<PAGE> 1
Exhibit 7
THE SEAGRAM COMPANY LTD.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------------
2000 1999 1998
---------- ---------- ---------
U.S. DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS
<S> <C> <C> <C>
Revenues.................................................... $15,686 $12,312 $9,474
Cost of revenues............................................ 9,006 7,337 5,525
Selling, general and administrative expenses................ 5,986 4,820 3,396
Restructuring charge (credit)............................... (59) 405 --
------- ------- ------
Operating income (loss)..................................... 753 (250) 553
Interest, net and other expense............................. 661 457 228
Gain on sale of businesses.................................. 98 -- --
Gain on USA transactions.................................... -- 128 360
Gain on sale of Time Warner shares.......................... -- -- 926
------- ------- ------
190 (579) 1,611
Provision (benefit) for income taxes........................ 158 (33) 638
Minority interest........................................... 17 (26) 48
Equity earnings (losses) from unconsolidated companies...... 109 137 (45)
------- ------- ------
Income (loss) from continuing operations.................... 124 (383) 880
Income (loss) from discontinued Tropicana operations, after
tax....................................................... -- (3) 66
Gain on sale of discontinued Tropicana operations, after
tax....................................................... -- 1,072 --
Cumulative effect of change in accounting principle, after
tax....................................................... (84) -- --
------- ------- ------
Net income.................................................. $ 40 $ 686 $ 946
======= ======= ======
EARNINGS PER SHARE -- BASIC
Income (loss) from continuing operations.................. $ 0.28 $ (1.01) $ 2.51
Discontinued Tropicana operations, after tax.............. -- 2.82 0.19
Cumulative effect of change in accounting principle, after
tax.................................................... (0.19) -- --
------- ------- ------
Net income................................................ $ 0.09 $ 1.81 $ 2.70
======= ======= ======
EARNINGS PER SHARE -- DILUTED
Income (loss) from continuing operations.................. $ 0.28 $ (1.01) $ 2.49
Discontinued Tropicana operations, after tax.............. -- 2.82 0.19
Cumulative effect of change in accounting principle, after
tax.................................................... (0.19) -- --
------- ------- ------
Net income................................................ $ 0.09 $ 1.81 $ 2.68
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
U.S. GAAP
1
<PAGE> 2
THE SEAGRAM COMPANY LTD.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1,230 $ 1,533
Receivables, net of allowances.............................. 2,697 2,985
Inventories................................................. 2,422 2,627
Other current assets........................................ 1,450 1,736
------- -------
TOTAL CURRENT ASSETS.............................. 7,799 8,881
Investments................................................. 5,603 5,663
Film costs, net of amortization............................. 991 1,251
Music catalogs, artists' contracts and advances............. 2,803 3,348
Property, plant and equipment, net.......................... 3,099 3,158
Goodwill and other intangible assets........................ 11,814 11,871
Other assets................................................ 699 839
------- -------
$32,808 $35,011
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings and current portion of long-term
debt...................................................... $ 499 $ 1,053
Payables and accrued liabilities............................ 3,960 4,808
Accrued royalties and participations........................ 2,263 2,285
------- -------
TOTAL CURRENT LIABILITIES......................... 6,722 8,146
Long-term debt.............................................. 7,378 7,468
Accrued royalties and participations........................ 575 434
Deferred income taxes....................................... 2,696 2,698
Other liabilities........................................... 1,326 1,499
Minority interest........................................... 1,882 1,878
------- -------
TOTAL LIABILITIES................................. 20,579 22,123
------- -------
Shareholders' Equity
Shares without par value.................................. 4,762 4,575
Retained earnings......................................... 8,460 8,707
Accumulated other comprehensive income.................... (993) (394)
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 12,229 12,888
------- -------
$32,808 $35,011
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
Approved by the Board
<TABLE>
<S> <C>
/s/ EDGAR M. BRONFMAN /s/ MATTHEW W. BARRETT
--------------------------------------------- ---------------------------------------------
Edgar M. Bronfman Matthew W. Barrett
Director Director
</TABLE>
U.S. GAAP
2
<PAGE> 3
THE SEAGRAM COMPANY LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------
2000 1999 1998
------ ------- -------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ 124 $ (383) $ 880
Adjustments to reconcile income (loss) from continuing
operations to net cash provided:
Depreciation and amortization of assets................... 720 527 289
Amortization of goodwill.................................. 347 246 127
Gain on sale of businesses................................ (98) -- --
Gain on sale of Time Warner shares........................ -- -- (926)
Gain on USA transactions.................................. -- (128) (360)
Minority interest in income (loss) of subsidiaries........ 17 (26) 48
Equity earnings from unconsolidated companies (in excess
of) less than dividends received....................... (35) (45) 101
Deferred income taxes..................................... 83 92 447
Other..................................................... 69 120 (69)
Changes in assets and liabilities, net of effect of
acquisitions and dispositions:
Receivables, net of allowances......................... (60) 952 (324)
Inventories............................................ (101) (85) 14
Other current assets................................... 390 6 (524)
Music catalogs, artists' contracts and advances........ 50 (2) (88)
Payables and accrued liabilities....................... (574) (69) (7)
Other liabilities...................................... (134) (270) 151
------ ------- -------
674 1,318 (1,121)
------ ------- -------
Net cash provided by (used for) operating activities........ 798 935 (241)
------ ------- -------
INVESTING ACTIVITIES
Acquisition of PolyGram..................................... -- (8,607) --
Sale of Tropicana........................................... -- 3,288 --
Sale of Champagne operations................................ 310 -- --
Sale of Universal Concerts.................................. 190 -- --
Sale of Time Warner shares.................................. -- -- 1,863
USA transactions............................................ (242) (243) (368)
Capital expenditures........................................ (607) (531) (410)
Other....................................................... 69 (43) (386)
------ ------- -------
Net cash (used for) provided by investing activities........ (280) (6,136) 699
------ ------- -------
FINANCING ACTIVITIES
Dividends paid.............................................. (287) (247) (231)
Issuance of shares.......................................... -- 1,417 --
Issuance of shares upon exercise of stock options and
conversion of LYONs....................................... 187 314 86
Issuance of Adjustable Conversion-rate Equity Security
Units..................................................... 75 900 --
Issuance of long-term debt.................................. 99 5,086 41
Repayment of long-term debt................................. (108) (1,066) (37)
Shares purchased and retired................................ -- -- (753)
(Decrease) increase in short-term borrowings and current
portion of long-term debt................................. (787) (841) 1,053
------ ------- -------
Net cash (used for) provided by financing activities........ (821) 5,563 159
------ ------- -------
Net cash (used for) provided by continuing operations....... (303) 362 617
------ ------- -------
Net cash (used for) provided by discontinued operations..... -- (3) 67
------ ------- -------
Net (decrease) increase in cash and cash equivalents........ (303) 359 684
Cash and cash equivalents at beginning of period............ 1,533 1,174 490
------ ------- -------
Cash and cash equivalents at end of period.................. $1,230 $ 1,533 $ 1,174
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
U.S. GAAP
3
<PAGE> 4
THE SEAGRAM COMPANY LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES
WITHOUT PAR VALUE ACCUMULATED
--------------------- OTHER TOTAL
NUMBER RETAINED COMPREHENSIVE SHAREHOLDERS'
(THOUSANDS) AMOUNT EARNINGS INCOME EQUITY
----------- ------ -------- ------------- -------------
U.S. DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1997............... 365,281 $ 809 $8,259 $ 354 $ 9,422
Components of comprehensive income:
Net income........................... 946 946
Currency translation adjustments..... (72) (72)
Unrealized holding loss in equity
securities, net of $44 tax
benefit............................ (82) (82)
-------
Total comprehensive income........... 792
-------
Dividends paid ($.66 per share)...... (231) (231)
Shares issued -- exercise of stock
options............................ 2,751 84 84
-- conversion of
LYONs.............................. 48 2 2
Shares purchases and retired......... (20,948) (47) (706) (753)
------- ------ ------ ----- -------
BALANCE AT JUNE 30, 1998............... 347,132 848 8,268 200 9,316
Components of comprehensive income:
Net income........................... 686 686
Currency translation adjustments..... (599) (599)
Unrealized holding gain in equity
securities, net of $8 tax.......... 5 5
-------
Total comprehensive income........... 92
-------
Dividends paid ($.66 per share)...... (247) (247)
Shares issued -- exercise of stock
options and other
compensation........ 8,493 312 312
-- conversion of
LYONs.............................. 26 2 2
-- issuance of common
shares............... 76,904 3,413 3,413
------- ------ ------ ----- -------
BALANCE AT JUNE 30, 1999............... 432,555 4,575 8,707 (394) 12,888
Components of comprehensive income:
Net income........................... 40 40
Currency translation adjustments..... (348) (348)
Unrealized holding loss in equity
securities, net of $140 tax
benefit............................ (251) (251)
-------
Total comprehensive income........... (559)
-------
Dividends paid ($.66 per share)...... (287) (287)
Shares issued -- exercise of stock
options and other
compensation........ 4,585 183 183
-- conversion of
LYONs.............................. 87 4 4
------- ------ ------ ----- -------
BALANCE AT JUNE 30, 2000............... 437,227 $4,762 $8,460 $(993) $12,229
======= ====== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
U.S. GAAP
4
<PAGE> 5
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Seagram Company Ltd. operates in four global business segments: music,
filmed entertainment, recreation and other, and spirits and wine. The music
business is conducted through Universal Music Group, which produces, markets and
distributes recorded music throughout the world in all major genres. Universal
Music Group also manufactures, sells and distributes video products in the
United States and internationally, and licenses music copyrights. The filmed
entertainment and recreation and other businesses are conducted through
Universal Studios Group. The filmed entertainment business produces and
distributes motion picture, television and home video products worldwide,
operates and has ownership interests in a number of international cable channels
and engages in the licensing of merchandising and film property rights. The
recreation and other business operates theme parks and retail stores and is also
involved in the development of entertainment software. The spirits and wine
business, directly and through affiliates and joint ventures, produces, markets
and distributes distilled spirits, wines, Ports and Sherries, coolers, beers,
mixers and other low-alcohol beverages. In addition to marketing owned brands,
the spirits and wine business also distributes distilled spirits, wine,
champagne and beer brands owned by others.
Summary of Significant Accounting Policies
BASIS OF PRESENTATION The Seagram Company Ltd. is headquartered in Canada,
and more than 50 percent of the Company's shares are held by U.S. residents. As
a result, the Company has prepared its consolidated financial statements in
accordance with U.S. generally accepted accounting principles (GAAP). U.S. GAAP
applicable to the Company conforms, in all material respects, to Canadian GAAP.
Differences between U.S. and Canadian GAAP affecting these financial statements
are discussed in Note 13. Should a material difference between the two
accounting principles arise in the future, financial statements would be
provided under both U.S. and Canadian GAAP.
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS The
consolidated financial statements include the accounts of The Seagram Company
Ltd. and its subsidiaries. All intercompany accounts, transactions and profits
have been eliminated. Investments in certain other companies in which Seagram
has significant influence, but less than a controlling interest, are accounted
for using the equity method. Investments in companies in which Seagram does not
have significant influence are accounted for at market value if the investments
are publicly traded, or at cost if not publicly traded.
USE OF ESTIMATES The preparation of the financial statements requires
management to make informed estimates, assumptions and judgments, with
consideration given to materiality, that affect the reported amounts of assets,
liabilities, revenues and expenses. For example, estimates are used in
management's forecast of anticipated revenues in the music and filmed
entertainment businesses and in determining valuation allowances for
uncollectible trade receivables and deferred income taxes. Actual results could
differ from those estimates.
REVENUES AND COSTS
Music -- Revenues from the sale of recorded music, net of a provision for
estimated returns and allowances, are recognized upon shipment to third parties.
Advances to established recording artists and direct costs associated with the
creation of record masters are capitalized and are charged to expense as the
related royalties are earned, or when the amounts are determined to be
unrecoverable. The advances are expensed when past performance or current
popularity does not provide a sound basis for estimating that the advance will
be recovered from future royalties.
U.S. GAAP
5
<PAGE> 6
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Filmed Entertainment -- Generally, theatrical films are first distributed
in the worldwide theatrical and home video markets. Subsequently, theatrical
films are made available for worldwide pay television, network exhibition,
television syndication and basic cable television. Television films from the
Company's library may be licensed for domestic and foreign syndication, cable or
pay television and home video. Theatrical revenues from the distribution of
films are recognized as the films are exhibited. Revenues from television and
pay television licensing agreements are recognized when the films are available
for telecast, and all other conditions of the sale have been met. Home video
product revenues, less a provision for estimated returns and allowances, are
recognized upon availability of product for retail sale. Film costs are stated
at the lower of cost, less accumulated amortization, or net realizable value.
The estimated total film production and participation costs are expensed based
on the ratio of the current period's gross revenues to estimated total gross
revenues from all sources on an individual production basis. Estimates of total
gross revenues and costs can change significantly due to a variety of factors,
including the level of market acceptance of film and television products.
Accordingly, revenue and cost estimates are reviewed quarterly and revisions to
amortization rates or write-downs to net realizable value may occur.
Film costs, net of amortization, for completed theatrical films intended
for distribution in the worldwide theatrical, home video and pay television
distribution markets are classified as other current assets. The portion of
released film costs expected to be realized from secondary markets such as
network exhibition, television syndication and basic cable television are
reported as noncurrent assets. Other costs relating to film production,
including the purchase price of literary properties and related film development
costs, and the film library are classified as noncurrent assets.
In order to effectively manage our capital needs and costs in the film
business, we may utilize a variety of arrangements, including co-production,
insurance, contingent profit participation and the sale of certain distribution
rights. In connection with our review of capital needs and costs, the Company
has entered into an agreement with an independent third-party to sell
substantially all completed feature films produced over the period 1997 - 2000.
Films under the agreement are sold at our cost and no revenue or expense from
the initial sale of the films is recognized. The Company distributes these films
and maintains an option to reacquire the films at fair value, based on a formula
considering the remaining estimated total gross revenues, net of costs, at the
time of reacquisition. No films have been reacquired as of June 30, 2000.
Following the sale to the third-party, we accrue participations due to the
third-party in the same manner that the Company has historically amortized film
costs under Financial Accounting Standard (SFAS) No. 53, Financial Reporting by
Producers and Distributors of Motion Picture Films. As a distributor, the
Company has recorded, in its statement of income, the revenues received from and
operating expenses related to the films in all markets where we bear financial
risk for film performance, and, in interest, net and other expense, certain
other costs relating to the agreement.
Recreation and Other -- Revenues at theme parks are recognized at the time
of visitor attendance. Revenues for retail operations are recognized at
point-of-sale.
Spirits and Wine -- Revenues from the sale of spirits and wines are
recognized when products are shipped. The Company establishes provisions for
estimated returns and allowances at the time of shipment. Accruals for customer
discounts and rebates are recorded when revenues are recognized.
FOREIGN CURRENCY TRANSLATION For operations in highly inflationary
economies the U.S. dollar is utilized as the functional currency. Affiliates
outside the U.S. generally use the local currency as the functional currency.
For affiliates in countries considered to have a highly inflationary economy,
inventories and property, plant and equipment are translated at historical
exchange rates and translation effects are included in net income. The
cumulative currency translation adjustment balance was $(1,446) million,
$(1,098) million and $(499) million at June 30, 2000, 1999 and 1998,
respectively.
U.S. GAAP
6
<PAGE> 7
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS Cash equivalents include time deposits and
highly liquid investments with original maturities of three months or less.
INVENTORIES Inventories consist principally of spirits and wines and are
stated at cost, which is not in excess of market. The cost of spirits and wines
inventories is determined by either the last-in, first-out (LIFO) method or the
identified cost method. In accordance with industry practice, current assets
include spirits and wines inventories which are aged for varying periods of
years. The cost of music, retail and home video inventories is determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is carried at
cost. Depreciation is determined using the straight-line method based on the
estimated useful lives of the assets, generally at annual rates of 2 1/2 - 10
percent for buildings, 4 - 33 percent for machinery and equipment and 10 - 50
percent for other assets.
GOODWILL AND INTANGIBLE ASSETS The Company has significant acquired
intangible assets, including goodwill, music catalogs, artists' contracts, music
publishing assets, film libraries, copyrights and trademarks. Artists' contracts
and music catalogs are amortized on an accelerated basis over 14 and 20 years,
respectively. From the date of acquisition, the acceleration results in 80
percent of artists' contracts being amortized within the first eight years and
50 percent of music catalogs being amortized within the first five years. Music
publishing assets, film libraries and copyrights are amortized on a
straight-line basis over 20 years. Goodwill is amortized on a straight-line
basis over periods up to 40 years. The Company reviews the carrying value of
goodwill and intangible assets for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Measurement of any impairment would include a comparison of
discounted estimated future operating cash flows anticipated to be generated
during the remaining amortization period to the net carrying value. Music
catalogs, artists' contracts, music publishing assets and copyrights includes
$400 million of the cost of the 1995 Universal acquisition and approximately
$2.8 billion of the cost of the December 1998 PolyGram acquisition. A film
library acquired in connection with the Universal acquisition was valued at $300
million.
STOCK-BASED COMPENSATION Compensation cost attributable to stock option
and similar plans is recognized based on the difference, if any, between the
quoted market price of the Company's common shares on the date of grant over the
exercise price of the option. The Company does not issue options at prices below
market value at date of grant.
DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into foreign currency
and interest rate derivative contracts for the purpose of minimizing risk. The
Company uses currency forwards and options to hedge firm commitments and a
portion of its foreign indebtedness. In addition, the Company hedges foreign
currency risk on intercompany payments and receipts through currency forwards,
options and swaps which offset the exposure being hedged. Gains and losses on
forward contracts are deferred and offset against foreign exchange gains and
losses on the underlying hedged transaction. Gains and losses on forward
contracts used to hedge foreign debt and intercompany payments are recorded in
the income statement in selling, general and administrative expenses. The
Company uses interest rate swaps and swaptions to manage net exposure to
interest rate movements related to its borrowings and to lower its overall
borrowing costs. Net payments or receipts are recorded as adjustments to
interest expense. Interest rate instruments generally have the same life as the
underlying interest rate exposure. Gains or losses on the early termination of
interest rate instruments are recognized over the remaining life, if any, of the
underlying exposure as an adjustment to interest expense.
NEW ACCOUNTING GUIDANCE
Start-Up Costs--It has been the Company's policy to capitalize one-time,
direct incremental costs incurred prior to the initial opening of major
recreation facilities, including sales and marketing, park set-up
U.S. GAAP
7
<PAGE> 8
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and training. Capitalized start-up costs were amortized over a twelve-month
period upon the opening of the facility. At June 30, 1999, capitalized costs
were $141 million. Amortization of start-up costs were $14 million and $1
million in fiscal 1999 and 1998, respectively. 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 requires that costs of
start-up activities and organization costs be expensed as incurred. The adoption
of SOP 98-5 resulted in an $84 million non-cash after-tax charge in fiscal 2000,
which was recorded as a cumulative effect of a change in accounting principle.
Financial Instruments--SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, issued by the Financial Accounting Standards Board
(FASB), will require the Company to recognize all derivatives in the financial
statements at fair value beginning July 1, 2000. Changes in the fair value of
all derivatives will be recorded each period in current earnings or other
comprehensive income, depending on whether the derivative is used to hedge
fair-value or cash-flow transactions. The ineffective portion of all hedges will
be recognized in current-period earnings. The adoption of SFAS 133 will not have
a material effect on the Company's financial statements.
Film Accounting--In June 2000, the AcSEC issued SOP 00-2, Accounting by
Producers or Distributors of Films. The SOP supersedes current film accounting
standards related to the recognition of revenues, costs and expenses and film
cost valuation and will be adopted by the Company on July 1, 2000. The SOP
requires that advertising costs for theatrical and television product be
expensed as incurred. Additionally, the SOP requires that certain abandoned
project costs, which were previously capitalized as film costs, be expensed on
an accelerated basis. Film costs are also required to be presented on the
balance sheet as noncurrent assets. In connection with the adoption of SOP 00-2,
the Company will expense story costs as incurred. The adoption of SOP 00-2 will
result in an approximate $360 million non-cash after-tax charge to reduce the
carrying value of film inventory, which will be reported as a cumulative effect
of a change in accounting principle.
RECLASSIFICATIONS Certain prior period amounts in the financial statement
notes have been reclassified to conform with the current year presentation.
NOTE 2 SIGNIFICANT TRANSACTIONS
Acquisition of PolyGram
On December 10, 1998, the Company acquired 99.5 percent of the outstanding
shares of PolyGram N.V. (PolyGram), a global music and entertainment company,
for $8,607 million in cash and approximately 47.9 million common shares of the
Company. Substantially all of the common shares were issued to Koninklijke
Philips Electronics N.V., which had owned 75 percent of the PolyGram shares. The
acquisition has been accounted for under the purchase method of accounting, and
accordingly the results of the operations of PolyGram are included in the
results of the Company's music and filmed entertainment segments from the date
of acquisition. The acquisition was financed through both short-term and
long-term borrowings
Allocation of Purchase Price -- The Company completed a purchase price
study related to its acquisition of PolyGram in order to assess and allocate the
purchase price among tangible and intangible assets acquired
U.S. GAAP
8
<PAGE> 9
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and liabilities assumed, based on fair values at the acquisition date. The final
allocation of purchase price follows:
<TABLE>
<CAPTION>
U.S. DOLLARS IN MILLIONS
------------------------
<S> <C>
Identifiable intangible assets.............................. $ 2,774
Goodwill.................................................... 9,616
Accrual for exit activities................................. (510)
All other, net.............................................. (1,080)
-------
$10,800
=======
</TABLE>
Intangible Assets -- Identifiable intangible assets consist of music
catalogs, artists' contracts, music publishing assets, distribution networks and
customer relationships. Acquired music catalogs, artists' contracts and music
publishing assets are amortized over periods ranging from 14 to 20 years, on an
accelerated basis, and other intangibles are amortized over a 40-year period, on
a straight-line basis. Goodwill is the excess of purchase price over the fair
value of assets acquired and liabilities assumed, and is amortized on a
straight-line basis over a 40-year period.
Accrual for Exit Activities -- 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 consists
principally of facility elimination costs, including leasehold termination
payments and incremental facility closure costs, contract terminations,
relocation costs and the severance of approximately 1,700 employees. The
utilization of the accrual for exit activities to date follows:
<TABLE>
<CAPTION>
UTILIZED
----------------- BALANCE AT
EXIT ACTIVITIES CASH NON-CASH JUNE 30, 2000
--------------- ----- -------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C>
Facility elimination costs............. $ 45 $ (23) $ (1) $ 21
Contract terminations.................. 68 (44) (13) 11
Severance or relocation................ 397 (207) (15) 175
---- ----- ---- ----
$510 $(274) $(29) $207
---- ----- ---- ----
</TABLE>
As of June 30, 2000, remaining exit activities relate principally to
contractual obligations, facility elimination and severance payments to be made
in future periods.
Disposition of Tropicana
On August 25, 1998, the Company completed the sale of Tropicana Products,
Inc. and the Company's global fruit juice business (Tropicana) for approximately
$3,288 million in cash, which resulted in a pre-tax gain of $1,445 million
($1,072 million after tax). Tropicana produced and marketed Tropicana, Dole and
U.S. GAAP
9
<PAGE> 10
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other branded fruit juices and beverages. Summarized financial information
related to the discontinued Tropicana business follows:
<TABLE>
<CAPTION>
PERIOD ENDED FISCAL YEAR ENDED
AUGUST 25, 1998 JUNE 30, 1998
--------------- -----------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
Revenues.............................................. $337 $1,986
Cost of revenues...................................... 266 1,394
Selling, general and administrative expenses.......... 68 423
---- ------
Operating income...................................... 3 169
Interest expense...................................... 3 39
Provision for income taxes............................ 3 64
---- ------
Income (loss) from discontinued operations............ $ (3) $ 66
==== ======
</TABLE>
Interest expense above represents allocations based on the ratio of net
assets of discontinued operations to consolidated net assets.
USA Transactions
On October 21, 1997, Universal acquired from Viacom Inc. the remaining 50
percent interest in the USA Networks partnership for $1.7 billion in cash. This
purchase was in addition to Universal's original 50 percent interest in USA
Networks. The acquisition was accounted for under the purchase method of
accounting. The cost of the acquisition was allocated on the basis of the
estimated fair market value of the assets acquired and liabilities assumed. This
transaction resulted in $1.6 billion of goodwill which was being amortized over
40 years.
On February 12, 1998, Universal sold its acquired 50 percent interest in
USA Networks to USA Networks, Inc. (USAi) and contributed its original 50
percent interest in USA Networks, the majority of its television assets and 50
percent of the international operations of USA Networks to USANi LLC. In this
transaction, Universal received $1,332 million in cash, a 10.7 percent interest
in USAi and a 45.8 percent exchangeable interest in USANi LLC. Universal
recognized a gross gain of $583 million, before taking into consideration the
effect of the transaction, which impaired certain remaining television assets
and transformed various related contractual obligations into adverse purchase
commitments. The fair value of these items was determined based on expected
future cash flows. The impairment losses and adverse purchase commitments
arising from the transaction aggregated $223 million and were reflected in the
net gain of $360 million ($222 million after tax). During 1999, $128 million of
accrued costs were reversed as a result of the favorable settlement of certain
contractual obligations and adverse purchase commitments. The transactions
resulted in $82 million of goodwill, which is being amortized over 40 years. The
investment in the 18.2 million shares of USAi common stock held by Universal at
June 30, 2000 is accounted for at market value ($393 million at June 30, 2000)
and has an underlying historical cost of $211 million. The investment in 13.4
million shares of Class B common stock of USAi is carried at its historical cost
of $136 million. The investment in the LLC is accounted for under the equity
method.
Pro Forma Financial Information
The unaudited condensed pro forma income statement data presented below
assume the PolyGram acquisition, the sale of Tropicana and the USA transactions
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 date previously
indicated, nor is it necessarily indicative of future operating results of the
Company.
U.S. GAAP
10
<PAGE> 11
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
--------------------------
1999 1998
----------- -----------
U.S. DOLLARS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS
<S> <C> <C>
Revenues.................................................... $15,344 $14,587
Net income (loss)........................................... $ (208) $ 447
Earnings (loss) per share:
Basic..................................................... $ (0.52) $ 1.12
Diluted................................................... $ (0.52) $ 1.11
</TABLE>
Other Transactions
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 pre-tax gain of $98 million.
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. The sale price approximated book value and therefore no gain or
loss was recognized. Through agreements with the purchaser, Seagram has retained
global distribution rights for Mumm and Perrier-Jouet Champagnes for a ten-year
period.
Time Warner Shares--On February 5, 1998, the Company sold 15 million shares
of Time Warner common stock for pre-tax proceeds of $958 million. On May 27,
1998, the Company sold its remaining 11.8 million shares of Time Warner common
stock for pre-tax proceeds of $905 million. The aggregate gain on the sale of
the shares was $926 million ($602 million after tax).
NOTE 3 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 included 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
MUSIC ENTERTAINMENT TOTAL
----- ------------- -----
U.S. DOLLARS IN MILLIONS
<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>
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. The cash and non-cash elements of the
restructuring charge approximated $318
U.S. GAAP
11
<PAGE> 12
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million and $87 million, respectively. Many restructuring activities are
complete or near completion. Due to the favorable settlement of certain
contractual and employee severance obligations, $59 million of the original
restructuring charge was credited to income in the second quarter of fiscal
2000. The utilization of the restructuring charge to date follows:
<TABLE>
<CAPTION>
UTILIZED
ORIGINAL RESTRUCTURING ---------------- BALANCE AT
CHARGE CREDIT CASH NON-CASH JUNE 30, 2000
-------- ------------- ----- -------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C>
Severance and other employee-related
costs............................... $126 $(12) $ (74) $ (3) $ 37
Facilities and labels................. 128 (35) (9) (56) 28
Contract termination and other
costs............................... 151 (12) (75) (28) 36
---- ---- ----- ---- ----
$405 $(59) $(158) $(87) $101
==== ==== ===== ==== ====
</TABLE>
As of June 30, 2000, essentially all of the employees provided for under
the restructuring initiative have separated from the Company. Remaining
restructuring activities relate principally to contractual obligations and
severance payments to be made in future periods.
NOTE 4 INVESTMENTS
The Company's investments consist of:
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
Equity method investments:
USANi LLC................................................ $2,719 $2,329
Other.................................................... 1,568 1,710
------ ------
4,287 4,039
------ ------
Cost and fair-value investments:
DuPont................................................... 719 1,123
USAi common stock........................................ 393 365
USAi Class B common stock................................ 136 136
Other.................................................... 68 --
------ ------
1,316 1,624
------ ------
$5,603 $5,663
====== ======
</TABLE>
Equity method investments -- The Company has a number of investments in
unconsolidated companies which are 50 percent or less owned or controlled, that
are accounted for using the equity method. The most significant of these is
USANi LLC, which is part of our filmed entertainment business and is engaged in
network and first run syndication television production, domestic distribution
of its and Universal's television production and operation of the USA Network
and SCI-FI Channel cable networks (49 percent equity interest). Other filmed
entertainment equity investments include Loews Cineplex Entertainment
Corporation, primarily engaged in theatrical exhibition of motion pictures in
the U.S. and Canada (26 percent owned); Cinema International Corporation and
United Cinemas International, both engaged in theatrical exhibition of motion
pictures in territories outside the U.S. and Canada (49 percent owned), and
several other equity investments primarily related to our international
television networks. Significant investments in the recreation and other
business include Universal City Development Partners, (50 percent owned) which
owns Universal Orlando, a themed tourist attraction in Orlando, Florida, that
includes Universal Studios, Islands of Adventure, CityWalk, Hard Rock Live and a
50 percent interest in the Portofino Bay Hotel (a Loews hotel);
U.S. GAAP
12
<PAGE> 13
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USJ Co., Ltd., which has begun development of a motion picture themed tourist
attraction, Universal Studios Japan, and owns commercial real estate in Osaka,
Japan (24 percent owned); Universal Studios Port Aventura, a theme park located
in Spain (37 percent owned); SEGA GameWorks LLC, which designs, develops and
operates location-based entertainment centers (27 percent owned); and Interplay
Entertainment Corp., an entertainment software developer (16 percent owned). In
the music business, the most significant equity investment is GetMusic, an
online music alliance to create Internet sites that promote and sell music (50
percent owned). The spirits and wine business has an investment in Kirin-Seagram
Limited, which is engaged in the manufacture, sale and distribution of distilled
beverage alcohol and wines in Japan (49 percent owned).
Summarized financial information for the Company's investments in
unconsolidated companies, derived from unaudited historical financial results,
follows:
SUMMARIZED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
Current assets............................................. $ 2,250 $ 1,897
Noncurrent assets.......................................... 12,781 11,928
------- -------
$15,031 $13,825
======= =======
Current liabilities........................................ $ 2,123 $ 1,991
Noncurrent liabilities..................................... 4,693 3,883
Equity..................................................... 8,215 7,951
------- -------
$15,031 $13,825
======= =======
Proportionate share of net assets of unconsolidated
companies................................................ $ 3,392 $ 3,691
======= =======
</TABLE>
Approximately $700 million of the cost of the 1995 Universal acquisition
was allocated to goodwill related to investments in unconsolidated companies and
is being amortized on a straight-line basis over 40 years.
SUMMARIZED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-----------------------------
2000 1999 1998
------- ------- -------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C>
Revenues................................................. $6,117 $5,294 $4,561
Earnings before interest and taxes....................... $ 286 $ 351 $ 366
Net income............................................... $ 241 $ 314 $ 173
</TABLE>
The equity earnings (losses) of unconsolidated companies in the
consolidated statement of income includes goodwill amortization related to
unconsolidated companies of $17 million, $35 million and $81 million for the
fiscal years ended June 30, 2000, 1999 and 1998, respectively, principally in
the filmed entertainment and recreation and other segments. Additionally,
operating income for the fiscal year ended June 30, 1998 includes $76 million of
income from USA Networks for the period from October 21, 1997 to February 12,
1998 when the Company owned 100 percent of USA Networks as described in Note 2.
Cost and fair-value investments
DuPont -- At June 30, 2000, 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
U.S. GAAP
13
<PAGE> 14
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value which was $719 million at June 30, 2000. The underlying historical book
value of the DuPont shares is $187 million, which represents the historical cost
of the shares plus unremitted earnings related to those shares.
USAi -- At June 30, 2000, the Company owned 18.2 million shares of the
outstanding common stock of USAi. The investment, which is accounted for at
market value ($393 million at June 30, 2000), has an underlying cost of $211
million. At June 30, 2000, the Company also owned 13.4 million shares of USAi
Class B common stock which is carried at its historical cost of $136 million.
Other -- Other cost and fair-value investments at June 30, 2000, are
primarily related to our music electronic business initiatives.
NOTE 5 LONG-TERM DEBT AND CREDIT ARRANGEMENTS
LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
6.5% Debentures due 2003.................................... $ 200 $ 200
8.35% Debentures due 2006................................... 200 200
8.35% Debentures due 2022................................... 200 200
6.875% Debentures due 2023.................................. 200 200
6% Swiss Franc Bonds due 2085 (SF 250 million).............. 153 162
7.50% Adjustable Conversion-rate Equity Security Units(1)... 1,004 927
Other....................................................... 293 208
------ ------
2,250 2,097
------ ------
Joseph E. Seagram & Sons, Inc. (JES), guaranteed by Company:
5.79% Senior Notes due 2001............................... 250 250
6.25% Senior Notes due 2001............................... 600 600
6.4% Senior Notes due 2003................................ 400 400
6.625% Senior Notes due 2005.............................. 475 475
8.375% Debentures due 2007................................ 200 200
7% Debentures due 2008.................................... 200 200
6.8% Senior Notes due 2008................................ 450 450
8.875% Debentures due 2011................................ 223 223
9.65% Debentures due 2018................................. 249 249
7.5% Senior Debentures due 2018........................... 875 875
9% Debentures due 2021.................................... 198 198
7.6% Senior Debentures due 2028........................... 700 700
8.00% Senior Quarterly Income Debt Securities due 2038
(QUIDS)................................................ 550 550
Liquid Yield Option Notes (LYONs)(2)...................... 9 9
------ ------
5,379 5,379
------ ------
7,629 7,476
Current portion of long-term debt........................... (251) (8)
------ ------
$7,378 $7,468
====== ======
</TABLE>
---------------
(1) In June 1999, the Company issued 18,500,000 units of the 7.5% Adjustable
Conversion-rate Equity Security Units at a stated price of $50.125 for an
aggregate initial offering price of $927 million. In
U.S. GAAP
14
<PAGE> 15
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
July 1999, the Company issued additional 1,525,000 units of the 7.5%
Adjustable Conversion-rate Equity Security Units at a stated price of
$50.125 for $77 million. Each unit consists of a contract to purchase common
shares of the Company and a subordinated deferrable note of its subsidiary,
Joseph E. Seagram & Sons, Inc., that is guaranteed by the Company. Under the
purchase contracts, on June 21, 2002, the unit holders will purchase for
$50.125 not more than one and not less than 0.8333 of one share of the
Company's common shares per unit, depending on the average trading price of
the common shares during a specified trading period in June 2002. The junior
subordinated deferrable notes have a principle amount equal to the stated
amount of the units and an interest rate of 7.62%. The interest rate on the
note is subject to adjustment at March 21, 2002 and the note matures on June
21, 2004. The holders of the units are required to pay contract fees to the
Company at an annual rate of .12%. These payments will be funded out of
payments made in respect of the notes so that the net distributions on the
notes will be 7.5%.
(2) LYONs 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 (189,106 shares at
June 30, 2000). The Company has guaranteed the LYONs on a subordinated
basis.
The Company's unused lines of credit totaled $5.5 billion and have varying
terms of up to two years. At June 30, 2000, short-term borrowings comprised $248
million of bank borrowings bearing interest at market rates.
Interest expense on long-term debt was $576 million, $380 million and $226
million in the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Annual repayments and redemptions of long-term debt for the five fiscal years
subsequent to June 30, 2000 are: 2001 -- $251 million; 2002 -- $674 million;
2003 -- $203 million; 2004 -- $1,407 million; and 2005 -- $9 million.
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>
FISCAL YEARS ENDED JUNE 30,
-----------------------------
2000 1999 1998
------- ------- -------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C>
Revenues.................................................... $2,438 $2,242 $2,144
Cost of revenues............................................ $1,514 $1,390 $1,356
Loss from continuing operations............................. $ (37) $ (8) $ (8)
Discontinued Tropicana operations........................... -- -- (17)
------ ------ ------
Net loss.................................................... $ (37) $ (8) $ (25)
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
Current assets.............................................. $ 2,232 $ 1,674
Noncurrent assets........................................... 18,377 18,602
------- -------
$20,609 $20,276
======= =======
Current liabilities......................................... $ 879 $ 1,099
Noncurrent liabilities...................................... 10,889 10,014
Shareholders' equity........................................ 8,841 9,163
------- -------
$20,609 $20,276
======= =======
</TABLE>
U.S. GAAP
15
<PAGE> 16
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, receivables, short-term
borrowings, current portion of long-term debt and payables approximate fair
value because maturities are less than one year in duration. The Company's
remaining financial instruments consisted of the following:
<TABLE>
<CAPTION>
ASSET (LIABILITY)
------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
---------------------------- ----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C>
NONDERIVATIVES
Investments (Note 4)...................... $ 431 $ 1,130 $ 398 $ 1,488
Long-term debt............................ $(7,378) $(7,239) $(7,468) $(7,600)
DERIVATIVES HELD FOR PURPOSES OTHER THAN
TRADING
Foreign exchange forwards................. $ -- $ 6 $ -- $ 50
Interest rate swaps....................... -- (41) -- 13
------- ------- ------- -------
$ -- $ (35) $ -- $ 63
======= ======= ======= =======
</TABLE>
Fair value of investments was determined based on quoted market value of
these securities as traded on stock exchanges. Fair value of long-term debt was
estimated using quoted market prices for similar issues. The fair value for
foreign exchange and interest rate instruments was based on market prices as
quoted from financial institutions.
The Company, as the result of its global operating and financing
activities, is exposed to changes in interest rates and foreign currency
exchange rates that may adversely affect its results of operations and financial
position. In seeking to minimize the risks and costs associated with such
activities, the Company manages the impact of interest rate changes and foreign
currency changes on earnings and cash flows by entering into derivative
contracts. The Company does not use derivative financial instruments for trading
or speculative purposes.
At June 30, 2000, the Company held interest rate swap contracts that had
notional amounts of $2,250 million ($500 million at June 30, 1999). These swap
agreements expire in one to seven years.
At June 30, 2000, the Company held foreign currency forward contracts and
options to purchase and sell foreign currencies, including cross-currency
contracts and options to sell one foreign currency for another currency, with
notional amounts totaling $1,972 million ($4,539 million at June 30, 1999). The
forward contracts and options are primarily used to hedge the exchange rate
exposure to foreign currency forecasted cash flows. The forecasted cash flows
are principally related to intercompany sales, royalties, licenses and service
fees. These derivatives have varying maturities not exceeding two years. The
principal currencies hedged are the euro, British pound, Canadian dollar and
Japanese yen.
The Company minimizes its credit exposure to counter-parties by entering
into contracts only with highly-rated commercial banks or financial institutions
and by distributing the transactions among the selected institutions. Although
the Company's credit risk is the replacement cost at the then-estimated fair
value of the instrument, management believes that the risk of incurring losses
is remote and that such losses, if any, would not be material. The market risk
related to the foreign exchange agreements should be offset by changes in the
valuation of the underlying items being hedged.
NOTE 7 COMMON SHARES, EARNINGS PER SHARE AND STOCK OPTIONS
The Company is authorized to issue an unlimited number of common and
preferred shares without nominal or par value. At June 30, 2000, 58,202,953
common shares were potentially issuable upon the
U.S. GAAP
16
<PAGE> 17
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
conversion of the LYONs, the exercise of employee stock options, the conversion
of deferred share units and the early settlement of the contracts to purchase
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 fiscal years ended June 30, 2000 -- 434,544,033; June 30,
1999 -- 378,193,043; and June 30, 1998 -- 349,874,259. Diluted net income per
share was based on the following weighted average number of shares outstanding
during the fiscal years ended June 30, 2000 -- 441,366,684; and June 30, 1998 --
353,604,553. Average shares of 4,933,249 were not included in the computation of
1999 diluted net income per share because to do so would have been
anti-dilutive.
STOCK OPTION PLANS
Under the Company's employee stock option plans, options may be granted to
purchase the Company's common shares at not less than the fair market value of
the shares on the date of the grant. Currently outstanding options become
exercisable one to five years from the grant date and expire ten years after the
grant date.
The Company has adopted SFAS 123, Accounting for Stock-Based Compensation.
In accordance with the provisions of SFAS 123, the Company applies Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
utilizing the methodology prescribed by SFAS 123, the Company's net income and
earnings per share would be reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------------
2000 1999 1998
--------- -------- --------
U.S. DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $ 40 $ 686 $ 946
Pro forma................................................. (49) 622 892
Basic earnings (loss) per common share:
As reported............................................... $ 0.09 $1.81 $2.70
Pro forma................................................. (0.11) 1.64 2.55
Diluted earnings (loss) per common share:
As reported............................................... $ 0.09 $1.81 $2.68
Pro forma................................................. (0.11) 1.64 2.52
</TABLE>
These pro forma amounts may not be representative of future disclosures.
The fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively: dividend yields of 1.1, 1.5 and 1.8 percent; expected volatility
of 29, 30 and 25 percent; risk-free interest rates of 6.7, 5.1 and 5.6 percent;
and expected life of six years for all periods. The weighted average fair value
of options granted during the fiscal years ended June 30, 2000, 1999 and 1998
for which the exercise price equals the market price on the grant date was
$22.39, $15.25 and $10.92, respectively. The weighted average fair value of
options granted during the fiscal year ended June 30, 1998 for which the
exercise price exceeded the market price on the grant date was $7.44.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models
U.S. GAAP
17
<PAGE> 18
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
STOCK OPTIONS OF OPTIONS
OUTSTANDING OUTSTANDING
------------- --------------
<S> <C> <C>
BALANCE, JUNE 30, 1997...................................... 32,961,126 $31.79
Granted..................................................... 8,160,909 38.32
Exercised................................................... (2,751,832) 26.14
Cancelled................................................... (752,284) 38.53
---------- ------
BALANCE, JUNE 30, 1998...................................... 37,617,919 33.49
Granted..................................................... 11,674,558 45.40
Exercised................................................... (8,489,374) 31.50
Cancelled................................................... (3,234,811) 34.79
---------- ------
BALANCE, JUNE 30, 1999...................................... 37,568,292 37.53
Granted..................................................... 9,299,360 59.97
Exercised................................................... (4,583,749) 31.36
Cancelled................................................... (977,503) 49.31
---------- ------
BALANCE, JUNE 30, 2000...................................... 41,306,400 42.99
========== ======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
under $30................... 5,451,676 2.7 $27.18 5,385,010 $27.17
$30 - $40................... 19,352,833 6.5 35.67 14,654,396 35.40
$40 - $50................... 5,562,122 8.6 47.66 1,782,782 47.71
$50 - $60................... 3,329,141 8.9 57.37 867,488 57.22
$60 - $70................... 7,610,628 9.6 61.44 -- --
---------- ----------
41,306,400 22,689,676
</TABLE>
U.S. GAAP
18
<PAGE> 19
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 INCOME TAXES
The following tables summarize the sources of pre-tax income and the
resulting income tax expense:
GEOGRAPHIC COMPONENTS OF PRETAX INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------
2000 1999 1998
------ ------ -------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C>
U.S. ....................................................... $(458) $(545) $1,192
Canada...................................................... 93 39 51
Other jurisdictions......................................... 555 (73) 368
----- ----- ------
Income (loss) from continuing operations, before tax........ 190 (579) 1,611
Discontinued Tropicana operations........................... -- 1,445 130
----- ----- ------
Income before tax........................................... $ 190 $ 866 $1,741
===== ===== ======
</TABLE>
COMPONENTS OF INCOME TAX EXPENSE
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------
2000 1999 1998
------ ------- ------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C>
Income tax expense (benefit) applicable to:
Continuing operations....................................... $158 $ (33) $638
Discontinued Tropicana operations........................... -- 376 64
---- ----- ----
Total income tax expense.................................... $158 $ 343 $702
==== ===== ====
Current
Continuing operations
Federal................................................ $ -- $(256) $134
State and local........................................ 8 3 (20)
Other jurisdictions.................................... 67 128 77
---- ----- ----
75 (125) 191
Discontinued Tropicana operations......................... -- 376 58
---- ----- ----
75 251 249
---- ----- ----
Deferred
Continuing operations
Federal................................................ (35) 130 351
State and local........................................ (2) 2 34
Other jurisdictions.................................... 120 (40) 62
---- ----- ----
83 92 447
Discontinued Tropicana operations......................... -- -- 6
---- ----- ----
83 92 453
---- ----- ----
Total income tax expense.................................... $158 $ 343 $702
==== ===== ====
</TABLE>
U.S. GAAP
19
<PAGE> 20
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPONENTS OF NET DEFERRED TAX LIABILITY
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
Basis and amortization differences.......................... $ 969 $ 1,016
DuPont share redemption..................................... 1,540 1,540
DuPont and USAi investments................................. 471 613
Unremitted foreign earnings................................. 102 89
Other, net.................................................. 106 193
------- -------
Deferred tax liabilities.................................... 3,188 3,451
------- -------
Employee benefits........................................... (17) (114)
Tax credit and net operating loss carryovers................ (515) (256)
Valuation, doubtful accounts and return reserves............ (23) (259)
Other, net.................................................. (703) (697)
------- -------
Deferred tax assets......................................... (1,258) (1,326)
Valuation allowance......................................... 270 82
------- -------
(988) (1,244)
------- -------
Net deferred tax liability.................................. $ 2,200 $ 2,207
======= =======
</TABLE>
The Company has U.S. tax credit carryovers of $56 million, $13 million of
which has no expiration date and $43 million of which have expiration dates
through 2009. In addition, the Company has approximately $1,309 million of net
operating loss carryovers, the majority of which have expiration dates through
2020. A portion of the valuation allowance arises from uncertainty as to the
realization of certain of these tax credit and net operating loss carryovers. If
realized, these benefits would be applied to reduce the unallocated purchase
price.
Deferred tax assets and liabilities are recognized based on differences
between the financial statement and tax bases of assets and liabilities using
presently enacted tax rates. Provision is made for income taxes which may be
payable on foreign subsidiary earnings to the extent that the Company
anticipates that they will be remitted. Unremitted earnings of foreign
subsidiaries which have been, or are intended to be, permanently reinvested and
for which no income tax has been provided, approximated $6,400 million at June
30, 2000. It is not practicable to estimate the additional tax that would be
incurred, if any, if these amounts were repatriated.
EFFECTIVE INCOME TAX RATE -- CONTINUING OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate......................................... 35% (35)% 35%
Goodwill amortization....................................... 58 11 1
Equity income............................................... 25 10 --
Foreign tax at other than U.S. statutory rate............... (39) 5 4
State and local............................................. 2 -- 1
Other....................................................... 2 3 (1)
--- --- --
Effective income tax rate -- continuing operations.......... 83% (6)% 40%
=== === ==
</TABLE>
U.S. GAAP
20
<PAGE> 21
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Various taxation authorities have proposed or levied assessments for
additional income taxes of prior years. Management believes that settlements
will not have a material effect on the results of operations, financial position
or liquidity of the Company.
NOTE 9 BENEFIT PLANS
Retirement pensions are provided for substantially all of the Company's
employees through defined benefit or defined contribution plans sponsored by the
Company or unions representing employees. For Company-sponsored defined benefit
plans, pension expense and plan contributions are determined by independent
consulting actuaries. The funding policy for tax-qualified pension plans is
consistent with statutory funding requirements and regulations. Contributions to
defined contribution plans are funded and expensed currently. Postretirement
health care and life insurance are provided to a majority of nonunion employees
in the U.S. Eligibility for benefits is based upon retirement, age and
completion of a specified number of years of service. Postemployment programs,
principally severance, are provided for the majority of nonunion employees. The
cost of these programs is accrued based on actuarial studies. There is no
advance funding for postretirement or postemployment benefits.
The following tables pertain to the Company's defined benefit pension or
postretirement plans principally in the U.S., the U.K., Canada, France, Germany
and Japan, and provide reconciliations of the changes in benefit obligations,
fair value of plan assets and funded status for the two-year period ending June
30, 2000:
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
2000 1999 2000 1999
------ ------ ----- -----
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.................. $1,339 $1,070 $ 182 $ 172
Service cost............................................. 54 48 2 2
Interest cost............................................ 81 81 13 12
Plan amendements and acquisitions........................ 41 220 (1) 5
Actuarial (gain) loss, net............................... (77) 21 (12) 1
Benefits paid............................................ (101) (81) (11) (10)
Translation.............................................. (12) (20) -- --
------ ------ ----- -----
Benefit obligation at end of year........................ $1,325 $1,339 $ 173 $ 182
====== ====== ===== =====
FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year........... $1,365 $1,271 $ -- $ --
Actual return on plan assets............................. 91 127 -- --
Acquisition.............................................. -- 45 -- --
Contributions............................................ 16 15 11 10
Benefits paid............................................ (95) (80) (11) (10)
Translation.............................................. (9) (13) -- --
------ ------ ----- -----
Fair value of plan assets at end of year................. $1,368 $1,365 $ -- $ --
====== ====== ===== =====
</TABLE>
U.S. GAAP
21
<PAGE> 22
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
2000 1999 2000 1999
------ ------ ----- -----
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C>
FUNDED STATUS
Funded status at end of year............................. $ 43 $ 26 $(173) $(182)
Unrecognized actuarial gain.............................. (212) (203) (18) (3)
Unrecognized prior service (benefit) cost................ 55 15 (13) (16)
Unrecognized net transition (asset) obligation........... (2) 4 -- --
------ ------ ----- -----
Accrued pension liability................................ $ (116) $ (158) $(204) $(201)
====== ====== ===== =====
</TABLE>
Amounts recognized in the Company's consolidated balance sheet at June 30
consist of:
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
2000 1999 2000 1999
------ ------ ----- -----
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C>
Prepaid benefit cost...................................... $ 198 $ 181 $ -- $ --
Accrued benefit liability................................. (314) (339) (204) (201)
----- ----- ----- -----
Net liability recognized.................................. $(116) $(158) $(204) $(201)
===== ===== ===== =====
</TABLE>
Net periodic pension and other postretirement benefit costs for the fiscal
years ended June 30 include the following components:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------- -----------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ----- ----- -----
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Service cost................................. $ 54 $ 48 $ 25 $ 2 $ 2 $ 2
Interest cost................................ 81 81 70 13 12 11
Expected return on plan assets............... (125) (116) (107) -- -- --
Amortization of prior service costs.......... 8 3 3 (3) (3) (3)
Amortization of actuarial gains.............. (7) (6) (6) -- -- (1)
----- ----- ----- --- --- ---
Net benefit cost (credit).................... $ 11 $ 10 $ (15) $12 $11 $ 9
===== ===== ===== === === ===
</TABLE>
The weighted average rates and assumptions utilized in accounting for these
plans for the fiscal years ended June 30 were:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------- -----------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Discount rate..................................... 8.0% 7.3% 7.0% 8.0% 7.3% 7.0%
Expected return on plan assets.................... 10.0% 10.0% 10.8% -- -- --
Rate of compensation increase..................... 5.0% 4.5% 4.3% 5.0% 4.5% 4.3%
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $212 million, $184 million and $13 million,
respectively as of June 30, 2000, and $218 million, $196 million and $15
million, respectively as of June 30, 1999.
For postretirement benefit measurement purposes, the Company assumed growth
in the per capita cost of covered health care benefits (the health care cost
trend rate) would gradually decline from 8.2 percent and 7.2 percent in the
pre-age 65 and post-age 65 categories, respectively in 1998 to 6 percent and 5
percent, pre-
U.S. GAAP
22
<PAGE> 23
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
age 65 and post-age 65, respectively in 2002. In fiscal 2000, a
one-percentage-point increase in the annual trend rate would have increased the
postretirement benefit obligation by $7 million and the pre-tax expense by $1
million; conversely, a one-percentage-point decrease in the annual trend rate
would have decreased the postretirement benefit obligation by $6 million and the
pre-tax expense by $1 million.
During 1999, the Company amended the pension plan for certain U.S.
employees from a final pay plan to a cash balance pension plan. Under the new
plan, participants accrue benefits based on a percentage of pay plus interest.
The new cash balance plan allows lump sum benefit payments in addition to
annuities. This change did not have a significant impact on the Company's net
periodic pension costs for the fiscal year ended June 30, 1999.
NOTE 10 BUSINESS SEGMENT AND GEOGRAPHIC DATA
BUSINESS SEGMENT DATA
The Company's four reportable segments are: music, filmed entertainment,
recreation and other, and spirits and wine. Each reportable segment defined by
the Company is a strategic business unit that offers different products and
services that are marketed through different channels. Segments are managed
separately because of their unique customers, technology, marketing and
distribution requirements. The Company evaluates the performance of its segments
and allocates resources to them based on several performance measures, including
modified EBITDA (EBITDA). As defined by the Company, EBITDA consists of
operating earnings (losses) before depreciation, amortization, corporate
expenses and restructuring activities from consolidated companies. While not a
standard measurement under GAAP, the Company believes EBITDA is an appropriate
measure of operating performance, given the significant assets and 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.
U.S. GAAP
23
<PAGE> 24
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FILMED RECREATION SPIRITS
MUSIC ENTERTAINMENT AND OTHER AND WINE CORPORATE TOTAL
------- ------------- ---------- -------- --------- -------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 2000
Revenues.................. $ 6,236 $3,480 $ 862 $5,108 $ -- $15,686
EBITDA.................... $ 1,018 $ (61) $ 188 $ 727 $ -- $ 1,872
Depreciation and
amortization............ (730) (97) (105) (125) (10) (1,067)
Corporate expenses........ -- -- -- -- (111) (111)
Restructuring credit...... 40 19 -- -- -- 59
------- ------ ------ ------ ------ -------
Operating income (loss)... $ 328 $ (139) $ 83 $ 602 $ (121) $ 753
======= ====== ====== ====== ====== =======
Segment assets............ $16,082 $7,624 $2,568 $4,521 $2,013(1) $32,808
Equity method
investments............. $ 18 $3,177 $1,037 $ 55 $ -- $ 4,287
Capital expenditures...... $ 263 $ 113 $ 101 $ 121 $ 9 $ 607
JUNE 30, 1999
Revenues.................. $ 3,751 $2,931 $ 818 $4,812 $ -- $12,312
EBITDA.................... $ 347 $ (136) $ 133 $ 684 $ -- $ 1,028
Depreciation and
amortization............ (473) (70) (88) (132) (10) (773)
Corporate expenses........ -- -- -- -- (100) (100)
Restructuring charge...... (313) (92) -- -- -- (405)
------- ------ ------ ------ ------ -------
Operating income (loss)... $ (439) $ (298) $ 45 $ 552 $ (110) $ (250)
======= ====== ====== ====== ====== =======
Segment assets............ $16,392 $7,735 $3,029 $5,165 $2,690(2) $35,011
Equity method
investments............. $ 26 $2,810 $1,151 $ 52 $ -- $ 4,039
Capital expenditures...... $ 135 $ 134 $ 134 $ 128 $ -- $ 531
JUNE 30, 1998
Revenues.................. $ 1,461 $2,793 $ 695 $4,525 $ -- $ 9,474
EBITDA.................... $ 84 $ 316 $ 99 $ 583 $ -- $ 1,082
Depreciation and
amortization............ (128) (87) (75) (119) (7) (416)
Corporate expenses........ -- -- -- -- (113) (113)
------- ------ ------ ------ ------ -------
Operating income (loss)... $ (44) $ 229 $ 24 $ 464 $ (120) $ 553
======= ====== ====== ====== ====== =======
Segment assets............ $ 2,902 $6,638 $3,044 $5,594 $4,001(3) $22,179
Equity method
investments............. $ 24 $2,431 $ 961 $ 21 $ -- $ 3,437
Capital expenditures...... $ 31 $ 94 $ 115 $ 170 $ -- $ 410
</TABLE>
---------------
(1) Comprised of corporate assets not identifiable with reported segments
($1,294) and DuPont holdings ($719).
(2) Comprised of corporate assets not identifiable with reported segments
($1,567) and DuPont holdings ($1,123).
(3) Comprised of corporate assets not identifiable with reported segments
($1,039), DuPont holdings ($1,228) and net assets of discontinued Tropicana
operations ($1,734).
U.S. GAAP
24
<PAGE> 25
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC DATA
The following table presents revenues and long-lived assets by geographic
area for the 2000, 1999 and 1998 fiscal years. 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 or long-lived assets
exceed 10 percent of the total.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------
2000 1999 1998
------- ------- ------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C>
REVENUES
United States............................................... $ 7,285 $ 5,917 $4,977
United Kingdom.............................................. 1,763 1,277 769
Canada...................................................... 438 325 285
Other countries............................................. 6,200 4,793 3,443
------- ------- ------
$15,686 $12,312 $9,474
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
LONG-LIVED ASSETS
United States............................................... $14,872 $15,093
United Kingdom.............................................. 1,654 1,905
Canada...................................................... 459 456
Other countries............................................. 8,024 8,676
------- -------
$25,009 $26,130
======= =======
</TABLE>
NOTE 11 ADDITIONAL FINANCIAL INFORMATION
Income Statement and Cash Flow Data
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------
2000 1999 1998
------ ------- ------
U.S. DOLLARS IN MILLIONS
<S> <C> <C> <C>
INTEREST, NET AND OTHER EXPENSE
Interest expense............................................ $745 $ 592 $318
Interest income............................................. (58) (109) (59)
Dividend income............................................. (23) (23) (27)
Capitalized interest........................................ (3) (3) (4)
---- ----- ----
$661 $ 457 $228
==== ===== ====
EXCISE TAXES (included in revenues and cost of revenues).... $883 $ 865 $726
CASH FLOW DATA
Interest paid, net.......................................... $728 $ 643 $265
Income taxes paid........................................... $133 $ 471 $144
</TABLE>
U.S. GAAP
25
<PAGE> 26
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Balance Sheet Data
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
RECEIVABLES
Trade....................................................... $3,071 $3,227
Other....................................................... 433 432
------ ------
3,504 3,659
Allowance for doubtful accounts and other valuation
accounts.................................................. (807) (674)
------ ------
$2,697 $2,985
====== ======
INVENTORIES
Beverages................................................... $2,009 $2,233
Materials, supplies and other............................... 413 394
------ ------
$2,422 $2,627
====== ======
LIFO INVENTORIES
Estimated replacement cost.................................. $ 381 $ 395
Excess of replacement cost over LIFO carrying value......... (190) (187)
------ ------
$ 191 $ 208
====== ======
OTHER CURRENT ASSETS
Film cost, net of amortization.............................. $ 142 $ 356
Artists' contracts.......................................... 222 247
Deferred income taxes....................................... 496 491
Prepaid expenses and other current assets................... 590 642
------ ------
$1,450 $1,736
====== ======
FILM COSTS, NET OF AMORTIZATION
Theatrical Film Costs
Released.................................................... $ 174 $ 320
In process and unreleased................................... 700 1,058
------ ------
874 1,378
------ ------
Television Film Costs
Released.................................................... 205 176
In process and unreleased................................... 54 53
------ ------
259 229
------ ------
1,133 1,607
Less: current portion....................................... 142 356
------ ------
$ 991 $1,251
====== ======
</TABLE>
Unamortized costs related to released theatrical and television films
aggregated $379 million at June 30, 2000. Excluding the portion of the purchase
price allocated to the film library which is being amortized over a 20-year
life, the Company currently anticipates that approximately 75 percent of the
unamortized released film costs will be amortized under the individual film
forecast method during the three years ending June 30, 2003.
U.S. GAAP
26
<PAGE> 27
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
U.S. DOLLARS IN MILLIONS
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Land........................................................ $ 636 $ 645
Buildings and improvements.................................. 1,498 1,646
Machinery and equipment..................................... 1,678 1,432
Furniture and fixtures...................................... 602 476
Construction in progress.................................... 272 286
------- -------
4,686 4,485
Accumulated depreciation.................................... (1,587) (1,327)
------- -------
$ 3,099 $ 3,158
======= =======
PAYABLES AND ACCRUED LIABILITIES
Trade....................................................... $ 774 $ 843
Income and other taxes...................................... 227 378
Other....................................................... 2,959 3,587
------- -------
$ 3,960 $ 4,808
======= =======
</TABLE>
Minority interest
At June 30, 2000, Matsushita Electric Industrial Co., Ltd. had an
approximate 7.7 percent ownership interest in the entities which own Universal's
music, filmed entertainment and recreation and other assets, which was reflected
as minority interest in the Company's financial statements.
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Company has various commitments for the purchase or construction of
property, plant and equipment, materials, supplies and items of investment
related to the ordinary conduct of business. The Company is involved in various
lawsuits, claims and inquiries. Management believes that the resolution of these
matters will not have a material adverse effect on the results of operations,
financial position or liquidity of the Company.
NOTE 13 DIFFERENCES BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Differences between U.S. and Canadian GAAP for these financial statements
are:
(i) The common stock of DuPont and USAi, and certain other publicly traded
companies in which we hold an interest, would be carried at cost under Canadian
GAAP, thereby reducing shareholders' equity by $453 million or approximately
four percent at June 30, 2000. There is no effect on net income.
(ii) Proportionate consolidation of joint ventures under Canadian GAAP
would increase assets and liabilities by approximately $1,007 million and
decrease working capital by approximately $40 million at June 30, 2000. There is
no effect on net income.
(iii) There are no other significant differences between U.S. and Canadian
GAAP.
U.S. GAAP
27
<PAGE> 28
THE SEAGRAM COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 RECENT EVENTS
On June 20, 2000, the Company, Vivendi and Canal+ announced that they had
entered into a merger agreement and related agreements providing for the
combination of the three companies into Vivendi Universal. The agreements
provide for the completion of a series of transactions, under which the
Company's shareholders will receive a number of Vivendi Universal American
Depositary Shares (ADSs) based on an exchange ratio. Each Vivendi Universal ADS
will represent one Vivendi Universal ordinary share. Canadian resident
shareholders of the Company may elect to receive exchangeable shares of a
Canadian subsidiary of Vivendi Universal that are substantially the economic
equivalent of the Vivendi Universal ADSs. The exchange ratio is equal to U.S.
$77.35 divided by the U.S. dollar equivalent of the average of the closing
prices on the Paris Bourse of Vivendi's ordinary shares during a measuring
period prior to the closing of the transactions. However, the exchange ratio
will equal 0.8000 if that average is equal to or less than U.S. $96.6875 and
0.6221 if that average is equal to or exceeds U.S. $124.3369. The merger is
expected to close by the end of the calendar year and is subject to customary
closing conditions, including shareholder approval and all necessary regulatory
approvals. There is no assurance that such approvals will be obtained.
On August 2, 2000, the Company entered into an agreement to purchase Rondor
Music, an independent music publishing company, for approximately $350 million
in stock.
U.S. GAAP
28
<PAGE> 29
MANAGEMENT'S REPORT
The Company's management is responsible for the preparation of the
accompanying financial statements in accordance with generally accepted
accounting principles, including the estimates and judgments required for such
preparation.
The Company has a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and financial records
underlying the financial statements properly reflect all transactions. The
system contains self-monitoring mechanisms, including a program of internal
audits, which allow management to be reasonably confident that such controls, as
well as the Company's administrative procedures and internal reporting
requirements, operate effectively. Management believes that its long-standing
emphasis on the highest standards of conduct and business ethics, as set forth
in written policy statements, serves to reinforce the system of internal
accounting controls. There are inherent limitations in the effectiveness of any
system of internal control, including the possibility of human error or the
circumvention or overriding of controls. Accordingly, even an effective internal
control system can provide only reasonable assurance with respect to financial
statement preparation.
The Company's independent accountants, PricewaterhouseCoopers LLP, review
the system of internal accounting controls to the extent they consider necessary
to evaluate the system as required by generally accepted auditing standards.
Their report covering their audits of the financial statements is presented
below.
The Audit Committee of the Board of Directors, solely comprising Directors
who are not officers or employees of the Company, meets with the independent
accountants, the internal auditors and management to ensure that each is
discharging its respective responsibilities relating to the financial
statements. The independent accountants and the internal auditors have direct
access to the Audit Committee to discuss, without management present, the
results of their audit work and any matters they believe should be brought to
the Committee's attention.
<TABLE>
<S> <C> <C>
/s/ EDGAR BRONFMAN, JR. /s/ BRIAN C. MULLIGAN /s/ FRANK MERGENTHALER
------------------------------------ ------------------------------------ ------------------------------------
Edgar Bronfman, Jr. Brian C. Mulligan Frank Mergenthaler
President and Chief Executive Vice President and Chief Vice President Controller and Chief
Executive Officer Financial Officer Accounting Officer
</TABLE>
August 16, 2000
29
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of The Seagram Company Ltd.
We have audited the accompanying consolidated balance sheet of The Seagram
Company Ltd. and its subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States and Canada. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Seagram
Company Ltd. and its subsidiaries at June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, in accordance with accounting principles generally accepted
in the United States which, in their application to the Company, conform in all
material respects with generally accepted accounting principles in Canada.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
PricewaterhouseCoopers LLP
New York, New York
August 16, 2000
30
