-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D7DY/tRz+i+206qTH3WQRMzs/yygXE+YpFIsfAA3+XE4i3p7Tw6Fychcsu9TFihX qCD2tuAGU9b1E+y8RnzYDQ== 0000898430-00-001623.txt : 20000516 0000898430-00-001623.hdr.sgml : 20000516 ACCESSION NUMBER: 0000898430-00-001623 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALT DISNEY CO/ CENTRAL INDEX KEY: 0001001039 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 954545390 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11605 FILM NUMBER: 634464 BUSINESS ADDRESS: STREET 1: 500 SOUTH BUENA VISTA ST CITY: BURBANK STATE: CA ZIP: 91521 BUSINESS PHONE: 8185601000 MAIL ADDRESS: STREET 1: 500 SOUTH BUENA VISTA ST CITY: BURBANK STATE: CA ZIP: 91521 FORMER COMPANY: FORMER CONFORMED NAME: DC HOLDCO INC DATE OF NAME CHANGE: 19950918 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2000 Commission File Number 1-11605 [LOGO OF THE WALT DISNEY COMPANY] Incorporated in Delaware I.R.S. Employer Identification No. 500 South Buena Vista Street, Burbank, 95-4545390 California 91521 (818) 560-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- There were 2,077,801,977 shares of Disney common stock outstanding and 45,101,691 shares of GO.com common stock outstanding as of May 11, 2000. TABLE OF CONTENTS
Page Reference --------- Part I--Financial Information Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1 Part II--Other Information Item 4. Submission of Matters to a Vote of Security Holders 2 Item 6. Exhibits 2 Signature 3 ANNEX I DISNEY ------ Condensed Combined Financial Information Condensed Combined Statements of Income I-1 Condensed Combined Balance Sheets I-2 Condensed Combined Statements of Cash Flows I-3 Notes to Condensed Combined Financial Statements I-4 Management's Discussion and Analysis of Financial Condition and Results of Operations I-7 ANNEX II GO.COM -------- Condensed Combined Financial Information Condensed Combined Statements of Operations II-1 Condensed Combined Balance Sheets II-2 Condensed Combined Statements of Cash Flows II-3 Notes to Condensed Combined Financial Statements II-4 Management's Discussion and Analysis of Financial Condition and Results of Operations II-7 ANNEX III THE WALT DISNEY COMPANY ----------------------- Condensed Consolidated Financial Information Condensed Consolidated Statements of Income III-1 Condensed Consolidated Balance Sheets III-2 Condensed Consolidated Statements of Cash Flows III-3 Notes to Condensed Consolidated Financial Statements III-4 Management's Discussion and Analysis of Financial Condition and Results of Operations III-7 Exhibits
PART I. FINANCIAL INFORMATION As more fully discussed herein, on November 17, 1999 The Walt Disney Company (the Company) completed its acquisition of the remaining interest in Infoseek Corporation (Infoseek) that it did not already own via the creation and issuance of a new class of common stock called GO.com common stock. GO.com common stock is intended to reflect the performance of the Company's Internet and direct marketing businesses including Infoseek (collectively, GO.com). Upon issuance of GO.com common stock, the Company's existing common stock was reclassified as Disney common stock, which is intended to reflect the performance of the Company's businesses other than GO.com, plus a retained interest in GO.com (collectively, Disney). As a result of the Infoseek transaction and issuance of GO.com common stock, the Company now reports consolidated financial information and separate financial information for Disney and for GO.com. Prior to the Infoseek acquisition, the Company's Internet and direct marketing businesses were referred to as "Disney's existing Internet business" or "Internet and Direct Marketing." ITEM 1. Financial Statements For information required by Item 1, refer to: "Disney Condensed Combined Financial Information" filed as part of this document in Annex I and "GO.com Condensed Combined Financial Information" filed as part of this document in Annex II and "The Walt Disney Company Condensed Consolidated Financial Information" filed as part of this document in Annex III. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For information required by Item 2, refer to: "Disney Management's Discussion and Analysis of Financial Condition and Results of Operations" filed as part of this document in Annex I and "GO.com Management's Discussion and Analysis of Financial Condition and Results of Operations" filed as part of this document in Annex II and "The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations" filed as part of this document in Annex III. -1- PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders The following matters were submitted to a vote of security holders during the Company's Annual Meeting of Shareholders held on February 22, 2000. Description of Matter Votes Cast For Authority Withheld --------------------- ----------------------- 1. Election of Directors Reveta Bowers 1,676,737,096 80,114,384 Roy Disney 1,728,312,127 28,539,353 Ignacio Lozano, Jr. 1,726,344,031 30,507,449 George Mitchell 1,675,111,411 81,740,069 Gary Wilson 1,726,703,787 30,147,693 Judith L. Estrin 1,727,592,608 29,258,872 Sanford M. Litvack 1,727,319,487 29,531,993 Sidney Poitier 1,725,946,869 30,904,611 Robert A. M. Stern 1,683,572,548 73,278,932 Andrea Van de Kamp 1,726,636,620 30,214,860
Broker For Against Abstentions Non-votes ------------------- ------------------- ----------------- -------------- 2. Ratification of PricewaterhouseCoopers LLP as independent accountants 1,742,725,118 6,073,200 8,053,162 - 3. Stockholder proposal with respect to management compensation 84,988,191 1,213,068,577 32,241,413 426,553,299 4. Stockholder proposal with respect to election of directors 74,914,596 1,229,835,340 25,547,720 426,553,824
ITEM 6. Exhibits 3. Amended and Restated By Laws of Registrant 10. Employment Agreement dated as of January 24, 2000 between Registrant and Robert A. Iger. 27. Financial Data Schedule, filed electronically. -2- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE WALT DISNEY COMPANY ------------------------------- (Registrant) By: /s/ THOMAS O. STAGGS ----------------------------------------------------- (Thomas O. Staggs, Senior Executive Vice President and Chief Financial Officer) May 15, 2000 Burbank, California -3- ANNEX I [LOGO OF THE WALT DISNEY COMPANY] DISNEY CONDENSED COMBINED FINANCIAL INFORMATION DISNEY CONDENSED COMBINED STATEMENTS OF INCOME In millions, except per share data (unaudited)
Three Months Ended Six Months Ended March 31, March 31, --------------------------------- --------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Revenues $ 6,206 $ 5,475 $ 13,036 $ 11,996 Costs and expenses (5,251) (4,615) (10,845) (9,986) Amortization of intangible assets (111) (107) (222) (215) Gain on sale of Fairchild -- -- 243 -- ------- ------- ------- ------- Operating income 844 753 2,212 1,795 Corporate and other activities (36) (64) (31) (85) Net interest expense (122) (172) (317) (335) -------- ------- ------- ------- Income before income taxes, minority interests and retained interest in GO.com 686 517 1,864 1,375 Income taxes (286) (206) (915) (572) Minority interests (31) (21) (62) (43) -------- ------- ------- ------- Income before retained interest in GO.com 369 290 887 760 Net (loss) income related to retained interest in GO.com/(1)/ (208) (64) (370) 88 ------- -------- ------- ------- Net income $ 161 $ 226 $ 517 $ 848 ======= ======= ======= ======= Earnings per share: Diluted $ 0.08 $ 0.11 $ 0.25 $ 0.41 ======= ======= ======= ======= Basic $ 0.08 $ 0.11 $ 0.25 $ 0.41 ======= ======= ======= ======= Average number of common and common equivalent shares outstanding: Diluted 2,103 2,089 2,092 2,083 ======= ======= ======= ======= Basic 2,069 2,054 2,067 2,052 ======= ======= ======= =======
- ------------- (1) Net (loss) income related to retained interest in GO.com includes 100% of GO.com's losses through November 17, 1999, and approximately 72% thereafter. See Notes to Condensed Combined Financial Statements I-1 DISNEY CONDENSED COMBINED BALANCE SHEETS In millions (unaudited)
March 31, September 30, 2000 1999 ----------------- ------------------- ASSETS Current Assets Cash and cash equivalents $ 856 $ 408 Receivables 3,917 3,615 Inventories 706 752 Film and television costs 4,001 4,071 Deferred income taxes 595 598 Other assets 733 666 --------- -------- Total current assets 10,808 10,110 Loan receivable from GO.com -- 19 Film and television costs 2,534 2,489 Investments 1,997 1,929 Retained interest in GO.com 1,495 371 Theme parks, resorts and other property, at cost Attractions, buildings and equipment 16,029 15,815 Accumulated depreciation (6,585) (6,201) --------- -------- 9,444 9,614 Projects in progress 1,767 1,266 Land 481 425 --------- -------- 11,692 11,305 Intangible assets, net 15,045 15,631 Other assets 1,282 1,509 --------- -------- $ 44,853 $ 43,363 ========= ======== LIABILITIES AND GROUP EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 4,988 $ 4,497 Current portion of borrowings 2,829 2,387 Unearned royalties and other advances 870 698 --------- -------- Total current liabilities 8,687 7,582 Loan payable to GO.com 36 -- Borrowings 7,706 9,187 Deferred income taxes 2,576 2,602 Other long term liabilities, unearned royalties and other advances 2,717 2,711 Minority interests 370 306 Group equity 22,761 20,975 --------- -------- $ 44,853 $ 43,363 ========= ========
See Notes to Condensed Combined Financial Statements I-2 DISNEY CONDENSED COMBINED STATEMENTS OF CASH FLOWS In millions (unaudited)
Six Months Ended March 31, -------------------------------- 2000 1999 --------- -------- NET INCOME $ 517 $ 848 OPERATING ITEMS NOT REQUIRING CASH OUTLAYS Amortization of film and television costs 1,518 1,287 Depreciation 443 404 Amortization of intangible assets 222 215 Gain on sale of Fairchild (243) -- Minority interests 62 43 Retained interest in GO.com 370 (88) Other (17) (14) CHANGES IN ASSETS AND LIABILITIES 456 (151) ------- ------- 2,811 1,696 ------- ------- CASH PROVIDED BY OPERATIONS 3,328 2,544 ------- ------- INVESTING ACTIVITIES Dispositions 688 -- Film and television costs (1,303) (1,625) Investments in theme parks, resorts and other property (914) (728) Investment in Euro Disney (91) -- Acquisitions (net of cash acquired) -- (159) Other 84 2 ------- ------- (1,536) (2,510) ------- ------- FINANCING ACTIVITIES Commercial paper borrowings, net (263) 134 Other borrowings 985 1,318 Reduction of borrowings (1,770) (751) Capital contributions to GO.com (22) (144) Borrowings from GO.com 8 -- Dividends (434) -- Repurchases of Disney common stock (115) (19) Exercise of stock options and other 267 99 ------- ------- (1,344) 637 ------- ------- Increase in cash and cash equivalents 448 671 Cash and cash equivalents, beginning of period 408 119 ------- ------- Cash and cash equivalents, end of period $ 856 $ 790 ======= =======
See Notes to Condensed Combined Financial Statements I-3 DISNEY NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS 1. These condensed combined financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these condensed combined financial statements. Operating results for the quarter and six months are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. Certain reclassifications have been made in the fiscal 1999 financial statements to conform to the fiscal 2000 presentation. For further information, refer to the consolidated financial statements and footnotes thereto for the Company included in its Annual Report on Form 10-K for the year ended September 30, 1999, as well as the combined financial statements and footnotes thereto for Disney for the year ended September 30, 1998, included in the joint proxy statement/prospectus of The Walt Disney Company and Infoseek Corporation, filed on Form S-4 dated September 30, 1999. 2. In November 1998, the Company acquired a 43% interest in Infoseek Corporation (Infoseek) in a transaction that, among other things, provided for the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by Infoseek. The Company recognized a $345 million non-cash gain on that transaction. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. The acquisition was effected by the creation and issuance of a new class of common stock, called GO.com common stock, in exchange for outstanding Infoseek shares, at an exchange rate of 1.15 shares of GO.com for each Infoseek share. Upon consummation of the acquisition, the Company combined its Internet and direct marketing businesses with Infoseek to create a single Internet and direct marketing business called GO.com. Disney retains an interest of approximately 71% in GO.com at March 31, 2000. Effective November 18, 1999, shares of the Company's existing common stock were reclassified as Disney common stock, to track the financial performance of the Company's businesses other than GO.com, plus Disney's retained interest in GO.com. The acquisition has been accounted for as a purchase, and the acquisition cost of $2.1 billion has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. Assets acquired totaled $130 million and liabilities assumed were $46 million. A total of approximately $2.0 billion, representing the excess of acquisition cost over the fair value of Infoseek's net assets, has been allocated to intangible assets, including goodwill of $1.9 billion, and is being amortized over two to nine years. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. Disney's interest in Infoseek intangible assets is included in the retained interest in GO.com in the condensed combined balance sheet. In November 1999, the Company sold Fairchild Publications, which it had acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain of $243 million. I-4 DISNEY NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued) Disney's combined results of operations have incorporated Infoseek's activity from November 18, 1999 and the activity of Fairchild Publications through the date of its disposal. The unaudited pro forma information below presents combined results of operations as if the Infoseek acquisition and the disposition of Fairchild Publications had occurred at the beginning of fiscal 1999. The unaudited pro forma information is not necessarily indicative of results of operations had the Infoseek acquisition and the disposition of Fairchild Publications occurred at the beginning of fiscal 1999, nor is it necessarily indicative of future results. Six Months Ended March 31, ------------------------- 2000 1999 ------- ------- (unaudited; in millions, except per share data) Revenues $13,022 $11,907 Net income 482 411 Diluted earnings per share $ 0.23 $ 0.20 Pro forma amounts for the six month periods exclude the impact of purchased in-process research and development expenditures of $23 million and $117 million in 2000 and 1999, respectively, the gain on the sale of Fairchild Publications in fiscal 2000 and the Starwave gain in fiscal 1999. 3. During the six months, Disney repaid $1.8 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $263 million. These repayments were partially funded by proceeds of $985 million from various financing arrangements having effective interest rates ranging from 5.96% to 6.32% and maturities in fiscal 2002 through 2015. 4. During 1998, the Company's Board of Directors decided to move to an annual, rather than quarterly, dividend policy to reduce costs and simplify payments to stockholders. During the first quarter of fiscal 2000, the Company paid a dividend of $434 million ($0.21 per share) applicable to fiscal 1999. 5. Diluted earnings per share amounts are calculated using the treasury stock method and are based upon the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation in periods in which they would have an anti- dilutive effect. The difference between basic and diluted earnings per share is solely attributable to stock options, which are considered anti-dilutive when option exercise prices exceed the weighted average market price per share of common stock during the period. For the three months ended March 31, 2000 and 1999, options for 12 million and 17 million shares, respectively, were excluded from the diluted earnings per share calculation. For the six-month periods, options for 32 million and 22 million shares, respectively, were excluded. 6. During the six months, a subsidiary of the Company repurchased 3.8 million shares of Disney common stock for approximately $115 million. Under its share repurchase program, the Company is authorized to purchase up to an additional 395 million shares. The Company evaluates share repurchase decisions on an ongoing basis, taking into account borrowing capacity, management's target capital structure, and other investment opportunities. I-5 DISNEY NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued) 7. Comprehensive income is as follows:
Three Months Ended Six Months Ended March 31, March 31, ----------------------------------- ----------------------------------- (unaudited, in millions) 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Net income $ 161 $ 226 $ 517 $ 848 Cumulative translation and other adjustments, net of tax 12 (3) 8 (11) ----- ----- ----- ----- Comprehensive income $ 173 $ 223 $ 525 $ 837 ===== ===== ===== =====
8. The operating segments reported below are the segments of Disney for which separate financial information is available and for which operating income or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. During the first quarter of the current year, Disney completed the merger of television production activities of the Walt Disney Studios with those of the ABC Television Network. Accordingly, television production activities formerly reported in Studio Entertainment are now reported in the Media Networks segment. All prior-year amounts have been restated to reflect the current presentation.
Three Months Ended Six Months Ended March 31, March 31, ------------------------------------ ------------------------------------ (unaudited, in millions) 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Revenues: Media Networks $2,380 $1,825 $ 5,117 $ 4,133 ------ ------ ------- ------- Studio Entertainment Third parties 1,631 1,579 3,206 3,332 Intersegment 25 16 49 36 ------ ------ ------- ------- 1,656 1,595 3,255 3,368 ------ ------ ------- ------- Theme Parks & Resorts 1,571 1,414 3,148 2,856 ------ ------ ------- ------- Consumer Products Third parties 624 657 1,565 1,675 Intersegment (25) (16) (49) (36) ------ ------ ------- ------- 599 641 1,516 1,639 ------ ------ ------- ------- $6,206 $5,475 $13,036 $11,996 ====== ====== ======= ======= Operating income: Media Networks $ 537 $ 364 $ 1,179 $ 735 Studio Entertainment 3 96 26 239 Theme Parks & Resorts 330 311 693 654 Consumer Products 85 89 293 382 Amortization of intangible assets (111) (107) (222) (215) ------ ------ ------- ------- 844 753 1,969 1,795 Gain on sale of Fairchild -- -- 243 -- ------ ------ ------- ------- $ 844 $ 753 $ 2,212 $ 1,795 ====== ====== ======= =======
I-6 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEASONALITY Disney's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and six months ended March 31, 2000 for each business segment, and for Disney as a whole, are not necessarily indicative of results to be expected for the full year. Media Networks revenues are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall. Studio Entertainment revenues fluctuate based upon the timing of theatrical motion picture and home video releases. Release dates for theatrical and home video products are determined by several factors, including timing of vacation and holiday periods and competition in the market. Theme Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring holiday periods. Consumer Products revenues are influenced by seasonal consumer purchasing behavior and the timing of animated theatrical releases. RESULTS OF OPERATIONS On November 4, 1999, the Company sold Fairchild Publications, which was acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999 stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. As more fully discussed in Note 2 to the Condensed Combined Financial Statements, the acquisition resulted in the creation of GO.com, which comprises all of Disney and Infoseek's Internet businesses, as well as Disney's direct marketing operations. The Company now separately reports operating results for GO.com and Disney, which comprises the Company's businesses other than GO.com, plus Disney's retained interest of approximately 71%, as of March 31, 2000, in GO.com. To enhance comparability, certain information for the current six months and prior-year periods is presented on a pro forma basis, which assumes that these events had occurred at the beginning of fiscal 1999. The pro forma results are not necessarily indicative of the combined results that would have occurred had these events actually occurred at the beginning of fiscal 1999, nor are they necessarily indicative of future results. Pro forma net loss related to Disney's retained interest in GO.com excludes the impact of GO.com purchased in-process research and development expenditures of $23 million and $117 million for the six months ended March 31, 2000 and 1999, respectively. I-7 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Combined Results - Quarter
Three Months Ended March 31, --------------------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 ------------ ------------ ------------ ------------ (unaudited; in millions, except per share data) Revenues $ 6,206 $ 5,426 14 % $ 5,475 Costs and expenses (5,251) (4,576) (15)% (4,615) Amortization of intangible assets (111) (106) (5)% (107) ------- ------ ------- Operating income 844 744 13 % 753 Corporate and other activities (36) (64) 44 % (64) Net interest expense (122) (171) 29 % (172) ------- ------ ------- Income before income taxes, minority interests and retained interest in GO.com 686 509 35 % 517 Income taxes (286) (207) (38)% (206) Minority interests (31) (21) (48)% (21) ------- ------ ------- Income before retained interest in GO.com 369 281 31 % 290 Net loss related to retained interest in GO.com (208) (184) (13)% (64) ------- ------ ------- Net income $ 161 $ 97 66 % $ 226 ======= ======= ====== Earnings per share: Diluted $ 0.08 $ 0.05 60 % $ 0.11 ======= ======= ====== Basic $ 0.08 $ 0.05 60 % $ 0.11 ======= ======= ====== Earnings per share excluding retained interest in GO.com: Diluted $ 0.18 $ 0.13 38 % $ 0.14 ======= ======= ====== Basic $ 0.18 $ 0.14 29 % $ 0.14 ======= ======= ====== Average number of common and common equivalent shares outstanding: Diluted 2,103 2,089 2,089 ======= ======= ====== Basic 2,069 2,054 2,054 ======= ======= ======
Net income for the quarter increased 66%, or $64 million to $161 million and diluted earnings per share increased 60% to $0.08, compared to prior-year pro forma amounts, driven by increased operating income, lower net interest expense and improved corporate and other activities, partially offset by increased net loss related to the retained interest in GO.com and increased minority interests. Excluding the retained interest in GO.com, net income and diluted earnings per share increased 31% and 38% to $369 million and $0.18, respectively. Increased operating income reflected higher Media Networks, Theme Parks and Resorts and Consumer Products results, partially offset by lower Studio Entertainment results. Lower net interest expense reflected gains from the sale of investments and lower average debt balances in the current quarter, partially offset by higher interest rates in the current quarter. Corporate and other activities improved due to increased income from equity investments. The increase in net loss related to the retained interest in GO.com reflected higher costs and expenses at GO.com, driven by continued investment in Internet operations and infrastructure, a non-cash charge of $31 million to reflect the impairment of certain intangible assets and one-time employee retention payments of $17 million required by the 1999 Infoseek acquisition agreement, partially offset by Internet revenue growth. I-8 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) As previously noted, the Company completed its acquisition of Infoseek during the first quarter of the current fiscal year (see Note 2 to the Condensed Combined Financial Statements). The acquisition resulted in a significant increase in intangible assets at GO.com. Disney's retained interest in GO.com reflects the impact of this amortization. Acquired intangible assets are being amortized over periods ranging from two to nine years. The impact of amortization related to the November 1998 and November 1999 acquisitions is expected to be $455 million for the remaining six months of fiscal 2000, $707 million in 2001, $658 million in 2002, $92 million in 2003 and $13 million over the remainder of the amortization period. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in- place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. On an as-reported basis, net income decreased 29% or $65 million, reflecting the items described above, as well as the consolidation of Infoseek operations beginning November 18, 1999. Combined Results - Six Months
Six Months Ended March 31, --------------------------------------------------------------------------------- Pro Forma As Reported ------------------------------------------- -------------------------------- 2000 1999 % Change 2000 1999 --------- ----------- ------------ -------------- ------------ (unaudited; in millions, except per share data) Revenues $ 13,022 $11,907 9 % $ 13,036 $11,996 Costs and expenses (10,832) (9,910) (9)% (10,845) (9,986) Amortization of intangible assets (222) (213) (4)% (222) (215) Gain on sale of Fairchild -- -- 243 -- -------- ------- -------- ------- Operating income 1,968 1,784 10 % 2,212 1,795 Corporate and other activities (29) (85) 66 % (31) (85) Net interest expense (315) (334) 6 % (317) (335) -------- ------- -------- ------- Income before income taxes, minority interests and retained interest in GO.com 1,624 1,365 19 % 1,864 1,375 Income taxes (678) (559) (21)% (915) (572) Minority interests (62) (43) (44)% (62) (43) -------- ------- -------- ------- Income before retained interest in GO.com 884 763 16 % 887 760 Net (loss) income related to retained interest in GO.com (402) (352) (14)% (370) 88 -------- ------- -------- ------- Net income $ 482 $ 411 17 % $ 517 $ 848 ======== ======= ======== ======= Earnings per share: Diluted $ 0.23 $ 0.20 15 % $ 0.25 $ 0.41 ======== ======= ======== ======= Basic $ 0.23 $ 0.20 15 % $ 0.25 $ 0.41 ======== ======= ======== ======= Earnings per share excluding retained interest in GO.com: Diluted $ 0.42 $ 0.37 14 % $ 0.42 $ 0.36 ======== ======= ======== ======= Basic $ 0.43 $ 0.37 16 % $ 0.43 $ 0.37 ======== ======= ======== ======= Average number of common and common equivalent shares outstanding: Diluted 2,092 2,083 2,092 2,083 ======== ======= ======== ======= Basic 2,067 2,052 2,067 2,052 ======== ======= ======== =======
I-9 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On a pro forma basis, net income for the six months increased 17% to $482 million and diluted earnings per share increased 15% to $0.23, driven by increased operating income, improved corporate and other activities and decreased net interest expense, partially offset by increased net loss related to the retained interest in GO.com and increased minority interests. Excluding the retained interest in GO.com, net income and diluted earnings per share increased 16% and 14% to $884 million and $0.42, respectively. Increased operating income reflected higher Media Networks and Theme Parks and Resorts results, partially offset by lower Studio Entertainment and Consumer Products results. Corporate and other activities improved due to increased income from equity investments. Lower net interest expense reflected gains from the sale of investments and lower average debt balances in the current year, partially offset by higher interest rates and charges related to certain financial instruments in the current year. The increase in net loss related to the retained interest in GO.com reflected higher costs and expenses at GO.com, driven by continued investment in Internet operations and infrastructure, a non- cash charge of $31 million to reflect the impairment of certain intangible assets and one-time employee retention payments of $17 million, partially offset by Internet revenue growth. As noted above, the Company completed the sale of Fairchild Publications during the six months. The sale resulted in a pre-tax gain of $243 million. Income taxes on the transaction largely offset the pre-tax gain. On an as-reported basis, net income decreased 39% or $331 million and operating income increased 23% or $417 million. As-reported results reflect the items discussed above, as well as the impact of the Infoseek acquisition on the retained interest in GO.com and the sale of Fairchild Publications. Retained interest in GO.com reflects a gain on the sale of Starwave of $345 million in the prior-year period and Infoseek losses and incremental amortization of acquired intangible assets in the current period. The higher effective tax rate for the quarter reflects the income tax impact of the sale of Fairchild Publications. I-10 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Quarter
Three Months Ended March 31, ---------------------------------------------------------------------------------------------- Pro Forma As Reported 2000 1999 %Change 1999 ------------------- ------------------- ------------------- ------------------- (unaudited, in millions) Revenues: Media Networks $2,380 $1,825 30 % $1,825 Studio Entertainment 1,656 1,595 4 % 1,595 Theme Parks & Resorts 1,571 1,414 11 % 1,414 Consumer Products 599 592 1 % 641 ------ ------ ------ $6,206 $5,426 14 % $5,475 ====== ====== ====== Operating income /(1)/: Media Networks $ 537 $ 364 48 % $ 364 Studio Entertainment 3 96 (97)% 96 Theme Parks & Resorts 330 311 6 % 311 Consumer Products 85 79 8 % 89 Amortization of intangible assets (111) (106) (5)% (107) ------ ------ ------ $ 844 $ 744 13 % $ 753 ====== ====== ====== (1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization (EBITDA) is as follows: Media Networks $ 572 $ 395 $ 395 Studio Entertainment 16 111 111 Theme Parks & Resorts 463 424 424 Consumer Products 109 110 120 ------ ------ ------ $1,160 $1,040 $1,050 ====== ====== ======
Disney believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non- GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Three Months Ended March 31, ------------------------------------------------------------- 2000 1999 % Change ----------------- ----------------- ----------------- (unaudited, in millions) Revenues: Broadcasting $1,652 $1,225 35% Cable Networks 728 600 21% ------ ------ $2,380 $1,825 30% ====== ====== Operating income: Broadcasting $ 244 $ 136 79% Cable Networks 293 228 29% ------ ------ $ 537 $ 364 48% ====== ======
I-11 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Revenues increased 30%, or $555 million to $2.4 billion, driven by increases of $427 million from Broadcasting and $128 million at the Cable Networks. Increased Broadcasting revenues were driven by growth at the ABC television network, the Company's owned television stations and the radio networks and stations. Increases at the television network and owned television stations were driven by the Super Bowl, a strong advertising market, the continued success of Who Wants to Be a Millionaire and higher overall ratings on network programming. The strong advertising market also resulted in growth at the radio network and stations. Cable Network revenue growth was driven by increased advertising revenues due to a strong advertising market, as well as higher affiliate fees due to contractual rate adjustments and subscriber growth. Operating income increased 48%, or $173 million to $537 million, reflecting increased Broadcasting and Cable Network revenues, partially offset by higher costs. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 26% or $382 million, driven by higher sports programming costs, principally related to National Football League (NFL) and National Hockey League (NHL) broadcasts. In addition, higher costs and expenses reflected increased costs associated with a higher volume of network television production, as well as start-up costs associated with the January launch of SoapNet and various international Disney Channels. The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating Income from Cable Television Activities," which comprise the Cable Networks and the Company's cable equity investments:
Three Months Ended March 31, --------------------------------------------------------------- 2000 1999 % Change ----------------- ----------------- ----------------- (unaudited, in millions) Operating income: Cable Networks $ 293 $ 228 29 % Equity Investments: A&E, Lifetime and E! Entertainment Television 168 133 26 % Other 33 (10) n/m ----- ----- Operating income from cable television activities 494 351 41 % Partner share of operating income (169) (109) (55)% ----- ----- Disney share of operating income $ 325 $ 242 34 % ===== =====
Note: Operating Income from Cable Television Activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Disney share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Combined Statements of Income. Equity Investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Combined Statements of Income. Disney believes that Operating Income from Cable Television Activities provides additional information useful in analyzing the underlying business results. However, Operating Income from Cable Television Activities is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. Disney's share of Cable Television Operating Income increased 34%, or $83 million to $325 million, driven by growth at the Cable Networks and increased advertising revenues at Lifetime Television, The History Channel and A&E Television. I-12 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Studio Entertainment Revenues increased 4%, or $61 million to $1.7 billion, driven by growth of $105 million in worldwide theatrical motion picture distribution, partially offset by declines of $29 million in network television production and distribution and $13 million in domestic home video. Growth in worldwide theatrical motion picture distribution reflected the performance of Scream 3 and a stronger animated film slate domestically and Toy Story 2, Tarzan and The Sixth Sense internationally. The decline in network television production and distribution reflected Home Improvement in the prior-year quarter. In domestic home video, the success of Tarzan on VHS and DVD and The Sixth Sense on DVD faced difficult comparisons to the combination of Mulan, The Waterboy and 101 Dalmatians in the prior-year quarter. Operating income decreased 97%, or $93 million to $3 million, due to declines in domestic home video, driven primarily by cost increases, and domestic theatrical motion picture distribution, where cost increases exceeded revenue gains. These declines were partially offset by improvements in international theatrical motion picture distribution, where cost increases only partially offset higher revenues. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, participations expense, product costs, labor and leasehold expenses, increased 10% or $154 million. Higher costs in domestic home video were driven by participations expense for The Sixth Sense and higher distribution costs. Cost increases in domestic theatrical motion picture distribution reflect higher production cost amortization, write-downs on Mission to Mars and Cradle Will Rock and increased promotional costs for Cider House Rules. Production cost amortization decreased in network television production and distribution due to the production of Home Improvement in the prior-year quarter and the distribution of more classic animated titles in the current quarter, which have a lower amortization cost relative to recent titles. Participations expense increased in international theatrical motion picture distribution due to Toy Story 2. Theme Parks and Resorts Revenues increased 11%, or $157 million to $1.6 billion, driven by growth of $90 million at the Walt Disney World Resort, reflecting increased guest spending and record theme park attendance, $40 million at Disney Cruise Line, reflecting a full quarter of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior-year quarter, and increased guest spending at Disneyland. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration. At Disneyland, 45th Anniversary Celebration merchandise sales and enhanced merchandise and food and beverage offerings throughout the park contributed to higher guest spending. Operating income increased 6%, or $19 million to $330 million, driven by revenue growth at the Walt Disney World Resort, results at Disney Cruise Line and higher guest spending at Disneyland. Costs and expenses, which consist principally of labor, costs of merchandise, food and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sale expense, increased 13% or $138 million. Increased operating costs were driven by the ongoing Millennium Celebration, Disney Cruise Line operations and higher theme park attendance at the Walt Disney World Resort. Consumer Products Revenues increased 1%, or $7 million to $599 million, compared to prior- year pro forma amounts, driven by growth of $11 million in worldwide merchandise licensing and publishing, offset by declines of $4 million at the Disney Stores. Merchandise licensing revenues reflected increases domestically, driven by the timing of certain contractual annual minimum guarantee payments, partially offset by continued licensing softness in Europe. Disney Store revenues decreased due to lower comparative store sales, principally domestically. I-13 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On an as-reported basis, revenues decreased 7% or $42 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Operating income increased 8%, or $6 million to $85 million, compared to prior-year pro forma amounts, reflecting increases in domestic merchandise licensing and Disney Interactive, partially offset by continued licensing softness in Europe and lower comparative store sales at the Disney Stores, principally domestically. Improvements at Disney Interactive were driven by the success of the Who Wants to Be A Millionaire video game and the Toy Story 2 action game, as well as cost savings. Costs and expenses, which consist primarily of labor, product costs, including product development costs, distribution and selling expenses and leasehold expenses, were comparable to the prior year quarter. On an as-reported basis, operating income decreased 4% or $4 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Business Segment Results - Six Months
Six Months Ended March 31, --------------------------------------------------------------------------------------------- Pro Forma As Reported ------------------------------------------------------ --------------------------------- 2000 1999 % Change 2000 1999 -------------- -------------- -------------- -------------- ------------- (unaudited, in millions) Revenues: Media Networks $ 5,117 $ 4,133 24 % $ 5,117 $ 4,133 Studio Entertainment 3,255 3,368 (3)% 3,255 3,368 Theme Parks & Resorts 3,148 2,856 10 % 3,148 2,856 Consumer Products 1,502 1,550 (3)% 1,516 1,639 ------- ------- ------- ------- $13,022 $11,907 9 % $13,036 $11,996 ======= ======= ======= ======= Operating income /(1)/: Media Networks $ 1,179 $ 735 60 % $ 1,179 $ 735 Studio Entertainment 26 239 (89)% 26 239 Theme Parks & Resorts 693 654 6 % 693 654 Consumer Products 292 369 (21)% 293 382 Amortization of intangible assets (222) (213) (4)% (222) (215) ------- ------- ------- ------- 1,968 1,784 10 % 1,969 1,795 Gain on sale of Fairchild -- -- -- 243 -- ------- ------- ------- ------- $ 1,968 $ 1,784 10 % $ 2,212 $ 1,795 ======= ======= ======= ======= (1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows: Media Networks $1,248 $ 796 $ 1,248 $ 796 Studio Entertainment 54 269 54 269 Theme Parks & Resorts 965 887 965 887 Consumer Products 342 431 343 444 ------ ------ ------- ------- $2,609 $2,383 $ 2,610 $ 2,396 ====== ====== ======= =======
Disney believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non- GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. I-14 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Six Months Ended March 31, ------------------------------------------------------------- 2000 1999 % Change ----------------- ----------------- ----------------- (unaudited, in millions) Revenues: Broadcasting $3,367 $2,740 23% Cable Networks 1,750 1,393 26% ------ ------ $5,117 $4,133 24% ====== ====== Operating income: Broadcasting $ 589 $ 284 107% Cable Networks 590 451 31% ------ ------ $1,179 $ 735 60% ====== ======
Revenues increased 24%, or $984 million to $5.1 billion, driven by increases of $627 million from Broadcasting and $357 million at the Cable Networks. Increased Broadcasting revenues were driven by growth at the ABC television network, the Company's owned television stations and the radio networks and stations. Increases at the television network and owned television stations were driven by the Super Bowl, a strong advertising market, the continued success of Who Wants to Be a Millionaire and higher overall ratings on network programming, including Good Morning America. The strong advertising market also resulted in growth at the radio network and stations. Cable Network revenue growth was driven by increased advertising revenues due to a strong advertising market, as well as higher affiliate fees due to contractual rate adjustments and subscriber growth. Operating income increased 60%, or $444 million to $1.2 billion, reflecting increased Broadcasting and Cable Network revenues, partially offset by higher costs. Costs and expenses increased 16% or $540 million, driven by higher sports programming costs, principally related to NFL broadcasts. In addition, increased costs associated with a higher volume of network television production, as well as start-up costs associated with the January launch of SoapNet and various international Disney Channels, contributed to increased costs and expenses. There has been a continuing decline in viewership at all major broadcast networks, including ABC, reflecting the growth in the cable industry's share of viewers. In addition, there have been continuing increases in the cost of sports and other programming. During the second quarter of 1998, the Company entered into a new agreement with the NFL for the right to broadcast NFL football games on the ABC Television Network and ESPN. The contract provides for total payments of approximately $9 billion over an eight-year period, and commenced with the 1998 season. Under the terms of the contract, the NFL has the right to cancel the contract after five years. The programming rights fees under the new contract are significantly higher than those required by the previous contract and the fee increases exceed the estimated revenue increases over the contract term. The higher fees under the new contract reflect various factors, including increased competition for sports programming rights and an increase in the number of games to be broadcast by ESPN. Disney continues to pursue a variety of strategies, including marketing efforts, to reduce the impact of the higher costs. The contract's impact on the Disney's results over the remaining contract term is dependent upon a number of factors, including the strength of advertising markets, effectiveness of marketing efforts and the size of viewer audiences. I-15 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The cost of the NFL contract is charged to expense based on the ratio of each period's gross revenues to estimated total gross revenues over the non- cancelable contract period. Estimates of total gross revenues can change significantly and, accordingly, they are reviewed periodically and amortization is adjusted if necessary. Such adjustments could have a material effect on results of operations in future periods. The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating Income from Cable Television Activities," which comprise the Cable Networks and the Company's cable equity investments:
Six Months Ended March 31, --------------------------------------------------------------- 2000 1999 % Change ----------------- ----------------- ----------------- (unaudited, in millions) Operating income: Cable Networks $ 590 $ 451 31 % Equity Investments: A&E, Lifetime and E! Entertainment Television 318 235 35 % Other 51 7 n/m ----- ----- Operating Income from Cable Television Activities 959 693 38 % Partner share of operating income (318) (209) (52)% ----- ----- Disney share of operating income $ 641 $ 484 32 % ===== =====
Note: Operating Income from Cable Television Activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Disney share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Combined Statements of Income. Equity Investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Combined Statements of Income. Disney's share of cable television operating income increased 32%, or $157 million to $641 million, driven by growth at the Cable Networks and increased advertising revenues at E! Entertainment Television, Lifetime Television and The History Channel. Studio Entertainment Revenues decreased 3%, or $113 million to $3.3 billion, driven by declines of $187 million in worldwide home video, $52 million in network television production and distribution and $42 million in domestic theatrical motion picture distribution, partially offset by growth of $156 million in international theatrical motion picture distribution. Domestic home video revenues reflected fewer unit sales in the current year, as the prior year included the successful releases of Lion King II: Simba's Pride, Mulan, The Waterboy and 101 Dalmatians. The decline in network television production and distribution reflects the production of Home Improvement in the prior year. In domestic theatrical motion picture distribution, the success of Toy Story 2 and Scream 3 faced difficult comparisons to the prior year, which included The Waterboy, A Bug's Life and Enemy of the State. Growth in international theatrical motion picture distribution reflected the performance of Toy Story 2, Tarzan and The Sixth Sense. I-16 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Operating income decreased 89%, or $213 million to $26 million, due to declines in worldwide home video and domestic theatrical motion picture distribution, driven primarily by decreased revenues. These declines were partially offset by improvements in international theatrical motion picture distribution, where cost increases only partially offset higher revenues. Costs and expenses increased 3% or $100 million. Cost increases in international theatrical motion picture distribution reflected higher production cost amortization and increased participations expense due to The Sixth Sense and Toy Story 2. Production cost amortization decreased in network television production and distribution, reflecting the production of Home Improvement in the prior year, as well as the distribution of more classic animated titles in the current year, which have a lower amortization cost relative to recent titles. Increases in production and participation costs are reflective of industry trends: as competition for creative talent has increased, costs within the industry have increased at a rate significantly higher than inflation. Theme Parks and Resorts Revenues increased 10%, or $292 million to $3.1 billion, driven by growth of $179 million at the Walt Disney World Resort, reflecting increased guest spending, increased occupied room nights and record theme park attendance, $68 million at Disney Cruise Line reflecting a full six months of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior year, and increased guest spending at Disneyland. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration; and higher occupied room nights reflected the opening of the All Star Movies Resort, which opened in the second quarter of the prior year. At Disneyland, 45th Anniversary Celebration merchandise sales and enhanced merchandise and food and beverage offerings throughout the park contributed to higher guest spending. Operating income increased 6%, or $39 million to $693 million, driven by revenue growth at the Walt Disney World Resort, improved results at Disney Cruise Line and higher guest spending at Disneyland. Costs and expenses increased 11% or $253 million, driven by higher theme park attendance and the ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise Line operations. Consumer Products Pro forma revenues decreased 3%, or $48 million to $1.5 billion, driven by declines of $74 million in worldwide merchandise licensing and publishing, partially offset by growth of $17 million at Disney Interactive and $10 million at the Disney Stores. Lower merchandise licensing and publishing revenues were primarily attributable to declines domestically and in Europe. Disney Interactive revenue increases were driven by the successful release of the Who Wants to Be a Millionaire video game and the Toy Story 2 action game. Disney Store revenues increased due to continued worldwide expansion, partially offset by lower comparative store sales, principally domestically. On an as-reported basis, revenues decreased 8% or $123 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Pro forma operating income decreased 21%, or $77 million to $292 million, reflecting decreases in worldwide merchandise licensing, softer publishing results domestically and in Europe, and decreases at the Disney Stores, primarily domestically and in Japan, partially offset by increases at Disney Interactive. Costs and expenses increased 2%, or $29 million, primarily at the Disney Stores due to the addition of new stores and inventory liquidation efforts. I-17 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On an as-reported basis, operating income decreased 23% or $89 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. FINANCIAL CONDITION For the six months ended March 31, 2000, cash provided by operations increased $784 million to $3.3 billion, driven by higher amortization of television broadcast rights relative to cash payments, decreased income tax payments and higher film and television cost amortization. During the six months, Disney invested $1.3 billion to develop, produce and acquire rights to film and television properties, a decrease of $322 million, primarily due to a $310 million payment related to the acquisition of a film library in the prior year. During the six months, Disney invested $914 million in theme parks, resorts and other properties. These expenditures reflected continued expansion activities related to Disney's California Adventure and certain resort facilities at the Walt Disney World Resort. During the six months, Disney invested $91 million in Euro Disney S.C.A. to maintain its 39% ownership interest after a Euro Disney equity rights offering, the proceeds of which will be used to fund construction of a new theme park. Total commitments to purchase broadcast programming approximated $13.5 billion at March 31, 2000, including approximately $11.2 billion related to sports programming rights, primarily NFL, College Football, Major League Baseball and NHL. Substantially all of this amount is payable over the next six years. Disney expects the ABC Television Network, ESPN and the Company's television and radio stations to continue to enter into programming commitments to purchase the broadcast rights for various feature films, sports and other programming. During the six months, Disney repaid $1.8 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $263 million. These repayments were partially funded by proceeds of $985 million from various financing arrangements. Commercial paper borrowings outstanding as of March 31, 2000 totaled $1.7 billion, with maturities of up to one year, supported by bank facilities totaling $4.8 billion, which expire in one to five years and allow for borrowings at various interest rates. Disney also has the ability to borrow under a U.S. shelf registration statement and a euro medium- term note program, which collectively permit the issuance of up to approximately $4.6 billion of additional debt. Disney acquires shares of its stock on an ongoing basis and is authorized as of March 31, 2000 to purchase up to an additional 395 million shares. During the six months, a subsidiary of Disney acquired approximately 3.8 million shares of Disney common stock for approximately $115 million. Disney also used $434 million to fund dividend payments during the first quarter. Disney believes that its financial condition is strong and that its cash, other liquid assets, operating cash flows, access to equity capital markets and borrowing capacity, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses, including GO.com, and development of new projects. I-18 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) OTHER MATTERS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Disney will adopt SAB 101 no later than the first quarter of fiscal 2001 and is evaluating the effect that such adoption may have on its combined results of operations and financial position. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that the Company believes are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to the Company's stockholders. The Company believes that all statements that express expectations and projections with respect to future matters, including the launching or prospective development of new business initiatives; anticipated motion picture or television releases; and Internet or theme park and resort projects, are forward-looking statements within the meaning of the Act. These statements are made on the basis of management's views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management's expectations will necessarily come to pass. Factors that may affect forward-looking statements. For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance. A list of such factors is set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 1999 under the heading "Factors that may affect forward-looking statements." I-19 ANNEX II The [LOGO OF WALT DISNEY] Company GO.com CONDENSED COMBINED FINANCIAL INFORMATION GO.com (The Internet and Direct Marketing businesses of The Walt Disney Company) CONDENSED COMBINED STATEMENTS OF OPERATIONS In thousands, except per share data (unaudited)
Three Months Ended Six Months Ended March 31, March 31, ------------------------------------ ------------------------------------ 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Revenues $ 97,576 $ 41,567 $ 199,719 $ 118,153 Costs and expenses: Cost of revenues (88,208) (31,382) (168,139) (77,014) Sales and marketing (59,073) (16,698) (118,062) (41,374) Other operating expenses (67,787) (9,719) (114,999) (17,993) Depreciation (9,178) (1,898) (14,101) (3,572) Amortization of intangible assets (233,168) -- (347,684) -- Gain on sale of Starwave -- -- -- 345,048 --------- --------- --------- --------- Operating (loss) income (359,838) (18,130) (563,266) 323,248 Corporate and other activities (2,325) (4,176) (4,521) (10,118) Equity in Infoseek loss -- (76,760) (40,575) (172,078) Net interest expense (4,411) (2,107) (6,229) (3,232) --------- --------- --------- --------- (Loss) income before income taxes and minority interests (366,574) (101,173) (614,591) 137,820 Income tax benefit (expense) 63,051 36,935 101,494 (50,405) Minority interests 11,320 -- 18,428 252 --------- --------- --------- --------- Net (loss) income $(292,203) $ (64,238) $(494,669) $ 87,667 ========= ========= ========= ========= Net (loss) income attributed to: Disney common stock/(1)/ $(208,274) $ (64,238) $(370,067) $ 87,667 ========= ========= ========= ========= GO.com common stock $ (83,929) $ n/a $(124,602) $ n/a ========= ========= ========= ========= Loss per share attributed to GO.com: Diluted and Basic $(1.88) $ n/a $ (2.83) $ n/a ========= ========= ========= ========= Average number of common and common equivalent shares outstanding: Diluted and Basic 44,547 n/a 44,021 n/a ========= ========= ========= =========
________________ (1) Net (loss) income attributed to Disney common stock includes 100% of GO.com's losses through November 17, 1999, and approximately 72% thereafter. See Notes to Condensed Combined Financial Statements II-1 GO.com (The Internet and Direct Marketing businesses of The Walt Disney Company) CONDENSED COMBINED BALANCE SHEETS In thousands (unaudited)
March 31, September 30, 2000 1999 ------------------- ------------------- ASSETS Current Assets Cash and cash equivalents $ 4,053 $ 5,530 Receivables (net of allowance for doubtful accounts of $16,608 and $4,791) 62,429 17,763 Inventories 20,419 43,521 Deferred income taxes 39,265 8,993 Other assets 9,141 13,905 ---------- -------- Total current assets 135,307 89,712 Loan receivable from Disney 35,621 -- Investments 40,796 505,210 Deferred income taxes 18,135 -- Property and equipment, at cost 163,057 53,509 Accumulated depreciation (74,085) (18,928) ---------- -------- 88,972 34,581 Projects in progress -- 6,112 ---------- -------- 88,972 40,693 Intangible assets, net 1,957,017 64,389 Other assets 2,857 6,420 ---------- -------- $2,278,705 $706,424 ========== ======== LIABILITIES AND GROUP EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 128,796 $ 90,997 Current portion of borrowings 8,324 28,313 Unearned royalties and other advances 21,751 6,312 ---------- -------- Total current liabilities 158,871 125,622 Loan payable to Disney -- 19,000 Borrowings -- 90,350 Deferred income taxes -- 58,396 Other long term liabilities, unearned royalties and other advances 6,013 -- Minority interests 23,613 42,041 Group equity 2,090,208 371,015 ---------- -------- $2,278,705 $706,424 ========== ========
See Notes to Condensed Combined Financial Statements II-2 GO.com (The Internet and Direct Marketing businesses of The Walt Disney Company) CONDENSED COMBINED STATEMENTS OF CASH FLOWS In thousands (unaudited)
Six Months Ended March 31, ----------------------------------- 2000 1999 ----------- ----------- NET (LOSS) INCOME $(494,669) $ 87,667 OPERATING ITEMS NOT REQUIRING CASH OUTLAYS Depreciation 14,101 3,572 Amortization of intangibles 347,684 -- Charge for in-process research and development 23,322 -- Impairment charges 35,849 -- Gain on sale of Starwave (345,048) Equity in Infoseek loss 40,575 172,078 Minority interests (18,428) (252) Other 1,516 6,564 CHANGES IN ASSETS AND LIABILITIES 53,582 10,528 --------- --------- 498,201 (152,558) --------- --------- CASH PROVIDED BY (USED IN) OPERATIONS 3,532 (64,891) --------- --------- INVESTING ACTIVITIES Investments in property and equipment (19,779) (9,354) Acquisitions (net of cash acquired) 17,551 (70,013) Purchases of investments (36,570) -- --------- --------- (38,798) (79,367) --------- --------- FINANCING ACTIVITIES Capital contributions from Disney, net 21,514 143,527 Borrowings 6,928 -- Reduction of borrowings (1,711) (6,950) Stock options exercised 14,634 Reduction of borrowings from Disney, net (7,576) -- --------- --------- 33,789 136,577 --------- --------- Decrease in cash and cash equivalents (1,477) (7,681) Cash and cash equivalents, beginning of period 5,530 7,684 --------- --------- Cash and cash equivalents, end of period $ 4,053 $ 3 ========= =========
See Notes to Condensed Combined Financial Statements II-3 GO.com NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS 1. These condensed combined financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these condensed combined financial statements. Operating results for the quarter and six months are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. For further information, refer to the consolidated financial statements and footnotes thereto for the Company included in its Annual Report on Form 10-K for the year ended September 30, 1999 as well as the combined financial statements and footnotes thereto for Disney's existing Internet businesses (hereinafter referred to as GO.com) for the year ended September 30, 1998, included in the joint proxy statement/prospectus of The Walt Disney Company and Infoseek Corporation, filed on Form S-4 dated September 30, 1999 and the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999. 2. In November 1998, the Company acquired a 43% interest in Infoseek Corporation (Infoseek) in a transaction that, among other things, provided for the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by Infoseek. The Company recognized a $345 million non-cash gain on that transaction. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. The acquisition was effected by the creation and issuance of a new class of common stock, called GO.com common stock, in exchange for outstanding Infoseek shares, at an exchange rate of 1.15 shares of GO.com for each Infoseek share. Upon consummation of the acquisition, the Company combined its Internet and direct marketing businesses with Infoseek to create a single Internet and direct marketing business called GO.com. Disney retains an interest of approximately 71% in GO.com at March 31, 2000. Effective November 18, 1999, shares of the Company's existing common stock were reclassified as Disney common stock, to track the financial performance of the Company's businesses other than GO.com, plus Disney's retained interest in GO.com. The acquisition has been accounted for as a purchase, and the acquisition cost of $2.1 billion has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. Assets acquired totaled $130 million and liabilities assumed were $46 million. A total of approximately $2.0 billion, representing the excess of acquisition cost over the fair value of Infoseek's net assets, has been allocated to intangible assets, including goodwill of $1.9 billion, and is being amortized over two to nine years. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. During the quarter ended December 31, 1999, GO.com recorded charges for purchased in-process research and development expenditures totaling $23.3 million. II-4 GO.com NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS GO.com's combined results of operations have incorporated Infoseek's activity on a consolidated basis since November 18, 1999. The unaudited pro forma information below presents combined results of operations as if the Infoseek acquisition had occurred at the beginning of fiscal 1999. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had the Infoseek acquisition occurred at the beginning of fiscal 1999, nor is it necessarily indicative of future results.
Six Months Ended March 31, -------------------------------------------- 2000 1999 -------------------------------------------- (unaudited; in thousands, except per share data) Revenues $ 223,188 $ 182,390 Net loss (561,612) (488,560) Net loss attributed to GO.com common stock (159,947) (136,440) Diluted and basic loss per share attributed to GO.com common stock $ (3.63) $ (3.19)
Pro forma amounts for the six months exclude purchased in-process research and development expenditures of $23.3 million and $116.2 million, in 2000 and 1999, respectively, and the Starwave gain in fiscal 1999. 3. Diluted and basic loss per share amounts for the six months reflect the results of operations after November 17, 1999, the date the Company acquired the remaining interest in Infoseek that it did not already own and first issued GO.com common stock, through March 31, 2000. Diluted loss per share amounts are calculated using the treasury stock method and are based upon the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation in periods in which they would have an anti-dilutive effect. The difference between basic and diluted earnings per share is solely attributable to stock options, which are considered anti-dilutive when option exercise prices exceed the weighted average market price per share of common stock during the period. For the quarter and six months ended March 31, 2000, all GO.com stock options were anti-dilutive and, accordingly, options for 14.3 million and 12.4 million shares were excluded from the loss per share calculation, respectively. 4. During the quarter, GO.com recorded a $30.8 million non-cash impairment charge related to goodwill and other intangible assets for an Internet business. Based upon a significant decrease in revenues relative to budget, GO.com performed an impairment assessment in accordance with Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived Assets to Be Disposed Of, and accordingly, wrote the assets down to their fair value, which was determined based upon projected discounted future cash flows. 5. In April 2000, the Company's Board of Directors approved a share repurchase program for up to five million shares of GO.com common stock in the open market. No shares have been repurchased under this program. II-5 GO.com NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS 6. Comprehensive (loss) income is as follows:
Three Months Ended Six Months Ended March 31, March 31, --------------------------- ------------------------ (unaudited, in thousands) 2000 1999 2000 1999 --------- -------- --------- -------- Net (loss) income $(292,203) $(64,238) $(494,669) $87,667 Unrealized holding gain (loss), net 1,102 -- (1,444) -- --------- -------- --------- ------- Comprehensive (loss) income $(291,101) $(64,238) $(496,113) $87,667 ========= ======== ========= =======
7. The operating segments reported below are the segments of GO.com for which separate financial information is available and for which operating income or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.
Three Months Ended March 31, Six Months Ended March 31, ----------------------------- -------------------------- (unaudited, in thousands) 2000 1999 2000 1999 --------- -------- --------- -------- Revenues: Internet: Media $ 55,621 $ 9,375 $ 86,268 $ 18,766 Commerce 18,001 5,596 36,716 10,894 --------- -------- --------- -------- 73,622 14,971 122,984 29,660 Direct Marketing 23,954 26,596 76,735 88,493 --------- -------- --------- -------- $ 97,576 $ 41,567 $ 199,719 $118,153 ========= ======== ========= ======== Operating (loss) income: Internet $(118,936) $(12,012) $(201,145) $(20,615) Direct Marketing (7,734) (6,118) (14,437) (1,185) --------- -------- --------- -------- (126,670) (18,130) (215,582) (21,800) Amortization of intangible assets (233,168) -- (347,684) -- --------- -------- --------- -------- (359,838) (18,130) (563,266) (21,800) Gain on sale of Starwave -- -- -- 345,048 --------- -------- --------- -------- $(359,838) $(18,130) $(563,266) $323,248 ========= ======== ========= ========
II-6 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEASONALITY GO.com's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and six months ended March 31, 2000 for each business segment, and for GO.com as a whole, are not necessarily indicative of results to be expected for the full year. Internet commerce and Direct Marketing revenues fluctuate with seasonal consumer purchasing behavior, with a significant portion of annual revenues generated in the first quarter. Internet media revenues are influenced by advertiser demand and visitor traffic. RESULTS OF OPERATIONS On November 17, 1999, the stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. As more fully discussed in Note 2 to the Condensed Combined Financial Statements, the acquisition resulted in the creation of GO.com, which comprises all of Disney's Internet businesses and Infoseek, as well as Disney's direct marketing operations. The Company now separately reports operating results for GO.com and Disney, which comprises the Company's businesses other than GO.com, plus Disney's retained interest of approximately 71% as of March 31, 2000, in GO.com. GO.com's results of operations have incorporated Infoseek's activity since the date of the acquisition. To enhance comparability, operating results for the current six months and prior-year periods have been presented on a pro forma basis, which assumes that the acquisition of the remaining interest in Infoseek and subsequent creation of GO.com had occurred at the beginning of fiscal 1999. The pro forma results are not necessarily indicative of the combined results that would have occurred had the acquisition actually occurred at the beginning of fiscal 1999, nor are they necessarily indicative of future results. Pro forma operating loss for the six months excludes purchased in-process research and development expenditures of $23.3 million and $72.6 million in 2000 and 1999, respectively, and the Starwave gain in fiscal 1999. II-7 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Combined Results - Quarter
Three Months Ended March 31, ------------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 ---------- ---------- -------- ----------- (unaudited; in thousands, except per share data) Revenues $ 97,576 $ 70,797 38 % $ 41,567 Cost of revenues (88,208) (51,130) (73)% (31,382) Sales and marketing (59,073) (45,819) (29)% (16,698) Other operating expenses (67,787) (21,152) (220)% (9,719) Depreciation (9,178) (5,238) (75)% (1,898) --------- --------- --------- (126,670) (52,542) (141)% (18,130) Amortization of intangible assets (233,168) (227,419) (3)% -- --------- --------- --------- Operating loss (359,838) (279,961) (29)% (18,130) Corporate and other activities (2,325) (1,742) (33)% (4,176) Equity in Infoseek loss -- -- (76,760) Net interest (expense) income (4,411) 1,915 (330)% (2,107) --------- --------- --------- Loss before income taxes and minority interests (366,574) (279,788) (31)% (101,173) Income tax benefit 63,051 24,621 156 % 36,935 Minority interests 11,320 267 n/m -- --------- --------- --------- Net loss $(292,203) $(254,900) (15)% $ (64,238) ========= ========= ========= Net loss attributed to: Disney common stock $(208,274) $(183,714) (13)% $ (64,238) ========= ========= ========= GO.com common stock $ (83,929) $ (71,186) (18)% $ n/a ========= ========= ========= Loss per share attributed to GO.com common stock: Diluted and Basic $ (1.88) $ (1.66) (13)% $ n/a ========= ========= ========= Loss per share attributed to GO.com common stock excluding amortization of intangibles /(1)/: Diluted and Basic $ (0.47) $ (0.21) (124)% $ n/a ========= ========= ========= Average number of common and common equivalent shares outstanding /(2)/: Diluted and Basic 44,547 42,834 n/a ========= ========= =========
(1) GO.com believes that loss per share excluding amortization of intangible assets provides additional information useful in analyzing business results. Loss per share excluding amortization of intangible assets is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported loss per share. (2) Total shares amount to 155,091 and 153,378 shares for 2000 and 1999, respectively, including 110,544 shares attributable to Disney's retained interest in GO.com. Net loss, net loss attributable to GO.com common stock and diluted loss per share for the quarter increased 15% to $292.2 million, 18% to $83.9 million and 13% to $1.88, respectively, compared to the prior-year pro forma amounts. These increases were driven by increased operating losses in both the Internet and Direct Marketing segments, including increased amortization of intangible assets and an increase in net interest expense resulting from a non-cash charge to reflect the impairment of an investment. Higher amortization of intangible assets reflected incremental intangible assets associated with the acquisitions of interests in Soccernet.com and toysmart.com in the third and fourth quarters of fiscal 1999, respectively. These increases were partially offset by minority interest adjustments and a higher effective tax benefit rate reflecting tax benefits provided by losses from operations, which are larger relative to losses attributable to goodwill amortization which generate no tax benefits. II-8 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) As previously discussed, the Company completed its acquisition of Infoseek during the quarter ended December 31, 1999 (see Note 2 to the Condensed Combined Financial Statements). The acquisition resulted in a significant increase in intangible assets. Intangible assets are being amortized over periods ranging from two to nine years. The impact of amortization related to the November 1998 and November 1999 acquisitions is expected to be $454.9 million for the remaining six months of fiscal 2000, $707.0 million in 2001, $657.9 million in 2002, $91.6 million in 2003 and $13.4 million over the remainder of the amortization period. GO.com determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in- place workforce. In addition, GO.com considered the competitive environment and the rapid pace of technological change in the Internet industry. On as-reported basis, net loss increased by $228.0 million. The as-reported comparison reflects the items described above, as well as Infoseek losses and the incremental amortization of intangible assets in the current quarter related to the Infoseek acquisition, and equity in Infoseek losses in the prior-year quarter. II-9 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Combined Results - Six Months
Six Months Ended March 31, --------------------------------------------------------------------------------- Pro Forma As Reported -------------------------------------------- --------------------------- 2000 1999 % Change 2000 1999 ---------- ---------- -------- --------- ---------- (unaudited; in thousands, except per share data) Revenues $ 223,188 $ 182,390 22% $ 199,719 $ 118,153 Cost of revenues (184,688) (112,266) (65)% (168,139) (77,014) Sales and marketing (128,330) (101,875) (26)% (118,062) (41,374) Other operating expenses (103,457) (38,651) (168)% (114,999) (17,993) Depreciation (15,982) (10,298) (55)% (14,101) (3,572) --------- --------- --------- --------- (209,269) (80,700) (159)% (215,582) (21,800) Amortization of intangible assets (466,337) (454,838) (3)% (347,684) -- Gain on sale of Starwave -- -- -- -- 345,048 --------- --------- --------- --------- Operating (loss) income (675,606) (535,538) (26)% (563,266) 323,248 Corporate and other activities (4,130) (3,448) (20)% (4,521) (10,118) Equity in Infoseek loss -- -- -- (40,575) (172,078) Net interest (expense) income (4,801) 2,734 (276)% (6,229) (3,232) --------- --------- --------- --------- (Loss) income before income taxes and minority interests (684,537) (536,252) (28)% (614,591) 137,820 Income tax benefit (expense) 104,486 47,190 121% 101,494 (50,405) Minority interests 18,439 502 n/m 18,428 252 --------- --------- --------- --------- Net (loss) income $(561,612) $(488,560) (15)% $(494,669) $ 87,667 ========= ========= ========= ========= Net (loss) income attributed to: Disney common stock $(401,665) $(352,120) (14)% $(370,067) $ 87,667 ========= ========= ========= ========= GO.com common stock/(1)/ $(159,947) $(136,440) (17)% $(124,602) $ n/a ========= ========= ========= ========= Loss per share attributed to GO.com/(1)/: Diluted and Basic $ (3.63) $ (3.19) (14)% $ (2.83) $ n/a ========= ========= ========= ========= Loss per share attributed to GO.com excluding amortization of intangibles/(1)(2)/: Diluted and Basic $ (0.77) $ (0.33) (133)% $ (0.71) $ n/a ========= ========= ========= ========= Average number of common and common equivalent shares outstanding/(3)/: Diluted and Basic 44,021 42,834 44,021 n/a ========= ========= ========= =========
(1) As-reported amounts reflect the period from November 18, 1999 (date of issuance of GO.com common stock) through March 31, 2000. (2) GO.com believes that loss per share excluding amortization of intangible assets provides additional information useful in analyzing business results. Loss per share excluding amortization of intangible assets is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported loss per share. (3) Total shares amount to 154,565 and 153,378 shares for 2000 and 1999, respectively, including 110,544 shares attributable to Disney's retained interest in GO.com. II-10 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On a pro forma basis, net loss, net loss attributed to GO.com common stock and diluted loss per share increased 15% to $561.6 million, 17% to $159.9 million and 14% to $3.63, respectively. These increases were driven by higher operating losses in both the Internet and Direct Marketing segments, including increased amortization of intangible assets and an increase in net interest expense resulting from a non-cash charge to reflect the impairment of an investment. Higher amortization of intangible assets reflects incremental intangible assets associated with the acquisitions of interests in Soccernet.com and toysmart.com. These increases were partially offset by minority interest adjustments and a higher effective tax benefit rate reflecting tax benefits provided by losses from operations, which are larger relative to losses attributable to goodwill amortization which generate no tax benefits. On an as-reported basis, net loss, net loss attributed to GO.com common stock and diluted loss per share were $494.7 million, $124.6 million and $2.83, respectively. As-reported results reflect the items described above, decreased corporate and other activities due to a change in the manner of accounting for Starwave and related businesses, the gain on the sale of Starwave in the first quarter of fiscal 1999 and the consolidation of Infoseek's operations beginning November 18, 1999. Costs and expenses for the remainder of the year are expected to reflect continued investment in infrastructure and new initiatives and incremental marketing and sales expenditures. Business Segment Results - Quarter
Three Months Ended March 31, ------------------------------------------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 ------------------- ------------------- ------------------- ---------------- (unaudited, in thousands) Revenues: Internet: Media $ 55,621 $ 34,739 60 % $ 9,375 Commerce and other 18,001 9,462 90 % 5,596 --------- --------- -------- 73,622 44,201 67 % 14,971 Direct Marketing 23,954 26,596 (10)% 26,596 --------- --------- -------- $ 97,576 $ 70,797 38 % $ 41,567 ========= ========= ======== Operating loss: /(1)/ Internet $(118,936) $ (46,424) (156)% $(12,012) Direct Marketing (7,734) (6,118) (26)% (6,118) --------- --------- -------- (126,670) (52,542) (141)% (18,130) Amortization of intangible assets (233,168) (227,419) (3)% - --------- --------- -------- $(359,838) $(279,961) (29)% $(18,130) ========= ========= ========
(1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization (EBITDA) is as follows: Internet $(110,628) $ (41,699) $(10,627) Direct Marketing (6,864) (5,605) (5,605) --------- -------- -------- $(117,492) $ (47,304) $(16,232) ========= ======== ========
GO.com believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non- GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating loss. II-11 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Internet Revenues increased 67%, or $29.4 million to $73.6 million compared to prior-year pro forma amounts, driven by growth in both media and commerce revenues. Media revenues, which consist primarily of advertising and sponsorship agreements, licensing of site content and subscriptions from member-only sites that provide subscribers with exclusive content and games, increased 60%, or $20.9 million to $55.6 million, reflecting higher advertising and sponsorship revenues driven by increased advertiser demand and higher online site traffic at the ABC-branded Web sites, ESPN.com, the GO.com portal, Family.com and Disney.com. Commerce revenues increased 90%, or $8.5 million to $18.0 million, driven by increased sales at DisneyStore.com, growth in intranet search software sales, operations at toysmart.com which was acquired during the fourth quarter of fiscal 1999, and increased sales at DisneyTravel.com. Commerce revenue growth reflected a 111% increase in the average number of monthly orders across GO.com's commerce sites due to increased site traffic. On an as-reported basis, revenues increased 392% or $58.7 million, reflecting the items described above, as well as the operations of Infoseek, which were consolidated into GO.com beginning November 18, 1999. Operating loss increased 156%, or $72.5 million to $118.9 million compared to prior-year pro forma amounts, reflecting higher costs and expenses, partially offset by increased revenues. Costs and expenses, which consists primarily of cost of revenues, sales and marketing, other operating expenses and depreciation, increased 112%, or $101.9 million. Cost of revenues, which consist primarily of employee compensation, third-party development and engineering costs, hosting and delivery costs associated with GO.com's Web sites, and the cost of commerce merchandise, increased primarily due to continued investment in Web site operations and infrastructure, new product initiatives, continued product development, and one-time employee retention payments of $7.9 million required by the 1999 Infoseek acquisition agreement. Sales and marketing expenses increased due to operations at toysmart.com, expanded promotion of commerce businesses and one-time employee retention payments of $5.2 million, partially offset by reduced marketing at the GO.com portal. Increased other operating expenses were driven by a non-cash charge of $30.8 million to reflect the impairment of certain intangible assets, continued infrastructure investment, one-time employee retention payments of $4.2 million and operations at toysmart.com. On an as-reported basis, operating loss increased $106.9 million to $118.9 million, reflecting the items described above, as well as losses at Infoseek, which was consolidated into GO.com beginning November 18, 1999. Direct Marketing Revenues decreased 10%, or $2.6 million to $24.0 million due principally to lower catalog response rates. Lower revenues also reflected inventory liquidation initiatives during the quarter. Operating loss increased 26%, or $1.6 million to $7.7 million, reflecting a 10% decline in revenues partially offset by a decrease in costs and expenses. Costs and expenses, which consist primarily of costs of goods sold reported as cost of revenues, selling and marketing, other operating expenses and depreciation decreased 3% or $1.0 million, principally due to lower cost of revenues as a result of lower sales volumes. II-12 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Six Months
Six Months Ended March 31, ------------------------------------------------------------------------------------------------ Pro Forma As Reported --------------------------------------------------------- --------------------------------- 2000 1999 % Change 2000 1999 --------------- --------------- --------------- --------------- ------------ (unaudited, in thousands) Revenues: Internet: Media $ 108,026 $ 76,325 42 % $ 86,268 $ 18,766 Commerce and other 38,427 17,572 119 % 36,716 10,894 --------- --------- --------- -------- 146,453 93,897 56 % 122,984 29,660 Direct Marketing 76,735 88,493 (13)% 76,735 88,493 --------- --------- --------- -------- $ 223,188 $ 182,390 22 % $ 199,719 $118,153 ========= ========= ========= ======== Operating (loss) income: /(1)/ Internet $(194,832) $ (79,515) (145)% $(201,145) $(20,615) Direct Marketing (14,437) (1,185) n/m (14,437) (1,185) --------- --------- --------- -------- (209,269) (80,700) (159)% (215,582) (21,800) Amortization of intangible assets (466,337) (454,838) (3)% (347,684) -- --------- --------- --------- --------- (675,606) (535,538) (26)% (563,266) (21,800) Gain on sale of Starwave -- -- -- 345,048 --------- --------- --------- -------- $(675,606) $(535,538) (26)% $(563,266) $323,248 ========= ========= ========= ========
(1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows: Internet $(180,672) $ (70,207) $(188,866) $(18,033) Direct Marketing (12,615) (195) (12,615) (195) --------- --------- --------- -------- $(193,287) $ (70,402) $(201,481) $(18,228) ========= ========= ========= ========
GO.com believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non- GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating loss. Internet Pro forma revenues increased 56%, or $52.6 million to $146.5 million, reflecting growth in both media and commerce revenues. Media revenues increased 42%, or $31.7 million to $108.0 million, reflecting higher advertising and sponsorship revenues driven by increased advertiser demand and higher online site traffic at ESPN.com, certain ABC-branded sites, the GO.com portal, Disney.com, and Family.com. Commerce revenues increased 119%, or $20.9 million to $38.4 million, driven by strong holiday-season sales at the DisneyStore.com, operations at toysmart.com, which was acquired during the fourth quarter of 1999, growth in intranet search software sales, and increased sales at DisneyTravel.com. Commerce revenue growth reflected a 175% increase in the average number of monthly orders across GO.com's commerce sites due to increased site traffic. On an as-reported basis, revenues increased 315%, or $93.3 million to $123.0 million, reflecting the items described above, as well as the operations of Infoseek, which were consolidated into GO.com beginning November 18, 1999. Pro forma operating loss increased 145%, or $115.3 million to $194.8 million, reflecting higher costs and expenses which increased 97% or $167.9 million, partially offset by increased revenues. Cost of revenues increased primarily due to continued investment in Web site operations and infrastructure, new product initiatives, continued product development, operations at toysmart.com and a one-time employee retention payment of $7.9 million II-13 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) required by the 1999 Infoseek acquisition agreement. Sales and marketing expenses increased due to operations at toysmart.com, expanded promotion of commerce businesses, and one-time employee retention payments of $5.2 million, partially offset by reduced marketing at the GO.com portal. Increased other operating expenses were driven by a non-cash charge of $30.8 million to reflect the impairment of goodwill and certain intangible assets, continued infrastructure investment, one-time employee retention payments of $4.2 million and operations at toysmart.com. On an as-reported basis, operating loss increased $180.5 million to $201.1 million, reflecting the items described above, as well as losses at Infoseek, which was consolidated into GO.com beginning November 18, 1999. Direct Marketing Revenues decreased 13%, or $11.8 million to $76.7 million due principally to lower catalog response rates. Lower response rates reflected a higher proportion of mailings targeting new customers during the six months. Lower revenues also reflected inventory liquidation initiatives. Operating loss increased $13.3 million to $14.4 million, compared to $1.2 million in the prior-year reflecting a 13% decline in revenues and a 2% or $1.5 million increase in costs and expenses. Cost of revenues declined due to lower sales volumes, while sales and marketing increased due primarily to an increase in the volume of catalogs mailed. FINANCIAL CONDITION GO.com's cash needs are funded by Disney and such funding is accounted for as either a capital contribution from Disney (i.e., as an increase in GO.com's group equity and Disney's retained interest in GO.com), or as a loan. Disney may account for all cash transfers from Disney or GO.com to or for the account of the other as inter-group loans, other than transfers in return for assets or services rendered or transfers in respect of Disney's retained interest that correspond to dividends paid on GO.com common stock. These loans bear interest at the rate at which Disney could borrow such funds. The Company's board of directors has discretion to determine, in the exercise of its business judgment, that a given transfer or type of transfer should be accounted for as a long-term loan, a capital contribution increasing Disney's retained interest in GO.com or a return of capital reducing Disney's retained interest in GO.com. The Company has agreed, however, that advances from Disney to GO.com up to $250.0 million on a cumulative basis will be accounted for as short-term or long-term loans at interest rates at which Disney could borrow such funds and will not be accounted for as capital contributions. For the six months ended March 31, 2000, cash provided by operations of $3.5 million was driven by tax benefits attributed to GO.com's operations, partially offset by higher pre-tax losses before non-cash items. From October 1, 1999 through the November 17, 1999 Infoseek acquisition, GO.com received $21.5 million in capital contribution funding from Disney. GO.com made payments to Disney during the six months ended March 31, 2000 totaling $7.6 million representing cash that was transferred to Disney pursuant to Disney's treasury and cash management policies. II-14 GO.com MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) OTHER MATTERS In April 2000, the Financial Accounting Standards Board Emerging Issues Task Force issued EITF Issue No. 00-2 Accounting for Web Site Development Costs. GO.com will adopt the consensus in the Issue in the fourth quarter of fiscal 2000, and is evaluating the effect that such adoption may have on its combined results of operations and financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. GO.com will adopt SAB 101 no later than the first quarter of fiscal 2001 and is evaluating the effect that such adoption may have on its combined results of operations and financial position. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of GO.com. GO.com and its representatives may from time to time make written or oral statements that GO.com believes are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to GO.com stockholders. GO.com believes that all statements that express expectations and projections with respect to future matters, including the launching or prospective development of new business initiatives; and Internet projects, are forward-looking statements within the meaning of the Act. These statements are made on the basis of management's views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management's expectations will necessarily come to pass. Factors that may affect forward-looking statements . A wide range of factors could materially affect future developments and performance. A list of such factors is set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 1999 under the heading "Factors that may affect forward-looking statements." II-15 Annex III The [LOGO OF WALT DISNEY] Company THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED FINANCIAL INFORMATION THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME In millions, except per share data (unaudited)
Three Months Ended Six Months Ended March 31, March 31, ------------------------------------ ------------------------------------ 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Revenues $ 6,303 $ 5,516 $ 13,235 $ 12,113 Costs and expenses (5,475) (4,674) (11,260) (10,125) Amortization of intangible assets (344) (107) (570) (215) Gain on sale of Fairchild -- -- 243 -- Gain on sale of Starwave -- -- -- 345 ------- ------- -------- -------- Operating income 484 735 1,648 2,118 Corporate and other activities (38) (70) (35) (108) Equity in Infoseek loss -- (75) (41) (159) Net interest expense (126) (174) (323) (338) ------- ------- -------- -------- Income before income taxes and minority interests 320 416 1,249 1,513 Income taxes (223) (169) (813) (622) Minority interests (20) (21) (44) (43) ------- ------- -------- -------- Net income $ 77 $ 226 $ 392 $ 848 ======= ======= ======== ======== Earnings (loss) attributed to: Disney common stock/(1)/ $ 161 $ 226 $ 517 $ 848 GO.com common stock (84) -- (125) -- ------- ------- -------- -------- $ 77 $ 226 $ 392 $ 848 ======= ======= ======== ======== Earnings (loss) per share attributed to: Disney/(1)/ Diluted $ 0.08 $ 0.11 $ 0.25 $ 0.41 ======= ======= ======== ======== Basic $ 0.08 $ 0.11 $ 0.25 $ 0.41 ======= ======= ======== ======== GO.com (basic and diluted) $ (1.88) n/a $ (2.83) n/a ======= ======= ======== ======== Average number of common and common equivalent shares outstanding: Disney Diluted 2,103 2,089 2,092 2,083 ======= ======= ======== ======== Basic 2,069 2,054 2,067 2,052 ======= ======= ======== ======== GO.com (basic and diluted) 45 n/a 44 n/a ======= ======= ======== ========
________________ (1) Including Disney's retained interest in GO.com. Disney's retained interest in GO.com reflects 100% of GO.com's losses through November 17, 1999, and approximately 72% thereafter. See Notes to Condensed Consolidated Financial Statements III-1 THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS In millions, except share data March 31, September 30, 2000 1999 ----------------------------- (unaudited) ASSETS Current Assets Cash and cash equivalents $ 860 $ 414 Receivables 3,979 3,633 Inventories 727 796 Film and television costs 4,001 4,071 Deferred income taxes 635 607 Other assets 742 679 ------- ------- Total current assets 10,944 10,200 Film and television costs 2,534 2,489 Investments 2,037 2,434 Theme parks, resorts and other property, at cost Attractions, buildings and equipment 16,192 15,869 Accumulated depreciation (6,659) (6,220) ------- ------- 9,533 9,649 Projects in progress 1,767 1,272 Land 481 425 ------- ------- 11,781 11,346 Intangible assets, net 17,002 15,695 Other assets 1,285 1,515 ------- ------- $45,583 $43,679 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 5,117 $ 4,588 Current portion of borrowings 2,837 2,415 Unearned royalties and other advances 892 704 ------- ------- Total current liabilities 8,846 7,707 Borrowings 7,706 9,278 Deferred income taxes 2,558 2,660 Other long term liabilities, unearned royalties and other advances 2,723 2,711 Minority interests 394 348 Stockholders' Equity Preferred stock, $.01 par value Authorized--100 million shares, Issued--None Common Stock Common stock--Disney, $.01 par value Authorized--3.6 billion, Issued--2.1 billion 9,574 9,324 Common stock--GO.com, $.01 par value Authorized--1.0 billion, Issued--45.0 million 2,177 -- Retained earnings 12,239 12,281 Cumulative translation and other (19) (25) ------- ------- 23,971 21,580 Treasury stock, at cost, 29 million shares (605) (605) Shares held by TWDC Stock Compensation Fund II, at cost--0.4 million shares (10) -- ------- ------- 23,356 20,975 ------- ------- $45,583 $43,679 ======= =======
See Notes to Condensed Consolidated Financial Statements III-2 THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS In millions (unaudited)
Six Months Ended March 31, -------------------------------- 2000 1999 -------- -------- NET INCOME $ 392 $ 848 OPERATING ITEMS NOT REQUIRING CASH OUTLAYS Amortization of film and television costs 1,518 1,287 Depreciation 457 408 Amortization of intangibles 570 215 Gain on sale of Fairchild (243) -- Gain on sale of Starwave -- (345) Minority interests 44 43 Equity in Infoseek loss 41 159 Other 42 5 CHANGES IN ASSETS AND LIABILITIES 510 (141) -------- -------- 2,939 1,631 -------- -------- CASH PROVIDED BY OPERATIONS 3,331 2,479 -------- -------- INVESTING ACTIVITIES Dispositions 688 -- Film and television costs (1,303) (1,625) Investments in theme parks, resorts and other property (934) (737) Investment in Euro Disney (91) -- Acquisitions (net of cash acquired) 18 (230) Other 47 2 -------- -------- (1,575) (2,590) -------- -------- FINANCING ACTIVITIES Commercial paper borrowings, net (263) 134 Other borrowings 992 1,318 Reduction of borrowings (1,772) (758) Dividends (434) -- Repurchases of Disney common stock (115) (19) Exercise of stock options and other 282 99 -------- -------- (1,310) 774 -------- -------- Increase in cash and cash equivalents 446 663 Cash and cash equivalents, beginning of period 414 127 -------- -------- Cash and cash equivalents, end of period $ 860 $ 790 ======== ========
See Notes to Condensed Consolidated Financial Statements III-3 THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. In December 1999, DVD Financing, Inc. (DFI), a subsidiary of Disney Vacation Development, Inc. and an indirect subsidiary of the Company, completed a receivables sale transaction. In connection with this sale, DFI prepares separate financial statements, although its separate assets and liabilities are also consolidated in these financial statements. Operating results for the quarter and six months are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. Certain reclassifications have been made in the fiscal 1999 financial statements to conform to the fiscal 2000 presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. 2. In November 1998, the Company acquired a 43% interest in Infoseek Corporation (Infoseek) in a transaction that, among other things, provided for the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by Infoseek. The Company recognized a $345 million non-cash gain on that transaction. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. The acquisition was effected by the creation and issuance of a new class of common stock, called GO.com common stock, in exchange for outstanding Infoseek shares, at an exchange rate of 1.15 shares of GO.com for each Infoseek share. Upon consummation of the acquisition, the Company combined its Internet and direct marketing businesses with Infoseek to create a single Internet and direct marketing business called GO.com. Disney retains an interest of approximately 71% in GO.com at March 31, 2000. Effective November 18, 1999, shares of the Company's existing common stock were reclassified as Disney common stock, to track the financial performance of the Company's businesses other than GO.com, plus Disney's retained interest in GO.com. The acquisition has been accounted for as a purchase, and the acquisition cost of $2.1 billion has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. Assets acquired totaled $130 million and liabilities assumed were $46 million. A total of approximately $2.0 billion, representing the excess of acquisition cost over the fair value of Infoseek's net assets, has been allocated to intangible assets, including goodwill of $1.9 billion, and is being amortized over two to nine years. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. In November 1999, the Company sold Fairchild Publications which it had acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain of $243 million. The Company's consolidated results of operations have incorporated Infoseek's activity, on a consolidated basis, from November 18, 1999 and the activity of Fairchild Publications through the date of its disposal. The unaudited pro forma information below presents combined results of operations as if the Infoseek acquisition and the disposition of Fairchild Publications had occurred at the beginning of fiscal 1999. The unaudited pro forma information is not necessarily indicative of results of operations had the Infoseek acquisition and the disposition of Fairchild Publications occurred at the beginning of fiscal 1999, nor is it necessarily indicative of future results. III-4 THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Six Months Ended March 31, -------------------------- 2000 1999 ---------- ---------- (unaudited; in millions, except per share data) Revenues $ 13,245 $ 12,089 Net income 323 274 Diluted earnings (loss) per share Disney $ 0.23 $ 0.20 GO.com $ (3.63) $ (3.19)
Pro forma amounts for the six-month periods exclude purchased in-process research and development expenditures of $23 million and $117 million in 2000 and 1999, respectively, the gain on the sale of Fairchild Publications in fiscal 2000 and the Starwave gain in fiscal 1999. 3. During the six months, the Company repaid $1.8 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $263 million. These repayments were partially funded by proceeds of $992 million from various financing arrangements having effective interest rates ranging from 5.96% to 6.32% and maturities in fiscal 2002 through 2015. 4. During 1998, the Company's Board of Directors decided to move to an annual, rather than quarterly, dividend policy to reduce costs and simplify payments to stockholders. During the first quarter of fiscal 2000, the Company paid a dividend of $434 million ($0.21 per share) applicable to fiscal 1999. 5. Diluted earnings per share amounts are calculated using the treasury stock method and are based upon the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation in periods in which they would have an anti- dilutive effect. The difference between basic and diluted earnings per share is solely attributable to stock options, which are considered anti-dilutive when option exercise prices exceed the weighted average market price per share of common stock during the period. For the three months ended March 31, 2000 and 1999, options for 12 million and 17 million shares, respectively, were excluded from the Disney diluted earnings per share calculation. For the six-month periods, options for 32 million and 22 million shares, respectively, were excluded. For the quarter and six months ended March 31, 2000, all GO.com stock options were anti-dilutive and, accordingly, options for 14 million and 12 million shares, respectively, were excluded from the GO.com earnings per share calculation. Net loss per share attributed to GO.com reflects the results of operations after November 17, 1999, the date the Company acquired the remaining interest in Infoseek that it did not already own and first issued GO.com common stock. 6. During the six months, a subsidiary of the Company repurchased 3.8 million shares of Disney common stock for approximately $115 million. Under its share repurchase program, the Company is authorized to purchase up to an additional 395 million shares. The Company evaluates share repurchase decisions on an ongoing basis, taking into account borrowing capacity, management's target capital structure, and other investment opportunities. In April of the current year, the Company's Board of Directors also approved a share repurchase program for up to five million shares of GO.com common stock in the open market. No shares have been repurchased under this program. III-5 THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Comprehensive income is as follows:
Three Months Ended Six Months Ended March 31, March 31, ----------------------------------- ---------------------------------- (unaudited, in millions) 2000 1999 2000 1999 --------------- --------------- --------------- -------------- Net income $ 77 $ 226 $ 392 $ 848 Cumulative translation and other adjustments, net of tax 13 (3) 6 (11) ----- ----- ----- ----- Comprehensive income $ 90 $ 223 $ 398 $ 837 ===== ===== ===== =====
8. The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating income or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. During the first quarter of the current year, the Company completed the merger of television production activities of the Walt Disney Studios with those of the ABC Television Network. Accordingly, television production activities formerly reported in Studio Entertainment are now reported in the Media Networks segment. All prior-year amounts have been restated to reflect the current presentation.
Three Months Ended Six Months Ended March 31, March 31, -------------------------- --------------------------- (unaudited, in millions) 2000 1999 2000 1999 --------- --------- --------- --------- Revenues: Media Networks $2,380 $1,825 $ 5,117 $ 4,133 -------- ------ ------- ------- Studio Entertainment Third parties 1,631 1,579 3,206 3,332 Intersegment 25 16 49 36 -------- ------ ------- -------- 1,656 1,595 3,255 3,368 -------- ------ ------- -------- Theme Parks & Resorts 1,571 1,414 3,148 2,856 -------- ------ ------- -------- Consumer Products Third parties 624 657 1,565 1,675 Intersegment (25) (16) (49) (36) -------- ------ ------- -------- 599 641 1,516 1,639 -------- ------ ------- -------- GO.com 97 41 199 117 -------- ------ ------- -------- $6,303 $5,516 $13,235 $ 12,113 ======== ====== ======= ======== Operating income (loss): Media Networks $ 537 $ 364 $ 1,179 $ 735 Studio Entertainment 3 96 26 239 Theme Parks & Resorts 330 311 693 654 Consumer Products 85 89 293 382 GO.com (127) (18) (216) (22) Amortization of intangible assets (344) (107) (570) (215) -------- ------ ------- -------- 484 735 1,405 1,773 Gain on sale of Fairchild -- -- 243 -- Gain on sale of Starwave -- -- -- 345 -------- ------ ------- -------- $ 484 $ 735 $ 1,648 $ 2,118 ======== ====== ======= ========
III-6 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEASONALITY The Company's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and six months ended March 31, 2000 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year. Media Networks revenues are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall. Studio Entertainment revenues fluctuate based upon the timing of theatrical motion picture and home video releases. Release dates for theatrical and home video products are determined by several factors, including timing of vacation and holiday periods and competition in the market. Theme Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring holiday periods. Consumer Products revenues are influenced by seasonal consumer purchasing behavior and the timing of animated theatrical releases. GO.com revenues for the Direct Marketing and Internet commerce businesses fluctuate as a result of seasonal consumer purchasing behavior, with a significant portion of annual revenues generated in the first quarter. Internet media revenues are influenced by advertiser demand and visitor traffic. RESULTS OF OPERATIONS On November 4, 1999, the Company sold Fairchild Publications, which was acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. To enhance comparability, certain information for the current six months and prior- year periods is presented on a pro forma basis, which assumes that these events had occurred at the beginning of fiscal 1999. The pro forma results are not necessarily indicative of the consolidated results that would have occurred had these events actually occurred at the beginning of fiscal 1999, nor are they necessarily indicative of future results. Pro forma operating income excludes purchased in-process research and development expenditures of $23 million and $73 million for the six months ended March 31, 2000 and 1999, respectively. III-7 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Consolidated Results - Quarter
Three Months Ended March 31, ------------------------------------------------------------------------------------------ Pro Forma As Reported 2000 1999 % Change 1999 ------------------- ------------------- ------------------- --------------- (unaudited, in millions) Revenues $ 6,303 $ 5,496 15 % $ 5,516 Costs and expenses (5,475) (4,698) (17)% (4,674) Amortization of intangible assets (344) (333) (3)% (107) ------- ------- ------- Operating income 484 465 4 % 735 Corporate and other activities (38) (66) 42 % (70) Equity in Infoseek loss -- -- (75) Net interest expense (126) (169) 25 % (174) ------- ------- ------- Income before income taxes and minority interests 320 230 39 % 416 Income taxes (223) (183) (22)% (169) Minority interests (20) (21) 5 % (21) ------- ------- ------- Net income $ 77 $ 26 n/m $ 226 ======= ======= =======
Net income for the quarter increased to $77 million compared to prior-year pro forma net income of $26 million, driven by decreased net interest expense, improvements in corporate and other activities and higher operating income. Lower net interest expense reflected gains from the sale of investments and lower average debt balances in the current quarter, partially offset by higher interest rates in the current quarter. Corporate and other activities improved due to increased income from equity investments. Increased operating income reflected higher Media Networks, Theme Parks and Resorts and Consumer Products results, partially offset by lower Studio Entertainment and GO.com results and increased amortization of intangible assets. As previously noted, the Company completed its acquisition of Infoseek during the first quarter (see Note 2 to the Condensed Consolidated Financial Statements). The acquisition resulted in a significant increase in intangible assets. Intangible assets are being amortized over periods ranging from two to nine years. The impact of amortization related to the November 1998 and November 1999 acquisitions is expected to be $455 million for the remaining six months of fiscal 2000, $707 million in 2001, $658 million in 2002, $92 million in 2003 and $13 million over the remainder of the amortization period. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in- place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. On an as-reported basis, net income decreased from $226 million to $77 million. The as-reported comparison reflects the items described above, as well as Infoseek losses and the incremental amortization of intangible assets related to the Infoseek acquisition in the current quarter, and equity in Infoseek losses in the prior-year quarter. The higher effective tax rate for the current quarter reflects the impact of incremental non-deductible amortization of intangible assets related to the Infoseek acquisition. III-8 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Consolidated Results - Six Months
Six Months Ended March 31, ------------------------------------------------------------------------------- Pro Forma As Reported ----------------------------------------- ----------------------------- 2000 1999 % Change 2000 1999 -------- -------- ------------ --------- -------- (unaudited, in millions) Revenues $ 13,245 $ 12,089 10 % $ 13,235 $ 12,113 Costs and expenses (11,265) (10,173) (11)% (11,260) (10,125) Amortization of intangible assets (688) (667) (3)% (570) (215) Gain on sale of Fairchild -- -- -- 243 -- Gain on sale of Starwave -- -- -- -- 345 -------- -------- -------- -------- Operating income 1,292 1,249 3 % 1,648 2,118 Corporate and other activities (33) (89) 63 % (35) (108) Equity in Infoseek loss -- -- -- (41) (159) Net interest expense (319) (331) 4 % (323) (338) -------- -------- -------- -------- Income before income taxes and minority interests 940 829 13 % 1,249 1,513 Income taxes (573) (512) (12)% (813) (622) Minority interests (44) (43) (2)% (44) (43) -------- -------- -------- -------- Net income $ 323 $ 274 18 % $ 392 $ 848 ======== ======== ======== ========
On a pro forma basis, net income for the six months increased 18%, or $49 million to $323 million, driven by improvements in corporate and other activities, higher operating income and decreased net interest expense. Corporate and other activities improved due to increased income from equity investments. Increased operating income reflected higher Media Networks and Theme Parks and Resorts results, partially offset by lower Studio Entertainment, Consumer Products and GO.com results and increased amortization of intangible assets. Lower net interest expense reflected gains from the sale of investments and lower average debt balances in the current period, partially offset by higher interest rates and charges related to certain financial instruments in the current period. As noted above, the Company completed the sale of Fairchild Publications during the first quarter. The sale resulted in a pre-tax gain of $243 million. Income taxes on the transaction largely offset the pre-tax gain. On an as-reported basis, net income decreased 54% or $456 million and operating income decreased 22% or $470 million. The as-reported results reflect the items described above, as well as the impact of the sale of Fairchild Publications and equity in Infoseek loss in the current six months and the gain on the sale of Starwave and higher Infoseek equity losses in the prior-year period. The prior-year equity in Infoseek loss includes a charge for purchased in-process research and development expenditures of $44 million. Current-period as-reported operating income and net income also reflect higher Infoseek losses and increased amortization of intangible assets resulting from the Infoseek acquisition and a $23 million charge for purchased in-process research and development expenditures. The higher effective tax rate for the current six months reflects the income tax impact of the sale of Fairchild Publications and the impact of higher non-deductible amortization of intangible assets. III-9 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Quarter
Three Months Ended March 31, ----------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 ------ --------- ---------- ----------- (unaudited, in millions) Revenues: Media Networks $2,380 $1,825 30 % $1,825 Studio Entertainment 1,656 1,595 4 % 1,595 Theme Parks & Resorts 1,571 1,414 11 % 1,414 Consumer Products 599 592 1 % 641 GO.com 97 70 39 % 41 ------ ------ ------ $6,303 $5,496 15 % $5,516 ====== ====== ====== Operating income (loss): /(1)/ Media Networks $ 537 $ 364 48 % $ 364 Studio Entertainment 3 96 (97)% 96 Theme Parks & Resorts 330 311 6 % 311 Consumer Products 85 79 8 % 89 GO.com (127) (52) n/m (18) Amortization of intangible assets (344) (333) (3)% (107) ------ ------ ------ $ 484 $ 465 4 % $ 735 ====== ====== ======
(1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization (EBITDA) is as follows: Media Networks $ 572 $ 395 $ 395 Studio Entertainment 16 111 111 Theme Parks & Resorts 463 424 424 Consumer Products 109 110 120 GO.com (117) (47) (16) ------ ------ ------ $1,043 $ 993 $1,034 ====== ====== ======
The Company believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Three Months Ended March 31, ----------------------------------------------- 2000 1999 % Change ------- ------ ---------- (unaudited, in millions) Revenues: Broadcasting $1,652 $1,225 35% Cable Networks 728 600 21% ------ ------ $2,380 $1,825 30% ====== ====== Operating income: Broadcasting $ 244 $ 136 79% Cable Networks 293 228 29% ------ ------ $ 537 $ 364 48% ====== ======
III-10 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Revenues increased 30%, or $555 million to $2.4 billion, driven by increases of $427 million from Broadcasting and $128 million at the Cable Networks. Increased Broadcasting revenues were driven by growth at the ABC television network, the Company's owned television stations and the radio networks and stations. Increases at the television network and owned television stations were driven by the Super Bowl, a strong advertising market, the continued success of Who Wants to Be a Millionaire and higher overall ratings on network programming. The strong advertising market also resulted in growth at the radio network and stations. Cable Network revenue growth was driven by increased advertising revenues due to a strong advertising market, as well as higher affiliate fees due to contractual rate adjustments and subscriber growth. Operating income increased 48%, or $173 million to $537 million, reflecting increased Broadcasting and Cable Network revenues, partially offset by higher costs. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 26% or $382 million, driven by higher sports programming costs, principally related to National Football League (NFL) and National Hockey League (NHL) broadcasts. In addition, higher costs and expenses reflected increased costs associated with a higher volume of network television production, as well as start-up costs associated with the January launch of SoapNet and various international Disney Channels. The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating Income from Cable Television Activities," which comprise the Cable Networks and the Company's cable equity investments:
Three Months Ended March 31, --------------------------------------- 2000 1999 % Change -------- ------- ------------ (unaudited, in millions) Operating income: Cable Networks $ 293 $ 228 29 % Equity Investments: A&E, Lifetime and E! Entertainment Television 168 133 26 % Other 33 (10) n/m ----- ----- Operating Income from Cable Television Activities 494 351 41 % Partner share of operating income (169) (109) (55)% ----- ----- Company share of operating income $ 325 $ 242 34 % ===== =====
Note: Operating Income from Cable Television Activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Company's share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Consolidated Statements of Income. Equity Investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Consolidated Statements of Income. The Company believes that Operating Income from Cable Television Activities provides additional information useful in analyzing the underlying business results. However, Operating Income from Cable Television Activities is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. III-11 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The Company's share of Cable Television Operating Income increased 34%, or $83 million to $325 million, driven by growth at the Cable Networks and increased advertising revenues at Lifetime Television, The History Channel and A&E Television. Studio Entertainment Revenues increased 4%, or $61 million to $1.7 billion, driven by growth of $105 million in worldwide theatrical motion picture distribution, partially offset by declines of $29 million in network television production and distribution and $13 million in domestic home video. Growth in worldwide theatrical motion picture distribution reflected the performance of Scream 3 and a stronger animated film slate domestically and Toy Story 2, Tarzan and The Sixth Sense internationally. The decline in network television production and distribution reflected Home Improvement in the prior-year quarter. In domestic home video, the success of Tarzan on VHS and DVD and The Sixth Sense on DVD faced difficult comparisons to the combination of Mulan, The Waterboy and 101 Dalmatians in the prior-year quarter. Operating income decreased 97%, or $93 million to $3 million, due to declines in domestic home video, driven primarily by cost increases, and domestic theatrical motion picture distribution, where cost increases exceeded revenue gains. These declines were partially offset by improvements in international theatrical motion picture distribution, where cost increases only partially offset higher revenues. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, participations expense, product costs, labor and leasehold expenses, increased 10% or $154 million. Higher costs in domestic home video were driven by participations expense for The Sixth Sense and higher distribution costs. Cost increases in domestic theatrical motion picture distribution reflected higher production cost amortization, write-downs on Mission to Mars and Cradle Will Rock and increased promotional costs for Cider House Rules. Production cost amortization decreased in network television production and distribution due to the production of Home Improvement in the prior-year quarter and the distribution of more classic animated titles in the current quarter, which have a lower amortization cost relative to recent titles. Participations expense increased in international theatrical motion picture distribution due to Toy Story 2. Theme Parks and Resorts Revenues increased 11%, or $157 million to $1.6 billion, driven by growth of $90 million at the Walt Disney World Resort, reflecting increased guest spending and record theme park attendance, $40 million at Disney Cruise Line, reflecting a full quarter of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior-year quarter, and increased guest spending at Disneyland. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration. At Disneyland, 45th Anniversary Celebration merchandise sales and enhanced merchandise and food and beverage offerings throughout the park contributed to higher guest spending. Operating income increased 6%, or $19 million to $330 million, driven by revenue growth at the Walt Disney World Resort, results at Disney Cruise Line and higher guest spending at Disneyland. Costs and expenses, which consist principally of labor, costs of merchandise, food and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sale expense, increased 13% or $138 million. Increased operating costs were driven by the ongoing Millennium Celebration, Disney Cruise Line operations and higher theme park attendance at the Walt Disney World Resort. III-12 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Consumer Products Revenues increased 1%, or $7 million to $599 million, compared to prior- year pro forma amounts, driven by growth of $11 million in worldwide merchandise licensing and publishing, offset by declines of $4 million at the Disney Stores. Merchandise licensing revenues reflected increases domestically, driven by the timing of certain contractual annual minimum guarantee payments, partially offset by continued licensing softness in Europe. Disney Store revenues decreased due to lower comparative store sales, principally domestically. On an as-reported basis, revenues decreased 7% or $42 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Operating income increased 8%, or $6 million to $85 million, compared to prior-year pro forma amounts, reflecting increases in domestic merchandise licensing and Disney Interactive, partially offset by continued licensing softness in Europe and lower comparative store sales at the Disney Stores, principally domestically. Improvements at Disney Interactive were driven by the success of the Who Wants to Be A Millionaire video game and the Toy Story 2 action game, as well as cost savings. Costs and expenses, which consist primarily of labor, product costs, including product development costs, distribution and selling expenses and leasehold expenses, were comparable to the prior year quarter. On an as-reported basis, operating income decreased 4% or $4 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. GO.com Revenues increased 39%, or $27 million to $97 million, compared to prior year pro forma amounts, driven by an increase of $30 million in Internet revenues, partially offset by a $3 million decrease in Direct Marketing revenues. Internet revenue growth was driven by increased advertising and sponsorship revenues reflecting increased advertiser demand and online site traffic, sales growth at DisneyStore.com, higher intranet software sales, operations at toysmart.com, which was acquired in the fourth quarter of fiscal 1999, and increased sales at DisneyTravel.com. Lower Direct Marketing revenues were due principally to lower catalog response rates and inventory liquidation efforts. On an as-reported basis, revenues increased 137% or $56 million, reflecting the items described above, as well as the operations of Infoseek, which was consolidated into GO.com beginning November 18, 1999. Operating loss increased $75 million to $127 million, compared to prior- year pro forma amounts, reflecting increased costs and expenses, partially offset by higher Internet revenues. Costs and expenses, which consist primarily of cost of revenues, sales and marketing costs, other operating expenses and depreciation expense increased 84% or $102 million. Higher costs and expenses were driven by continued investment in Internet operations and infrastructure, new product initiatives, a non-cash charge of $31 million to reflect the impairment of certain intangible assets, one-time employee retention payments of $17 million required by the 1999 Infoseek acquisition agreement and operations at toysmart.com, which was acquired in the fourth quarter of fiscal 1999. On an as-reported basis, operating loss increased $109 million to $127 million, reflecting the items described above, as well as losses at Infoseek, which was consolidated into GO.com beginning November 18, 1999. III-13 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Six Months
Six Months Ended March 31, ----------------------------------------------------------------------------------- Pro Forma As Reported ------------------------------------------- ------------------------------- 2000 1999 % Change 2000 1999 ---------- ----------- ----------- ---------- ------------ (unaudited, in millions) Revenues: Media Networks $ 5,117 $ 4,133 24 % $ 5,117 $ 4,133 Studio Entertainment 3,255 3,368 (3)% 3,255 3,368 Theme Parks & Resorts 3,148 2,856 10 % 3,148 2,856 Consumer Products 1,502 1,550 (3)% 1,516 1,639 GO.com 223 182 23 % 199 117 ------- ------- ------- ------- $13,245 $12,089 10 % $13,235 $12,113 ======= ======= ======= ======= Operating income (loss): /(1)/ Media Networks $ 1,179 $ 735 60 % $ 1,179 $ 735 Studio Entertainment 26 239 (89)% 26 239 Theme Parks & Resorts 693 654 6 % 693 654 Consumer Products 292 369 (21)% 293 382 GO.com (210) (81) n/m (216) (22) Amortization of intangible assets (688) (667) (3)% (570) (215) ------- ------- ------- ------- 1,292 1,249 3 % 1,405 1,773 Gain on sale of Fairchild -- -- -- 243 -- Gain on sale of Starwave -- -- -- -- 345 ------- ------- ------- ------- $ 1,292 $ 1,249 3 % $ 1,648 $ 2,118 ======= ======= ======= ======= (1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows: Media Networks $ 1,248 $ 796 $ 1,248 $ 796 Studio Entertainment 54 269 54 269 Theme Parks & Resorts 965 887 965 887 Consumer Products 342 431 343 444 GO.com (193) (70) (201) (18) ------- ------- ------- ------- $ 2,416 $ 2,313 $ 2,409 $ 2,378 ======= ======= ======= =======
The Company believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. III-14 PAGE> THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Six Months Ended March 31, --------------------------------------- 2000 1999 % Change ----------- ---------- ----------- (unaudited, in millions) Revenues: Broadcasting $3,367 $2,740 23 % Cable Networks 1,750 1,393 26 % ------ ------ $5,117 $4,133 24 % ====== ====== Operating income: Broadcasting $ 589 $ 284 107 % Cable Networks 590 451 31 % ------ ------ $1,179 $ 735 60 % ====== ======
Revenues increased 24%, or $984 million to $5.1 billion, driven by increases of $627 million from Broadcasting and $357 million at the Cable Networks. Increased Broadcasting revenues were driven by growth at the ABC television network, the Company's owned television stations and the radio networks and stations. Increases at the television network and owned television stations were driven by the Super Bowl, a strong advertising market, the continued success of Who Wants to Be a Millionaire and higher overall ratings on network programming, including Good Morning America. The strong advertising market also resulted in growth at the radio network and stations. Cable Network revenue growth was driven by increased advertising revenues due to a strong advertising market, as well as higher affiliate fees due to contractual rate adjustments and subscriber growth. Operating income increased 60%, or $444 million to $1.2 billion, reflecting increased Broadcasting and Cable Network revenues, partially offset by higher costs. Costs and expenses increased 16% or $540 million, driven by higher sports programming costs, principally related to NFL broadcasts. In addition, increased costs associated with a higher volume of network television production, as well as start-up costs associated with the January launch of SoapNet and various international Disney Channels, contributed to increased costs and expenses. There has been a continuing decline in viewership at all major broadcast networks, including ABC, reflecting the growth in the cable industry's share of viewers. In addition, there have been continuing increases in the cost of sports and other programming. During the second quarter of 1998, the Company entered into a new agreement with the NFL for the right to broadcast NFL football games on the ABC Television Network and ESPN. The contract provides for total payments of approximately $9 billion over an eight-year period, and commenced with the 1998 season. Under the terms of the contract, the NFL has the right to cancel the contract after five years. The programming rights fees under the new contract are significantly higher than those required by the previous contract and the fee increases exceed the estimated revenue increases over the contract term. The higher fees under the new contract reflect various factors, including increased competition for sports programming rights and an increase in the number of games to be broadcast by ESPN. The Company continues to pursue a variety of strategies, including marketing efforts, to reduce the impact of the higher costs. The contract's impact on the Company's results over the remaining contract term is dependent upon a number of factors, including the strength of advertising markets, effectiveness of marketing efforts and the size of viewer audiences. III-15 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The cost of the NFL contract is charged to expense based on the ratio of each period's gross revenues to estimated total gross revenues over the non- cancelable contract period. Estimates of total gross revenues can change significantly and, accordingly, they are reviewed periodically and amortization is adjusted if necessary. Such adjustments could have a material effect on results of operations in future periods. The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating Income from Cable Television Activities," which comprise the Cable Networks and the Company's cable equity investments:
Six Months Ended March 31, ---------------------------------------- 2000 1999 % Change -------- -------- ------------ (unaudited, in millions) Operating income: Cable Networks $ 590 $ 451 31 % Equity Investments: A&E, Lifetime and E! Entertainment Television 318 235 35 % Other 51 7 n/m ----- ----- Operating Income from Cable Television Activities 959 693 38 % Partner share of operating income (318) (209) (52)% ----- ----- Company share of operating income $ 641 $ 484 32 % ===== =====
Note: Operating Income from Cable Television Activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Company's share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Consolidated Statements of Income. Equity Investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Consolidated Statements of Income. The Company's share of cable television operating income increased 32%, or $157 million to $641 million, driven by growth at the Cable Networks and increased advertising revenues at E! Entertainment Television, Lifetime Television and The History Channel. Studio Entertainment Revenues decreased 3%, or $113 million to $3.3 billion, driven by declines of $187 million in worldwide home video, $52 million in network television production and distribution and $42 million in domestic theatrical motion picture distribution, partially offset by growth of $156 million in international theatrical motion picture distribution. Domestic home video revenues reflected fewer unit sales in the current year, as the prior year included the successful releases of Lion King II: Simba's Pride, Mulan, The Waterboy and 101 Dalmatians. The decline in network television production and distribution reflects the production of Home Improvement in the prior year. In domestic theatrical motion picture distribution, the success of Toy Story 2 and Scream 3 faced difficult comparisons to the prior year, which included The Waterboy, A Bug's Life and Enemy of the State. Growth in international theatrical motion picture distribution reflected the performance of Toy Story 2, Tarzan and The Sixth Sense. III-16 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Operating income decreased 89%, or $213 million to $26 million, due to declines in worldwide home video and domestic theatrical motion picture distribution, driven primarily by decreased revenues. These declines were partially offset by improvements in international theatrical motion picture distribution, where cost increases only partially offset higher revenues. Costs and expenses increased 3% or $100 million. Cost increases in international theatrical motion picture distribution reflected higher production cost amortization and increased participations expense due to The Sixth Sense and Toy Story 2. Production cost amortization decreased in network television production and distribution, reflecting the production of Home Improvement in the prior year, as well as the distribution of more classic animated titles in the current year, which have a lower amortization cost relative to recent titles. Increases in production and participation costs are reflective of industry trends: as competition for creative talent has increased, costs within the industry have increased at a rate significantly higher than inflation. Theme Parks and Resorts Revenues increased 10%, or $292 million to $3.1 billion, driven by growth of $179 million at the Walt Disney World Resort, reflecting increased guest spending, increased occupied room nights and record theme park attendance, $68 million at Disney Cruise Line reflecting a full six months of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior year, and increased guest spending at Disneyland. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration; and higher occupied room nights reflected the opening of the All Star Movies Resort, which opened in the second quarter of the prior year. At Disneyland, 45th Anniversary Celebration merchandise sales and enhanced merchandise and food and beverage offerings throughout the park contributed to higher guest spending. Operating income increased 6%, or $39 million to $693 million, driven by revenue growth at the Walt Disney World Resort, improved results at Disney Cruise Line and higher guest spending at Disneyland. Costs and expenses increased 11% or $253 million, driven by higher theme park attendance and the ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise Line operations. Consumer Products Pro forma revenues decreased 3%, or $48 million to $1.5 billion, driven by declines of $74 million in worldwide merchandise licensing and publishing, partially offset by growth of $17 million at Disney Interactive and $10 million at the Disney Stores. Lower merchandise licensing and publishing revenues were primarily attributable to declines domestically and in Europe. Disney Interactive revenue increases were driven by the successful release of the Who Wants to Be a Millionaire video game and the Toy Story 2 action game. Disney Store revenues increased due to continued worldwide expansion, partially offset by lower comparative store sales, principally domestically. On an as-reported basis, revenues decreased 8% or $123 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Pro forma operating income decreased 21%, or $77 million to $292 million, reflecting decreases in worldwide merchandise licensing, softer publishing results domestically and in Europe, and decreases at the Disney Stores, primarily domestically and in Japan, partially offset by increases at Disney Interactive. Costs and expenses increased 2% or $29 million, primarily at the Disney Stores due to the addition of new stores and inventory liquidation efforts. III-17 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On an as-reported basis, operating income decreased 23% or $89 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. GO.com Pro forma revenues increased 23%, or $41 million to $223 million, driven by an increase of $53 million in Internet revenues, partially offset by a $12 million decrease in Direct Marketing revenues. Internet revenue growth reflected increased advertising and sponsorship revenues driven by increased advertiser demand and online site traffic, strong holiday-season sales at DisneyStore.com, operations at toysmart.com, which was acquired in the fourth quarter of fiscal 1999, higher intranet software sales and increased sales at DisneyTravel.com. Lower Direct Marketing revenues were due principally to lower catalog response rates and inventory liquidation efforts. On an as-reported basis, revenues increased 70% or $82 million, reflecting the items described above, as well as the operations of Infoseek, which was consolidated into GO.com beginning November 18, 1999. Pro forma operating loss increased $129 million to $210 million, reflecting increased costs and expenses, partially offset by higher Internet revenues. Costs and expenses increased 65% or $170 million driven by continued investment in Internet operations and infrastructure, new product initiatives, a non-cash charge of $31 million to reflect the impairment of certain intangible assets, one-time employee retention payments of $17 million required by the 1999 Infoseek acquisition agreement and operations at toysmart.com, which was acquired in the fourth quarter of fiscal 1999. On an as-reported basis, operating loss increased $194 million to $216 million, reflecting the items described above, as well as losses from Infoseek, which was consolidated into GO.com beginning November 18, 1999. Costs and expenses for the remainder of the year are expected to reflect continued investment in infrastructure and new initiatives and incremental marketing and sales expenditures. FINANCIAL CONDITION For the six months ended March 31, 2000, cash provided by operations increased $852 million to $3.3 billion, driven by higher amortization of television broadcast rights relative to cash payments, decreased income tax payments and higher film and television cost amortization. During the six months, the Company invested $1.3 billion to develop, produce and acquire rights to film and television properties, a decrease of $322 million, primarily due to a $310 million payment related to the acquisition of a film library in the prior year. During the six months, the Company invested $934 million in theme parks, resorts and other properties. These expenditures reflected continued expansion activities related to Disney's California Adventure and certain resort facilities at the Walt Disney World Resort. During the six months, the Company invested $91 million in Euro Disney S.C.A. to maintain its 39% ownership interest after a Euro Disney equity rights offering, the proceeds of which will be used to fund construction of a new theme park. Total commitments to purchase broadcast programming approximated $13.5 billion at March 31, 2000, including approximately $11.2 billion related to sports programming rights, primarily NFL, College Football, Major League Baseball and NHL. Substantially all of this amount is payable over the next six years. III-18 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The Company expects the ABC Television Network, ESPN and the Company's television and radio stations to continue to enter into programming commitments to purchase the broadcast rights for various feature films, sports and other programming. During the six months, the Company repaid $1.8 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $263 million. These repayments were partially funded by proceeds of $992 million from various financing arrangements. Commercial paper borrowings outstanding as of March 31, 2000 totaled $1.7 billion, with maturities of up to one year, supported by bank facilities totaling $4.8 billion, which expire in one to five years and allow for borrowings at various interest rates. The Company also has the ability to borrow under a U.S. shelf registration statement and a euro medium-term note program, which collectively permit the issuance of up to approximately $4.6 billion of additional debt. The Company acquires shares of its stock on an ongoing basis and is authorized as of March 31, 2000 to purchase up to an additional 395 million shares. During the six months, a subsidiary of the Company acquired approximately 3.8 million shares of Disney common stock for approximately $115 million. The Company also used $434 million to fund dividend payments during the first quarter. The Company believes that its financial condition is strong and that its cash, other liquid assets, operating cash flows, access to equity capital markets and borrowing capacity, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses and development of new projects. OTHER MATTERS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company will adopt SAB 101 no later than the first quarter of fiscal 2001 and is evaluating the effect that such adoption may have on its consolidated results of operations and financial position. III-19 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that the Company believes are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to the Company's stockholders. The Company believes that all statements that express expectations and projections with respect to future matters, including the launching or prospective development of new business initiatives; anticipated motion picture or television releases; and Internet or theme park and resort projects, are forward-looking statements within the meaning of the Act. These statements are made on the basis of management's views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management's expectations will necessarily come to pass. Factors that may affect forward-looking statements. For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance. A list of such factors is set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 1999 under the heading "Factors that may affect forward-looking statements." III-20 EX-3 2 AMENDED AND RESTATED BY LAWS OF REGISTRANT EXHIBIT 3 AMENDED BYLAWS OF THE WALT DISNEY COMPANY (hereinafter called the "Corporation") ARTICLE I OFFICES ------- Section 1. Registered Office. The registered office of the --------- ----------------- Corporation shall be in the City of Wilmington, County of New Castle, Delaware. Section 2. Principal Place of Business. The principal place of --------- --------------------------- business of the Corporation is hereby fixed and located at 500 South Buena Vista Street, Burbank, California 91521. Section 3. Other Offices. The Corporation may also have offices at --------- ------------- such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Place of Meetings. Meetings of the stockholders for the --------- ----------------- election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors (and in the case of a special meeting, by the Board of Directors or the person calling the special meeting as authorized by Section 3 of this Article II) and stated in the notice of the meeting or in a duly executed waiver of notice thereof. -1- Section 2. Annual Meetings. The Annual Meetings of Stockholders --------- --------------- shall be held on such date and at such time and place as may be fixed by the Board of Directors and stated in the notice of the meeting, for the purpose of electing directors and for the transaction of such other business as is properly brought before the meeting in accordance with these Bylaws. Section 3. Special Meetings. Special meetings of stockholders, for --------- ---------------- any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board of Directors, or the President. Special meetings of stockholders may not be called by any other person or persons. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting, and only such business as is stated in such notice shall be acted upon thereat. Section 4. Quorum. Except as may be otherwise provided by law or by --------- ------ the Certificate of Incorporation, the holders of a majority in voting power of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a minority of the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. Section 5. Voting. Unless otherwise required by law, the Certificate --------- ------ of Incorporation or these Bylaws, (i) at all meetings of stockholders for the election of directors, a plurality of votes cast shall be sufficient to elect, and (ii) any other question brought before any meeting of stockholders shall be decided by the vote of the holders of a majority in voting power of the stock represented and entitled to vote thereon. Unless otherwise provided in the Certificate of Incorporation, each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. Section 6. Organization. --------- ------------ (a) All meetings of the stockholders shall be presided over by the Chairman of the Board of Directors or, if he is not present, by the Vice Chairman of the Board of Directors, and if he is not present, by such officer or director as is designated by the Board of -2- Directors. The Secretary of the Corporation or, if he is not present, any Assistant Secretary or other person designated by the presiding officer shall act as secretary of the meeting. (b) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. Section 7. List of Stockholders Entitled to Vote. The officer of --------- ------------------------------------- the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 8. Stock Ledger. The stock ledger of the Corporation shall --------- ------------ be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 9. Inspectors of Election. Before any meeting of --------- ---------------------- stockholders, the Board of Directors shall appoint one or more inspectors to act at the meeting and make a written report thereof. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of -3- stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. The inspectors shall: (a) ascertain the number of shares outstanding and the voting power of each, (b) determine the shares represented at the meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination made by the inspectors, and (e) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. In determining the validity and counting of proxies and ballots, the inspectors shall act in accordance with applicable law. Section 10. Notice of Stockholder Business and Nominations. ---------- ---------------------------------------------- (a) Annual Meetings of Stockholders. ------------------------------- (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the Corporation's notice of meeting (or any supplement thereto), (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record of the Corporation at the time the notice provided for in this Section 10 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (a)(1) of this Section 10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and any such proposed business other than the nomination of persons for election to the Board of Directors must constitute a proper matter for stockholder action. To be timely, a stockholder's -4- notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth day nor earlier than the close of business on the one hundred twentieth day prior to the first anniversary of the preceding year's annual meeting (provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than seventy days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the one hundred twentieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation). In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (a) as to each person whom the stockholder proposes to nominate for election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (and such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, (ii) the class and number of shares of capital stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and or by proxy at the meeting to propose such business or nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation's outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (b) otherwise to solicit proxies from stockholders in support of such proposal or nomination. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 10 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation at an annual meeting is increased and there is no public announcement by the Corporation naming the nominees for the additional directorships at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 10 shall also be considered timely, but only with -5- respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be -------------------------------- conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (1) by or at the direction of the Board of Directors of (2) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time the notice provided for in this Section 10 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 10. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (a)(2) of this Section 10 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. (c) General. (1) Only such persons who are nominated in accordance ------- with the procedures set forth in this Section 10 shall be eligible to be elected at an annual or special meeting of stockholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 10. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty (a) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 10 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder's nominee or proposal in compliance with such stockholder's representation as required by clause (a)(2)(c)(iv) of this Section 10) and (b) if any proposed nomination or business was not so made or proposed in compliance with this Section 10 to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. -6- (2) For purposes of this Section 10, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 10. Nothing in this Section 10 shall be deemed to affect any rights (a) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation. ARTICLE III DIRECTORS --------- Section 1. Number and Election of Directors. Subject to the rights, --------- -------------------------------- if any, of holders of preferred stock of the Corporation to elect directors of the Corporation, the Board of Directors shall consist of not less than nine nor more than 21 members with the exact number of directors to be determined from time to time solely by resolution duly adopted by the Board of Directors. Directors shall be elected by a plurality of the votes cast at Annual Meetings of stockholders, and each director so elected shall hold office as provided by Article FIFTH of the Certificate of Incorporation. Directors need not be stockholders. Section 2. Resignation of Directors. Any director may resign at any --------- ------------------------ time effective upon giving written notice to the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. Section 3. Vacancies. Any vacancy on the Board of Directors, --------- --------- howsoever resulting, may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy shall hold office for a term as specified in Article FIFTH of the Certificate of Incorporation. Section 4. Duties and Powers. The business of the Corporation shall --------- ----------------- be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 5. Meetings. The Board of Directors of the Corporation may --------- -------- hold meetings, both regular and special, either within or without the State of Delaware. Regular -7- meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the President, or by a majority of the Board of Directors. Notice thereof, stating the place, date and hour of the meeting, shall be given to each director either by mail not less than four days before the date of the meeting, or personally or by telephone, telegram, telex or similar means of communication on 12 hours notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 6. Quorum; Action of Board of Directors. Except as may be --------- ------------------------------------ otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 7. Action by Written Consent. Any action required or --------- ------------------------- permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 8. Meetings by Means of Conference Telephone. Members of --------- ----------------------------------------- the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 8 shall constitute presence in person at such meeting. Section 9. Committees. The Board of Directors may, by resolution --------- ---------- passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and -8- affairs of the Corporation. The Board of Directors shall have the power to prescribe the manner in which proceedings of any such committee shall be conducted. In the absence of any such prescription, such committee shall have the power to prescribe the manner in which its proceedings shall be conducted. Unless the Board of Directors or such committee shall otherwise provide, regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article III applicable to meetings and actions of the Board of Directors. Each committee shall keep regular minutes and report to the Board of Directors when required. Section 10. Fees and Compensation. Directors and members of ---------- --------------------- committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board of Directors. ARTICLE IV OFFICERS -------- Section 1. General. The officers of the Corporation shall be chosen --------- ------- by the Board of Directors and shall be a Chairman of the Board of Directors (who must be a director), a President, a Secretary and a Treasurer. The Board of Directors, in its sole discretion, may also choose a Vice Chairman of the Board of Directors (who must be a director), one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. Section 2. Election. The Board of Directors at its first meeting --------- -------- held after each Annual Meeting of stockholders shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time solely by the Board of Directors, which determination may be by resolution of the Board of Directors or in any bylaw provision duly adopted or approved by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the Board of Directors with or without cause. Any vacancy occurring in any office of the Corporation may be filled only by the Board of Directors. Section 3. Chairman of the Board of Directors. The Chairman of the --------- ---------------------------------- Board of Directors shall be the Chief Executive Officer of the Corporation, shall preside at all meetings of the Board of Directors and of stockholders and shall, subject to the provisions of the Bylaws and the control of the Board of Directors, have general and active management, direction, and supervision over the business of the Corporation and over its officers. He shall perform all duties incident to the office of chief executive and such other duties as from time to time may be -9- assigned to him by the Board of Directors. He shall have the right to delegate any of his powers to any other officer or employee. Section 4. President. The President shall report and be responsible --------- --------- to the Chairman of the Board. The President shall have such powers and perform such duties as from time to time may be assigned or delegated to him by the Board of Directors or are incident to the office or President. During the absence, disability, or at the request of the Chairman of the Board of Directors, the President shall perform the duties and exercise the powers of the Chairman of the Board of Directors. In the absence or disability of both the President and the Chairman of the Board of Directors, the person designated by the Board of Directors shall perform the duties and exercise the powers of the President, and unless otherwise determined by the Board, the duties and powers of the Chairman. Section 5. Executive Vice Presidents. The Executive Vice Presidents --------- ------------------------- shall have such powers and perform such duties as from time to time may be prescribed for them respectively by the Board of Directors or are incident to the office of Executive Vice President. Section 6. Senior Vice Presidents. The Senior Vice Presidents shall --------- ---------------------- have such powers and perform such duties as from time to time may be prescribed for them respectively by the Board of Directors or are incident to the office of Senior Vice President. Section 7. Vice Presidents. The Vice Presidents shall have such --------- --------------- powers and perform such duties as from time to time may be prescribed for them respectively by the Board of Directors or are incident to the office of Vice President. Section 8. Secretary. The Secretary shall keep or cause to be kept, --------- --------- at the principal executive office or such other place as the Board of Directors may order, a book of minutes of all meetings of stockholders, the Board of Directors and its committees, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Board of Directors and committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive office or business office of the Corporation. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, if one be appointed, a stock register, or a duplicate stock register, showing the names of the stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. -10- The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors and any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors. Section 9. Treasurer. The Treasurer shall have the custody of the --------- --------- corporate funds and securities of the Corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, and shall send or cause to be sent to the stockholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The Treasurer shall deposit all moneys and valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all transactions and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors. Section 10. Other Officers. Such other officers or assistant ---------- -------------- officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. Section 11. Execution of Contracts and Other Documents. Each officer ---------- ------------------------------------------ of the Corporation may execute, affix the corporate seal and/or deliver, in the name and on behalf of the Corporation, deeds, mortgages, notes, bonds, contracts, agreements, powers of attorney, guarantees, settlements, releases, evidences of indebtedness, conveyances, or any other document or instrument which is authorized by the Board of Directors or is required to be executed in the ordinary course of business, except in cases where the execution, affixation of the corporate seal and/or delivery thereof shall be expressly and exclusively delegated by the Board of Directors to some other officer or agent of the Corporation. ARTICLE V STOCK ----- Section 1. Form of Certificates. Every holder of stock in the --------- -------------------- Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman or Vice Chairman of the Board of Directors, the President or any Executive Vice President, Senior Vice President or Vice President and (ii) by the Treasurer or an Assistant Treasurer or the -11- Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 2. Signatures. Where a certificate is countersigned by (i) --------- ---------- a transfer agent or (ii) a registrar, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a --------- ----------------- new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Transfers. Transfers of shares of capital stock of the --------- --------- Corporation shall be made only on the stock record of the Corporation by the holder of record thereof or by his attorney thereunto authorized by the power of attorney duly executed and filed with the Secretary of the Corporation or the transfer agent thereof, and only on surrender of the certificate or certificates representing such shares, properly endorsed or accompanied by a duly executed stock transfer power. The Board of Directors may make such additional rules and regulations as it may deem expedient concerning the issue and transfer of certificates representing shares of the capital stock of the Corporation. Section 5. Record Date. --------- ----------- (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -12- (b) Notwithstanding Section 5(a) of Article V of these Bylaws, the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the Board of Directors or as otherwise established under this Section 5(b). Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice addressed to the Secretary and delivered to the Corporation, request that a record date be fixed for such purpose. The Board of Directors may fix a record date for such purpose which shall be no more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board and shall not precede the date such resolution is adopted. If the Board of Directors fails within 10 days after the Corporation receives such notice to fix a record date for such purpose, the record date shall be the day on which the first written consent is delivered to the Corporation in the manner described in Section 5(c) below unless prior action by the Board of Directors is required under the General Corporation Law of the State of Delaware, in which event the record date shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) Every written consent purporting to take or authorizing the taking of corporate action and/or related revocations (each such written consent and related revocation is referred to in this Section 5(c) of Article V of the Bylaws as a "Consent") shall bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated Consent delivered in the manner required by this Section 5(c), Consents signed by a sufficient number of stockholders to take such action are so delivered to the Corporation. A Consent shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the Corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. In the event of the delivery to the Corporation of a Consent, the Secretary of the Corporation shall provide for the safe-keeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the Consents and of the validity of the action to be taken by stockholder consent as he deems necessary or appropriate, including, without limitation, whether the holders of a number of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the Board of Directors, the Secretary of the Corporation shall promptly designate two persons, who shall not be members of the Board of Directors, to serve as inspectors with respect to such Consent and such inspectors shall discharge the functions of the Secretary of the Corporation under this Section 5(c). If after such investigation the Secretary or the inspectors (as the case may be) shall determine that the Consent is valid and that the action therein specified has been validly authorized, that fact shall forthwith be certified on the records of the Corporation kept for -13- the purpose of recording the proceedings of meetings of stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 5(c), the Secretary or the inspectors (as the case may be) may, at the expense of the Corporation, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them, and shall be fully protected in relying in good faith upon the opinion of such counsel or advisors. Section 6. Beneficial Owners. The Corporation shall be entitled to --------- ----------------- recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VI NOTICES ------- Section 1. Notices. Whenever written notice is required by law, the --------- ------- Certificate of Incorporation or these Bylaws, to be given to any director or stockholder, such notice may be given by mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex, cable or facsimile transmission followed, if required by law, by deposit in the United States mail, with postage prepaid. Section 2. Waivers of Notice. Whenever any notice is required by --------- ----------------- law, the Certificate of Incorporation or these Bylaws, to be given to any director or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII GENERAL PROVISIONS ------------------ Section 1. Disbursements. All checks or demands for money and notes --------- ------------- of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. -14- Section 2. Fiscal Year. The fiscal year of the Corporation shall be --------- ----------- fixed by resolution of the Board of Directors. Section 3. Voting Securities Owned by the Corporation. Powers of --------- ------------------------------------------ attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board of Directors or the President or any other officer or officers authorized by the Board of Directors, the Chairman of the Board of Directors or the President, and any such officer may, in the name of and on behalf of the Corporation, vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation and take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. ARTICLE VIII INDEMNIFICATION --------------- Section 1. General. The Corporation shall indemnify to the full --------- ------- extent authorized or permitted by law (as now or hereafter in effect) any person made, or threatened to be made, a defendant or witness to any action, suit or proceeding (whether civil or criminal or otherwise) by reason of the fact that he, his testator or intestate, is or was a director or officer of the Corporation or by reason of the fact that such director or officer, at the request of the Corporation, is or was serving any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, in any capacity. Nothing contained herein shall affect any rights to indemnification to which employees other than directors and officers may be entitled by law. No amendment or repeal of this Section 1 shall apply to or have any effect on any right to indemnification provided hereunder with respect to any acts or omissions occurring prior to such amendment or repeal. Section 2. Further Assurance. In furtherance and not in limitation --------- ----------------- of the powers conferred by statute: (a) the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as -15- such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of law; and (b) the Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the full extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing to ensure the payment of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere. ARTICLE IX AMENDMENTS ---------- Section 1. General. These Bylaws may be altered, amended or --------- ------- repealed, in whole or in part, or new Bylaws may be adopted by either the holders of 66-2/3% of the outstanding capital stock entitled to vote thereon or by the Board of Directors. ARTICLE X EMERGENCY PROVISIONS -------------------- Section 1. General. The provisions of this Article X shall be --------- ------- operative only during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic or other attack on the United States or a disaster making it impossible or impracticable for the Corporation to conduct its business without recourse to the provisions of this Article X. Said provisions in such event shall override all other Bylaws of the Corporation in conflict with any provisions of this Article X, and shall remain operative so long as it remains impossible or impracticable to continue the business of the Corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the Bylaws other than those contained in this Article X. Section 2. Unavailable Directors. All directors of the Corporation --------- --------------------- who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if such persons had resigned as directors, so long as such unavailability continues. -16- Section 3. Authorized Number of Directors. The authorized number of --------- ------------------------------ directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article X, or the minimum number required by law, whichever number is greater. Section 4. Quorum. The number of directors necessary to constitute --------- ------ a quorum shall be one-third of the authorized number of directors as specified in Section 3 of this Article X, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the Bylaws of a Corporation to specify. Section 5. Creation of Emergency Committee. In the event the number --------- ------------------------------- of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article X is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authorities which the Board of Directors could by law delegate including all powers and authorities which the Board of Directors could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the Corporation pursuant to such powers and authorities and shall have all other powers and authorities as may by law or lawful decree be conferred on any person or body of persons during a period of emergency. Section 6. Constitution of Emergency Committee. The emergency --------- ----------------------------------- committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article X, provided that such remaining directors are not less than three in number. In the event such remaining directors are less than three in number, the emergency committee shall consist of three persons, who shall be the remaining director or directors and either one or two officers or employees of the Corporation, as the remaining director or directors may in writing designate. If there is no remaining director, the emergency committee shall consist of the three most senior officers of the Corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the Corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration. In the event that there are no remaining directors and no officers or employees of the Corporation available, the emergency committee shall consist of three persons designated in writing by the stockholder owning the largest number of shares of record as of the date of the last record date. Section 7. Powers of Emergency Committee. The emergency committee, --------- ----------------------------- once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and in the event of a vacancy or vacancies therein, arising at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. In the event at any time after its appointment all members of the emergency committee shall die or resign or become unavailable to act for any -17- reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article X. Section 8. Directors Becoming Available. Any person who has ceased --------- ---------------------------- to be a director pursuant to the provisions of Section 2 of this Article X and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. Section 9. Election of Board of Directors. The emergency committee --------- ------------------------------ shall, as soon after its appointment as is practicable, take all requisite action to secure the election of a board of directors, and upon such election all the powers and authorities of the emergency committee shall cease. Section 10. Termination of Emergency Committee. In the event, after ---------- ---------------------------------- the appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 2 of this Article X become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be enough directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall be at an end. -18- EX-10 3 EMPLOYMENT AGREEMENT DATED AS OF 1/24/2000 EXHIBIT 10 EMPLOYMENT AGREEMENT DATED AS OF JANUARY 24, 2000 BETWEEN THE WALT DISNEY COMPANY AND ROBERT A. IGER AGREEMENT (the "Agreement") made as of January 24, 2000 by and between THE WALT DISNEY COMPANY ("Disney") and ROBERT A. IGER ("Executive"). In consideration of the mutual covenants contained herein, Executive and Disney hereby agree as follows: 1. Term ---- The initial term of Executive's employment hereunder shall commence on and as of January 24, 2000, and shall expire on the fourth anniversary thereof (i.e., January 24, 2004) unless earlier terminated as hereinafter provided. ---- 2. Salary ------ In full consideration for all rights and services provided by Executive hereunder, Executive shall receive an annual salary of $1,500,000, of which $1,000,000 shall be payable in accordance with Employer's then prevailing payroll policy, and $500,000 of which shall be deferred and shall be paid, together with interest thereon (which interest shall accrue at the rate of the applicable federal rate for mid-term treasuries (currently 6.8% compounded annually), which rate shall be reset annually on the basis of the rate in effect for March for each year during which the deferral shall be in effect), by Disney to Executive upon a date which shall be not less than thirty days after the date Executive shall no longer be subject to the provisions of Section 162(m) of the Internal Revenue Code. Executive's salary shall be subject to annual review by Disney for increase. 3. Bonus ----- Bonus compensation for Executive shall be subject to the discretion of the Executive Performance Subcommittee of the Board of Directors of Disney in accordance with Disney's Annual Bonus Performance Plan for Executive Officers (or any successor plan thereto). 4. Special Payment --------------- As an inducement for Executive to enter into this Agreement and in discharge of all obligations of Disney and/or any of its affiliated entities to provide compensation (other than previously granted stock options) to Executive pursuant to any prior arrangements between Executive and Disney and/or any affiliated entity thereof, Disney shall pay to Executive, within ten business days of the execution hereof by both parties, the amount of $2,200,000. 5. Stock Options ------------- All stock options heretofore granted to Executive shall be subject to the following: All shares issuable upon exercise of any such options shall be registered on Form S-8 or any successor form or other applicable form under the Securities Act of 1933 and Disney shall, subject to the provisions of the plan, seek to keep such registration effective at all required times. For the purpose of such options, a termination of Executive's employment shall not be deemed to be for "cause" unless such termination constitutes termination for "good cause" as defined in Paragraph 10(a)(iii) below. 6. Title ----- Executive shall be employed hereunder in the position of President and Chief Operating Officer of Disney and shall report to the Chief Executive Officer of Disney. In addition, Disney agrees to nominate Executive for election to its board of directors as a member of the management slate at each annual meeting of stockholders during the term of his employment hereunder or, if there shall at any time be director classes, at each such meeting at which Executive's director class comes up for election. Executive agrees to serve on the board if elected. 7. Duties ------ Executive shall devote substantially all of his business time to personally and diligently performing on an exclusive basis such duties, which services shall not be inconsistent with his position as President and Chief Operating Officer of Disney, as are assigned to him from time to time by the Chief Executive Officer of Disney, and any other duties accepted or undertaken by Executive. 8. Expenses -------- Executive shall be expected to incur various business expenses customarily incurred by persons holding like positions, including but not limited to traveling, entertainment and similar expenses, all of which are to be incurred by Executive for the benefit of Disney. Subject to Disney's policy regarding the reimbursement and non-reimbursement of all such expenses, Employer shall reimburse Executive for such expenses from time to time, at Executive's request, and Executive shall account to Employer for such expenses. 2 9. Benefits -------- (a) Except as otherwise specifically provided hereunder, Executive shall be entitled to receive and participate in all employee welfare benefit plans generally made available to the highest level of senior executives of Disney, including, without limitation, participation in Disney's medical, dental, life insurance and disability benefit plans, in accordance with the normal policies and practices of Disney. (b) Executive shall be provided with an automobile in accordance with Disney's standard automobile policy. (c) In addition, Disney will provide Executive with such other perquisites as may be made generally available to the highest level of senior executives of Disney. 10. Termination by Disney --------------------- (a) Disney shall have the right to terminate this Agreement, including the term of Executive's employment under this Agreement, under the following circumstances: (i) Upon the death of Executive. (ii) Upon notice from Disney to Executive in the event of a total and permanent disability which has incapacitated him from performing his duties for six consecutive months as determined in good faith by the Board of Directors of Disney. (iii) For good cause upon written notice from the Disney. Termination by Disney of Executive's employment for "good cause" as used in this Agreement shall be limited to willful gross neglect or malfeasance by Executive in the performance of his duties or the unilateral resignation by Executive as an employee of Disney without the prior written consent of Disney. (b) If this Agreement is terminated pursuant to Paragraph 10(a) above, Executive's rights and Disney's obligations hereunder shall forthwith terminate except as expressly provided in this Agreement. (c) If this Agreement is terminated pursuant to Paragraph 10(a)(i) or (ii) hereof, Executive or his estate shall, in addition to the payments and benefits referred to in Paragraph 9(d), be entitled to receive one hundred percent (100%) of his annual salary (including deferred salary) for an additional 12 months, seventy-five percent (75%) of such salary for 12 months thereafter, and fifty percent (50%) of such salary for the next 12 months. In addition, all of Executive's stock options shall accelerate and become immediately exercisable for the period specified in the relevant stock option agreements (which shall be 18 months from date of death or disability, but not beyond the originally scheduled term of the option in the case of the option granted on 3 February 9, 1996, and 18 months from date of death and 12 months from date of disability with respect to all other options, but not beyond the originally scheduled term of such options), and Executive or his estate shall be paid a pro rata bonus for the year in which death or termination for disability occurred which will be calculated on the basis of an assumed bonus for the full year equal to the greater of $1,000,000 or the annual bonus received by Executive for the prior fiscal year of Disney. Executive or his estate shall also be entitled to other benefits in accordance with and subject to the terms of the relevant plans and programs of Disney applicable to Executive at the time of his death or disability. (d) If this Agreement is terminated pursuant to Paragraph 10(a)(iii), Disney shall have no obligation to Executive hereunder, except to (i) pay any amounts unconditionally accrued under any pension or benefit plans of Disney or any of its affiliates companies in accordance with the terms thereof, (ii) pay amounts earned, unconditionally accrued or owing to Executive but not yet paid, including, without limitation, any salary (including deferred salary plus accrued interest thereon) earned through the date of termination, and (iii) provide other benefits unconditionally accrued and vested on the date of termination, if any, in accordance with applicable plans and programs of Disney or any of its affiliated companies. (e) Whenever compensation is payable to Executive hereunder during a time when he is partially or totally disabled and such disability (except for the provisions hereof) would entitle him to disability income or to base salary continuation payments from Disney according to the terms of any plan now or hereafter provided by Disney or any subsidiaries thereof or according to any Disney policy in effect at the time of such disability, the compensation payable to him hereunder shall be inclusive of any such disability income or base salary continuation and shall not be in addition thereto. If disability income is payable directly to Executive by an insurance company under an insurance policy paid for by Disney or any subsidiaries thereof, the amounts paid to him by said insurance company shall be considered to be part of the payments to be made by Disney to him pursuant to this Paragraph 10, and shall not be in addition thereto. 11. Termination by Executive ------------------------ Executive shall have the right to terminate this Agreement, including his employment under this Agreement, upon at least 30 days' notice to Disney given within 60 days following the occurrence of any of the following events without his consent, provided that Disney shall have 30 days after the date such notice has been given to Disney in which to cure the conduct specified in such notice: (i) a reduction in Executive's compensation rights hereunder (salary or stock options), other than as permitted hereunder or, in the case of stock options, under the applicable stock option plan or related rules, or material reduction of any employee benefit or perquisite provided by Disney (other than as part of an across- 4 the-board reduction in such employee benefit or perquisite generally applicable to all senior executives of Disney; (ii) the failure to continue Executive in his position as provided in Paragraph 6 hereof, removal of him from such position or failure to nominate him for election to Disney's board of directors as provided in Paragraph 6 hereof; (iii) a material diminution in Executive's duties under Paragraph 7, the assignment to Executive of duties which are materially inconsistent with such duties, or a change in the reporting relationship of Executive so that he no longer reports as provided in Paragraph 6 above; (iv) the relocation of Executive's principal office to a location more than 50 miles from Manhattan or more than 50 miles outside of the greater Los Angeles area. With respect to subparagraph (iii) above, Executive's duties and responsibilities shall not be deemed materially reduced for purposes hereof solely by virtue of the fact that Disney is (or substantially all of its assets are) sold to, or is combined with, another entity provided that (a) Executive shall continue to have the same duties, responsibilities and authority with respect to Disney's business (including but not limited to entertainment and recreation, parks and resorts, broadcasting, cable, direct broadcast satellite, filmed entertainment, consumer products, music and the internet) as he had immediately prior to the time of such sale or combination and (b) Executive shall continue to report directly to the chief executive officer and/or board of directors of the entity that represents all or substantially all of the continued businesses of Disney or any of its affiliated companies. 12. Consequences of Breach by Disney -------------------------------- If this Agreement is terminated pursuant to Paragraph 11 hereof, or if Disney shall terminate Executive's employment under this Agreement in any other way that is a breach of this Agreement by Disney, Executive shall be entitled to the following, which he acknowledges to be fair and reasonable, as his sole and exclusive remedy, in lieu of all other remedies at law or in equity, for any such termination: (i) salary (including deferred salary and interest accrued thereon) through the date of termination; (ii) salary (including deferred salary and accrued interest thereon), at the annualized rate in effect immediately prior to the date of termination of Executive's employment (or in the event a reduction in base salary is the basis for a termination pursuant to Paragraph 11 above, then the base salary in effect immediately prior to such reduction), for the balance of the originally scheduled term of this Agreement; 5 (iii) annual bonus for the year in which termination occurs based on an assumed bonus equal to the greater of $1,000,000 or the annual bonus received by Executive for the prior fiscal year of Disney, payable in a single installment promptly after his termination; (iv) the right to exercise all stock options in full for the period provided in the relevant stock option agreement (which shall be twelve months in the case of the stock option granted to Executive on February 9, 1996, and three months for all other options granted to Executive, but in all cases not beyond the originally scheduled term of the relevant option); provided, however, that -------- ------- notwithstanding the foregoing, no stock options which may at any time hereafter be granted to Executive shall be included or taken into account in the calculation of the payments provided for in Paragraph 18 hereof unless such inclusion or taking into account is expressly provided for in the stock option agreement(s) evidencing any such future grant(s); (v) any amounts earned, unconditionally accrued or owing to Executive but not yet paid; and (vi) other benefits in accordance with applicable plans and programs of Employer. 13. Services Unique --------------- Executive recognizes that Executive's services hereunder are of a special, unique, unusual, extraordinary and intellectual character giving them a peculiar value, the loss of which cannot be reasonably or adequately compensated for in damages, and in the event of a breach of this Agreement by Executive (particularly, but without limitation, with respect to the provisions hereof relating to the exclusivity of Executive's services and the provisions of Paragraph 14 hereof), Employer shall, in addition to all other remedies available to it, be entitled to equitable relief by way of injunction and any other legal or equitable remedies. 14. Protection of Employer's Interests ---------------------------------- (a) During the term of Executive's employment by Disney, Executive will not compete in any manner, directly or indirectly, whether as a principal, employee, agent or owner, with Disney or any affiliate thereof, except that the foregoing will not prevent Executive from holding at any time less than 2% of the outstanding capital stock of any company whose stock is publicly traded. (b) To the extent permitted by law, all rights worldwide with respect to any and all intellectual or other property of any nature produced, created or suggested by Executive during the term of Executive's employment with Disney or any affiliated Company or resulting from Executive's services shall be deemed to be a work made for 6 hire and shall be the sole and exclusive property of Disney. Executive agrees to execute, acknowledge and deliver to Disney at Disney's request, such further documents as Disney finds appropriate to evidence Disney's and/or any affiliated company's rights in such property. Any confidential and/or proprietary information of Disney or any affiliate thereof shall not be used by Executive or disclosed or made available by Executive to any person except (i) as required in the course of Executive's employment or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of Disney or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information, it being understood that Executive will promptly notify Disney of such requirement so that Disney may seek to obtain a protective order. Upon expiration or earlier termination of the term of Executive's employment, Executive shall return to Disney all such information that exists in written or other physical form (and all copies thereof) under Executive's control. Without limiting the generality of the foregoing, Executive acknowledges signing and delivering to Disney, The Walt Disney Company and Associated Companies Confidentiality Agreement and The Walt Disney Company and Associated Companies Statement of Policy Regarding Conflicts of Interest and Business Ethics and Questionnaire Regarding Compliance and Executive agrees that all terms and conditions contained therein, and all of Executive's obligations and commitments provided for therein, shall be deemed, and hereby are, incorporated into this Agreement as if set forth in full herein. The provisions of this paragraph shall survive the expiration or earlier termination of this Agreement. 15. Arbitration ----------- (a) Any dispute regarding any of the terms and conditions of this Agreement (a "Dispute") between Executive and Disney shall be settled by arbitration in the Los Angeles and, except as herein specifically stated, in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA Rules") then in effect, subject to the provisions of this Agreement. Any judgment upon the determination reached by the arbitrators may be entered in any court having jurisdiction of the subject matter thereof. The parties hereby submit to the in personam jurisdiction of the courts of the State of California -------- for purposes of confirming any such determination and entering judgment in respect thereof. (b) Any such arbitration shall be conducted before a panel of three arbitrators, who shall be compensated for their services at a rate to be determined by the parties or by the American Arbitration Association in the event the parties are not able to agree upon their rate of compensation. (c) Within five calendar days of notice by a party seeking arbitration under this provision, the party requesting arbitration shall appoint one person as arbitrator, and within ten calendar days thereafter the other party shall appoint the second arbitrator. Within ten business days after the appointment of the second arbitrator, the 7 two arbitrators so chosen shall mutually agree upon the selection of the third impartial and neutral arbitrator, who (i) shall possess demonstrable knowledge and experience in the entertainment industry and (ii) shall have had no dealings with either party during the preceding 5 years. (d) In the event the chosen arbitrators cannot agree upon the selection of the third arbitrator, the AAA Rules for the selection of such an arbitrator shall be followed, except the selection shall be from such persons as are described in the immediately preceding subparagraph (c). If the other party shall fail to designate the second arbitrator, the sole arbitrator appointed shall have the power to appoint, in his sole discretion, both the second and third arbitrators. If a party fails to appoint a successor to its appointed arbitrator within ten business days of the death, resignation or other incapacity of such arbitrator, the remaining two arbitrators shall appoint such successor. The majority decision of the arbitrators will be final and conclusive upon the parties hereto. (e) Each party hereby agrees to pay one-half of the compensation to be paid to the arbitrators in any such arbitration and one-half of the costs of transcripts and other expenses of the arbitration proceedings and all of his or its own attorney's fees and other expenses; provided, however, that if Executive is the prevailing party in any arbitration, he shall be entitled to apply to the arbitrators for an award to be paid by Disney of his reasonable attorneys' fees and costs, arbitrators' fees and costs and all other costs of arbitration and if the arbitrators shall conclude that Disney's position in such arbitration was unreasonable, the arbitrators may, in their discretion, make an award to Executive of any part or all of such fees and costs, provided further that Disney shall have the right to contest any such application and the amount of any such award. (f) All testimony of witnesses at any arbitration proceeding held pursuant to these provisions shall be taken under oath, and the rules of evidence of the State of New York and judicial interpretations thereunder shall be strictly followed. The actual arbitration hearing or hearings shall be transcribed by a reporter. (g) The parties shall be entitled to conduct discovery proceedings in accordance with the California Code of Civil Procedure, and the rules of evidence of the California Evidence Code shall apply. (h) The arbitrators chosen in accordance with these provisions shall not have the power to alter, amend or otherwise affect the terms of these arbitration provisions or the other provisions of this Agreement. (i) Except as herein specifically provided, arbitration shall be the sole and exclusive remedy of the parties for a Dispute. 16. FCC Provision ------------- 8 Executive acknowledges that Executive has been provided by Disney with a copy of Section 508 of the Federal Communications Act of 1934, as amended, relating in part to receiving or paying consideration for product identification in television programs, that Executive is familiar with the provisions thereof and that Executive will fully comply therewith during the term of this Agreement. Without limiting the foregoing, however, and whether or not Section 508 is applicable to his activities, Executive agrees that Executive will not, without Employer's prior written consent, accept any compensation or gift, from any person, firm or corporation (other than Employer or its affiliates) where such compensation or gift is, or may appear to be, in consideration of Executive's acting in a particular manner in relation to the business of such person, firm or corporation with Employer or any affiliate thereof. 17. No Conflict with Prior Agreements; Due Authorization ---------------------------------------------------- Executive represents to Disney that neither Executive's commencement of employment hereunder nor the performance of Executive's duties hereunder conflicts with any contractual commitment on Executive's part to any third party or violates or interferes with any rights of any third party. Disney represents to Executive that it is fully authorized and empowered by action of the its Board of Directors to enter into this Agreement and that performance of its obligations under this Agreement will not violate any agreement between it and any other person, firm or other entity. 18. Certain Payments ---------------- The parties believe that the payments to Executive hereunder do not constitute "Excess Parachute Payments" under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding such belief, if any payment or benefit under this Agreement is determined to be an "Excess Parachute Payment" the Employer shall pay Executive an additional amount ("Tax Payment") such that (x) the excess of all Excess Parachute Payments (including payments under this sentence) over the sum of excise tax thereon under Section 4999 of the Code and income tax thereon under Subtitle A of the Code and under applicable state law is equal to (y) the excess of all Excess Parachute Payments (excluding payments under this sentence) over income tax thereon under Subtitle A of the Code and under applicable state law. 19. Post-Termination Obligations ---------------------------- After the expiration or earlier termination of Executive's employment hereunder for any reason whatsoever, Executive shall not either alone or jointly, with or on behalf of others, either directly or indirectly, whether as principal, partner, agent, shareholder, director, employee, consultant or otherwise, at any time during a period of two years following such expiration or termination, offer employment to, or solicit the employment or engagement of, or otherwise entice away from the employment of Disney or any affiliated entity, either for Executive's own account or for any other person, firm or 9 company, any person who is employed by Disney or any such affiliated entity, whether or not such person would commit any breach of his contract of employment by reason of his leaving the service of Disney or any affiliated entity. 20. Entire Agreement; Amendments; Waiver, Etc. ----------------------------------------- (a) This Agreement supersedes all prior or contemporaneous agreements and statements, whether written or oral, concerning the terms of Executive's employment, and no amendment or modification of this Agreement shall be effective unless set forth in a writing signed by Disney and Executive. No waiver by either party of any breach by the other party of any provision or condition of this Agreement shall be deemed a waiver of any similar or dissimilar provision or condition at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or Disney, as the case may be. (b) Nothing herein contained shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any present or future statute, law, ordinance or regulation, the latter shall prevail, but in such event the provision of this Agreement affected shall be curtailed and limited only to the extent necessary to bring it within legal requirements. Without limiting the generality of the foregoing, in the event any compensation or other monies payable hereunder shall be in excess of the amount permitted by any statute, law, ordinance, regulation or wage guideline which may be in affect at any time or from time to time, payment of the maximum amount then allowed thereby shall constitute full compliance by Disney with the payment requirements of this Agreement. (c) This Agreement and all rights hereunder are personal to Executive and shall not be assignable; provided, however, that all of Executive's rights -------- ------- accrued hereunder following his death shall inure to the benefit of his widow, personal representatives or designees or other legal representatives, as the case may be. Disney may assign its rights under this Agreement to any successor by merger, purchase, consolidation or otherwise, provided that such successor assumes all of the liabilities, obligations and duties of Disney under this Agreement, either contractually or as a matter of law. (d) The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or Executive's employment hereunder to the extent necessary to the intended preservation of such rights and obligations. (e) This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to principles of conflict of laws. 10 (f) All payments required to be made to Executive hereunder, whether during the term of his employment hereunder or otherwise, shall be subject to all applicable federal, state and local tax withholding laws. 21. Indemnification --------------- Indemnification shall be provided to Executive pursuant to an agreement substantially equivalent to Disney's standard form of indemnification for senior officers, a copy of which has been previously provided to Executive. 22. Notices ------- All notices that either party is required or may desire to give the other shall be in writing and given either personally or by depositing the same in the United States mail addressed to the party to be given notice as follows: To Employer: 500 South Buena Vista Street Burbank, California 91521 Attn: Chairman and Chief Executive Officer To Executive: 500 South Buena Vista Street Burbank, California 91521 Attn: Robert A. Iger Either party may by written notice designate a different address for giving of notices. The date of mailing of any such notices shall be deemed to be the date on which such notice is given. 23. Headings -------- The headings set forth herein are included solely for the purpose of identification and shall not be used for the purpose of construing the meaning of the provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE WALT DISNEY COMPANY By: /s/ Michael D. Eisner /s/ Robert A. Iger --------------------------- ------------------ Title: Robert A. Iger 11 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS SEP-30-2000 OCT-01-1999 MAR-31-2000 860 0 36,546 0 727 10,944 18,440 (6,659) 45,583 8,846 7,706 0 0 11,751 11,605 45,583 0 13,235 0 11,587 120 0 323 1,205 813 392 0 0 0 392 .25 .25
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