intent, belief or current expectations of
our management with respect to our future operating performance. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. All statements that
express forecasts, expectations and projections with respect to future matters,
including the launching or prospective development of new business initiatives
and products, anticipated music or motion picture releases, internet or theme
park projects, and Y2K remediation efforts and anticipated cost savings or
synergies are forward-looking statements within the meaning of the Act. Such
forward-looking statements are not guarantees of future performance. Actual
results may differ materially from our forward-looking statements as a result of
certain risks and uncertainties, many of which are outside of our control,
including but not limited to:
- - Changes in global and localized economic and political conditions which may
affect attendance and spending at our theme parks, purchases of our
consumer products and the performance of our filmed entertainment
operations.
- - Changes in financial and equity markets, including significant interest
rate and foreign currency rate fluctuations, which may affect our access
to, or increase the cost of financing for our operations and investments.
- - Increased competitive product and pricing pressures and unanticipated
actions by competitors that could impact our market share, increase
expenses and hinder our growth potential.
- - Changes in consumer preferences and tastes, which may affect all our
business segments.
- - Adverse weather conditions or natural disasters, such as hurricanes and
earthquakes, which may, among other things, impair performance at our theme
parks in California, Florida and Spain.
- - Legal and regulatory developments, including changes in accounting
standards, taxation requirements, such as the impact of excise tax
increases with respect to the spirits and wine business, and environmental
laws.
- - Technological developments that may affect the distribution of our products
or create new risks to our ability to protect our intellectual property
rights.
- - The uncertainties of litigation and other risks and uncertainties detailed
from time to time in our filings with the Securities and Exchange
Commission.
21
<PAGE> 24
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 15, 1999, an action was filed in the Superior Court for the County
of Los Angeles entitled KirchMedia GmbH & Co. KGaA v. Universal Studios, Inc.
and Universal Studios International B.V., case no. BC 221645. The plaintiff is a
German company that entered into several agreements with Universal in 1996
involving the licensing of film and television programming. The contracts also
required the plaintiff to allocate to Universal two channels on its German pay
television service. Plaintiff alleges that it is entitled to terminate its
agreements with Universal on the ground that certain decisions by European
regulatory authorities have materially impaired its business and constitute
events of "force majeure." Plaintiff also alleges that Universal has breached
its obligations under the parties' licensing agreements by allegedly failing to
provide plaintiff with the quality and/or quantity of film and television
programming anticipated by plaintiff. Plaintiff asserts claims for declaratory
relief, breach of contract, breach of the implied covenant of good faith and
fair dealing, and breach of fiduciary duty. Plaintiff seeks an order requiring
the return of all monies paid by plaintiff under the parties' agreements, as
well as purported damages in excess of $500,000,000. Plaintiff also seeks
punitive damages on its breach of fiduciary duty claim. Universal has denied the
allegations of the complaint and intends vigorously to defend this action. On
February 3, 2000, Universal filed a cross-complaint in this action alleging that
KirchMedia had breached certain of its obligations under the parties' Channel
Carriage Agreement and that certain entities related to KirchMedia were
obligated to indemnify Universal for all damages sustained as a result of
KirchMedia's breach of that agreement. No trial date has been set.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index filed with this Form 10-Q is on page 24.
(b) Current Reports on Form 8-K
None
22
<PAGE> 25
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/ Brian C. Mulligan
----------------------
Brian C. Mulligan
Executive Vice President and Chief
Financial Officer
(Principal Accounting Officer)
Dated: February 11, 2000
23
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
-------------------------------
<S> <C>
10.1 Amended and Restated Employment Agreement dated November 1, 1999
between Joseph E. Seagram & Sons, Inc. and Robert W. Matschullat.
10.2 Letter dated November 23, 1999 from Joseph E. Seagram & Sons, Inc.
to Kevin Conway.
12(a) Computation of Ratio of Earnings to Fixed Charges
- The Seagram Company Ltd.
12(b) Computation of Ratio of Earnings to Fixed Charges
- Joseph E. Seagram & Sons, Inc.
27 Financial Data Schedule.
</TABLE>
24
<PAGE> 1
Exhibit 10.1
JOSEPH E. SEAGRAM & SONS, INC.
EXECUTIVE OFFICES
375 PARK AVENUE, NEW YORK, NEW YORK 10152
November 1, 1999
Robert W. Matschullat
46 Vineyard Lane
Greenwich, Connecticut 06830
Dear Bob:
This letter amends and restates our original letter agreement with
you dated July 31, 1995, as amended and restated on February 4, 1998, under
which you currently serve as Vice Chairman and Chief Financial Officer of The
Seagram Company Ltd. ("SCL") and of Joseph E. Seagram & Sons, Inc. (the
"Company"), in light of the mutual intention of you, SCL and the Company for
your employment to terminate no later than March 31, 2001.
1. Position and Duties.
(a) During the period commencing on the date of this letter and ending
December 31, 1999, you will continue to be employed as Vice Chairman and Chief
Financial Officer of SCL and the Company, and will continue to perform your
current duties on a full-time basis.
(b) During the period from January 1, 2000 through May 31, 2000 (the
"Transition Period"), subject to the Company's right to terminate the Transition
Period, as set forth below, you will continue to be employed to perform services
on a full-time basis as Vice Chairman of SCL and the Company, with
responsibility for Investor Relations, Corporate Communications, Corporate
Shared Services, Corporate Real Estate, Corporate Strategic Sourcing and
Information Technology. The Company may, upon 30 days notice or pay (including a
pro-rated portion of the bonus described in paragraph 3) in lieu of notice,
elect to terminate the Transition Period prior to May 31, 2000, in which event
the Advisory Period described in (c) below shall commence.
(c) During the period from June 1, 2000 (or such earlier date as may
apply by application of (b) above) through March 31,
<PAGE> 2
2
2001 (the "Advisory Period"), you will remain an employee of the Company, and
will make yourself available to render support and advisory services to the
Company and SCL at the request of the Chief Executive Officer of SCL. At the end
of the Advisory Period your employment by SCL, the Company and their affiliates
shall terminate, and such termination will entitle you to the payments and
benefits described in paragraph 6(c) below.
(d) From the date hereof through the end of the Transition Period,
while you are employed hereunder, we will make our best efforts to insure your
election to, and retention as a member of, the Board of Directors of SCL and the
Board of Directors of the Company, your principal office will be located at the
Company's headquarters in New York City, and except for reasonable travel
requirements associated with your position, you will be performing your services
hereunder in the New York City metropolitan area. At the end of the Transition
Period, you shall resign all officerships and directorships of SCL and its
affiliates, and you will no longer have an office at the Company. If at any time
you obtain substantially full time employment (or substantially full-time
self-employment, other than managing your personal or family's investments), you
shall immediately notify the Company, and resign all officerships and
directorships of SCL and its affiliates, and the Company shall provide
appropriate notice (not to exceed 60 days after receipt of notice from you) to
you of the termination of your employment, whereupon your employment by SCL and
the Company and its affiliates shall cease. Upon such cessation of employment,
you will become entitled to the payments and benefits described in paragraph
6(c) below. If your new substantially full-time employment or self-employment
commences during the period following your notification to the Company as
described in the preceding sentence and preceding your termination of employment
with the Company and SCL, you will continue to make yourself available to render
support and advisory services to the Company and SCL as described in paragraph
1(c) above, provided that such support and services do not materially interfere
with such new full-time employment.
2. Base Salary. Your base salary through the end of the
Transition Period and for one month thereafter will be payable at a rate of
$1,000,000 per year. Starting on the first day of the Advisory Period you shall
receive a salary at a rate of $20,000 per month. Your salary will be paid in
equal periodic installments in accordance with the Company's payroll policies
applicable to its senior executives.
<PAGE> 3
3
3. Bonus Plans. Your annual bonus for the fiscal year ending
June 30, 2000 shall be $2,341,500, payable when other senior executives of the
Company receive their annual bonuses, but no later than September 28, 2000. No
annual bonus shall be payable in respect of the Advisory Period. If the Advisory
Period begins prior to June 1, 2000, the annual bonus payable hereunder shall be
reduced by multiplying it by a fraction, the numerator of which is the number of
days from July 1, 1999 through the end of the Transition Period, and the
denominator of which is 365 and such annual bonus shall be paid no later than
ten (10) days following the end of the Transition Period.
4. Options. While you are employed hereunder, all options that
you currently hold to purchase common shares, without nominal or par value, of
SCL (the "Options") shall continue to become exercisable in accordance with
their terms, provided that any Options which have not otherwise become vested
and exercisable shall become fully vested and exercisable on March 31, 2001.
There will be no further option grants to you hereafter. After termination of
employment your rights with respect to the Options will be determined under the
terms of the Options, except as provided in paragraph 6(c).
5. Benefit Plans and Arrangements. (a) While you are employed
hereunder, you will be entitled to participate, in a manner appropriate to your
position with the Company, from time to time, in all benefit and compensation
plans, programs and arrangements generally applicable to the Company's senior
executives (other than any annual bonus plan and any option plan except to the
extent described herein). In addition, your senior executive medical, dental and
life insurance aspects of our Senior Executive Benefit Program will continue
through the earlier of June 30, 2002 or the date you become eligible for
medical, dental and life insurance coverage with a subsequent employer.
(b) While you are employed hereunder, the Company will provide
to you, through the end of the Transition Period, at the Company's expense a car
and driver and such other fringe benefits and perquisites (including vacation
entitlement) as are generally available to the Company's senior executives.
After the end of the Transition Period, no fringe benefits or perquisites will
be provided; you shall receive your Company car and your current home computer
(plus peripherals) upon termination of your employment (other than for Cause).
You will be afforded the same indemnity provisions regarding directors and
officers liability
<PAGE> 4
4
that the Company and SCL provide to their senior executive officers and
directors. In addition, you will be covered by any directors and officers
liability policy generally in force for SCL's and the Company's senior executive
officers and directors.
(c) Commencing on the first day of the month following your
attainment of age 60, you will receive a pension benefit of the product of
$50,000 times the number of full and partial years that you were employed by SCL
or the Company, payable each year for your lifetime; provided that such product
will be reduced by all other pension payments you may receive under the SCL or
Company defined benefit plans or arrangements, expressed as a single-life
annuity.
(d) You have previously deferred all or a portion of your
annual bonuses. We hereby agree with you that such prior deferrals, plus any
amount of the bonus under paragraph 3 that you defer pursuant to the Company's
normal deferral policies, along with any earnings thereon in accordance with the
Company's deferral arrangements, shall become payable to you in eight annual
installments, starting on July 1, 2005, equal to one-eighth, one-seventh,
one-sixth, one-fifth, one-fourth, one-third, one-half and all of your remaining
deferred compensation balance, respectively, and that pending such distribution
your deferred compensation account shall be periodically credited with earnings
as a Prime Rate Deferred Award under the Company's applicable policies. In the
event of your death, an accelerated lump sum payment of such deferred
compensation account shall be made as soon as practicable after your date of
death.
6. Termination. (a) The Company may terminate your employment
hereunder for Cause or pursuant to paragraph 1(d). You may terminate your
employment for any reason, and your employment shall automatically terminate in
the event your death.
(b) In the event your employment with the Company is terminated
by the Company for Cause, you will receive, as soon as practicable thereafter, a
lump sum payment equal to the sum of (i) all Base Salary accrued but unpaid
through your date of termination and (ii) the unpaid portion, if any, of any
annual bonus or any other compensation otherwise payable hereunder with respect
to any completed fiscal year of the Company preceding your date of termination.
(c) In the event your employment with the Company is terminated
by you at any time, your employment terminates
<PAGE> 5
5
pursuant to paragraph 1(c) or paragraph 1(d), or if you die, you (or your
estate, if applicable) will receive, subject to your (or your estate's, if
applicable) execution of a release in the form attached hereto as Exhibit A:
(i) a lump sum payment equal to the sum of all amounts
specified in paragraph 6(b) payable as soon as practicable
after termination;
(ii) a lump sum payment equal to any unpaid amount of
annual bonus under Section 3, multiplied, if the Advisory
Period has not yet commenced, by the number of days you
were employed during the fiscal year ending June 30, 2000,
and divided by 365, payable within 30 days after your
termination of employment;
(iii) a lump sum payment of $6,683,000; payable within 30
days after your termination of employment;
(iv) continued coverage under the medical, dental and
life insurance aspects of our Senior Executive Benefit
Program until the earlier of (A) June 30, 2002 or (B) the
date on which you become eligible for medical, dental and
life insurance coverage with a subsequent employer; and
(v) full vesting of the Options held by you on your date
of termination.
(d) For purposes of this Agreement:
"Cause" will mean (i) your conviction of a felony; (ii) any willful
misconduct by you which is materially injurious to SCL, the Company or
their affiliates or (iii) your willful and continuing refusal or failure
to perform your duties and obligations under this Agreement which is not
corrected within 30 days following written notice from the Company or SCL
to you specifying such refusal or failure. In no event shall your
incompetence in the performance of your duties hereunder or a bona fide
disagreement over corporate policy be deemed grounds for termination for
Cause. In the case of (i) and (ii) above, Cause shall include a
conviction or misconduct which occurs prior to your employment hereunder.
In the event of termination for willful misconduct
<PAGE> 6
6
described in (ii) above, you will receive five days advance notice of
termination of employment.
7. No Mitigation. You will not be required to mitigate any
payments due to you under this Agreement by seeking alternative employment, nor
will any payments from SCL or the Company be reduced by any amounts received in
connection with such alternative employment.
8. Legal Fees. The Company will reimburse you for (i) all
reasonable legal fees and disbursements incurred by you in connection with the
negotiation and preparation of this Agreement and (ii) all reasonable fees and
disbursements incurred by you in connection with any dispute over the
enforcement of your rights under this Agreement, but only if you prevail in such
dispute.
9. Confidentiality. You will not, without the prior consent
of the Company, or as required by a court of law or a governmental agency, or
administrative or legislative body with apparent jurisdiction to so order,
divulge confidential information concerning the operations of the Company or SCL
during your employment hereunder or at any time thereafter.
10. Withholding. The Company and SCL will be entitled to
withhold from any payment hereunder the amount of withholding required by law.
<PAGE> 7
7
11. Governing Law. This Agreement will be construed,
interpreted, and governed in accordance with the laws of the State of New York,
without reference to rules relating to conflicts of law.
12. Counterparts. This Agreement may be signed in counterparts.
The Seagram Company Ltd. and
Joseph E. Seagram & Sons, Inc.
By:/s/ Edgar Bronfman, Jr.
Edgar Bronfman, Jr.
President and Chief Executive
Officer
Accepted and Agreed on this
1st day of November, 1999
/s/ R. Matschullat
Robert W. Matschullat
<PAGE> 8
8
EXHIBIT A
RELEASE
Robert W. Matschullat (the "Executive") hereby covenants and
agrees not to sue, file any action, complaint, charge, grievance or arbitration
or commence any other proceedings, administrative or judicial, against The
Seagram Company Ltd. ("SCL") or any of SCL's divisions, affiliates,
subsidiaries, parents, branches, predecessors, successors, assigns, officers,
directors, trustees, employees, agents, stockholders, administrators,
representatives, attorneys, insurers or fiduciaries, past, present or future
(collectively, the "SCL Group") in any court of law or equity, or before any
administrative agency, with respect to any matter whatsoever arising or
derivative from Executive's employment with, performing services for, or
consulting for, the SCL Group, or his separation from employment and termination
of services with the SCL Group, arising on or prior to the date of execution of
this Release, including, without limitation, claims arising under Title VII of
the Civil Rights Act of 1964, as amended, the Reconstruction Era Civil Rights
Act, as amended, the Age Discrimination in Employment Act, as amended, the Older
Workers Benefit Protection Act, as amended, the Fair Labor Standards Act, as
amended, the Employee Retirement Income Security Act of 1974, as amended, the
Worker Adjustment and Retraining Act, as amended, the Americans with
Disabilities Act of 1990, as amended, the Rehabilitation Act of 1973, as
amended, the Connecticut Human Rights Law, as amended, the New York Human Rights
Law, as amended, the New York City Administrative Code, as amended, any state or
local laws regarding employment discrimination and/or federal, state or local
laws of any type or description regarding the employment of labor, and any and
all claims under state contract or tort law (the "Acts"); provided, however,
that this covenant not to sue does not affect Executive's future right to
enforce appropriately the terms of this Release or the attached letter agreement
dated November 1, 1999 (the "Letter Agreement").
For and in consideration of payments described in the Letter
Agreement and for other good and valuable consideration, Executive hereby
releases and forever discharges, and by this
<PAGE> 9
9
instrument does release and forever discharge, SCL and the SCL Group of and from
any and all debts, obligations, promises, covenants, agreements, contracts,
endorsements, bonds, controversies, suits or causes of action known or unknown,
suspected or unsuspected, of every kind and nature whatsoever in respect of
those matters arising or derivative from Executive's employment with or
consulting for or otherwise performing services for, the SCL Group or
Executive's separation from employment and termination of services with the SCL
Group, which may heretofore have existed or which may now exist, including,
without limitation, those arising under the Acts; provided, however, that this
covenant does not affect Executive's future right to enforce the terms of the
Letter Agreement.
Executive understands and agrees that the obligations set forth
in the Letter Agreement are in lieu of any and all other amounts to which
Executive might be, is now, or may become entitled to receive from SCL or any
member of the SCL Group upon any claim in respect of those matters arising or
derivative from Executive's employment or other services with the SCL Group or
Executive's separation from the SCL Group and, without limiting the generality
of the foregoing, Executive expressly waives any claim to employment or
reinstatement to employment, payment for salary, wages, backpay, frontpay,
interest, bonuses, contributions to or vesting in any employee benefit plans,
damages, accrued vacation, accrued sick leave, medical, dental, optical or
hospitalization benefits, accidental death and dismemberment coverage, life
insurance benefits, overtime, severance pay and/or attorneys' fees or costs,
except as are expressly provided for in the Letter Agreement or under the terms
of any employee benefit plan or any member of the SCL Group in which Executive
participates as of the date hereof.
Executive understands and agrees that he must forever continue to
keep confidential all proprietary or confidential information which he learned
while employed by the SCL Group, whether oral or written ("Confidential
Information") and shall not make use of any such Confidential Information on his
own behalf or on behalf or any other person or entity; provided however, that
Executive may divulge such Confidential Information if he is required to do so
by a court of law, by any governmental agency having supervisory authority over
the business of the SCL Group, or by any administrative or legislative body with
apparent jurisdiction to order Executive to divulge, disclose or make accessible
such Confidential Information.
<PAGE> 10
10
Executive understands and agrees that SCL's payment of money to
him and his signing of this Release does not in any way indicate that he has any
viable claims against SCL or the SCL Group or that SCL or the SCL Group admits
any liability to him whatsoever.
Executive has read this Release carefully, has been given at least
twenty-one (21) days to consider all of its terms, has been advised to consult
with an attorney and other advisors of his choice, and fully understands that by
signing below he is giving up any right which he may have to sue or bring any
other claims against SCL and the SCL Group. Executive has not been forced or
pressured in any manner whatsoever to sign his Release, and he agrees to all of
its terms voluntarily.
Executive understands that he has seven (7) days from the date he
has signed this Release below to revoke this Release, that this Release will not
become effective until the 8th day following the date that he has signed this
Release, and that SCL and the SCL Group will have no obligation to extend the
payments set forth in the Letter Agreement unless this Release becomes
effective.
This Release shall be governed by the laws of the United States of
America and the State of New York, without giving effect to the principles of
choice of law thereof.
Dated: __________ ___, ____
- -------------------------
Robert W. Matschullat
THE SEAGRAM COMPANY LTD.
By:
--------------------------------
<PAGE> 1
Exhibit 10.2
Joseph E. Seagram & Sons, Inc.
800 Third Avenue
New York, NY 1022-7699
November 23, 1999
PRIVATE AND CONFIDENTIAL
Mr. Kevin Conway
1 Gold Street - Unit 20
Hartford, CT 06103
Dear Kevin:
This letter will confirm our offer to you to join Seagram as Senior Vice
President - Tax of The Seagram Company Ltd., ("SCL") and of Joseph E. Seagram &
Sons, Inc., ("Company") (collectively, "Seagram") and will set forth terms and
conditions of your employment. As agreed, you will commence employment on
January 4, 2000.
1. Position and Duties. As Senior Vice President-Tax, you will be
responsible, subject to the direction of the Chief Financial Officer of the
Company, to whom you will report, for developing and implementing SCL's and the
Company's tax planning and compliance policies. You will be hired as a Grade 64
executive and your principal office will be located in New York City. Except for
reasonable travel requirements associated with your position, you will be
performing your services hereunder in the New York City metropolitan area.
2. Base Salary. Your base salary ("Base Salary") will be payable at a
rate of $450,000 per year in accordance with the Company's payroll policies
applicable to its executives at your level.
3. Annual Bonus. You will be eligible to receive an annual bonus
award pursuant to the SCL Management Incentive Plan (the "MIP") for each fiscal
year of the Company ending during your employment hereunder. Your target
management incentive award will be 65% of your Base Salary (i.e.,
<PAGE> 2
$292,500), appropriately prorated based on the number of months you are employed
during the Company's fiscal year ending June 30, 2000.
4. Option Grant. (a) We have recommended for approval to our Human
Resources Committee a one-time grant, effective on your date of employment
hereunder, of 150,000 options pursuant to the SCL 1996 Stock Incentive Plan (
the "1996 Plan") at an exercise price equal to the fair market value of an SCL
common share on the date of grant (the "Special Award"). One-third of the
Special Award will vest and become exercisable immediately upon the effective
date of the grant; an additional one-third of the Special Award will vest and
become exercisable on January 1, 2001 and the final one-third of the Special
Award will vest and become exercisable on January 1, 2002. The Special Award
will expire on the day before the tenth anniversary of the grant, provided that
should your employment terminate before the Special Award expires, treatment of
the Special Award, including vesting, exercise and cancellation, will be in
accordance with the terms of the 1996 Plan; and provided further that for any
termination of your employment to qualify as a retirement for purposes of the
1996 Plan, the sum of your total years of service with Seagram and your age on
such date of termination must equal or exceed 65.
(b) You will also be eligible to participate in the 1996 Plan (or any
successor plans) on an annual basis and your initial target annual grant of
options will be 37,500 for grants issued in the year 2000. Options are generally
granted in February of each year at an exercise price equal to the fair market
value on the date of grant. These options are subject to a three-year vesting
schedule, with the first one-third vesting and becoming exercisable on the first
anniversary of the date of grant, the second one-third vesting and becoming
exercisable on the second anniversary of the date of grant, and the third
one-third vesting and becoming exercisable on the third anniversary of the date
of grant. These options expire on the day before the tenth anniversary of the
date of grant, provided that should your employment with the Company and SCL
terminate before any such option expires, treatment of such options, including
vesting, exercise and cancellation will be in accordance with the 1996 Plan (or
applicable successor plan); and provided further that for any termination of
your employment to qualify as a retirement for purposes of the 1996 Plan (or
applicable successor plan) the sum of your total years of service with Seagram
and your age on such date of termination must equal or exceed 65.
5. Additional Sign-On Inducements. (a) Subject to the terms and conditions
set forth hereinafter, you will receive a payment of $1,000,000 to replace part
of the unrealized gain on the unvested portion of stock options provided to you
by your previous employer, which options will be canceled by reason of your
leaving. This amount shall be payable in three equal installments, with the
first
<PAGE> 3
installment to be paid within 30 days after your date of employment hereunder,
the second installment to be paid on January 31, 2001 and the third such
installment to be paid on January 31, 2002. Should your employment with the
Company and SCL terminate before the payment dates described in this paragraph
for any reason other than for Cause (as defined herein) or your voluntary
termination without Good Reason (as defined herein) the then remaining
installments shall be paid to you in accordance with this Agreement, as if you
had remained employed.
(b) Provided that you commence employment with Seagram before the date
upon which your previous employer ordinarily pays bonuses to its senior
executives and you do not receive such bonus, you will receive a payment of
$225,000 to be paid within 30 days after your date of employment hereunder.
(c) You will be granted, effective as of your date of employment
hereunder, 10,000 restricted stock units. Each restricted stock unit represents
the right to receive, on the date such unit vests (unless the parties agree to
defer payment), one SCL common share. One-third of the total units shall vest on
each of the first, second and third anniversaries of the date of the grant. As
cash dividends are paid on SCL common shares, you will be treated, on the record
date of such dividends, as if you were a holder of 10,000 SCL common shares, or
the adjusted number if there is any change in the capital structure of SCL. As a
result, you will be credited with such hypothetical cash dividends, which
themselves will be converted into further restricted stock units based upon the
mean between the high and low trading prices of SCL common shares on the New
York Stock Exchange, as reported in the Wall Street Journal, on the dividend
payment date. If there is any change in the capital structure of SCL through
reorganization, recapitalization or otherwise, or if there is a dividend of SCL
common shares payable in equity securities of SCL or other property (other than
cash) or a stock split or combination of shares, then the number of restricted
stock units granted hereunder shall be appropriately adjusted, as determined by
SCL. In the event of a merger or consolidation of SCL with another company, you
shall be credited hereunder with the merger or consolidation consideration, as
if you were a holder of SCL common shares. Should your employment with the
Company or SCL terminate at any time prior to the full vesting of the restricted
stock units described herein other than for Cause, or your voluntary termination
without Good Reason, the restrictions with respect to all the units of the Award
shall be waived and the units will be deemed fully vested, and paid out on the
otherwise applicable dates, as if you had remained employed.
6. Pension (a) Upon your retirement from the Company and SCL, you will be
entitled to receive a pension in an amount equal to the greater of (i) the
<PAGE> 4
amount payable in accordance with the terms of the Company's pension, retirement
and similar plans then generally applicable to senior executives of the Company;
or (ii) an annual life annuity equal to the product of $30,000 multiplied by the
number of years (or portion thereof) of your continuous services with Seagram.
(b) The pension payments due you under paragraph 6(a) (ii) will commence
upon your retirement, but no earlier than your attainment of age 60, and will
not be reduced actuarially or otherwise, except to the extent that you elect to
receive a joint and survivor benefit with your spouse, and
(c) For purposes of determining the comparative value of the benefits
under 6 (a) (i) and 6 (a) (ii), and for determining the actuarial reduction in
the event you choose a joint and survivor benefit under 6 (b), the actuarial
factors and assumptions then in use under Seagram's qualified defined benefit
plan will apply.
7. Other Benefits. While you are employed hereunder you will be
eligible to participate in our Senior Executive Compensation and Benefits
Program which provides medical benefits, accident, life insurance and disability
salary continuation, flexible perquisites, matching contributions and related
benefits. In addition, the Company agrees that it will pay the lease payment on
your automobile, in the amount of $1,584.41 per month until the current lease is
terminated on June 30, 2000.
8. Severance. In the event your employment is terminated by Seagram
other than for death, Permanent Disability (as defined below) or Cause, or you
voluntarily resign for Good Reason, Seagram will, for a period of two and
one-half years following your termination of employment (a) continue to pay you
your Seagram annual Base Salary at the annual rate in effect on the date of your
termination, and (b) continue the medical, dental and life insurance aspects of
our Senior Executive Benefits Program. Should you request payment of your Base
Salary in a lump sum, the Company shall continue the medical, dental and life
insurance aspects of our Senior Executive Benefits Program for the three month
period following the month in which the lump sum payment is made to you.
For purposes of this paragraph, "Cause" will mean (i) your conviction of
a felony, (ii) any willful misconduct by you which is substantially
injurious to SCL, the Company, or their affiliates or (iii) your willful
and continuing refusal or failure to perform your duties and obligation
under this Agreement which is not corrected within 30 days following the
written notice from the Company, its affiliates or SCL to you specifying
<PAGE> 5
such refusal or failure. In no event shall your incompetence in the
performance of your duties hereunder or a bona fide disagreement over
corporate policy be deemed grounds for termination for Cause. In the case
of (i) or (ii) above, Cause shall include a conviction or misconduct that
occurs prior to your employment hereunder. In the event of a termination
for willful misconduct described in (ii) above, you will receive five
days advance notice of termination of employment.
"Good Reason" will mean any material breach by SCL or the Company of its
obligations to you under this Agreement including, without limitation,
(i) the refusal or failure of SCL or the Company to pay you the
compensation and/or benefits due under the Agreement, (ii) any diminution
(without your consent), other than an insignificant or incidental
diminution in your duties, authority, responsibilities or reporting
requirements (whether or not accompanied by a change in title), (iii) the
failure to appoint you to the position of Senior Vice President - Tax of
SCL and the Company, or (iv) relocation of your principal office outside
of the New York City metropolitan area, which is not corrected within 30
days following written notice from you to the Company specifying the
breach.
"Permanent Disability" will mean disability as defined in the Company's
Senior Executive Disability Salary Continuation Arrangement.
9. Legal Fees. The Company will reimburse you for all reasonable
fees and disbursements incurred by you should you prevail in connection with a
dispute over the enforcement of your rights under this Agreement.
10. Confidentiality. You will not, without the prior consent of the
Company, divulge confidential information regarding the Company, SCL their
officers and directors or their operations during your employment hereunder or
at any time thereafter
11. Withholding. The Company and SCL will be entitled to withhold from
any payment hereunder the amount of withholding tax required by law.
12. No Mitigation. You will not be required to mitigate any payments
due to you under this Agreement by seeking alternative employment, nor will any
payments from SCL or the Company be reduced by any amounts received in
connection with such alternative employment.
<PAGE> 6
13. Successors. This Agreement shall be binding upon a successor to
substantially all of the business of the Company and SCL whether by reason of a
transfer of stock or assets.
14. Governing Law. This Agreement will be construed, interpreted, and
governed in accordance with the laws of the State of New York, without reference
to rules relating to conflicts of law.
15. Counterparts. This Agreement may be signed in counterparts.
On behalf of the Company and myself, I am delighted to describe Seagram's
offer to you. I am confident that you will make significant contributions to the
success of Seagram while at the same time having the opportunity to accomplish
your personal and professional goals.
Should you have any questions, please do not hesitate to contact me.
Best regards,
/s/ Yvonne Gilchrist Shaw
READ, ACCEPTED AND AGREED
On this 26th day of November, 1999
/s/ Kevin Conway
- -------------------------------
Kevin Conway
<PAGE> 1
Exhibit 12 (a)
The Seagram Company Ltd. and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
(U.S. dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
December 31, June 30,
---------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations,
before tax $ 413 $ (157) $ (579) $ 1,611
Add (deduct):
Dividends from equity companies 17 37 92 56
Fixed charges 402 211 656 406
Interest capitalized, net of amortization - (7) - (2)
------------- ------------- ------------ ----------
Earnings available for fixed charges $ 832 $ 84 $ 169 $ 2,071
============= ============= ============ ==========
Fixed charges:
Interest expense $ 370 $ 182 $ 592 $ 357
Portion of rent expense deemed to
represent interest factor 32 29 64 49
------------- ------------- ------------ ----------
Fixed charges $ 402 $ 211 $ 656 $ 406
============= ============= ============ ==========
Ratio of earnings to fixed charges 2.07 (a) (b) 5.10
============= ============= ============ ==========
</TABLE>
(a) Fixed charges exceeded earnings by $127 million for the six-month period
ended December 31, 1998.
(b) Fixed charges exceeded earnings by $487 million for the year ended June 30,
1999.
<PAGE> 1
Exhibit 12(b)
Joseph E. Seagram & Sons, Inc. and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
(U.S. dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
December 31, June 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations,
before tax $ 75 $ 88 $ (17) $ 17
Add
Dividends from equity companies 1 1 1 2
Fixed charges 135 99 349 182
Interest capitalized, net of amortization - - - -
-------------- ------------ --------------- --------------
Earnings available for fixed charges $ 211 $ 188 $ 333 $ 201
============== ============ =============== ==============
Fixed charges:
Interest expense $ 130 $ 93 $ 339 $ 170
Portion of rent expense deemed to
represent interest factor 5 6 10 12
-------------- ------------ --------------- --------------
Fixed charges $ 135 $ 99 $ 349 $ 182
============== ============ =============== ==============
Ratio of earnings to fixed charges 1.56 1.90 (a) 1.10
============== ============ =============== ==============
</TABLE>
(a) Fixed charges exceeded earnings by $16 million for the year ended June 30,
1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STTEMENTS OF THE SEAGRAM COMPANY LTD. FOR THE QUARTER ENDED DECEMBER
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> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,365
<SECURITIES> 0
<RECEIVABLES> 4,461
<ALLOWANCES> (544)
<INVENTORY> 2,470
<CURRENT-ASSETS> 9,262
<PP&E> 4,499
<DEPRECIATION> (1,457)
<TOTAL-ASSETS> 35,467
<CURRENT-LIABILITIES> 7,857
<BONDS> 7,656
0
0
<COMMON> 4,617
<OTHER-SE> 8,664
<TOTAL-LIABILITY-AND-EQUITY> 35,467
<SALES> 0
<TOTAL-REVENUES> 8,613
<CGS> 4,931
<TOTAL-COSTS> 4,931
<OTHER-EXPENSES> 3,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323
<INCOME-PRETAX> 413
<INCOME-TAX> (39)
<INCOME-CONTINUING> 517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (84)
<NET-INCOME> 433
<EPS-BASIC> 1.00
<EPS-DILUTED> 0.99
</TABLE>
