ITEM 3. LEGAL PROCEEDINGS
On May 30, 1995, a purported retailer class action was filed in the United States District Court for the Central District of California, entitled Digital Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music & Video Distribution, Inc. (formerly known as UNI Distribution Corp.), Bertelsmann Music Group, Inc. and PolyGram Group Distribution, Inc., No. 95-3596 JSL. The plaintiffs brought the action on behalf of direct purchasers of compact discs alleging that defendants, including Universal Music & Video Distribution, Inc. (formerly known as UNI Distribution Corp.), and PolyGram Group Distribution, Inc., violated the federal and/or state antitrust laws and unfair competition laws by engaging in a conspiracy to fix prices of compact discs, and seek an injunction and treble damages. The defendants' motion to dismiss the amended complaint was granted and the action was dismissed, with prejudice, on January 9, 1996. Plaintiffs filed a notice of appeal on February 12, 1996. By an order filed July 3, 1997, the Ninth Circuit reversed the District Court and remanded the action. Upon reinstatement of this litigation by the Ninth Circuit, a number of related actions were filed, which all arise out of the same claims and subject matter. These related actions are captioned: Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution, et al., v. EMI Music Distribution (formerly known as CEMA Distribution), Sony Music Entertainment, Inc.; Warner Elektra Atlantic Corporation, Universal Music & Video Distribution, Inc. (formerly known as UNI Distribution Corp.), Bertelsmann Music Group, Inc., and PolyGram Group Distribution, Inc., No. CV 97-7226 (JSL), filed on September 30, 1997 in the U.S. District Court for the Central District of California; Third Street Jazz and Rock Holding Corporation, et al., v. EMI Music Distribution (formerly known as CEMA Distribution), Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music & Video Distribution, Inc. (formerly known as UNI Distribution Corp.), Bertelsmann Music Group, Inc., and PolyGram Group Distribution, Inc., No. CV 97-8864 JSL (VAPx), filed on October 21, 1997 in the U.S. District Court for the Central District of California; T. Obie, Inc. d/b/a/ Chestnut Hill Compact Disc v. EMI Music Distribution (formerly known as CEMA Distribution), Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music & Video Distribution, Inc. (formerly known as UNI Distribution Corp.), Bertelsmann Music Group, Inc., and PolyGram Group Distribution, Inc., No. 97 Civ. 7764 LMM, filed on October 21, 1997 in the U.S. District Court for the Southern District of New York; Nathan Muchnick, Inc., et al., v. Sony Music Entertainment, Inc., PolyGram Group Distribution, Inc., Bertelsmann Music Group, Inc., Universal Music & Video Distribution, Inc. (formerly known as UNI Distribution Corp.), Warner Elektra Atlantic Corporation, and EMI Music Distribution, Inc./Capitol Records, Inc., No. 98 Civ. 0612, filed on January 28, 1998 in the U.S. District Court for the Southern District of New York. The Digital Distribution, Chandu Dani, and Third Street Jazz matters have been set for trial on February 15, 2000. On February 17, 1998, a purported consumer class action was filed in the Circuit Court for Cocke County, Tennessee, Civil Action No., 24,885 II, entitled Doris D. Ottinger, et al., v. EMI Music Distribution, Inc., Sony Music Entertainment, Inc., Warner Elektra Atlantic Corp., Universal Music & Video Distribution, Inc. (formerly known as UNI Distribution Corp.), Bertelsmann Music Group, Inc., and
PolyGram Group Distribution, Inc. A motion to dismiss was filed on May 11, 1998, and is pending. The trial date of February 15, 2000 was vacated and no new trial date has been set.
On or about July 25, 1996, Universal Music & Video Distribution, Inc. and PolyGram Group Distribution, Inc. were served with an antitrust civil investigation demand from the Office of the Attorney General of the State of Florida that calls for the production of documents in connection with an investigation to determine whether there "is, has been or may be" a "conspiracy to fix the prices" of compact discs or conduct consisting of "unfair methods of competition" or "unfair trade practices" in the sale and marketing of compact discs. No allegations of unlawful conduct have been made against Universal Musical & Video Distribution, Inc. or PolyGram Group Distribution, Inc.
By letter dated April 11, 1997, the Federal Trade Commission ("FTC") advised Universal Music and Video Distribution Corp. (formerly Universal Music & Video Distribution, Inc.) ("UMVD") and PolyGram Group Distribution, Inc. ("PGDI") that it is conducting a preliminary investigation to determine whether minimum advertised pricing ("MAP") policy used by major record distributors constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act. UMVD and PGDI received a subpoena dated September 19, 1997 for the production of documents. No allegations of unlawful conduct have been made against UMVD or PGDI. On May 1, 2000 UMVD (PGDI has merged into UMVD) and UMG Recordings, Inc. ("UMGR") (which owns substantially all of the Company's record labels) signed a Consent Agreement with the staff of the FTC. The Company anticipates that the Consent Agreement will resolve the FTC's investigation of the MAP policy. Among other things, UMVD and UMGR have agreed that (i) for seven years they shall not make the receipt of any cooperative advertising funds for their prerecorded music product contingent upon the price or price level at which such product is advertised or promoted, (ii) for twenty years they shall not make the receipt of any cooperative advertising funds for their prerecorded music product contingent upon the price or price level at which such product is advertised or promoted where the dealer does not seek any contribution from UMVD or UMGR for the cost of the advertisement or promotion, and (iii) for five years they shall not announce resale or minimum advertised prices of their prerecorded music product and unilaterally terminate those who fail to comply because of such failure.
On August 30, 1999, the Australian Competition and Consumer Commission ("ACCC") commenced proceedings against Universal Music Australia Pty Limited (formerly PolyGram Pty Limited) and three former employees of PolyGram, alleging violations of the Australian Trade Practices Act, the statute which governs competition law in Australia. The ACCC alleges that Universal has taken certain unlawful steps to restrict parallel imports into Australia to reduce price competition in the sale of sound recordings. Separate proceedings making similar allegations have also been commenced against certain other record companies in Australia and their current or former employees, and against two industry trade associations in Australia. The ACCC seeks injunctive relief to eliminate any unlawful restrictions on parallel imports into Australia and the imposition of fines against Universal and the three individuals who were employees of PolyGram. Universal and the three individuals are vigorously defending these proceedings. Universal has received Answers to its Request for Particulars from the ACCC along with an amended Statement of Claim. Universal and the three individuals continue to vigorously defend these proceedings.
On February 4, 1999, the Antitrust Division issued a civil investigative demand to Universal as well as to a number of other motion picture film distributors and exhibitors as part of a civil investigation into compliance with the consent decrees entered in U.S. v. Paramount Pictures, et al. and various other practices in the motion picture distribution and exhibition industry. The civil investigative demands require the distributors and exhibitors to provide documents and other information to the Antitrust Division. The scope of the investigation and the extent, if any, to which it may relate to Universal is not known at this time. Universal has responded to the government's demand.
On December 15, 1999, an action was filed in the Superior Court for the County of Los Angeles entitled KirchMedia GmbH & Co. KGaA v. Universal Studios, Inc. and Universal Studios International B.V., case no. BC 221645. The plaintiff is a German company that entered into several agreements with Universal in 1996 involving the licensing of film and television programming. The contracts also required the plaintiff to allocate to Universal two channels on its German pay television service. Plaintiff alleges that it is entitled to terminate its agreements with Universal on the ground that certain decisions by European regulatory authorities have materially impaired its business and constitute events of "force majeure." Plaintiff also alleges that Universal has breached its obligations under the parties' licensing agreements by allegedly failing to provide plaintiff with the quality and/or quantity of film and television programming anticipated by plaintiff. Plaintiff asserts claims for declaratory relief, breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. Plaintiff seeks an order requiring the return of all monies paid by plaintiff under the parties' agreements, as well as purported damages in excess of $500,000,000. Plaintiff also seeks punitive damages on its breach of fiduciary duty claim. Universal has denied the allegations of the complaint and intends vigorously to defend this action. On February 3, 2000, Universal filed a cross-complaint in this action alleging that KirchMedia had breached certain of its obligations under the parties' Channel Carriage Agreement and that certain entities related to KirchMedia were obligated to indemnify Universal for all damages sustained as a result of KirchMedia's breech of that agreement. On August 11, 2000, the Court granted Universal's motion for judgment on the pleadings on the ground that plaintiff's complaint did
not state facts sufficient to constitute a claim. The Court granted the plaintiff leave to file an amended complaint that identified specific films that Universal supposedly should have licensed to plaintiff under the parties' agreements. The Court ruled that its grant of leave to amend did not extend to plaintiff's other purported claims. An amended complaint has not yet been filed. No trial date has been set.
In May, June, and July of 2000, ninety-four purported consumer class action law suits were filed in various state and federal courts across the country against Universal Music & Video Distribution Corp., UMG Recordings, Inc. and PolyGram Group Distribution, Inc. as well as Sony Music Entertainment Inc., Time Warner Inc., Bertelsmann Music Group, and Capitol Records Inc. (along with companies affiliated with these defendants). Certain recorded music retailers are also named as defendants in some of these actions. Plaintiffs in each of these actions allege that the defendants violated the federal and/or state antitrust laws and unfair competition laws by conspiring to fix the wholesale and/or retail prices of compact discs. Plaintiffs in each of these actions further allege that the purported conspiracy was related in some fashion to the minimum advertised price ("MAP") policies adopted by each of the record distributor defendants, including Universal Music & Video Distribution Corp. and PolyGram Group Distribution, Inc. Plaintiffs in these cases seek treble damages and/or restitution as well as attorney's fees and costs. With respect to the federal cases, there is currently pending before the Judicial Panel for Multi-District Litigation a motion to consolidate and transfer. The Judicial Panel will hear the motion on September 22, 2000. With respect the eighteen state cases pending in California, on September 11, 2000, the Court ordered that these cases be coordinated for pretrial proceedings. With respect to the five state cases pending in Florida, on August 31, 2000, the Circuit Court of the 11th Judicial Circuit dismissed them with leave to amend for failure to state a claim upon which relief may be granted.
In addition to the consumer actions, on August 8, 2000, the Attorneys General for 28 states and 2 territories filed a parens patriae action in the federal district court in the Southern District of New York entitled State of Florida, et al. v. BMG Music, Bertelsmann Music Group Inc., Capitol Records, Inc. dba EMI Music Distribution, Virgin Records America, Inc., Priority Records, LLC, MTS Inc. dba Tower Records, Musicland Stores Corporation, Sony Music Entertainment Inc., Trans World Entertainment Corporation, Universal Music & Video Distribution Corp., UMG Recordings, Inc., Warner-Elektra-Atlantic Corporation, Warner Music Group, Inc., Warner Bros. Records, Inc., Atlantic Recording Corporation, Elektra Entertainment Group, Inc. and Rhino Entertainment Company. The Attorneys General brought this suit on behalf of consumers in their respective states or territories, and they allege that the defendants violated the federal and state antitrust laws and unfair competition laws by conspiring to fix the retail prices of compact discs. The Attorneys General seek treble damages, civil penalties, attorney's fees, and costs.
Cleveland, et al. v. Viacom, et al., Civil Action No. SA-99-CA-0783-EP, in the United States District Court for the Western District of Texas, San Antonio Division. In July 1999, a small video retailer located in San Antonio, Texas filed a lawsuit in the federal district court in San Antonio alleging that the home video divisions of the major movie studios, including Universal Studios Home Video, Inc., had conspired with one another and with Blockbuster Inc., a video rental retailer, and with Viacom, Inc., in violation of the federal antitrust laws. The action was filed on behalf of a proposed class of all "independent" video retailers that compete with Blockbuster.
Since its original filing, the complaint has gone through several substantive changes, including the substitution of new proposed class representatives, and the addition of claims arising under California law. The core allegation, however, has remained the same: plaintiffs allege that the studios have entered direct revenue sharing agreements with Blockbuster that include terms that are unavailable to independent video retailers, and that give Blockbuster an unfair competitive advantage. Plaintiffs seek monetary and injunctive relief.
Plaintiffs have filed a motion asking that the court certify the proposed class. Universal and the other defendants have opposed the motion, arguing that the case is not amenable to class treatment. Under the current scheduling order, all briefing regarding whether a class should be certified should be complete by October 2, 2000.
Seagram and its subsidiaries and affiliates are defendants or respondents in a number of other actions arising in the ordinary course of business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are listed on the New York, Toronto and London Stock Exchanges. The following sets forth the high and low closing prices for the fiscal periods indicated:
The Company had 6,053 registered shareholders at August 31, 2000. In the fiscal years ended June 30, 2000, 1999 and 1998, the Company paid dividends of $0.165 per share per quarter.
Payment of dividends to our shareholders who are not residents of Canada is subject under Canadian law to Canadian withholding tax. Dividends paid to shareholders residing in the United States is subject to 15% withholding pursuant to currently existing treaty arrangements between the United States and Canada. For shareholders who are residents of other countries, the withholding rate varies depending upon the existence and terms of applicable treaties between each such other country and Canada.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Company 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 is the largest recorded music company in the world. Universal Music Group 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. Our 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.
Management's discussion and analysis of our results of operations and liquidity should be read in conjunction with the accompanying financial statements.
VIVENDI UNIVERSAL
On June 20, 2000, Seagram, 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 our 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. Our Canadian resident shareholders 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.
COMPARABILITY
The discussion presented below includes an analysis of total Seagram and business segment results prepared in accordance with U.S. generally accepted accounting principals (GAAP), which conforms in all material respects to Canadian GAAP. The supplemental financial data includes modified EBITDA (EBITDA). As defined by Seagram, EBITDA consists of operating earnings (losses) before depreciation, amortization, corporate expenses and restructuring activities. Because of the significant assets and goodwill associated with our acquisitions, we believe EBITDA is an appropriate measure of operating performance. However, you should note that EBITDA is not a substitute for operating income, net income, cash flows and other measures of financial performance as defined by GAAP and may be defined differently by other companies. Investments in companies that are not consolidated with the results of Seagram are reported as "equity earnings from unconsolidated companies". This discussion includes, as supplemental financial data, information about our share of the results of revenues and EBITDA related to these investments.
As several significant transactions have realigned our businesses and impacted the comparability of our financial statements, financial information for the 1999 and 1998 fiscal years is also presented on a pro forma basis. We believe that pro forma results represent meaningful information for assessing earnings trends because the pro forma results include comparable operations in each year presented. The discussion of the recreation and other and spirits and wine business segments does not include pro forma comparisons, since the pro forma adjustments did not impact those segments. The pro forma results are not necessarily indicative of the combined results that would have occurred had the following transactions actually occurred at the beginning of our 1998 fiscal year. We believe this information will help you to better understand our business results.
ACQUISITION OF POLYGRAM -- On December 10, 1998, we 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 Seagram. Substantially all of the common shares were issued to Koninklijke Philips Electronics N.V., which had owned 75 percent of the PolyGram shares. The results of the operations of PolyGram are included in the results of our music and filmed entertainment segments from the date of acquisition.
DISPOSITION OF TROPICANA -- On August 25, 1998, we completed the sale of Tropicana, consisting of Tropicana Products, Inc. and our global juice business (Tropicana) for $3,288 million in cash, which resulted in a pre-tax gain of $1,445 million ($1,072 million after tax). As a result of this disposal, we reported the results of Tropicana as discontinued operations for all periods presented.
USA TRANSACTIONS -- On October 21, 1997, Universal acquired the remaining 50 percent interest in the USA Networks partnership from Viacom Inc. for $1.7 billion in cash. On February 12, 1998, Universal sold its acquired 50 percent interest in USA Networks to USA Networks, Inc. (USAi) 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. As a result of 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 transactions, which impaired certain remaining television assets and transformed various related contractual obligations into adverse purchase commitments. The impairment losses and adverse purchase commitments arising from the transactions aggregated $223 million and were reflected in the net gain of $360 million ($222 million after tax). In fiscal 1999, we recognized an $128 million pre-tax gain from the USA transactions reflecting the reversal of accrued costs due to the favorable settlement of certain contractual obligations and adverse purchase commitments.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
2000 VERSUS 1999
Actual
In addition to the significant transactions discussed above, several other items also affect the comparability of our annual results. In fiscal 1999, these items included a $405 million pre-tax restructuring charge associated with the integration of PolyGram into our existing music and film operations (discussed in Note 3 to the consolidated financial statements), and a $128 million pre-tax gain from the USA transactions reflecting the reversal of accrued costs due to the favorable settlement of certain contractual obligations and adverse purchase commitments. In the current fiscal year, these items include the reversal of $59 million of the restructuring accruals due to the favorable settlement of certain contractual and employee severance obligations, the sale of our concert operations for a pre-tax gain of $98 million, the sale of our Champagne operations for $310 million in cash, an amount which approximated the book value of those operations, and an $84 million non-cash after-tax cumulative effect of a change in accounting principle related to start-up activities. In addition to these one-time items, our results are impacted on a ongoing basis by foreign exchange rate fluctuations, particularly in our music and spirits and wine businesses where a significant portion of sales are transacted in local currencies. In fiscal 1999, the impact of foreign currency exchange was not significant, however, our fiscal 2000 results were negatively impacted by foreign exchange rate fluctuations as illustrated in the discussion of operating results, presented below.
Revenues increased 27 percent (30 percent on a constant U.S. dollar basis) to $15.7 billion, primarily due to our reporting of a full twelve-month results of the acquired PolyGram operations in the current year, combined with improved sales in all business segments. Operating income was $753 million compared with an operating loss of $250 million in the prior year. The significant improvement reflects the impact of the PolyGram acquisition, the restructuring activities discussed above and improved earnings in all business segments. EBITDA from consolidated companies increased 82 percent (89 percent on a constant U.S. dollar basis) to $1.9 billion.
Interest, net and other expense included net interest expense of $684 million, offset by $23 million of dividend income from DuPont. The increase of $204 million primarily reflects the increased interest costs associated with funding the PolyGram acquisition.
The effective tax rate was 83 percent in fiscal 2000, compared with six percent in the prior year. The provision for 2000 includes $38 million of taxes on the sale of Universal Concerts, Inc. and $21 million for the restructuring charge reversal. The 1999 tax provision included $45 million of taxes on the USA transactions and a $140 million benefit for the restructuring charge. The tax rate for continuing operations, excluding these items, increased largely due to the increased goodwill expense for which there is no associated tax benefit.
Minority interest was an expense of $17 million compared to income of $26 million in 1999, which included $21 million associated with the restructuring charge. The equity in earnings of unconsolidated companies decreased to $109 million from $137 million in 1999. The decrease primarily reflects increased depreciation and interest expense at Universal Orlando since the opening of Islands of Adventure, pre-opening development costs at Universal Studios Japan, partially offset by improved operating results at USANi LLC.
Net income from continuing operations of $124 million or $0.28 per share (basic and diluted) was earned in fiscal 2000, compared to a net loss from continuing operations of $383 million or $1.01 per share (basic and diluted) in 1999. The net income from continuing operations, excluding the restructuring activities, the gain on the sale of Universal Concerts, Inc. and the impact of the USA transactions, was $34 million or $0.08 per share (basic and diluted) in fiscal 2000, compared with a loss of $215 million or $0.57 per share (basic and diluted) in 1999.
Pro Forma
Revenues increased two percent (five percent on a constant U.S. dollar basis), as growth in the film, recreation and other and spirits and wine businesses was partially offset by a slight decline in music revenues. Operating income, excluding restructuring activities, more than doubled, while EBITDA from consolidated companies increased 27 percent year-on-year (31 percent on a constant U.S. dollar basis). These increases reflect a significant improvement in the performance of all our business segments. Interest, net and other expense declined three percent, primarily as a result of the lower average debt outstanding during the current year. The effective income tax rate was 83 percent compared to 22 percent in the prior year. The minority interest charge increased $13 million primarily due to the improved performance of our film business. Equity in earnings of unconsolidated companies declined 16 percent for the reasons discussed above.
Net income of $40 million or $0.09 per share (basic and diluted) was earned in fiscal 2000, compared with a net loss of $208 million or $0.52 per share (basic and diluted) in 1999. Excluding the restructuring activities, the gain on the sale of Universal Concerts, Inc., the impact of the USA transactions and the cumulative effect of a change in accounting principle, net income was $34 million or $0.08 per share (basic and diluted), a significant improvement over the prior year when a pro forma net loss of $284 million or $0.71 per share (basic and diluted) was incurred.
1999 VERSUS 1998
Actual
Our fiscal 1999 results compared favorably to fiscal 1998 results, which were severely impacted by the economic and currency crises in Asia which hampered business performance and resulted in a $60 million charge to spirits and wine operations. Revenues increased 30 percent to $12.3 billion, primarily due to the PolyGram acquisition and improved sales in all business segments. Operating income declined from $553 million in 1998 to a loss of $250 million in 1999, driven by the restructuring charge, higher amortization and depreciation expense and disappointing motion picture results. EBITDA from consolidated companies decreased five percent to $1,028 million. The impact of foreign currency exchange on 1999 was not significant.
Interest, net and other expense increased $229 million reflecting the interest costs associated with funding the PolyGram acquisition. In fiscal 1999, a gain from the USA transactions was recognized reflecting the reversal of $128 million of accrued costs due to the favorable settlement of certain contractual obligations and adverse purchase commitments. In fiscal 1998, we recognized a pre-tax gain on the sale of the remaining Time Warner shares of $926 million and a pre-tax gain on the USA transactions of $360 million. The effective tax rate was six percent in fiscal 1999, compared with 40 percent in the prior year. The underlying effective tax rate for continuing operations (excluding the impact of the restructuring charge, USA transactions, sale of Time Warner shares and spirits and wine charge) was 21 percent compared with 48 percent in 1998. The decrease in the rate results from increased goodwill expense for which there is no associated tax benefit and taxes on earnings from unconsolidated equity investments. Minority interest for 1999 was income of $26 million compared to an expense of $48 million in the prior year, primarily due to losses in our film business and the restructuring charge. The equity in earnings of unconsolidated companies increased to $137 million in fiscal 1999 from a loss of $45 million in fiscal 1998. The increase in equity earnings primarily reflected the improved operating results at USANi LLC and the impact of the USA transactions. Earnings from our investment in USANi LLC were included in equity earnings from unconsolidated companies for all of 1999. In 1998, we had a 100 percent interest in USA Networks from October 1997 until February 1998, during which time the results were consolidated.
A net loss from continuing operations of $383 million or $1.01 per share (basic and diluted) was incurred in 1999, compared with net income from continuing operations of $880 million or $2.51 per basic share and $2.49 per share on a diluted basis for 1998. The net loss from continuing operations, excluding the restructuring charge, the gains on the sales of Time Warner shares and the USA transactions and a charge for spirits and wine operations in Asia, was $215 million or $0.57 per share (basic and diluted) in 1999 compared with income of $141 million or $0.40 per share (basic and diluted) in 1998.
For the period to August 25, 1998, the loss from discontinued Tropicana operations, after tax, was $3 million or $0.01 per share (basic and diluted). During 1999, we recorded a pre-tax gain of $1,445 million ($1,072 million after tax or $2.83 per share, basic and diluted) on the sale of Tropicana. Net income including discontinued operations was $686 million or $1.81 per basic and diluted share in the fiscal year ended June 30, 1999, compared with $946 million or $2.70 per basic share and $2.68 per diluted share in the prior fiscal year.
Pro Forma
Revenues increased five percent to $15.3 billion with growth in all business segments. Operating income was $281 million compared with $274 million in 1998. EBITDA from consolidated companies decreased one percent year-on-year. Increases in EBITDA outside the filmed entertainment segment were more than offset by disappointing performance of our film business. The effective income tax rate for the year was 22 percent compared with 51 percent in the prior year. The minority interest charge for 1999 was $4 million compared with $16 million in the prior year due to losses in our film business. Equity in earnings of unconsolidated companies shows a similar improvement as the actual results, increasing to $130 million in 1999 from a loss of $6 million in 1998.
A net loss of $208 million or $0.52 per share (basic and diluted) was incurred in fiscal 1999, compared with net income of $447 million or $1.12 per basic share and $1.11 per share on a diluted basis in 1998. Excluding the gains on the sales of Time Warner shares and the USA transactions and the prior year charge for spirits and wine operations in Asia, the pro forma net loss was $284 million or $0.71 per share (basic and diluted) in the current year, a slight improvement over the prior year when a net loss of $292 million or $0.73 per share (basic and diluted) was incurred.
BUSINESS SEGMENT RESULTS
MUSIC
2000 VERSUS 1999
Consolidated Operations
Actual - Revenues increased 66 percent, EBITDA more than doubled and operating income (excluding restructuring activities) of $288 million was earned in the current year, compared to a loss of $126 million incurred in the prior year. These significant increases primarily reflect the acquisition and successful integration of PolyGram, partially offset by investments in our electronic business initiatives. In fiscal 2000, over 64 percent of product sales were from new releases. Major album sales included those by Shania Twain, Eminem, Dr Dre, Limp Bizkit, Sisqo, Sting, Enrique Iglesias, Blink 182, DMX, Andrea Bocelli, Bon Jovi, Boyzone and the soundtrack from the Universal feature film Notting Hill, among others. We continue to hold strong chart positions in all music genres and major markets, including the United States, United Kingdom, France, Germany and Brazil. Internationally, we continue to maintain a strong local repertoire presence. In fiscal 2000, revenues generated in North America accounted for 43 percent of the total music revenues of $6,236 million. The European market accounted for 41 percent, Asia Pacific contributed 12 percent and Latin America accounted for the remaining four percent.
An important aspect of our music business relates to electronic business initiatives. We believe that emerging technologies will be strategically important to the future of the music business. Evolving technology allows consumers to experience music in new electronic mediums and formats. Through a variety of strategic alliances and independent initiatives, we continue to invest resources in the technology and electronic commerce areas. Our investments include internal infrastructure, which includes hardware and software that will allow the music business to be conducted over the Internet, such as bluematter.com and Jimmy and Doug's Farm Club, as well as investments in, GetMusic, ARTISTdirect, InterTrust Technologies, ReplayTV, eritmo.com and others.
Pro Forma - Revenues declined two percent in fiscal 2000 primarily due to the impact of unfavorable foreign exchange, label consolidation and our effort to continually refine our artist roster, partially offset by strong chart positions. In fiscal 2000, 65 albums reached worldwide sales in excess of one million units and 5 albums sold over five million units compared with 2 in 1999. North American revenues increased 10 percent, reflecting higher volume and average prices. International revenues declined two percent (but increased two percent on a constant U.S. dollar basis) due to the soft music market in several territories including Latin America, Japan and France. Operating income, excluding restructuring activities, more than tripled and EBITDA increased 18 percent (24 percent on a constant U.S. dollar basis) to over $1 billion. The improvements in operating income and EBITDA reflect higher
volumes in North America, strong performances in the United Kingdom and Germany, lower European marketing spend and worldwide cost savings achieved from the integration of PolyGram, partially offset by investments in our electronic business initiatives.
Unconsolidated Operations
The equity in earnings from unconsolidated companies was a loss of $16 million in fiscal 2000 as income of $3 million from concert operations sold in the first quarter was more than offset by losses from electronic business initiatives.
1999 VERSUS 1998
Consolidated Operations
Actual - In fiscal 1999, revenues more than doubled. This increase reflected the acquisition of PolyGram with its strong presence in local repertoire and our strength in the U.S. market. An operating loss of $126 million (excluding restructuring activities) was incurred compared to a loss of $44 million in fiscal 1998. EBITDA, at $347 million, more than quadrupled in 1999. The significant increase in EBITDA reflected the PolyGram acquisition. The decline in operating income was principally driven by higher goodwill amortization. In fiscal 1999, revenues generated in North America accounted for 45 percent of the total music revenues of $3,751 million. The European market accounted for 40 percent, Asia Pacific and Japan contributed 11 percent and Latin America accounted for the remaining four percent.
Pro Forma - Revenues increased four percent to $6.3 billion, driven by solid performances from U2, Shania Twain, Jay-Z, Andrea Bocelli, Bee Gees and Sheryl Crow, among others, along with increases in higher priced units. In total, 69 albums reached worldwide sales in excess of one million units compared with 52 in 1998. Operating income was $75 million for 1999, compared to a loss of $124 million in 1998. EBITDA increased 22 percent in 1999 compared to 1998. These improvements were due to a strong release schedule worldwide and the elimination of duplicate costs achieved from the integration of PolyGram.
Unconsolidated Operations
The equity in earnings from unconsolidated companies, consisting primarily of concert operations, was $4 million in 1999, unchanged from 1998.
FILMED ENTERTAINMENT
2000 VERSUS 1999
Consolidated Operations
Actual - The performance of our filmed entertainment business improved year-on-year. Revenues increased 19 percent, EBITDA improved $75 million and the operating loss (excluding restructuring activities) of $158 million was a $48 million improvement over the prior year. These results primarily reflect the solid performance of the motion picture business versus a disappointing prior year. The theatrical success of The Mummy, Notting Hill, American Pie, The Bone Collector, The Green Mile, Erin Brockovich, U-571, Gladiator and Best Man, combined with strong DVD and video sales of The Mummy, Notting Hill and American Pie resulted in improved earnings. Additionally, the development of programs designed to manage production, marketing, participation and overhead and development costs also contributed to filmed entertainment results. Included in EBITDA and operating income are the costs of our continued investment in the international network business, where the creation of new digital delivery technologies in many markets have created significant growth opportunities. International television networks not only provide a dual revenue stream from advertising and subscription but also provide a captive outlet for our extensive film and television libraries. Over the last fiscal year, excluding the impact of new channel launches, total subscribers for owned and operated networks have grown approximately 20 percent.
Pro Forma - 1999 pro forma filmed entertainment included the results of PolyGram Filmed Entertainment (PFE). Revenues increased three percent while operating income, excluding restructuring activities, and EBITDA improved by $123 million and $139 million, respectively. The current year results compare favorably to the prior year, which included a $64 million loss largely due to the start-up of PFE domestic film distribution operations.
Unconsolidated Operations
Unconsolidated companies principally include USANi LLC, Loews Cineplex Entertainment Corporation, United Cinemas International Multiplex B.V. and Cinema International Corporation. Year-on-year results primarily reflect improved operating results at USANi LLC.
1999 VERSUS 1998
Consolidated Operations
Actual - Filmed entertainment revenues increased five percent in fiscal 1999. Operating income, excluding restructuring activities, decreased from income of $229 million in 1998 to a loss of $206 million in 1999. The 1998 results included operating income of $76 million for USA Networks from October 21, 1997 until February 12, 1998. In 1999 the contribution of USANi LLC was included in equity earnings from unconsolidated companies rather than consolidated operations. The results of the motion picture business declined because of the disappointing box office performance of fiscal 1999 releases such as Babe: Pig in the City, Meet Joe Black, Virus and edTV. Also, comparisons with 1998 results were difficult since those results benefited from the positive carryover of the successful releases of The Lost World: Jurassic Park and Liar, Liar. International television and library results declined year-on-year due to the loss of profit on products transferred in the USA transactions and lower profitability on television library sales. EBITDA declined from $316 million in 1998 to a loss of $136 million in 1999. The 1998 results included $97 million of EBITDA related to USA Networks, which was consolidated from October 21, 1997 until February 12, 1998. There was no contribution from USA Networks in consolidated EBITDA in 1999.
Pro Forma - Pro forma filmed entertainment included the results of PolyGram Filmed Entertainment and the 1998 results reflected the USA transactions as though they had both occurred at the beginning of our 1998 fiscal year. On a pro forma basis, revenues increased four percent in fiscal 1999 to $3.4 billion. EBITDA was a loss of $200 million in 1999 compared to income of $105 million in 1998. Operating income decreased from income of $30 million in 1998 to a loss of $281 million in 1999. The results declined primarily due to the weak performance of current year releases discussed above.
Unconsolidated Operations
The equity in earnings from unconsolidated companies increased from a loss of $28 million for 1998 to income of $148 million in 1999. Revenues from unconsolidated companies increased 49 percent year-on-year, EBITDA more than doubled in the same period. The significant improvement was due primarily to improved operating results at USANi LLC and the impact of the USA transactions. In fiscal 1999, subsequent to the USA transactions, the results of USANi LLC were included in equity earnings from unconsolidated companies for the entire year. In the 1998 fiscal year, we had a 100 percent interest in USA Networks from October 1997 until February 1998, during which time the results were included in consolidated operations. We also benefited from improved operating results at Loews Cineplex in 1999 compared to Cineplex Odeon Corporation (owned in the prior year). In addition to USANi LLC and Loews Cineplex, the unconsolidated companies principally included United Cinemas International Multiplex B.V. and Cinema International Corporation N.V.
RECREATION AND OTHER
2000 VERSUS 1999
Consolidated Operations
Revenues increased five percent, EBITDA rose 41 percent and operating income increased over 80 percent as compared to the prior year. Revenue growth was due to increased management fees generated from the expansion of Universal Orlando, increased retail sales at Spencer Gifts, and a full twelve months of Wet n' Wild results, which was purchased in September 1998. Additionally, operating income and EBITDA increased as the result of improved earnings at Universal City Hollywood and lower overhead and improved margins at interactive games. At Universal City Hollywood, EBITDA increased 15 percent primarily due to improved cost management and a four percent increase in total visitor spending, due principally to higher admission charges. Increased earnings at the park were partially offset by a two percent decline in paid attendance, since fiscal 1999 included one additional week compared to fiscal 2000. Excluding the impact of the additional week, attendance would have increased one percent year-on-year.
Unconsolidated Operations
Unconsolidated companies principally include Universal Orlando, Universal Studios Japan, Universal Studios Port Aventura and Sega GameWorks. Equity in earnings from unconsolidated companies declined from a loss of $17 million last year to a loss of $76 million this year. This decline is largely due to increased depreciation and interest expense at Universal Orlando since the opening of Islands of Adventure and the pre-opening development costs at Universal Studios Japan. In addition, the prior year comparatives included a gain recognized by Sega GameWorks on the sale of its game sales operation to Sega in the first quarter. Revenues from unconsolidated companies increased 61 percent reflecting the opening of Islands of Adventure, Hard Rock Live, CityWalk and the Portofino Bay Hotel (a Loews hotel) at Universal Orlando. EBITDA from unconsolidated companies was flat at $92 million as increased earnings at Universal Orlando were offset by pre-opening development costs at Universal Studios Japan. At Universal Orlando, EBITDA increased 21 percent reflecting a 51 percent increase in attendance since the opening of the new attractions discussed above and a two percent increase in total visitor spending, partially offset by a continued investment in marketing and other non-recurring costs associated with the expansion.
1999 VERSUS 1998
Consolidated Operations
In fiscal 1999, revenues increased 18 percent, operating income almost doubled to $45 million and EBITDA increased 34 percent. These increases reflected the success of the Crash Bandicoot and Spyro video games, improved sales by Spencer Gifts and additional management fees from the expansion of Universal Orlando and the acquired Universal Studios Port Aventura. These increases were
partially offset by a five percent decline in paid attendance at Universal City Hollywood, largely due to reduced Asian tourism. Increased operating expenses at the park were partially offset by a one percent increase in total visitor spending.
Unconsolidated Operations
The equity in earnings from unconsolidated companies improved from a loss of $22 million in fiscal 1998 to a loss of $17 million in fiscal 1999. Revenues from unconsolidated companies were flat year-on-year while EBITDA increased 53 percent. The improved results were due to the expansion at Universal Orlando, Universal Studios Port Aventura and a gain recognized by Sega GameWorks, on the sale of its game sales operation to Sega in the first quarter. At Universal Studios Orlando, the opening of Islands of Adventure, Hard Rock Live and CityWalk contributed to a 12 percent increase in paid attendance and a two percent increase in total visitor spending.
SPIRITS AND WINE
2000 VERSUS 1999
Consolidated Operations
Revenues increased six percent (ten percent on a constant U.S. dollar basis), EBITDA rose six percent (10 percent on a constant U.S. dollar basis) and operating income increased nine percent (13 percent on a constant U.S. dollar basis) as compared to the prior year. Adjusting for the sale of the Champagne production operations, operating income increased 15 percent and EBITDA increased 12 percent. The improved year-on-year results were driven by continued momentum in the global spirits and wine business, the impact of the millennium and earnings growth in all regions. In North America, higher volumes and prices, partially offset by increased marketing investment contributed to the growth. Europe benefited from growth in most major markets, particularly Germany, driven by a recovery in Mumm Sekt sales, and the United Kingdom. The continued economic recovery in Asia, specifically in Greater China, facilitated improvement in that region. In Latin America, growth was driven by Brazil, Venezuela and Don Julio in Mexico. Of the $5,108 million total spirits and wine revenues, 46 percent were generated in North America, the European and African markets accounted for 33 percent, Asia Pacific contributed 13 percent and Latin America generated the remaining eight percent. Total spirits and wine case volumes, including unconsolidated companies, increased seven percent year-on-year, driven by growth in Crown Royal, Captain Morgan, ABSOLUT VODKA (which is owned by V&S Vin & Sprit AB), Mumm Sekt and Royal Salute.
In fiscal 2000, cost of goods sold as a percentage of revenues increased to 54.2 percent from 53.3 percent in the prior year. This increase was offset by a decrease in selling, general and administrative expenses as a percentage of revenues, which declined to 34.0 percent from 34.7 percent in the prior year. On a constant U.S. dollar basis, global marketing expense increased in excess of 20 percent in order to sustain the momentum established in our core brands and to support the millennium trade activity earlier in the year. Brand equity build also increased in excess of 20 percent on a constant U.S. dollar basis as we continued to invest for future growth by supporting our brands in key markets, particularly North America.
Unconsolidated Operations
In the current fiscal year there is only one spirits and wine unconsolidated company, Kirin-Seagram Limited in Japan. In fiscal 1999, the unconsolidated companies also included Seagram (Thailand) Limited for nine months to March 1999, at which time we increased our investment in Thailand and began to consolidate that affiliate. In fiscal 2000, the equity in earnings of unconsolidated companies increased $2 million and revenues and EBITDA from unconsolidated companies increased 10 and 11 percent, respectively. The year-on-year variances are primarily due to the entities that are included in unconsolidated companies.
1999 VERSUS 1998
Consolidated Operations
Revenues increased six percent and operating income increased 19 percent in 1999. Operating income in 1998 included a $60 million charge related to operations in Asia. Excluding the impact of this charge, operating income increased five percent. Asia Pacific's revenues increased 79 percent, principally due to the June 1998 acquisition of the remaining shares of our Korean affiliate, Doosan Seagram Co., Ltd., and the inclusion of their results in consolidated operations in 1999. Additionally, an improvement in the difficult economic conditions experienced in the region in 1998 also contributed to the increase. Revenues in North America increased four percent reflecting higher volumes and pricing. Europe's revenues increased four percent year-on-year. In Latin America, revenues declined six percent due to the difficult economic conditions in the region, particularly in Brazil. In fiscal 1999, cost of goods sold as a percentage of revenues increased to 53.3 percent from 52.7 in 1998. Selling, general and administrative expenses as a percentage of revenues decreased to 34.7 percent from 35.9 percent due to slight reductions in both brand spending and overhead expenses coupled with improved revenues. On a constant U.S. dollar basis, total brand spending declined two percent in 1999 and brand equity spending increased one percent as we continued to invest for future growth by supporting our brands in key markets. The brand equity growth reflected an increased emphasis on the consumer and was focused behind core strategic brands, particularly Crown Royal Canadian Whisky and ABSOLUT VODKA in North America and Chivas Regal and Martell globally. Spirits and wine case volumes, including unconsolidated companies, increased one percent in 1999 as the performance of our global brands was mixed. Volumes in North America were strong, in particular for Crown Royal Canadian Whisky and Captain Morgan Rum. Globally, volumes for Crown Royal Canadian Whiskey and Captain Morgan Rum increased five and 14 percent, respectively. ABSOLUT VODKA, had a nine percent increase in volume. Case volumes of several global brands declined including Martell and Chivas which were down three and nine percent, respectively. EBITDA increased 17 percent. Excluding the impact of the $60 million charge for Asia Pacific from the prior year results, EBITDA would have increased six percent.
Unconsolidated Operations
The equity in earnings of unconsolidated companies was $2 million in 1999 compared to $1 million in 1998. Revenues from unconsolidated companies declined by 30 percent and EBITDA increased 29 percent. The year-on-year variances were primarily due to changes in the entities that were included in unconsolidated companies. In 1999, the results included Kirin-Seagram Limited in Japan for the entire twelve months and Seagram (Thailand) Limited for nine months to March 1999 at which time we increased our investment in Thailand and began to consolidate that affiliate. In 1998, the unconsolidated companies also included Doosan Seagram Co., Ltd. in Korea. As a result of an additional investment in Doosan Seagram Co., Ltd. at the end of June 1998, that affiliate's results are now consolidated.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position -- Current assets of $7.8 billion at June 30, 2000 were $1.1 billion lower than at June 30, 1999. Current liabilities decreased $1.4 billion to $6.7 billion at June 30, 2000. The improvement in working capital was primarily due to a reduction in short-term borrowings. Shareholders' equity was $12.2 billion at June 30, 2000 compared to $12.9 billion at June 30, 1999. Our total long- and short-term debt, net of cash and short-term investments, decreased to $6.6 billion at June 30, 2000 from $7.0 billion at June 30, 1999 reflecting the reduction in short-term borrowings discussed above. Our ratio of net debt to total capitalization (including minority interest) remained unchanged at 32 percent.
Cash Flows from Operating Activities -- Net cash provided by operating activities totaled $798 million in the 2000 fiscal year, a decrease of $137 million from fiscal 1999. Payments towards restructuring, exit and other accruals in fiscal 2000 and the monetization of acquired PolyGram receivables in fiscal 1999 more than offset the $507 million year-on-year increase in income from continuing
operations. In 1999, operating activities provided net cash of $935 million, following net cash used of $241 million in 1998. The increased cash requirements in the 1998 fiscal year reflected reduced income from continuing operations (excluding the gains on the USA transactions and the Time Warner share sales) and higher working capital requirements.
Cash Flows from Investing Activities -- Net cash used for investing activities was $280 million in fiscal year 2000. The $310 million proceeds from the Champagne operations disposition combined with $190 million proceeds from the sale of Universal Concerts, Inc., were more than offset by an additional $242 million investment in USANi LLC and capital expenditures of $607 million. The capital expenditures by business segment were music $263 million, filmed entertainment $113 million, recreation and other $101 million and spirits and wine $130 million. In 1999, net cash used for investing activities was $6.1 billion. The $3.3 billion pre-tax proceeds from the Tropicana disposition were more than offset by the use of $8.6 billion of cash for the PolyGram acquisition, an additional investment in USANi LLC and USA Networks, Inc. of $243 million and capital expenditures of $531 million. The capital expenditures by business segment were music $135 million, filmed entertainment $134 million, recreation and other $134 million and spirits and wine $128 million. In 1998, net cash provided by investing activities was $699 million. The net cash provided included $1.3 billion gross proceeds from the USA transactions and $1.9 billion proceeds from the sales of 26.8 million Time Warner shares. Partially offsetting these proceeds were the $1.7 billion acquisition of the incremental 50 percent interest in USA Networks and capital expenditures of $410 million, broken down by business segment as follows: music $31 million, filmed entertainment $94 million, recreation and other $115 million and spirits and wine $170 million. In addition, $386 million of cash was used for sundry investments including investments in Doosan Seagram Co., Ltd., our spirits and wine affiliate in Korea, Universal Studios Port Aventura, a theme park located in Spain, and Loews Cineplex Entertainment Corporation.
Cash Flows from Financing Activities -- Financing activities in fiscal 2000 used $821 million. A $787 million decrease in short-term borrowings, a $108 million repayment of long-term debt and dividend payments of $287 million were partially offset by a $75 million supplemental issuance of Adjustable Conversion-rate Equity Security Units, $187 million issuance of shares upon exercise of stock options and conversion of LYONs and a $99 million issuance of long-term debt. In fiscal 1999, financing activities provided $5.6 billion, an increase of $5.4 billion over the prior year, primarily used to finance the PolyGram acquisition. Contributing to the significant increase were a $1.4 billion common share issuance, a $900 million issuance of Adjustable Conversion-rate Equity Security Units and long-term debt issuance's and other borrowings totaling $5.1 billion. In 1999, we made dividend payments of $247 million. In fiscal 1998, financing activities provided $159 million. An increase in short-term borrowings of $1.1 billion was used to finance the acquisition of the incremental 50 percent interest in USA Networks, offsetting this were dividend payments of $231 million and $753 million used to repurchase common shares.
In fiscal 1999, cash used by the discontinued Tropicana operations to the disposition date of August 25, 1998 was $3 million as compared to the cash provided by discontinued Tropicana operations of $67 million in fiscal 1998.
Working Capital -- Our working capital position is reinforced by available credit facilities of $5.5 billion. These facilities are used to support our commercial paper borrowings and are available for general corporate purposes. We believe our access to external capital resources together with internally generated liquidity will be sufficient to satisfy existing commitments and plans, and to provide adequate financial flexibility.
In order to effectively manage our capital needs and costs in the film business, we 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, we have 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. We distribute these films and maintain 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. As a distributor, we have recorded, in our 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.
YEAR 2000 ISSUE
During the year, we completed our efforts to minimize the risk of business disruption associated with the Year 2000 (Y2K) issue. To date, we have not experienced any material business disruptions or system failures as a result of Y2K issues, nor are we aware of Y2K issues affecting our critical third party vendors and customers that could have a significant impact on our business or operations. However, Y2K compliance has many elements and potential consequences, some of which may not be foreseeable or may be realized in future periods. Consequently, there can be no assurance that unforeseen circumstances may not arise, or that we will not in the future identify equipment, systems or third parties which are not Y2K compliant.
The total costs related to our Y2K remediation efforts approximate $65 million, substantially all of which have been incurred as of June 30, 2000. These costs do not include the costs of redeployed internal resources or the costs of internally developed software or hardware which is being replaced or developed in the normal course of business. All costs associated with our Y2K efforts were funded through operations.
Statements concerning Y2K issues that contain more than historical information may be considered forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those expressed in the forward-looking statements, and our Y2K discussion should be read in conjunction with our statement on forward-looking statements which appears below.
EURO CONVERSION
In January 1999, certain member countries of the European Union began operating with a new common currency, the euro, which was established by fixing conversion rates between their existing currencies and the euro. The euro may be used in business transactions along with existing currencies until June 2002, at which time the existing currencies will be removed from circulation. We conduct business in member countries and accordingly continue to evaluate the effects of the euro conversion on our European operations, principally in the music and spirits and wine businesses. We have established processes to address the issues raised by this currency conversion, including the impact on information technology and other systems, currency risk, financial instruments, taxation and competitive implications. Based upon progress to date, we believe that the introduction of the euro and phasing out of existing currencies will not have a material impact on our financial position or results of operations.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report contains statements that are "forward-looking statements," in that they include statements regarding the intent, belief or current expectations of our management with resect to our future operating performance. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements that express forecasts, expectations and projections with respect to future matters, including the launching or prospective development of new business initiatives and products, anticipated music or motion picture releases, Internet or theme park projects, euro conversion and "Year 2000" remediation efforts and anticipated cost savings or synergies are forward-looking statements within the meaning of the Act. Such forward-looking
statements are not guarantees of future performance. Actual results may differ materially from our forward-looking statements as a result of certain risks and uncertainties, many of which are outside of our control, including but not limited to:
- - Changes in global and localized economic and political conditions, which may affect attendance and spending at our theme parks, purchases of our consumer products and the performance of our filmed entertainment operations.
- - Changes in financial and equity markets, including significant interest rate and foreign currency rate fluctuations, which may affect our access to, or increase the cost of financing for our operations and investments.
- - Increased competitive product and pricing pressures and unanticipated actions by competitors that could impact our market share, increase expenses and hinder our growth potential.
- - Changes in consumer preferences and tastes, which may affect all our business segments.
- - Adverse weather conditions or natural disasters, such as hurricanes and earthquakes, which may, among other things, impair performance at our theme parks in California, Florida and Spain.
- - Legal and regulatory developments, including changes in accounting standards, taxation requirements, such as the impact of excise tax increases with respect to the spirits and wine business, and environmental laws.
- - Technological developments that may affect the distribution of our products or create new risks to our ability to protect our intellectual property rights.
- - The uncertainties of litigation and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in financial market conditions in the normal course of business because we conduct business in many foreign currencies and engage in ongoing investing and funding activities in many countries. Market risk is the uncertainty to which future earnings or asset/liability values are exposed due to operating cash flows denominated in foreign currencies and various financial instruments used in the normal course of operations. We have established policies, procedures and internal processes governing management of market risks and the use of financial instruments to manage our exposure to such risks.
We are also exposed to changes in interest rates primarily as a result of our borrowing and investing activities that include short-term investments and borrowings and long-term debt used to maintain liquidity and fund business operations. We continue to utilize U.S. dollar-denominated commercial paper and bank borrowings to fund seasonal working capital requirements in the United States and Canada and also borrow in different currencies from other sources to meet the borrowing needs of our affiliates. The nature and
amount of our long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors.
Operating cash flows denominated in foreign currency as a result of our international business activities and certain of its borrowings are exposed to changes in foreign exchange rates. We continually evaluate our foreign currency exposure (primarily the British pound, euro, Canadian dollar and Japanese yen), based on current market conditions and the business environment. In order to mitigate the effect of foreign currency risk, we engage in hedging activities. The magnitude and nature of such hedging activities are explained in Note 6 to the financial statements.
We employ a variance/covariance approach in our calculation of Value at Risk (VaR), which measures the potential losses in fair value or earnings that could arise from changes in market conditions, using a 95 percent confidence level and assuming a one-day holding period. The VaR, which is the potential loss in fair value, attributable to those interest rate sensitive exposures associated with our exposure to interest rates at June 30, 2000 was $41 million. This exposure is primarily related to long-term debt with fixed interest rates. The VaR, which is the potential loss in earnings associated with our exposure to foreign exchange rates, primarily to hedge cash flow exposures denominated in foreign currencies, was $3 million at June 30, 2000. These exposures include intercompany trade accounts, service fees, intercompany loans and third party debt. We are subject to other foreign exchange market risk exposure as a result of non-financial instrument anticipated foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the Company's VaR calculation.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page 34.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about our directors is incorporated by reference to the Company's director information in The Seagram Annual Meeting Information in the joint proxy statement-prospectus to be contained in the Registration Statement on Form of Vivendi Universal (to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2000; if the filing is not made within 120 days after June 30, 2000, the director information will be filed as an amendment to this Annual Report on Form 10-K).
Set forth below is certain information with respect to our executive officers.
Our Board of Directors chooses our executive officers annually. Once chosen, these executive officers hold office until they resign, are removed or otherwise become disqualified to serve.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information about executive compensation is incorporated by reference to the executive compensation disclosure in The Seagram Annual Meeting Information in the joint proxy statement-prospectus to be contained in the Registration Statement on Form of Vivendi Universal (to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2000; if the filing is not made within 120 days after June 30, 2000, the executive compensation disclosure will be filed as an amendment to this Annual Report on Form 10-K).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about the ownership of Seagram's common shares by certain beneficial owners and management is incorporated by reference to the Company's beneficial ownership disclosure in The Seagram Annual Meeting Information in the joint proxy statement-prospectus to be contained in the Registration Statement on Form of Vivendi Universal (to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2000; if the filing is not made within 120 days after June 30, 2000, the beneficial ownership disclosure will be filed as an amendment to this Annual Report on Form 10-K).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of August 31, 2000, Koninklijke Philips Electronics N.V. ("Philips") owned approximately 10.78% of Seagram's common shares, which it acquired as part of Seagram's acquisition of PolyGram in fiscal 1999. Cornelis Boonstra, a director of Seagram, is Chairman and President of Philips. Philips and subsidiaries of Seagram are parties to intellectual property and distribution arrangements containing normal business terms and conditions.
Information about certain relationships and transactions with related parties is incorporated by reference to the Company's related party disclosure in The Seagram Annual Meeting Information in the joint proxy statement-prospectus to be contained in the Registration Statement on Form
of Vivendi Universal (to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2000; if the filing is not made within 120 days after June 30, 2000, the related party disclosure will be filed as an amendment to this Annual Report on Form 10-K).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1&2. Financial Statements and Financial Statement Schedules
The financial statements and schedules filed as part of or incorporated by reference in this Report are listed in the accompanying Index to Financial Statements.
3. Exhibits
The exhibits filed as part of or incorporated by reference in this Report are listed in the accompanying Exhibit Index. Exhibits 10(s) through 10(ww) listed in the accompanying Exhibit Index identify management contracts or compensatory plans or arrangements.
(b) Current Reports on Form 8-K
1. A Current Report on Form 8-K dated June 26, 2000 was filed to report under Item 5 and file under Item 7 a press release announcing that the Corporation had agreed to enter into a strategic business combination with Vivendi S.A. and Canal Plus S.A.
2. A Current Report on Form 8-K dated August 17, 2000 was filed to report under Item 5 and file under Item 7 Seagram's consolidated financial statements for the fiscal year ended June 30, 2000 together with management's discussion and analysis of financial condition and results of operations.
FORWARD LOOKING STATEMENTS
This Form 10-K contains statements that are "forward-looking statements," in that they include statements regarding the intent, belief or current expectations of our management with resect to our future operating performance. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements that express forecasts, expectations and projections with respect to future matters, including the launching or prospective development of new business initiatives and products, anticipated music or motion picture releases, Internet or theme park projects, euro conversion and "Year 2000" remediation efforts and anticipated cost savings or synergies are forward-looking statements within the meaning of the Act. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from our forward-looking statements as a result of certain risks and uncertainties, many of which are outside of our control, including but not limited to:
- Changes in global and localized economic and political conditions, which may affect attendance and spending at our theme parks, purchases of our consumer products and the performance of our filmed entertainment operations.
- Changes in financial and equity markets, including significant interest rate and foreign currency rate fluctuations, which may affect our access to, or increase the cost of financing for, our operations and investments.
- Increased competitive product and pricing pressures and unanticipated actions by competitors that could impact our market share, increase expenses or hinder our growth potential.
- Changes in consumer preferences and tastes, which may affect all our business segments.
- Adverse weather conditions or natural disasters, such as hurricanes and earthquakes, which may, among other things, impair performance at our theme parks in California, Florida or Spain.
- Legal and regulatory developments, including changes in accounting standards, taxation requirements, such as the impact of excise tax increases with respect to the spirits and wine business, and environmental laws.
- Technological developments that may affect the distribution of our products or create new risks to our ability to protect our intellectual property rights.
- The uncertainties of litigation and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE SEAGRAM COMPANY LTD. (Registrant)
Date: September 28, 2000 By /s/ Frank Mergenthaler ---------------------- Frank Mergenthaler Senior Vice President of Finance and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on September 28, 2000 by the following persons on behalf of the Registrant and in the capacities indicated.
Principal Executive Officer:
/s/ Edgar Bronfman, Jr. Director, President and Chief - ----------------------- Executive Officer Edgar Bronfman, Jr.
Principal Financial Officer:
/s/ Brian C. Mulligan Executive Vice President and - --------------------- Chief Financial Officer Brian C. Mulligan
Principal Accounting Officer:
/s/ Frank Mergenthaler Senior Vice President of Finance - ---------------------- and Chief Accounting Officer Frank Mergenthaler
Directors:
Edgar M. Bronfman* Director, Chairman of the Board
The Hon. Charles R. Bronfman* Director, Co-Chairman of the Board and Chairman of the Executive Committee
Samuel Bronfman II* Director Stephen R. Bronfman * Director Matthew W. Barrett* Director Laurent Beaudoin* Director Cornelis Boonstra* Director Richard H. Brown* Director Andre Desmarais* Director Barry Diller* Director Michele J. Hooper* Director David L. Johnston* Director Marie-Josee Kravis* Director Samuel Minzberg* Director John S. Weinberg* Director
* By signing his name hereto, Brian C. Mulligan signs this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission.
By /s/ Brian C. Mulligan --------------------- Brian C. Mulligan, Attorney-in-fact
THE SEAGRAM COMPANY LTD. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2000
1. Financial Statements
Consolidated Statement of Income for the Fiscal Years ended June 30, 2000, 1999 and 1998
Consolidated Balance Sheet at June 30, 2000 and June 30, 1999
Consolidated Statement of Cash Flows for the Fiscal Years ended June 30, 2000, 1999 and 1998
Consolidated Statement of Shareholders' Equity for the Fiscal Years ended June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Management's Report
Report of Independent Accountants
Quarterly Data (Unaudited)
2. Financial Statement Schedules and Report:
Report of Independent Accountants on Financial Statement Schedule;
Schedule for The Seagram Company Ltd. and Subsidiary Companies:
II. Valuation and Qualifying Accounts.
Schedules not included have been omitted because they are not applicable or the required information is shown in our Consolidated Financial Statements or Notes thereto.
CONSOLIDATED STATEMENT OF INCOME
The accompanying notes are an integral part of these statements.
35 U.S. GAAP
CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of these statements.
Approved by the Board
/s/ Edgar M. Bronfman /s/ Matthew W. Barrett --------------------- ---------------------- Edgar M. Bronfman Matthew W. Barrett Director Director
36 U.S. GAAP
CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these statements.
37 U.S. GAAP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
38 U.S. GAAP
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.
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.
39 U.S. GAAP
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.
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.
40 U.S. GAAP
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 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.
41 U.S. GAAP
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 and liabilities assumed, based on fair values at the acquisition date. The final allocation of purchase price follows:
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:
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 other branded fruit juices and beverages. Summarized financial information related to the discontinued Tropicana business follows:
42 U.S. GAAP
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.
43 U.S. GAAP
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:
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 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:
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.
44 U.S. GAAP
NOTE 4 INVESTMENTS
The Company's investments consist of:
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); 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:
45 U.S. GAAP
SUMMARIZED BALANCE SHEET INFORMATION
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
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 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.
46 U.S. GAAP
NOTE 5 LONG-TERM DEBT AND CREDIT ARRANGEMENTS
LONG-TERM DEBT
(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 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.
47 U.S. GAAP
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.
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:
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.
48 U.S. GAAP
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 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:
49 U.S. GAAP
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 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:
50 U.S. GAAP
The following table summarizes information concerning currently outstanding and exercisable stock options:
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
51 U.S. GAAP
COMPONENTS OF INCOME TAX EXPENSE
COMPONENTS OF NET DEFERRED TAX LIABILITY
52 U.S. GAAP
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
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:
53 U.S. GAAP
Amounts recognized in the Company's consolidated balance sheet at June 30 consist of:
Net periodic pension and other postretirement benefit costs for the fiscal years ended June 30 include the following components:
54 U.S. GAAP
The weighted average rates and assumptions utilized in accounting for these plans for the fiscal years ended June 30 were:
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-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.
55 U.S. GAAP
(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).
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.
56 U.S. GAAP
NOTE 11 ADDITIONAL FINANCIAL INFORMATION
Income Statement and Cash Flow Data
57 U.S. GAAP
Balance Sheet Data
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.
58 U.S. GAAP
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.
59 U.S. GAAP
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.
60 U.S. GAAP
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.
August 16, 2000
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
QUARTERLY DATA
FISCAL 2000
FISCAL 1999
(1) Includes a $55 million gain on sale of businesses, after tax and minority interest.
(2) Includes a $35 million restructuring credit, after tax and minority interest.
(3) For earnings per share data, each quarter is calculated as a discrete period and the sum of the four quarters does not necessarily equal the full year amount.
(4) Includes a $244 million restructuring charge, after tax and minority interest.
(5) Includes a $76 million gain on the USA transactions, after tax and minority interest.
SCHEDULE II
THE SEAGRAM COMPANY LTD. (Incorporated under the Canada Business Corporations Act) AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (U.S. dollars in millions)
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of The Seagram Company Ltd.
Our audits of the consolidated financial statements of The Seagram Company Ltd. referred to in our report dated August 16, 2000 appearing in this Form 10-K also included an audit of the financial statement schedule listed in Item 14(a) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP
New York, New York August 16, 2000
THE SEAGRAM COMPANY LTD. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2000
EXHIBIT INDEX