-----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, L5UlwxdOGsn6UF9kK7Au0SYdFynkjtuIT/scj/p0mSL6Wu9u79Yf6gWZZ2Sla7NB KTn7H3QGsV/TcR3hU43RoQ== 0000898430-99-004582.txt : 19991222 0000898430-99-004582.hdr.sgml : 19991222 ACCESSION NUMBER: 0000898430-99-004582 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991221 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-K SEC ACT: SEC FILE NUMBER: 001-11605 FILM NUMBER: 99778548 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-K 1 FORM 10-K DATED 09/30/1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 1999 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, California 91521 95-4545390 (818) 560-1000 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Disney Group Common Stock, $.01 par value New York Stock Exchange Pacific Stock Exchange go.com Common Stock, $.01 par value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None. 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of November 30, 1999, the aggregate market values of Disney Group and go.com common stock held by non-affiliates (based on the closing price on such date as reported on the New York Stock Exchange-Composite Transactions) were $57.6 billion and $1.2 billion, respectively. All executive officers and directors of registrant and all persons filing a Schedule 13D with the Securities and Exchange Commission in respect to registrant's common stock have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant. There were 2,065,943,456 shares of Disney Group common stock outstanding and 35,545,985 shares of go.com common stock outstanding as of December 17, 1999 Documents Incorporated by Reference Certain information required for Part III of this report is incorporated herein by reference to the proxy statement for the 2000 annual meeting of the Company's stockholders. PART I ITEM 1. Business The Walt Disney Company owns 100% of Disney Enterprises, Inc. (DEI) which, together with its subsidiaries, is a diversified worldwide entertainment company with operations in five business segments: Media Networks, Studio Entertainment, Theme Parks and Resorts, Consumer Products and Internet and Direct Marketing. The term "Company" is used to refer collectively to the parent company and the subsidiaries through which its various businesses are actually conducted. Information on revenues, operating income, identifiable assets and supplemental revenue of the Company's business segments appears in Note 11 to the Consolidated Financial Statements included in Item 8 hereof. The Company employs approximately 120,000 people. MEDIA NETWORKS Television and Radio Networks The Company operates the ABC Television Network, which as of September 30, 1999 had 225 primary affiliated stations operating under long-term agreements reaching 99.9% of all U.S. television households. The ABC Television Network broadcasts programs in "dayparts" as follows: Monday through Friday Early Morning, Daytime and Late Night, Monday through Sunday Prime Time and News, Children's and Sports. The Company operates the ABC Radio Networks, which reach more than 147 million domestic listeners weekly and consist of over 8,900 program affiliations on more than 4,400 radio stations. The ABC Radio Networks also produce and distribute a number of radio program series for radio stations nationwide and can be heard in more than 90 countries worldwide. In addition, ABC Radio Networks produces and operates Radio Disney, which targets children ages 6 to 11 and their parents. Radio Disney is carried on 45 stations that cover nearly 50 percent of the U.S. market. Generally, the networks pay the cost of producing their own programs or acquiring broadcast rights from other producers for network programming and pay varying amounts of compensation to affiliated stations for broadcasting the programs and commercial announcements included therein. Substantially all revenues from network operations are derived from the sale to advertisers of time in network programs for commercial announcements. The ability to sell time for commercial announcements and the rates received are primarily dependent on the quantitative and qualitative audience that the network can deliver to the advertiser as well as overall advertiser demand for time in the network marketplace. Television and Radio Stations The Company owns nine very high frequency (VHF) television stations, five of which are located in the top ten markets in the United States; one ultra high frequency (UHF) television station; 26 standard (AM) radio stations; and 16 frequency modulation (FM) radio stations. All of the television stations are affiliated with the ABC Television Network, and most of the 42 radio stations are affiliated with the ABC Radio Networks. The Company's television stations reach 24% of the nation's television households, calculated using the multiple ownership rules of the Federal Communications Commission (FCC). The Company's radio stations reach more than 13 million people weekly in the top 20 United States advertising markets. Markets, frequencies and other station details are set forth in the following tables: -1- Television Stations
Expiration Television date of FCC market Station and Market Channel authorization ranking (1) - ------------------ ------- ------------- ----------- WABC-TV (New York, NY) 7 Jun. 1, 2007 1 KABC-TV (Los Angeles, CA) 7 Dec. 1, 2006 2 WLS-TV (Chicago, IL) 7 Dec. 1, 2005 3 WPVI-TV (Philadelphia, PA) 6 Aug. 1, 2007 4 KGO-TV (San Francisco, CA) 7 (2) 5 KTRK-TV (Houston, TX) 13 Aug. 1, 2006 11 WTVD-TV (Raleigh-Durham, NC) 11 Dec. 1, 2004 29 KFSN-TV (Fresno, CA) 30 Dec. 1, 2006 55 WJRT-TV (Flint, MI) 12 Oct. 1, 2005 64 WTVG-TV (Toledo, OH) 13 Oct. 1, 2005 66 Radio Stations Frequency Expiration Radio AM-Kilohertz date of FCC market Station and Market FM-Megahertz authorization ranking (3) - ------------------ ------------ ------------- ----------- WABC (New York, NY) 770 K June 1, 2006 1 KABC (Los Angeles, CA) 790 K Dec. 1, 2005 2 KDIS (Los Angeles, CA) 710 K Dec. 1, 2005 2 WLS (Chicago, IL) 890 K Dec. 1, 2004 3 WMVP (Chicago, IL) 1000 K Dec. 1, 2004 3 WRDZ (Chicago, IL) 1300 K Dec. 1, 2004 3 WDDZ (Chicago, IL) 1500 K Dec. 1, 2004 3 KGO (San Francisco, CA) 810 K Dec. 1, 2005 4 KSFO (San Francisco, CA) 560 K Dec. 1, 2005 4 KMKY (San Francisco, CA) 1310 K Dec. 1, 2005 4 WBAP (Dallas-Fort Worth, TX) 820 K Aug. 1, 2005 6 KMKI (Dallas-Fort Worth, TX) 620 K Aug. 1, 2005 6 WJR (Detroit, MI) 760 K Oct. 1, 2004 7 WMAL (Washington, D.C.) 630 K Oct. 1, 2003 8 WDWD (Atlanta, GA) 590 K Apr. 1, 2004 12 KKDZ (Seattle, WA) 1250 K Feb. 1, 2006 14 KDIZ (Minneapolis, MN) 1440 K Apr. 1, 2005 18 WSDZ (St. Louis, MO) 1260 K Dec. 1, 2004 19 WEAE (Pittsburgh, PA) 1250 K Aug. 1, 2006 21 WWMK (Cleveland, OH) 1260 K Oct. 1, 2004 24 KADZ (Denver, CO) 1550 K Oct. 1, 2004 23 KDDZ (Denver, CO) 1690 K (2) 23 KMIK (Phoenix, AZ) 1580 K Feb. 2, 2005 15 KMIC (Houston, TX) 1590 K Aug. 1, 2005 10 WWMI (Tampa, FL) 1380 K Feb. 1, 2004 22 WFBA (Miami, FL) 990 K Feb. 1, 2004 11 WPLJ (FM) (New York, NY) 95.5 M June 6, 2006 1 KLOS (FM) (Los Angeles, CA) 95.5 M (2) 2 WXCD (FM) (Chicago, IL) 94.7 M Dec. 1, 2004 3 KSCS (FM) (Dallas-Fort Worth, TX) 96.3 M Aug. 1, 2005 6 KMEO (FM) (Dallas-Fort Worth, TX) 96.7 M Aug. 1, 2005 6 WPLT (FM) (Detroit, MI) 96.3 M Oct. 1, 2004 7 WDRQ (FM) (Detroit, MI) 93.1 M Oct. 1, 2001 7 WRQX (FM) (Washington, D.C.) 107.3 M Oct. 1, 2003 8 WJZW (FM) (Washington, D.C.) 105.9 M Oct. 1, 2001 8
-2-
Frequency Expiration Radio AM-Kilohertz date of FCC market Station and Market FM-Megahertz authorization ranking (3) - ------------------ ------------ ------------- ----------- WKHX (FM) (Atlanta, GA) 101.5 M Apr. 1, 2004 12 WYAY (FM) (Atlanta, GA) 106.7 M Apr. 1, 2004 12 KQRS (FM) (Minneapolis-St.Paul, MN) 92.5 M Apr. 1, 2005 18 KXXR (FM) (Minneapolis-St.Paul, MN) 93.7 M Apr. 1, 2005 18 KZNR (FM) (Minneapolis-St.Paul, MN) 105.1 M Apr. 1, 2005 18 KZNT (FM) (Minneapolis-St.Paul, MN) 105.3 M Apr. 1, 2005 18 KZNZ (FM) (Minneapolis-St.Paul, MN) 105.7 M Apr. 1, 2005 18
- -------- (1) Based on Nielsen U.S. Television Household Estimates, Nielsen Station Index, September 1998 (2) See "Renewals" (3) Based on 1998 Arbitron Radio Market Rank Cable Networks The Company's cable networks, which consist of cable and international broadcast operations, are principally involved in the production and distribution of cable television programming, the licensing of programming to domestic and international markets and investing in foreign television broadcasting, production and distribution entities. The Company owns the Disney Channel, Toon Disney, SoapNet, which will be launched in January 2000, 80% of ESPN, Inc., 37.5% of the A&E Television Networks, 50% of Lifetime Entertainment Services, 39.6% of E! Entertainment Television and has various international investments. The Disney Channel, which has approximately 59 million domestic subscribers, is a cable and satellite television service. New shows developed for original use by the Disney Channel include dramatic, adventure, comedy and educational series, as well as documentaries and first-run television movies. In addition, entertainment specials include shows originating from both the Walt Disney World Resort and Disneyland Park. The balance of the programming consists of products acquired from third parties and products from the Company's theatrical film and television programming library. The Disney Channel International reaches approximately 11 million subscribers. Programming consists primarily of the Company's theatrical film and television programming library, as well as products acquired from third parties and locally produced programming. The Disney Channels in Taiwan and the U.K. premiered in 1995, followed by the launch of the Disney Channels in Australia and Malaysia in 1996, France and the Middle East in 1997, Spain in April 1998, Italy in October 1998 and Germany in October 1999. Further launches are planned thereafter in Latin America and Scandinavia. The Company continues to explore the development of the Disney Channel in other countries around the world. Toon Disney, a 24-hour cable and satellite channel airing primarily Disney animation, was launched April 18, 1998. Toon Disney reaches 14 million subscribers. SoapNet, a 24-hour, seven-day-a-week soap opera channel, will be launched in January 2000. SoapNet's prime-time schedule will feature same-day telecasts of the ABC Daytime soap operas, All My Children, General Hospital, One Life to Live and Port Charles. The network, targeted to soap opera fans who cannot tune in during the daytime block on the ABC Television Network, will also feature an original half-hour daily soap news magazine show, Soap Center, as well as classic "Flashback" episodes from daytime series. SoapNet will add third party licensed programming in the near future. ESPN, Inc. operates ESPN, a cable and satellite sports programming service reaching 77 million domestic households; ESPN2, which reaches 67 million homes; ESPN Classic, which reaches nearly 20 million homes; and ESPNEWS, a 24- hour sports news service that reaches approximately 14 million households nationwide. ESPN launched two domestic pay sports channels, ESPN Now and ESPN -3- Extra, in September 1999. ESPN, Inc. programs, owns or has equity interests in 20 international networks, reaching more than 150 million households outside the United States in more than 180 countries and territories. ESPN, Inc., owns 33% of Eurosport, a pan-European cable and direct-to-home sports programming service, and 50% of ESPN Brazil. ESPN, Inc. owns a 50% interest in the ESPN STAR Sports joint venture, which delivers sports programming throughout most of Asia, and 32% of NetStar, which owns The Sports Network (TSN) and Le Reseau des Sports, among other media properties in Canada. ESPN, Inc. also holds a 20% interest in Sports-i ESPN in Japan, the country's only cable and direct- to-home all-sports network. ESPN also has several other brand extensions, including ESPN Radio, the largest radio sports network in the United States, distributed through ABC Radio to more than 620 stations; ESPN The Magazine published by Disney Publishing, included in the Consumer Products segment; and ESPN Zones, sports-themed dining and entertainment facilities managed by Disney Regional Entertainment, included in the Theme Parks and Resorts segment. The A&E Television Networks are cable programming services devoted to cultural and entertainment programming. The A&E cable service reaches 81 million subscribers. The History Channel, which is owned by A&E, reaches 61 million subscribers. Lifetime Entertainment Services owns Lifetime Television, which reaches 75 million cable subscribers and is devoted to women's lifestyle programming. During 1998, Lifetime launched the Lifetime Movie Network, a 24-hour digital channel. E! Entertainment Television is a cable programming service which reaches 59 million cable subscribers and is devoted to the world of entertainment. E! Entertainment Television also launched style. in October 1998. style. is a 24- hour network devoted to style, fashion and design (available to both analog and digital systems). The Company's share of the financial results of the cable and international broadcast services, other than the Disney Channel, ESPN, Inc., and SoapNet, beginning in 2000, is reported under the heading "Corporate and other activities" in the Company's Consolidated Statements of Income. Competitive Position The ABC Television Network, the Disney Channel, ESPN and other broadcasting entities primarily compete for viewers with the other television networks, independent television stations, other video media such as cable television, satellite television program services and videocassettes. In the sale of advertising time, the broadcasting operations compete with other television networks, independent television stations, suppliers of cable television programs and other advertising media such as newspapers, magazines and billboards. The ABC Radio Networks likewise compete with other radio networks and radio programming services, independent radio stations and other advertising media. The Company's television and radio stations are in competition with other television and radio stations, cable television systems, satellite television program services, videocassettes and other advertising media such as newspapers, magazines and billboards. Such competition occurs primarily in individual market areas. A television station in one market does not compete directly with other stations in other market areas. There has been a continuing decline in viewership at all major broadcast networks, including ABC, reflecting, among other things, the growth in the cable industry's share of viewers, which has resulted in increased competitive pressures for advertising revenues. In addition, sports and other programming costs have increased due to increased competition. Federal Regulation Television and radio broadcasting are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the Communications Act). The Communications Act -4- empowers the FCC, among other things, to issue, revoke or modify broadcasting licenses, determine the location of stations, regulate the equipment used by stations, adopt such regulations as may be necessary to carry out the provisions of the Communications Act and impose certain penalties for violation of its regulations. FCC regulations also restrict the ownership of stations and cable operations in certain circumstances, and regulate the practices of network broadcasters, cable providers and competing services. Such laws and regulations are subject to change, and the Company generally cannot predict whether new legislation or regulations, or a change in the extent of application or enforcement of current laws and regulations, would have an adverse impact on the Company's operations. Renewals Broadcasting licenses are granted for a maximum period of eight years, and are renewable upon application therefor if the FCC finds that the public interest would be served thereby. During certain periods when a renewal application is pending, other parties may file petitions to deny the application for renewal of a license. A renewal application is now pending for KGO-TV in San Francisco, KLOS (FM) in Los Angeles and KDDZ (AM) in Denver. All of the Company's other owned stations have been granted license renewals by the FCC for maximum terms. STUDIO ENTERTAINMENT The Studio Entertainment segment produces live-action and animated motion pictures, television programs, musical recordings and live stage plays. The Company is an industry leader in producing and acquiring live-action and animated motion pictures for distribution to the theatrical, television and home video markets and produces original television programming for network, first-run syndication, pay and international syndication markets. In addition, television programs have been created that contain characters originated in animated films. Films and characters are also often promoted through the release of audiocassettes and compact discs. The Company is also engaged directly in the home video and television distribution of its film and television library. Theatrical Films Walt Disney Pictures and Television, a subsidiary of the Company, produces and acquires live-action motion pictures that are distributed under the banners Walt Disney Pictures, Touchstone Pictures and Hollywood Pictures. Another subsidiary, Miramax Film Corp., acquires and produces motion pictures that are primarily distributed under the Miramax and Dimension banners. The Company also produces and distributes animated motion pictures under the banner Walt Disney Pictures. In addition, the Company distributes films produced or acquired from certain independent production companies. During fiscal 2000, the Company expects to distribute approximately 23 feature films under the Walt Disney Pictures, Touchstone Pictures and Hollywood Pictures banners and approximately 30 films under the Miramax and Dimension banners, including several live-action family films and five full length animated films, with the remainder targeted to teenagers and adults. In addition, the Company periodically reissues previously released animated films. As of September 30, 1999, the Company had released 569 full length live-action features (primarily color), 38 full length animated color features and approximately 483 cartoon shorts. The Company distributes and markets its filmed products principally through its own distribution and marketing companies in the United States and major foreign markets. In 1999, the Company's international distributor, Buena Vista International, became the first international distribution company to gross more than $1 billion at the box office for five consecutive years. -5- Home Video The Company directly distributes home video releases from each of its banners in the domestic market. In the international market, the Company distributes both directly and through foreign distribution companies. In addition, the Company develops, acquires and produces original programming for direct to video release. The Company distributed four of the ten top selling home videos and three of the ten top rental titles in 1999. As of September 30, 1999, 1,343 produced and acquired titles, including 726 feature films and 539 cartoon shorts and animated features, were available to the domestic marketplace and 1,524 produced and acquired titles, including 853 feature films and 671 cartoon shorts and animated features, were available to the international home entertainment market. Television Production and Distribution The Company develops, produces and distributes television programming to global broadcasters, cable and satellite operators, including the major television networks, the Disney Channel and other cable broadcasters, under the Buena Vista Television, Touchstone Television, Walt Disney Television and Miramax Television labels. Program development is carried out in collaboration with a number of independent writers, producers and creative teams under various development arrangements. The Company focuses on the development, production and distribution of half-hour comedies and one-hour dramas for network prime-time broadcast. Half-hour comedies Boy Meets World, Sports Night and The PJ's, and the one-hour drama Felicity, were all renewed for the 1999/2000 television season. New prime-time series that premiered in the fall of 1999 included the half-hour comedy Thanks and the one-hour dramas Once and Again and Popular. Midseason orders included the half-hour comedies Brutally Normal, Talk to Me and Clerks, and the one-hour drama Wonderland. The Company is also producing nine original television movies for The Wonderful World of Disney, which was renewed for the 1999/2000 television season and continues to air on ABC on Sunday evenings. The 1999/2000 Saturday morning television season returned with a third year of the two-hour kids' show, Disney's One Saturday Morning on ABC. Disney's One Saturday Morning is a show comprised of audience participation segments, cartoons and pre-recorded comedy segments that "wrap-around" the weekly series Disney's Doug, Disney's Recess, Disney's Pepper Ann, Sabrina and The New Adventures of Winnie the Pooh. Other television animation series on Disney's One Saturday Morning include the return of Mouseworks, the first cartoon series since the 1950's featuring Mickey Mouse and his friends, and the midseason premier of Weekenders. The Company also provides a variety of prime-time specials for exhibition on network television. Additionally, the Company produces first-run animated and live-action syndicated programming. Disney's One Too is a two-hour block, airing six days per week, including Disney's Recess, Disney's Doug, Sabrina and Disney's Hercules. Live-action programming includes Live! with Regis and Kathie Lee, a daily talk show; Honey, I Shrunk the Kids, a weekly family action hour; Roger Ebert and the Movies, a weekly motion picture review program; Your Big Break, a weekly variety show; Disney Presents Bill Nye the Science Guy, a weekly educational program for children; as well as the daily game show on cable Win Ben Stein's Money. The Company licenses its theatrical and television film library to the domestic television syndication market. Television programs in off-network syndication or cable include Home Improvement, Ellen, Boy Meets World, Blossom, Dinosaurs, Golden Girls, Brotherly Love, Empty Nest and Unhappily Ever After. Major packages of the Company's feature films and television programming have been licensed for broadcast over several years. The Company also licenses its theatrical and television properties in a number of foreign television markets. In addition, certain of the Company's television programs are syndicated by the Company abroad, including The Disney Club, a weekly series that the Company produces for foreign markets. -6- The Company has licensed to the Encore pay television services, over a multi-year period, exclusive domestic pay television rights to certain films released under the Walt Disney Pictures, Touchstone Pictures, Hollywood Pictures, Miramax and Dimension banners. In addition, the Company has licensed to the Showtime pay television services over a multi-year period, exclusive domestic pay television rights to certain films released under the Dimension banner. Audio Products and Music Publishing The Company also produces and distributes compact discs, audiocassettes and records, consisting primarily of soundtracks for animated films and read-along products, directed at the children's market in the United States, France and the United Kingdom, and licenses the creation of similar products throughout the rest of the world. In addition, the Company commissions new music for its motion pictures and television programs, and records and licenses the song copyrights created for the Company to others for printed music, records, audiovisual devices and public performances. Domestic retail sales of compact discs, audiocassettes and records are the largest source of music-related revenues, while direct marketing, which utilizes catalogs, coupon packages and television, is a secondary means of music distribution for the Company. The Company's Hollywood Records subsidiary develops, produces and markets recordings from new talent across the spectrum of popular music, as well as soundtracks from certain of the Company's live-action motion pictures. The Company's Mammoth Records develops, produces and markets a diverse group of artists in the popular and alternative music fields. The Company also owns the Nashville-based music label Lyric Street Records. Walt Disney Theatrical Productions The Company's award-winning live stage musical division produces musicals for stages on Broadway and around the world. During 1999, Beauty and the Beast entered its sixth year on Broadway and a new domestic touring production was launched. To date, the show has been produced in twelve international markets. The Lion King continues its standing-room-only Broadway run at the New Amsterdam Theatre into its second year. The show is running to equal acclaim in Tokyo and Osaka, Japan, and in London, England. Additional companies debuted in London in October 1999 and will debut in Toronto and Los Angeles during 2000. Under a license agreement, The Hunchback of Notre Dame opened in Berlin in June 1999. Elton John and Tim Rice's Aida opened in Chicago in December 1999 and is scheduled to open on Broadway in early 2000. Competitive Position The success of the Studio Entertainment operations is heavily dependent upon public taste, which is unpredictable and subject to change. In addition, Studio Entertainment operating results fluctuate due to the timing and performance of theatrical and home video releases. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods. The Company's Studio Entertainment businesses compete with all forms of entertainment. A significant number of companies produce and/or distribute theatrical and television films, exploit products in the home video market, provide pay television programming services and sponsor live theater. The Company also competes to obtain creative talents, story properties, advertiser support, broadcast rights and market share, which are essential to the success of all the Company's Studio Entertainment businesses. -7- THEME PARKS AND RESORTS The Company operates the Walt Disney World Resort in Florida and the Disneyland Park and two hotels in California. The Company also earns royalties on revenues generated by the Tokyo Disneyland theme park and has an ownership interest in Disneyland Paris. Walt Disney World Resort The Walt Disney World Resort is located on approximately 30,500 acres of land owned by Company subsidiaries 15 miles southwest of Orlando, Florida. The resort includes four theme parks (the Magic Kingdom, Epcot, Disney-MGM Studios and Disney's Animal Kingdom), hotels and villas, a retail, dining and entertainment complex, a sports complex, conference centers, campgrounds, golf courses, water parks and other recreational facilities designed to attract visitors for an extended stay. In addition, the resort operates Disney Cruise Line from Port Canaveral, Florida. The Company markets the entire Walt Disney World destination resort through a variety of national, international and local advertising and promotional activities. A number of attractions in each of the theme parks are sponsored by corporate participants through long-term participation agreements. Magic Kingdom - The Magic Kingdom, which opened in 1971, consists of seven principal areas: Main Street U.S.A., Liberty Square, Frontierland, Tomorrowland, Fantasyland, Adventureland and Mickey's Toontown Fair. These areas feature themed rides and attractions, restaurants, refreshment areas and merchandise shops. Epcot - Epcot, which opened in 1982, consists of two major themed areas: Future World and World Showcase. Future World dramatizes certain historical developments and addresses the challenges facing the world today through major pavilions devoted to high-tech products of the future ("Innoventions"), communication and technological exhibitions ("Spaceship Earth"), energy, transportation, imagination, life and health, the land and seas. World Showcase presents a community of nations focusing on the culture, traditions and accomplishments of people around the world. World Showcase includes as a central showpiece the American Adventure, which highlights the history of the American people. Other nations represented are Canada, China, France, Germany, Italy, Japan, Mexico, Morocco, Norway and the United Kingdom. Both areas feature themed rides and attractions, restaurants and merchandise shops. Beginning October 1, 1999, Epcot began hosting the Company's 15-month Millennium Celebration, which includes new entertainment spectaculars, attractions, interactive experiences from around the world and special events. Disney-MGM Studios - The Disney-MGM Studios, which opened in 1989, consists of a theme park, an animation studio and a film and television production facility. The park centers around Hollywood as it was during the 1930's and 1940's and features Disney animators at work and a backstage tour of the film and television production facilities in addition to themed food service and merchandise facilities and other attractions. The production facility consists of three sound stages, merchandise shops and a back lot area and currently hosts both feature film and television productions. In late 1998, Disney-MGM Studios began featuring Fantasmic!, a night-time entertainment production spectacular. Disney's Animal Kingdom - Disney's Animal Kingdom, which opened in April 1998, consists of a 145-foot Tree of Life as the centerpiece surrounded by five themed areas: Dinoland U.S.A., Africa, Conservation Station, Asia and Camp Minnie-Mickey. Each themed area contains adventure attractions, entertainment shows, restaurants and merchandise shops. The park features more than 200 species of animals and 4,000 varieties of trees and plants on more than 500 acres of land. -8- Resort Facilities - As of September 30, 1999, the Company owned and operated 13 resort hotels and a complex of villas and suites at the Walt Disney World Resort, with a total of approximately 20,200 rooms and 318,000 square feet of conference meeting space. In addition, Disney's Fort Wilderness camping and recreational area offers approximately 800 campsites and 400 wilderness homes. The resort also offers professional development and personal enrichment programs at the Disney Institute. Recreational amenities and activities available at the resort include five championship golf courses, miniature golf courses, full-service spas, tennis, sailing, water skiing, swimming, horseback riding and a number of other noncompetitive sports and leisure time activities. The resort also operates three water parks: Blizzard Beach, River Country and Typhoon Lagoon. The Company has also developed a 120-acre retail, dining and entertainment complex known as Downtown Disney, which consists of the Downtown Disney Marketplace, Pleasure Island and Downtown Disney West Side. In addition to more than 20 specialty retail shops and restaurants, the Downtown Disney Marketplace is home to the 50,000-square-foot World of Disney, the largest Disney retail outlet. Pleasure Island, an entertainment center adjacent to the Downtown Disney Marketplace, includes restaurants, night clubs and shopping facilities. Downtown Disney West Side is situated on 66 acres on the west side of Pleasure Island and includes a DisneyQuest facility, Cirque du Soleil and several participant retail, dining and entertainment operations. Disney's Wide World of Sports, which opened in 1997, is a 200-acre sports complex providing professional caliber training and competition, festival and tournament events and interactive sports activities. The complex's venues accommodate more than 30 different sporting events, including baseball, tennis, basketball, softball, track and field, football and soccer. Its 9,000- seat stadium is the spring training site for the Atlanta Braves. The tennis venue is the home of the U.S. Men's Clay Court championships. In addition, the Harlem Globetrotters use the facility for their official training site and holiday season games. The Amateur Athletic Union hosts more than 30 championship events per year at the facility. Disney Cruise Line is a cruise vacation line that includes two 85,000-ton ships, the Disney Magic and its sister ship the Disney Wonder, which sailed their maiden voyages in July 1998 and August 1999, respectively. Both ships cater to children, families and adults, with distinctly themed areas for each group. Each ship features 875 staterooms, 73% of which are outside staterooms providing guests with ocean views. Each cruise vacation includes a visit to Disney's Castaway Cay, a 1,000-acre private Bahamian island in the Abacos. The Company packages cruise vacations with visits to the Walt Disney World Resort and also offers cruise-only options. At the Downtown Disney Marketplace Hotel Plaza, seven independently operated hotels are situated on property leased from the Company. These hotels have a capacity of approximately 3,700 rooms. Additionally, two hotels--The Walt Disney World Swan and the Walt Disney World Dolphin, with an aggregate capacity of approximately 2,300 rooms--are independently operated on property leased from the Company near Epcot. The Disney Vacation Club offers ownership interests in several resort facilities, including the 497-unit Disney Old Key West Resort and 383 units at Disney's BoardWalk Resort at the Walt Disney World Resort, a 175-unit resort in Vero Beach, Florida, and a 102-unit resort on Hilton Head Island, South Carolina. A 34-unit expansion at Disney's Old Key West is scheduled to open in 2000 and a 136-unit expansion adjacent to Disney's Wilderness Lodge is scheduled for opening in 2001. Available units at each facility are intended to be sold under a vacation ownership plan and operated partially as rental property until sold. In addition, under continued development is Celebration, an innovative new town that combines architecture, education, health and technology in ways that promote a strong sense of community. Founded in 1994, Celebration is home to more than 2,500 residents, an Osceola County public school, -9- an 18-hole public golf course, park and recreation areas and a downtown featuring a variety of shops and restaurants. Disneyland Resort The Company owns 393 acres and has under long-term lease an additional 65 acres of land in Anaheim, California. The Company also has the option to purchase an additional 53 acres of land near Disneyland. This option expires in May 2001. Disneyland, which opened in 1955, consists of eight principal areas: Toontown, Fantasyland, Adventureland, Frontierland, Tomorrowland, New Orleans Square, Main Street and Critter Country. These areas feature themed rides and attractions, restaurants, refreshment stands and merchandise shops. A number of the Disneyland attractions are sponsored by corporate participants. The Company markets Disneyland through international, national and local advertising and promotional activities. The Company also owns and operates the 1,000-room Disneyland Hotel and the 500-room Disneyland Pacific Hotel near Disneyland. The Company is constructing a new theme park, Disney's California Adventure, projected to open in 2001. The new theme park is under construction on property adjacent to Disneyland. Disney's California Adventure will celebrate the many attributes of the state of California and will feature Downtown Disney, a themed complex of shopping, dining and entertainment venues; the Grand Californian, a deluxe 750-room hotel located inside the park; and an assortment of California-themed areas with associated rides and attractions. Disney Regional Entertainment Through the Disney Regional Entertainment group, the Company is developing a variety of new entertainment concepts to be located in metropolitan and suburban locations in the United States. These businesses include sports concepts, interactive entertainment venues and other operations that are based on Disney brands and creative properties. The ESPN Zone is a sports-themed dining and entertainment experience featuring three components: the Studio Grill, offering dining in an ESPN studio environment; the Screening Room, offering fans any game on the air in the ultimate sports viewing environment; and the Sports Arena, challenging fans with a variety of interactive and competitive attractions. In 1998, the first ESPN Zone site opened in Baltimore's Inner Harbor. Two additional locations were opened in 1999, in Chicago's River North District and New York's Times Square. The Company plans to open a further three locations in Atlanta, Washington, D.C. and Denver in 2000. DisneyQuest is a multi-story facility where guests of all ages are launched into a wide range of virtual, interactive adventures. In the summer of 1998, the first DisneyQuest opened in Downtown Disney at the Walt Disney World Resort. A second DisneyQuest opened in Chicago in the summer of 1999, and the Company plans to open a third location in Philadelphia in 2001. Tokyo Disney Resort The Company earns royalties on revenues generated by the Tokyo Disneyland theme park, which is owned and operated by Oriental Land Co., Ltd. (OLC), an unrelated Japanese corporation. The park, which opened in 1983, is similar in size and concept to Disneyland and is located approximately six miles from downtown Tokyo, Japan. Adjacent to Tokyo Disneyland, OLC is developing a retail, dining and entertainment complex known as Ikspiari. Ikspiari is scheduled to open in July 2000, together with a 504-room Disney-branded hotel, the Disney Ambassador hotel. The hotel will be owned and operated by OLC under license from a Company subsidiary. Construction has begun on Tokyo DisneySea, the second theme park in Japan designed by Walt Disney Imagineering. Tokyo DisneySea is scheduled to open in fall 2001, together with a 502-room Disney-branded hotel and a monorail system. -10- The Company will be entitled to royalties from Tokyo DisneySea and the two new hotels. All construction costs for the development projects are being borne by OLC, which is also reimbursing the Company for its design, technical and operational assistance costs. Disneyland Paris Disneyland Paris is located on a 4,800-acre site at Marne-la-Vallee, approximately 20 miles east of Paris, France. The existing theme park, The Magic Kingdom, which opened in 1992, features 43 attractions in its five themed lands. Seven themed hotels, with a total of approximately 5,800 rooms, are part of the resort complex, together with an entertainment center offering a variety of retail, dining and show facilities. The project was developed pursuant to a 1987 master agreement with French governmental authorities by Euro Disney S.C.A. (Euro Disney), a publicly-held French company in which the Company currently holds a 39% equity interest and which is managed by a subsidiary of the Company. The financial results of the Company's investment in Euro Disney are reported under the heading "Corporate and other activities" in the Company's Consolidated Statements of Income. Development of the site continues with the Val d'Europe project near Disneyland Paris. Construction of an international shopping mall and the associated road infrastructure is now underway, with an opening date expected in winter of the year 2000. In November 1999, Euro Disney stockholders approved an increase in share capital through an equity rights offering. The offering has been underwritten to raise $238 million by the end of December 1999. The net proceeds will be used to partially finance the construction of a second theme park, Disney Studios, adjacent to the Magic Kingdom. The Company subscribed to approximately $93 million of the equity rights offering, maintaining its 39% interest in Euro Disney. Disney Studios is expected to open in spring 2002. Walt Disney Imagineering Walt Disney Imagineering provides master planning, real estate development, attraction and show design, engineering support, production support, project management and other development services, including research and development for the Company's operations. Anaheim Sports, Inc. Anaheim Sports, Inc., a subsidiary of the Company, owns and operates a National Hockey League franchise, the Mighty Ducks of Anaheim. In addition, a Company subsidiary is the managing general partner of Anaheim Angels L.P., the holder of the Anaheim Angels Major League Baseball franchise. The Company owns a 100% general partnership interest in Anaheim Angels L.P., as a result of exercising its option to purchase the 75% of the partnership that it did not previously own during the second quarter of 1999. Competitive Position All of the theme parks and the associated resort facilities are operated on a year-round basis. Historically, the theme parks and resort business experiences fluctuations in park attendance and resort occupancy resulting from the 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. The Company's theme parks and resorts compete with all other forms of entertainment, lodging, tourism and recreational activities. The profitability of the leisure-time industry is influenced by various factors that are not directly controllable, such as economic conditions including business cycle and exchange rate fluctuations, amount of available leisure time, oil and transportation prices and weather patterns. -11- CONSUMER PRODUCTS The Consumer Products segment licenses the Company's characters and other intellectual property for use in connection with merchandise and publications and publishes books and magazines. The Company licenses the name "Walt Disney," as well as the Company's characters, visual and literary properties, to various consumer manufacturers, retailers, show promoters and publishers throughout the world. Character merchandising and publications licensing promote the Company's films and television programs, as well as the Company's other operations. Company subsidiaries also engage in direct retail distribution of products based on the Company's characters and films through "The Disney Stores" it operates; publish books, magazines and comics worldwide; and produce children's audio products and computer software for the entertainment market, as well as film and video products for the educational marketplace. Character Merchandise and Publications Licensing The Company's worldwide licensing activities generate royalties, which are usually based on a fixed percentage of the wholesale or retail selling price of the licensee's products. The Company licenses characters based upon both traditional and newly created film properties. Character merchandise categories that have been licensed include apparel, toys, gifts, home furnishings and housewares, stationery and sporting goods. Publication categories that have been licensed include continuity-series books, book sets, art and picture books and magazines. In addition to receiving licensing fees, the Company is actively involved in the development and approval of licensed merchandise and in the conceptualization, development, writing and illustration of licensed publications. The Company continually seeks to create new characters to be used in licensed products. The Disney Stores The Company markets Disney-related products directly through its retail facilities operated under "The Disney Store" name. These facilities are generally located in leading shopping malls and similar retail complexes. The stores carry a wide variety of Disney merchandise and promote other businesses of the Company. During fiscal 1999, the Company opened 29 new stores in the United States and Canada, 10 in Europe and 10 in the Asia-Pacific area. The total number of stores was 728 as of September 30, 1999. Books and Magazines The Company has book imprints in the United States offering books for children and adults as part of the Buena Vista Publishing Group. The Company also produces several magazines, including FamilyFun, Disney Adventures and Discover, a general science magazine. In addition, the Company produces ESPN The Magazine as part of a joint venture with ESPN, Inc. and The Hearst Company. Disney Interactive Disney Interactive is a software business that licenses, develops and markets entertainment and educational computer software and video game titles for home and school. Other Activities The Company produces audiovisual materials for the educational market, including videocassettes and film strips. It also licenses the manufacture and sale of posters and other teaching aids. The Company markets and distributes, through various channels, animation cel art and other animation-related artwork and collectibles. Competitive Position The Company competes in its character merchandising and other licensing, publishing and retail activities with other licensors, publishers and retailers of character, brand and celebrity names. -12- Although public information is limited, the Company believes it is the largest worldwide licensor of character-based merchandise and producer/distributor of children's audio and film-related products. Operating results for the licensing and retail distribution business are influenced by seasonal consumer purchasing behavior and by the timing and performance of animated theatrical releases. INTERNET AND DIRECT MARKETING In 1997, the Buena Vista Internet Group was formed to consolidate and coordinate the Company's wide-ranging Internet activities. On November 18, 1998, the Company acquired 43% of Infoseek Corporation (Infoseek), a publicly- held Internet search company. During January 1999, the Company and Infoseek together launched GO.com, an Internet portal serving as an interactive link through which people can gain access to the Internet at large, as well as every form of information, entertainment and consumer products that Disney offers through the Internet. During the third quarter of 1999, the Company's Direct Marketing business, consisting mainly of The Walt Disney Catalog, was combined with the Buena Vista Internet Group to form the Internet and Direct Marketing business. The Internet business develops, publishes and distributes content for online services intended to appeal to broad consumer interest in sports, news, family and entertainment. Internet websites include Disney.com, Family.com, ESPN.com, ABCNEWS.com, ABCSports.com and ABC.com. The Internet business also produces Disney's Club Blast, an entertainment and educational online subscription service for kids. Internet commerce activities include the DisneyStore.com, which markets Disney-themed merchandise online; Disney Travel Online, which offers travel packages to the Walt Disney World Resort and other Disney destinations; and ESPNStore.com, which offers ESPN-themed and other sports- related merchandise. The Direct Marketing business operates the Walt Disney Catalog, which markets Disney-themed merchandise via direct mail. On July 10, 1999, the Company entered into an Agreement and Plan of Reorganization with Infoseek to acquire the remaining 58% of Infoseek that it did not then own. On November 17, 1999, the stockholders of both Infoseek and the Company approved the transaction. As a result of this approval, the Company combined its Internet and Direct Marketing operations with Infoseek to create a single Internet business. A new class of common stock, trading under the ticker symbol GO, was issued to track the performance of the combined businesses. ITEM 2. Properties The Walt Disney World Resort, Disneyland Park and other properties of the Company and its subsidiaries are described in Item 1 under the caption Theme Parks and Resorts. Film library properties are described in Item 1 under the caption Studio Entertainment. Radio and television stations owned by the Company are described in Item 1 under the caption Media Networks. A subsidiary of the Company owns approximately 51 acres of land in Burbank, California on which the Company's studios and executive offices are located. The studio facilities are used for the production of both live-action and animated motion pictures and television products. In addition, Company subsidiaries lease office and warehouse space for certain studio and corporate activities. A 397,000 square-foot office building is under construction in Burbank, California, with an expected completion date during 2000. Other owned properties include a 400,000 square-foot office building in Burbank, California, which is used for the Company's operations. A subsidiary of the Company owns approximately 2.2 million square feet of office and warehouse buildings on approximately 113 acres in Glendale, California. The buildings are used for the Company's operations and also contain space leased to third parties. A 142,000 square-foot broadcast facility for KABC-TV is under construction with an expected completion date during 2000. The Company's Media Networks segment corporate offices are located in a building owned by a subsidiary of the Company in New York City. A Company subsidiary also owns the ABC Television Center adjacent to the corporate offices and ABC Radio Networks' studios, also in New York City. -13- Subsidiaries of the Company own the ABC Television Center and lease the ABC Television Network offices in Los Angeles, the ABC News Bureau facility in Washington, D.C. and a computer facility in Hackensack, New Jersey, under leases expiring on various dates through 2034. The Company's 80%-owned subsidiary, ESPN, Inc., owns ESPN Plaza in Bristol, Connecticut, from which it conducts its technical operations. The Company owns the majority of its other broadcast studios and offices and broadcast transmitter sites elsewhere, and those which it does not own are occupied under leases expiring on various dates through 2039. A U.K. subsidiary of the Company owns buildings on a four-acre parcel under long-term lease in London, England. The mixed-use development consists of 140,000 square feet of office space occupied by subsidiary operations, a 27,000 square-foot building leased to a third party and 65,000 square feet of retail space. A second phase of this development, completed in 1998, includes a 142,000 square-foot office building occupied by Company subsidiaries in 1999. Company subsidiaries also lease office space in other parts of Europe and in Asia and Latin America. The Disney Stores and Disney Regional Entertainment lease retail space for their operations. ITEM 3. Legal Proceedings The Company, together with, in some instances, certain of its directors and officers, is a defendant or co-defendant in various legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses. Management does not expect the Company to suffer any material liability by reason of such actions. In re The Walt Disney Company Derivative Litigation. On October 8, 1998, the Delaware Court of Chancery dismissed an amended and consolidated complaint filed on May 28, 1997 that named each of the Company's directors as of December 1996 as defendants. The amended complaint, filed by William and Geraldine Brehm and thirteen other individuals, had sought, among other things, a declaratory judgment that the Company's 1995 employment agreement with its former president, Michael S. Ovitz, was void, or alternatively that Mr. Ovitz's termination should be deemed a termination "for cause" and any severance payments to him forfeited. The complaint also sought compensatory or rescissory damages and injunctive and other equitable relief from the named defendants, as well as class-action status to pursue a claim for damages and invalidation of the 1997 election of directors. In its ruling on October 8, 1998, the Delaware court dismissed all counts of the amended complaint. On November 4, 1998, plaintiffs filed a notice of appeal from the court's decision. Similar or identical claims have also been filed by the same plaintiffs (other than William and Geraldine Brehm) in the Superior Court of the State of California, Los Angeles County, beginning with a claim filed by Richard and David Kaplan on January 3, 1997. On May 18, 1998, an additional claim was filed in the same California court by Dorothy L. Greenfield. All of the California claims have been consolidated and stayed pending final resolution of the Delaware proceedings. ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. Executive Officers of the Company The executive officers of the Company are elected each year at the organizational meeting of the Board of Directors which follows the annual meeting of the stockholders and at other meetings as appropriate. Each of the executive officers has been employed by the Company in the position or positions indicated in the list and pertinent notes below. Messrs. Eisner, Disney and Litvack have been employed by the Company as executive officers for more than five years. -14- At September 30, 1999, the executive officers were as follows: Executive Officer Name Age Title Since ------------------ --- ----------------------------------------- --------- Michael D. Eisner 57 Chairman of the Board and Chief Executive 1984 Officer Roy E. Disney 69 Vice Chairman of the Board 1984 Sanford M. Litvack 63 Vice Chairman of the Board 1991 Louis M. Meisinger 57 Executive Vice President and General 1998 Counsel /1/ John F. Cooke 57 Executive Vice President-Corporate 1995 Affairs /2/ Peter E. Murphy 36 Executive Vice President and Chief 1998 Strategic Officer /3/ Thomas O. Staggs 38 Executive Vice President and Chief 1998 Financial Officer /4/
- -------- /1/ Mr. Meisinger was named Executive Vice President and General Counsel of the Company on July 6, 1998. Prior to joining the Company, he was a senior partner with the law firm of Troop, Meisinger, Steuber & Pasich in Los Angeles, California, a firm he co-founded in 1975. Mr. Meisinger specialized in the litigation of complex entertainment, commercial and securities matters. /2/ Mr. Cooke served as President of the Disney Channel from 1985 until assuming his present position in February 1995. /3/ Mr. Murphy joined the Company's strategic planning operation in 1988 and was named Senior Vice President-Strategic Planning and Development of the Company in July 1995. From August 1997 to May 1998 he served as Chief Financial Officer of ABC, Inc. He assumed his present position in May 1998. Effective October 3, 1999, Mr. Murphy was promoted to Senior Executive Vice President. /4/ Mr. Staggs joined the Company's strategic planning operation in 1990 and was named Senior Vice President-Strategic Planning and Development of the Company in July 1995, serving in that capacity until assuming his present position in May 1998. Effective October 3, 1999, Mr. Staggs was promoted to Senior Executive Vice President. -15- PART II ITEM 5. Market for the Company's Common Stock and Related Stockholder Matters The Company's common stock is listed on the New York and Pacific stock exchanges (NYSE symbol DIS). The following sets forth the high and low composite closing sale prices for the fiscal periods indicated, adjusted to reflect the three-for-one split of the Company's stock effective June 1998.
Sales Price ------------------- High Low --------- --------- 1999 4th Quarter.......................................... $30 $25 1/2 3rd Quarter.......................................... 35 7/16 28 13/16 2nd Quarter.......................................... 38 29 9/16 1st Quarter.......................................... 33 9/16 23 1/2 1998 4th Quarter.......................................... $39 7/8 $24 7/16 3rd Quarter.......................................... 42 3/8 35 1/64 2nd Quarter.......................................... 38 19/64 31 31/64 1st Quarter.......................................... 33 25 59/64
On September 29, 1998, the Company's Board of Directors decided to begin paying dividends on an annual, rather than a quarterly basis, to reduce costs and simplify payments to stockholders. The Company declared a fourth quarter dividend of $0.21 per share on November 4, 1999 related to fiscal 1999. The Company declared a first quarter dividend of $0.0442 per share and three subsequent quarterly dividends of $.0525 per share in 1998. As of September 30, 1999, the approximate number of record holders of the Company's common stock was 842,000. Effective November 17, 1999, shares of the Company's existing common stock were reclassified as Disney Group common stock and reflect the performance of the Disney Group. In addition, the Company issued a new class of common stock to reflect the performance of GO.com. The go.com common stock began trading on the NYSE under the symbol GO on November 18, 1999 (see Note 15 to the Consolidated Financial Statements). -16- ITEM 6. Selected Financial Data (In millions, except per share data)
1999(/2/) 1998(/3/) 1997(/4/) 1996(/5/) 1995 --------- --------- --------- --------- ------- Statements of income Revenues $23,402 $22,976 $22,473 $18,739 $12,151 Operating income 3,444 4,015 4,447 3,033 2,466 Net income 1,300 1,850 1,966 1,214 1,380 Per share(/1/) Earnings Diluted $ 0.62 $ 0.89 $ 0.95 $ 0.65 $ 0.87 Basic 0.63 0.91 0.97 0.66 0.88 Dividends(/6/) 0.21 0.20 0.17 0.14 0.12 Balance sheets Total assets $43,679 $41,378 $38,497 $37,341 $14,995 Borrowings 11,693 11,685 11,068 12,342 2,984 Stockholders' equity 20,975 19,388 17,285 16,086 6,651 Statements of cash flows Cash provided by operations $ 5,588 $ 5,115 $ 5,099 $ 3,707 $ 3,510 Investing activities (5,310) (5,665) (3,936) (12,546) (2,288) Financing activities 9 360 (1,124) 8,040 (332)
- -------- (1) The earnings and dividends per share have been adjusted to give effect to the three-for-one split of the Company's common shares effective June 1998. See Note 8 to the Consolidated Financial Statements. (2) 1999 results include a gain from the sale of Starwave Corporation of $345 million, Equity in Infoseek loss of $322 million and restructuring charges of $132 million. See Notes 2 and 15 to the Consolidated Financial Statements. The diluted earnings per share impact of these activities were $0.10, ($0.09) and ($0.04), respectively. (3) 1998 results include a $64 million restructuring charge. The diluted earnings per share impact of the charge was $0.02. (4) 1997 results include a $135 million gain from the sale of KCAL-TV. The diluted earnings per share impact of the gain was $0.04. See Note 2 to the Consolidated Financial Statements. (5) 1996 results include a $300 million non-cash charge pertaining to the implementation of SFAS 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and a $225 million charge for costs related to the acquisition of ABC. The earnings per share impacts of these charges were $0.10 and $0.07, respectively. See Note 2 to the Consolidated Financial Statements. (6) The 1999 dividend was declared on November 4, 1999, to be paid on December 17, 1999, to holders of record as of November 16, 1999. See Note 8 to the Consolidated Financial Statements. -17- ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS In the fourth quarter of 1999, the Company changed the manner in which it reports its operating segments. In addition, intangible asset amortization has been excluded from segment results and reported as a separate component of operating income (see Notes 1 and 11 to the Consolidated Financial Statements). Accordingly, the Company now reports five operating segments: Media Networks, which is broken into two categories, Broadcasting and Cable Networks. Broadcasting includes the ABC Television Network, the Company's television stations and radio stations, and the ABC, ESPN and Radio Disney Radio Networks. Cable Networks consists of the ESPN-branded cable networks, the Disney Channel and start-up cable operations, including Toon Disney and the soon-to-be launched SoapNet; Studio Entertainment, which includes the Company's feature animation and live-action motion picture, home video, television, live stage play, and music production and distribution businesses; Theme Parks and Resorts, reflecting the Company's theme park and resort activities except Disneyland Paris, which is accounted for under the equity method and included in Corporate and other activities, its sports team franchises and its DisneyQuest and ESPN Zone regional entertainment businesses; Consumer Products, reflecting primarily merchandise licensing, publishing, The Disney Store and Disney Interactive software; and Internet and Direct Marketing, representing the Company's online activities, except for its investment in Infoseek Corporation, and the Disney Catalog. Prior years have been restated to conform to the 1999 presentation. -18- Consolidated Results (in millions, except per share data)
Pro forma (/4/) As Reported (unaudited) ------------------------- --------------- 1999 1998 1997 1997 ------- ------- ------- --------------- Revenues: Media Networks $ 7,512 $ 7,142 $ 6,522 $ 6,501 Studio Entertainment 6,548 6,849 6,981 6,981 Theme Parks and Resorts 6,106 5,532 5,014 5,014 Consumer Products 3,030 3,193 3,782 2,943 Internet and Direct Marketing 206 260 174 174 ------- ------- ------- ------- Total $23,402 $22,976 $22,473 $21,613 ======= ======= ======= ======= Operating income: (/1/) Media Networks $ 1,611 $ 1,746 $ 1,699 $ 1,695 Studio Entertainment 116 769 1,079 1,079 Theme Parks and Resorts 1,446 1,288 1,136 1,136 Consumer Products 607 801 893 673 Internet and Direct Marketing (93) (94) (56) (56) Amortization of intangible assets (456) (431) (439) (413) ------- ------- ------- ------- 3,231 4,079 4,312 4,114 Restructuring charges (132) (64) -- -- Gain on sale of Starwave 345 -- -- -- Gain on sale of KCAL -- -- 135 -- ------- ------- ------- ------- Total 3,444 4,015 4,447 4,114 Corporate and other activities (196) (236) (367) (367) Equity in Infoseek loss (322) -- -- -- Net interest expense (612) (622) (693) (693) ------- ------- ------- ------- Income before income taxes 2,314 3,157 3,387 3,054 Income taxes (1,014) (1,307) (1,421) (1,282) ------- ------- ------- ------- Net income $ 1,300 $ 1,850 $ 1,966 $ 1,772 ======= ======= ======= ======= Earnings per share (EPS): (/2/) Diluted $ 0.62 $ 0.89 $ 0.95 $ 0.86 ======= ======= ======= ======= Basic $ 0.63 $ 0.91 $ 0.97 $ 0.88 ======= ======= ======= ======= Net income and earnings per share excluding restructuring charges and other items: (/2/) (/3/) Net income $ 1,368 $ 1,890 $ 1,886 $ 1,772 ======= ======= ======= ======= Earnings per share: Diluted $ 0.66 $ 0.91 $ 0.92 $ 0.86 ======= ======= ======= ======= Basic $ 0.67 $ 0.93 $ 0.93 $ 0.88 ======= ======= ======= ======= Average number of common and common equivalent shares outstanding: (/2/) Diluted 2,083 2,079 2,060 2,060 ======= ======= ======= ======= Basic 2,056 2,037 2,021 2,021 ======= ======= ======= ======= - -------- (1) Segment results exclude intangible asset amortization and include depreciation as follows: Media Networks................... $ 131 $ 122 $ 104 $ 111 Studio Entertainment............. 64 115 86 86 Theme Parks and Resorts.......... 498 443 408 408 Consumer Products................ 124 85 95 92 Internet and Direct Marketing.... 8 10 6 6 ------- ------- ------- ------- $ 825 $ 775 $ 699 $ 703 ======= ======= ======= =======
-19- (2) Earnings per share and average shares outstanding have been adjusted to give effect to the three-for-one split of the Company's common shares in June 1998. (3) The 1999 results exclude a $345 million gain from the sale of Starwave Corporation, equity in Infoseek loss of $322 million and restructuring charges of $132 million. The 1998 results exclude restructuring charges of $64 million and the 1997 results exclude a $135 million gain from the sale of KCAL (see Notes 2, 14 and 15 to the Consolidated Financial Statements). (4) During 1997, the Company sold KCAL, a Los Angeles television station, completed ABC purchase price allocations and disposed of certain ABC publishing assets. The discussion of 1998 versus 1997 performance below includes comparisons to pro forma results for 1997, which assume these events occurred as of the beginning of 1996, the year in which the ABC acquisition occurred. The Company believes pro forma results represent a meaningful comparative standard for assessing net income, changes in net income and earnings trends because the pro forma results include comparable operations in each year presented. 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 1996. The discussions of Studio Entertainment, Theme Parks and Resorts and Internet and Direct Marketing segments do not include pro forma comparisons, since the pro forma adjustments did not impact these segments. Consolidated Results 1999 vs. 1998 Revenues increased 2% to $23.4 billion, driven by growth at Theme Parks and Resorts and Media Networks, partially offset by decreases in the other segments. Excluding the impact of Infoseek, which includes the gain on the sale of Starwave, and fourth quarter restructuring charges, operating income decreased 21% to $3.2 billion, net income decreased 28% to $1.4 billion and diluted earnings per share decreased 27% to $0.66. Results for the year were driven by decreased operating income, increased equity losses from Infoseek, which include amortization of intangible assets of $229 million and a $44 million charge for purchased in-process research and development expenditures, and an increase in restructuring charges recorded in the fourth quarter, as discussed below. These items were partially offset by the gain on the sale of Starwave, as discussed below, and lower net expense associated with Corporate and other activities. Including the restructuring charges and Infoseek, operating income decreased 14% to $3.4 billion and net income and diluted earnings per share decreased 30% to $1.3 billion and $0.62, respectively. Decreased operating income reflected lower results in Studio Entertainment, Consumer Products and Media Networks and increased amortization of intangible assets primarily as a result of the Company's second quarter purchase of the 75% interest in the Anaheim Angels that it did not previously own. These items were partially offset by improvements from Theme Parks and Resorts. Lower net expense associated with Corporate and other activities reflected improved results from the Company's cable equity investments and Euro Disney, partially offset by increased corporate general and administrative expenses due, in part, to start-up costs associated with a company-wide strategic sourcing initiative designed to consolidate its purchasing power. Net interest expense decreased due to gains from the sale of investments and lower interest rates in the current year, partially offset by higher debt balances. In April 1997, the Company purchased a significant equity stake in Starwave Corporation (Starwave), an Internet technology company. In connection with the acquisition, the Company was granted an option to purchase substantially all the remaining shares of Starwave. The Company exercised the option during the third quarter of 1998. Accordingly, the accounts of Starwave have been included in the Company's September 30, 1998 consolidated financial statements. On June 18, 1998, the Company reached an agreement for the acquisition of Starwave by Infoseek Corporation (Infoseek), a publicly-held Internet search company, pursuant to a merger. On November 18, 1998, the Company completed its acquisition of an initial 43% equity interest in Infoseek (see Notes 2 and 15 to the Consolidated Financial Statements). In that transaction, Infoseek exchanged shares of its common -20- stock for the Company's interest in Starwave and $70 million in cash. As a result of the exchange of its Starwave investment, the Company recognized a non-cash gain of $345 million. In connection with its Infoseek investment, the Company recorded $229 million of amortization related to goodwill and other identifiable intangible assets and a charge of $44 million for purchased in- process research and development expenditures, which have been reflected in "Equity in Infoseek loss" in the Company's Consolidated Statements of Income. Acquired intangible assets are being amortized over a period of two years. The impact of such amortization is expected to be $256 million in 2000 and $23 million in 2001. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, consisting of developed technology, trademarks and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. At special meetings on November 17, 1999, the stockholders of the Company and Infoseek approved the Company's proposed acquisition of the remaining interest in Infoseek that it did not already own. Accordingly, Infoseek became a wholly-owned subsidiary of the Company as of that date. The Company combined its Internet and Direct Marketing business with Infoseek to establish a new reporting entity, GO.com, and the Company created and issued a new class of common stock to reflect the performance of GO.com. The go.com common stock began trading on the NYSE under the symbol GO on November 18, 1999. Subsequent to the acquisition, the Company will separately report earnings per share for GO.com and the Disney Group. The Company's existing class of outstanding common stock will track Disney Group financial performance, which will reflect all of the Company's businesses (other than GO.com), as well as the Company's initial 72% retained interest in GO.com. The remaining 28% interest in GO.com is publicly traded. As a result of its initial 72% interest in GO.com, the Company expects this transaction to have a significant negative impact on fiscal 2000 Disney Group earnings per share, including a substantial increase in amortization of intangible assets (see Notes 2 and 15 to the Consolidated Financial Statements). The Company expects certain trends that affected its 1999 results to continue in fiscal 2000, especially in the first half of the year, primarily in the Company's home video and merchandise licensing businesses. In addition, continued strategic investments in the Company's network television production and cable network businesses, including Toon Disney and the SoapNet, are expected to result in higher costs in fiscal 2000. As a result, the Company believes that fiscal 2000 earnings per share should be approximately in line with fiscal 1999 results, excluding restructuring charges discussed below and GO.com, as previously discussed. The Company remains committed to investing in core markets, pursuing international opportunities, including theme park expansions, achieving operational improvements and leveraging technologies such as DVD and the Internet. 1999 Restructuring Charges In the third quarter, the Company began an across-the-board assessment of its cost structure. The Company's efforts are directed toward leveraging marketing and sales efforts, streamlining operations and further developing distribution channels, including its Internet sites and cable and television networks (see Note 14 to the Consolidated Financial Statements). In connection with actions taken to streamline operations, restructuring charges of $132 million ($0.04 per share) were recorded in the fourth quarter. The restructuring activities primarily related to the following: Consolidation of Television Production and Distribution Operations - The Company decided to consolidate certain of its television production and distribution operations to improve efficiencies through reduced labor and overhead costs. Related charges include lease and contract termination costs, and severance, substantially all of which was paid as of September 30, 1999. -21- Club Disney Closure - The Company determined that its Club Disney regional entertainment centers would not provide an appropriate return on invested capital, and, accordingly decided to close its five Club Disney locations and terminate further investment. Related charges primarily include lease termination costs and write-offs of fixed assets. ESPN Store Closures and Consolidation of Retail Operations - The Company determined that the sale of ESPN-branded product could be accomplished more efficiently via the Internet and through its ESPN Zone regional entertainment centers, rather than through stand-alone retail stores, and accordingly decided to close its three ESPN stores. In addition, the Company will eliminate certain job responsibilities as part of the consolidation of its retail operations. Related charges for both actions include severance and asset write-offs. A summary of the restructuring charges is as follows (in millions):
Description ----------- Lease and other contract cancellation costs $ 55 Severance 24 Non-cash charges: Asset write-offs and write-downs 53 ---- Total $132 ====
The Company's cost-saving initiatives will continue into next year and may result in additional charges of a similar nature. In addition, the Company is undertaking a strategic sourcing initiative which is designed to consolidate its purchasing power. Together these cost-saving measures are expected to result in total annual savings in excess of $500 million beginning in fiscal 2001. 1998 vs. 1997 Compared to 1997 pro forma results, revenues increased 6% to $23 billion, driven by growth in all business segments. Net income and diluted earnings per share increased 4% and 3% to $1.9 billion and $0.89, respectively. These results were driven by a reduction in net expense associated with Corporate and other activities and lower net interest expense, partially offset by decreased operating income. The reduction in net expense associated with Corporate and other activities was driven by improved results from the Company's equity investments, including A&E Television and Lifetime Television, and a gain on the sale of the Company's interest in Scandinavian Broadcasting System. Decreased net interest expense reflected lower average debt balances during 1998. Lower operating income was driven by a decline in Studio Entertainment and Internet and Direct Marketing results, partially offset by improvements from Theme Parks and Resorts, Consumer Products and Media Networks. As reported revenues increased 2% and net income and diluted earnings per share decreased by 6%. The as reported results reflect the items described above, as well as the impact of the disposition of certain ABC publishing assets and the sale of KCAL in 1997. -22- Business Segment Results Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment (in millions).
Pro forma As Reported (unaudited) -------------------- ----------- 1999 1998 1997 1997 ------ ------ ------ ----------- Revenues: Broadcasting $4,694 $4,734 $4,526 $4,505 Cable Networks 2,818 2,408 1,996 1,996 ------ ------ ------ ------ $7,512 $7,142 $6,522 $6,501 ====== ====== ====== ====== Operating Income: Broadcasting $ 659 $ 977 $1,016 $1,012 Cable Networks 952 769 683 683 ------ ------ ------ ------ $1,611 $1,746 $1,699 $1,695 ====== ====== ====== ======
1999 vs. 1998 Revenues increased 5% or $370 million to $7.5 billion, driven by increases of $410 million at the Cable Networks, partially offset by a $40 million decrease in Broadcasting revenues. Cable Network revenue growth reflected increased advertising revenues, subscriber growth and contractual rate increases at ESPN and subscriber growth at the Disney Channel. International expansion at the Disney Channel also contributed to increased revenues. Lower Broadcasting revenues were driven by decreases at the television network and stations, partially offset by growth from radio operations. Television network revenues were impacted by lower ratings, and lower revenues at owned television stations reflected ongoing softness in local advertising markets. Revenue growth at the radio network and stations was driven by strong advertising markets and higher ratings. Operating income decreased 8% or $135 million to $1.6 billion, reflecting higher Broadcasting and Cable Network costs and expenses and lower Broadcasting revenues. These decreases were partially offset by Cable Network revenue growth. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 9% or $505 million, driven by higher sports programming costs associated with the NFL contract and other programming costs at the television network and ESPN. 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 National Football League (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, commencing with the 1998 season. Under the terms of the contract, the NFL has the right to cancel the contract after 5 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 is pursuing 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. -23- 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 (unaudited, in millions):
1999 1998 % Change ------ ------ -------- Operating Income: Cable Networks $ 952 $ 769 24% Equity Investments: A&E Television and Lifetime Television 480 393 22% Other 37 (68) n/m ------ ------ Operating Income from Cable Television Activities 1,469 1,094 34% Partner Share of Operating Income (462) (333) ------ ------ Disney Share of Operating Income $1,007 $ 761 32% ====== ======
Note: Operating Income from Cable Television Activities presented in this table represents 100% 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 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 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. The Company's share of Cable Television Operating Income increased 32% or $246 million to $1.0 billion, driven by increases at the Cable Networks, subscriber growth at A&E Television and Lifetime Television and lower losses on start-up investments. 1998 vs. 1997 Revenues increased 10%, or $641 million to $7.1 billion compared with pro forma 1997 results, reflecting a $412 million increase at the Cable Networks and $229 million increase in Broadcasting revenues. Cable Network revenues were driven by a strong advertising market, which resulted in increased revenues at ESPN, and subscriber growth, which contributed to revenue increases at ESPN and the Disney Channel. Broadcasting revenue growth was driven by higher sports advertising revenues, primarily attributable to the 1998 soccer World Cup at the television network, and a strong advertising market which benefited the television stations. On an as reported basis, revenues increased $620 million or 10%, reflecting the items described above, partially offset by the impact of the sale of KCAL in 1997. Operating income increased 3%, or $51 million to $1.7 billion compared with pro forma 1997 results, reflecting growth at the Cable Networks, partially offset by lower Broadcasting results. Broadcasting results reflected decreases at the television network driven by lower ratings. Additionally, increased costs and expenses across the segment and start-up and operating losses from new cable business initiatives also impacted results. Costs and expenses increased 12% or $590 million, -24- reflecting increased programming and production costs at the Cable Networks, driven by ESPN, higher Broadcasting program amortization at the television network, reflecting a reduction in benefits from the ABC acquisition, increased costs related to the NFL contract (see discussion above) and start- up and operating costs related to new cable business initiatives. On an as reported basis, operating income increased $47 million or 3%, reflecting the items described above, partially offset by the impact of the sale of KCAL in 1997. Studio Entertainment 1999 vs. 1998 Revenues decreased 4%, or $301 million to $6.5 billion, driven by declines of $481 million in domestic home video, partially offset by growth of $152 million in worldwide theatrical motion picture distribution. Domestic home video revenues reflected fewer unit sales in the current year due to the greater number of classic animated library titles released in the prior year. Growth in worldwide theatrical motion picture distribution revenues was primarily attributable to a stronger film slate in the current year, including the box office successes: The Sixth Sense, Inspector Gadget, The Waterboy, Tarzan and A Bug's Life domestically and A Bug's Life and Armageddon internationally. Operating income decreased 85%, or $653 million to $116 million, reflecting declines in worldwide home video and network television production and distribution, partially offset by increases in worldwide theatrical motion picture distribution. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, product costs, labor and leasehold expenses, increased 6% or $352 million. In worldwide home video, participation and production cost amortization increased, reflecting an increase in the current year in the proportion of recent titles, versus classic animated library titles, whose production costs are fully amortized. In addition, participation costs increased due to the release of A Bug's Life and The Sixth Sense. Production cost amortization also increased in network television production and distribution, reflecting, in part, increased network television pilot activity and production deficits for four new prime time series, all of which have been renewed for the 1999/2000 season. Improved results in theatrical motion picture distribution were partially offset by higher distribution costs and participation cost amortization. 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. 1998 vs. 1997 Studio Entertainment revenues decreased 2%, or $132 million to $6.8 billion compared with 1997 results, driven by declines in worldwide home video and theatrical motion picture distribution of $330 million, partially offset by growth of $204 million in television distribution. Lower worldwide home video revenues reflected difficult comparisons to 1997, which benefited from the strength of Toy Story, The Hunchback of Notre Dame and 101 Dalmatians, compared to the 1998 releases of Lady & the Tramp, Hercules and The Little Mermaid, as well as economic weaknesses in Asian markets. In worldwide theatrical motion picture distribution, while 1998 revenues reflected successful box-office performances of Armageddon and Mulan, revenues were lower overall due to difficult comparisons to 1997, which benefited from the strong performances of 101 Dalmatians, Ransom and The English Patient. Growth in television distribution revenue was driven by high volume of television programming and theatrical releases distributed to the worldwide television market. Operating income decreased 29%, or $310 million to $769 million compared with 1997 results, reflecting declines in worldwide theatrical motion picture distribution and international home video. These declines were partially offset by growth in television distribution and improved results in domestic home video, which was driven by the success of The Little Mermaid, Lady & the Tramp and Peter Pan. Costs and expenses increased 3% or $178 million. The increase was driven by increased write-downs related to domestic theatrical live-action releases and an increase in production costs for -25- theatrical and television product, as well as an increase in the number of shows produced for network television and syndication. Production cost increases are reflective of industry trends: as competition for creative talent has increased, costs within the industry have increased at a rate significantly above inflation. In addition, expenses increased $10 million related to a restructuring charge in connection with the consolidation of the Company's Touchstone Pictures and Hollywood Pictures theatrical motion picture production banners. Increased expenses for 1998 were partially offset by declines in distribution and selling expenses in the home video and domestic theatrical motion picture distribution markets, reflecting lower volume, and declines within television distribution due to the termination of a network production joint venture. Theme Parks and Resorts 1999 vs. 1998 Revenues increased 10%, or $574 million to $6.1 billion, driven by growth at the Walt Disney World Resort, reflecting $153 million from increased guest spending and record attendance, as well as increases of $202 million from Disney Cruise Line, $101 million from Anaheim Sports, Inc. and $36 million of increased guest spending at Disneyland. Increased revenues at Disney Cruise Line reflected a full period of operations of the Company's first ship, the Disney Magic, which launched in the fourth quarter of the prior year, and a partial period of operations of the Company's second ship, the Disney Wonder, which launched in the fourth quarter of the current year. The increase at Anaheim Sports, Inc. reflects consolidation of the operations of the Anaheim Angels, following the Company's second quarter purchase of the 75% of the Angels that it did not previously own. Operating income increased 12%, or $158 million to $1.4 billion, resulting primarily from revenue growth at the Walt Disney World Resort and a full period of operations at Disney Cruise Line, compared to pre-opening costs for the majority of the prior year. Costs and expenses, which consist principally of labor, costs of merchandise, food and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sales expenses, increased $416 million or 10%. Increased operating costs were driven by higher theme park attendance, a full year of operations of Disney's Animal Kingdom and Disney Cruise Line, and increased ownership in the Anaheim Angels. 1998 vs. 1997 Revenues increased 10%, or $518 million to $5.5 billion, driven by growth at the Walt Disney World Resort, reflecting contributions of $256 million from increased guest spending and record attendance, growth of $106 million from higher occupied room nights and $76 million from Disney Cruise Line. Higher guest spending reflected strong per capita spending, due in part to new food, beverage and merchandise offerings throughout the resort, and higher average room rates. Increased occupied room nights reflected additional capacity resulting from the opening of Disney's Coronado Springs Resort in August 1997. Record theme park attendance resulted from growth in domestic and international tourist visitation due to the opening of the new theme park, Disney's Animal Kingdom. Disneyland's revenues for 1998 increased slightly as higher guest spending was largely offset by reduced attendance driven primarily by difficult comparisons to 1997's Main Street Electrical Parade farewell season and construction of New Tomorrowland in the first half of 1998. Operating income increased 13%, or $152 million to $1.3 billion, resulting primarily from higher guest spending, increased occupied room nights and record attendance at the Walt Disney World Resort, partially offset by start- up and operating costs associated with Disney's Animal Kingdom and Disney Cruise Line. Costs and expenses increased 9% or $366 million. Increased costs and expenses were driven by higher theme park attendance and start-up and operating costs at the new theme park and Disney Cruise Line. -26- Consumer Products 1999 vs. 1998 Revenues decreased 5%, or $163 million to $3.0 billion, driven by declines of $159 million in worldwide merchandise licensing, $98 million in domestic Disney Stores, partially offset by growth of $49 million at the Disney Stores internationally, $34 million in publishing operations and $23 million at Disney Interactive. Lower merchandise licensing revenues were primarily attributable to declines in domestic activity and in Japan. Lower revenues at the Disney Stores reflected a decline in comparable store sales domestically. Publishing revenue increases primarily reflected improvements at ESPN The Magazine due to increased circulation and a full year of operations. Disney Interactive revenue increased due to increased licensing activity and strong results for video game products. Operating income decreased 24%, or $194 million to $607 million, reflecting declines in worldwide merchandise licensing and the Disney Stores domestically, partially offset by increases at Disney Interactive. Declines in merchandise licensing primarily reflected continuing softness domestically and in Japan, partially offset by improvements in the rest of Asia and Latin America. Costs and expenses, which consist primarily of labor, product costs, including product development costs, distribution and selling expenses and leasehold expenses increased 1% or $31 million. Higher costs and expenses were driven by increases at the Disney Stores due, in part, to write-downs of underutilized assets and inventory, principally domestically, partially offset by decreased operating expenses at Disney Interactive. 1998 vs. 1997 Consumer Product revenues increased 8%, or $250 million to $3.2 billion compared with pro forma 1997 results driven by growth of $136 million in the Disney Stores, $75 million in domestic publishing and $51 million in domestic character merchandise licensing. Increased revenues at the Disney Stores reflected an increase in comparable store sales in North America and Europe and continued worldwide expansion, partially offset by a decrease in comparable store sales in Asian markets. The increase in domestic publishing revenues resulted from the success of book titles such as Don't Sweat the Small Stuff and the launch of ESPN The Magazine. Character merchandise licensing growth was driven primarily by the continued strength of Winnie the Pooh in the domestic market, partially offset by declines internationally, primarily due to softness in Asian markets. On an as reported basis, revenue decreased 16% or $589 million reflecting the items described above, as well as the impact of the disposition of certain ABC publishing assets in 1997. Operating income increased 19%, or $128 million to $801 million compared with pro forma 1997 results driven by an increase in domestic merchandise licensing and Disney Store growth in North America and Europe, partially offset by declines in international merchandise licensing and increased costs. Costs and expenses increased 5% or $122 million. Costs and expense increases were due, in part, to 1998 charges totaling $50 million related to strategic downsizing, particularly in response to Asian economic difficulties. Increased costs and expenses for 1998 were partially offset by operating expense improvements at Disney Interactive. On an as reported basis, operating income decreased 10% or $92 million, reflecting the items described above, as well as the impact of the disposition of certain ABC publishing assets in 1997. Internet and Direct Marketing On November 18, 1998, the Company exchanged its ownership interest in Starwave plus $70 million in cash for a 43% equity interest in Infoseek. This transaction resulted in a change in the manner of accounting for Starwave and certain related businesses from the consolidation method, which was applied prior to the exchange, to the equity method, which was applied after the exchange. -27- The following table provides supplemental revenue and operating income detail for the Internet and Direct Marketing segment, on an as reported basis (unaudited, in millions):
1999 1998 1997 ---- ---- ---- Revenues: Direct Marketing $148 $192 $147 Internet 58 68 27 ---- ---- ---- Total $206 $260 $174 ==== ==== ==== Operating Income (Loss): Direct Marketing $(23) $(19) $ 10 Internet (70) (75) (66) ---- ---- ---- Total $(93) $(94) $(56) ==== ==== ====
The following discussion of 1999 versus 1998 performance includes comparisons on a pro forma basis as if Starwave and the related businesses had been accounted for using the equity method of accounting during 1998. The Company believes pro forma results represent a meaningful comparative standard for assessing changes because the pro forma results reflect comparable accounting methodologies in each year presented. The discussion of Direct Marketing does not include pro forma comparisons, since the pro forma adjustments did not impact this business. 1999 vs. 1998 On a pro forma basis, Internet revenues increased $20 million, driven primarily by increased media and commerce revenues due to growth in advertising, licensing and subscription businesses as a result of increased site traffic and related page views and additional advertising and sponsorship agreements. This increase was offset by a $44 million decline in Direct Marketing revenues, which resulted in a 10% decrease in total segment revenues to $206 million compared to pro forma 1998 revenues of $230 million. Internet operating losses increased 43% or $21 million, to $70 million, on a pro forma basis, driven primarily by increased development and investment spending. In addition, as discussed below, increased operating losses of 21% or $4 million at Direct Marketing resulted in an increase in total segment operating losses to $93 million compared to pro forma operating losses of $68 million. On an as reported basis, segment revenues decreased 21% or $54 million to $206 million, driven by declines of $44 million in Direct Marketing revenues and $10 million in Internet revenue. Lower Direct Marketing revenues reflected slower order fill rates due to system and capacity constraints resulting from the relocation of the Direct Marketing distribution center from Tennessee to South Carolina and reduced average order size. In addition, management reduced catalog circulation during the 1998 holiday season to ensure better quality of customer service during the holiday period. Internet revenues decreased, since the pro forma increases described above were more than offset by the change in the manner of accounting for Starwave and related businesses from the consolidation method to the equity method. On an as reported basis, operating losses decreased 1% or $1 million to $93 million, reflecting lower losses from Internet operations, partially offset by increased losses from Direct Marketing operations. Increased expenses in Internet operations from continued expansion of the business were more than offset by the effects of the change in the manner of accounting for Starwave and related businesses, as described above. Increased operating losses from Direct Marketing operations reflected costs relating to the start-up of the Direct Marketing distribution center and the implementation of new business processes, systems and software applications. Segment costs and expenses, which consist primarily of cost of revenues, sales and marketing, other operating expenses and depreciation, decreased 16% or $55 million, driven by the change in the manner of accounting for Starwave and related businesses and lower Direct Marketing selling -28- expenses, driven by reduced catalog mailings and lower outbound shipping costs, partially offset by increased Internet expenses associated with continued development of entertainment and family websites and operations of Toysmart.com and Soccernet.com, two Internet companies acquired during the fourth quarter of 1999. 1998 vs. 1997 Segment revenues increased 49%, or $86 million to $260 million, driven by Direct Marketing growth of $45 million and Internet growth of $41 million. Growth in Direct Marketing reflects increased sales volume driven primarily by an increase in the number of catalogs. Increased Internet revenues were driven primarily by increased media and commerce revenue due to growth in advertising, licensing and subscription businesses. Commerce and subscription revenue increases also reflected a full year of operations and growth of Disney's Club Blast and DisneyStore.com. Operating losses increased 68%, or $38 million to $94 million, due to growth in Direct Marketing cost of revenues, driven by higher sales volume, increased inventory liquidation efforts during 1998 and increased spending on development and growth of the Internet operations, including increased promotional activities. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations increased 9% or $473 million to $5.6 billion, driven by a decline in receivables, lower income tax payments and higher depreciation and amortization of intangible assets, partially offset by decreased net income. In 1999, the Company invested $3.0 billion to develop, produce and acquire rights to film and television properties, including $310 million in connection with a prior year agreement to acquire a film library. Excluding the payment in connection with the film library acquisition, film and television expenditures decreased $625 million, driven by lower live-action production spending. During the year, the Company invested $2.1 billion in theme parks, resorts and other properties. These expenditures reflected continued expansion activities related to Disney's California Adventure, Disney's Animal Kingdom, Disney Cruise Line and certain resort facilities at the Walt Disney World Resort. While several of our recent significant Theme Park and Resort expansions such as Disney's Animal Kingdom and Disney Cruise Line are substantially complete, we expect fiscal 2000 spending will be comparable to 1999, reflecting significant increases driven by construction at Disney's California Adventure. 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 the more than 2.7 million stockholders of Company common stock. Accordingly, there was no dividend payment during the year ended September 30, 1999. On November 4, 1999, the Board of Directors declared an annual cash dividend of 21 cents per share applicable to 1999. The $433 million dividend was payable December 17, 1999 to shareholders of Disney common stock at the close of business November 16, 1999. During the year, the Company received approximately $2.3 billion from various financing arrangements. These borrowings have effective interest rates, including the impact of interest rate swaps, ranging from 4.8% to 5.6% and maturities in fiscal 2000 through fiscal 2039. Certain of these financing agreements are denominated in foreign currencies, and the Company has entered into cross-currency swap agreements effectively converting these obligations into U.S. dollar denominated LIBOR-based variable rate debt instruments. Commercial paper borrowings outstanding as of September 30, 1999 totaled $1.7 billion, with maturities of up to one year, supported by bank facilities totaling $4.8 billion, which expire in one to three 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 $3.8 billion of additional debt. -29- 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 Year 2000 The Y2K Problem. During the year, the Company continued to devote significant resources throughout its business operations to minimize the risk of potential disruption from the "year 2000" (Y2K) problem. This problem is a result of computer programs having been written using two digits (rather than four) to define the applicable year. Any information technology (IT) systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations and system failures. The problem also extends to many "non-IT" systems; that is, operating and control systems that rely on embedded chip systems. In addition, like every other business enterprise, the Company is at risk from Y2K failures on the part of its major business counterparties, including suppliers, distributors, licensees and manufacturers, as well as potential failures in public and private infrastructure services, including electricity, water, gas, transportation and communications. System failures resulting from the Y2K problem could adversely affect operations and financial results in all of the Company's business segments. Failures may affect security, payroll operations or employee and guest health and safety, as well as such routine but important operations as billing and collection. In addition, the Company's business segments face more specific risks. For example: In the Media Networks segment, at-risk operations include satellite transmission and communication systems. Y2K failures in such systems could adversely affect the Company's television and radio networks, including cable services, as well as its owned and operated stations. In the Studio Entertainment segment, Y2K failures could interfere with critical systems in such areas as the production, duplication and distribution of motion picture and home video product. The Company's Theme Parks and Resorts operations could be significantly impeded by failures in hotel and cruise line reservation and operating systems; in theme park operating systems, including those controlling individual rides, attractions, parades and shows; and in security, health and safety systems. In the Consumer Products segment, operations that could be significantly affected include the ordering, distribution and sale of merchandise at the Company's retail stores. In the Internet and Direct Marketing segment, system failures could affect systems available to Disney guests on the Internet, online security and internal operations such as web page maintenance. Addressing the Problem. The Company has developed a six-phase approach to resolving the Y2K issues that are reasonably within its control. All of these efforts are being coordinated through a senior-level task force chaired by the Company's Chief Information Officer (CIO), as well as individual task forces in each major business unit. As of September 30, 1999, approximately 400 employees were devoting more than half of their time to Y2K efforts, in addition to approximately 400 expert consultants retained on a full-time basis to assist with specific potential problems. The CIO reports periodically to the Audit Review Committee of the Board of Directors with respect to the Company's Y2K efforts. The Company's approach to and the anticipated timing of each phase are described below. Phase 1 - Inventory. The first phase entailed a worldwide inventory of all hardware and software (including business and operational applications, operating systems and third-party products) that -30- may be at risk, and identification of key third-party businesses whose Y2K failures might most significantly impact the Company. The IT system inventory process, as well as the inventories of key third-party businesses and of internal non-IT systems have been completed. Phase 2 - Assessment. Once each at-risk system was identified, the Y2K task forces assessed how critical the system was to business operations and the potential impact of failure in order to establish priorities for repair or replacement. Systems were classified as "critical," "important" or "non- critical." A "critical" system is one that, if not operational, would cause the shutdown of all or a portion of a business unit within two weeks, while an "important" system is one that would cause such a shutdown within two months. This process has been completed for all IT systems, resulting in the identification of nearly 600 business systems that are "critical" to continued functioning and more than 1,000 that are either "important" or are otherwise being monitored. The assessment process for internal non-IT systems and for key third-party businesses has also been completed. Phase 3 - Strategy. This phase involved the development of appropriate remedial strategies for both IT and non-IT systems. These strategies included repairing, testing and certifying, replacing or abandoning particular systems (as discussed under Phases 4 and 5 below). Selection of appropriate strategies was based upon such factors as the assessments made in Phase 2, the type of system, the availability of a Y2K-compliant replacement and cost. The strategy phase has been completed for all IT and non-IT systems. Phase 4 - Remediation. The remediation phase involves creating detailed project plans, marshalling necessary resources and executing the strategies chosen. For IT systems, this phase has been completed. For non-critical systems, most corrections are expected to be completed by December 31, 1999. For those systems that are not expected to be reliably functional after January 1, 2000, detailed manual workaround plans will be developed prior to the end of 1999. Phase 5 - Testing and Certification. This phase includes establishing a test environment, performing systems testing (with third parties if necessary) and certifying the results. The certification process entails having functional experts review test results, computer screens and printouts against pre- established criteria to ensure system compliance. The testing and certification of all critical and important IT systems has been completed. Testing for non-IT systems has been completed, and where feasible and practical, the systems have been tested by either validating that the system has no date function, is not date-aware, or operates properly when the millennial date is tested. In other cases, the Company has reviewed vendor or manufacturer design specifications, drawings, lab results or test data in order to verify proper date capability. Where the Company has not received adequate assurance of successful certification efforts by third parties, contingency plans have been established to minimize potential disruption to operations. The Company has initiated written and telephonic communications with key third-party businesses, as well as public and private providers of infrastructure services, to ascertain and evaluate their efforts in addressing Y2K compliance. The Company has tested as many online interfaces between critical business partners as is practical. In cases where joint testing has not been possible, the Company has reviewed partners' test scripts and other indications that ongoing communications and commerce will not be disrupted. For critical partners' systems interactions with the Company, IT and functional experts will carefully review the evidence of correct operation at the earliest possible time in the new year. Manual and semi-automated workarounds have been developed, where practical. For many hundreds of vendors and partners for which the Company does not rely upon automated interfaces, but rather, relies on physical supplies of food, merchandise, fuel and general supplies, safety stocks of critical items have been, or will be, secured. Phase 6 - Contingency Planning. This phase involves addressing any remaining open issues expected in 1999 and early 2000. Contingency planning is now the primary focus of efforts throughout the Company. Primary emphasis is on guest and employee safety and comfort, followed by our desire to continue to generate revenues and minimize any unnecessary costs caused by unexpected outages. -31- Contingency plans have been developed by all business segments. They include, as appropriate, plans for guest evacuation from rides, theme parks and other entertainment settings, assuring that guests and employees are safe and warm, protection of assets and continued operation in the event of loss of power or communications and the resumption of normal business operations at the earliest time possible. Costs. The Company anticipates that expenditures related to the Y2K project will total $260 million, of which $140 million is expected to be capitalized. The majority of these costs have been incurred as of September 30, 1999. A significant portion of these costs has not been incremental, but rather reflected redeployment of internal resources from other activities. The Company believes that these redeployments did not have a material adverse effect on other ongoing business operations. All costs of the Y2K project are being borne out of the Company's operating cash flow. Based upon its efforts to date, the Company believes that the vast majority of both its IT and non-IT systems, including all critical and important systems, will remain up and running after January 1, 2000. Accordingly, the Company does not currently anticipate that internal systems failures will result in any material adverse effect to its operations or financial condition. During 1999, the Company has continued its efforts to ensure that major third-party businesses and public and private providers of infrastructure services, such as utilities, communications services and transportation, will also be prepared for the year 2000, and to develop contingency plans to address any failures on their part to become Y2K compliant. At this time, the Company believes that the most likely "worst- case" scenario involves potential disruptions in areas in which the Company's operations must rely on such third parties whose systems may not work properly after January 1, 2000. In addition, the Company's international operations may be adversely affected by failures of businesses in other parts of the world to take adequate steps to address the Y2K problem. While such failures could affect important operations of the Company and its subsidiaries, either directly or indirectly, in a significant manner, the Company cannot presently estimate either the likelihood or the potential cost of such failures. It is important to note that the description of the Company's efforts necessarily involves estimates and projections with respect to activities required in the future. These estimates and projections are subject to change as work continues, and such changes may be substantial. Conversion to the Euro Currency On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency (euro). The transition period for the introduction of the euro ends June 30, 2002. Issues facing the Company as a result of the introduction of the euro include converting information technology systems, reassessing currency risk, negotiating and amending licensing agreements and contracts, and processing tax and accounting records. The Company is addressing these issues and does not expect the euro to have a material effect on the Company's financial condition or results of operations. 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 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. Management believes that all statements that express expectations and projections with respect to future matters, including further restructuring or strategic initiatives and actions relating to the Company's strategic sourcing initiative, as well as from developments beyond the Company's control including changes in global economic conditions that may, among other things, affect the international performance of the Company's theatrical and home video releases, television programming and consumer products and, in addition, uncertainties associated with the Internet; the launching or prospective development of new business initiatives; "Year 2000" remediation efforts and the introduction of the euro; are forward-looking statements within the meaning of the Act. These -32- 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, including the following: Changes in Company-wide or business-unit strategies, which may result in changes in the types or mix of businesses in which the Company is involved or chooses to invest; Changes in U.S., global or regional economic conditions, which may affect attendance and spending at the Company's theme parks and resorts, purchases of Company-licensed consumer products and the performance of the Company's broadcasting and motion picture operations; Changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede the Company's access to, or increase the cost of, external financing for its operations and investments; Increased competitive pressures, both domestically and internationally, which may, among other things, affect the performance of the Company's theme park, resort and regional entertainment operations and lead to increased expenses in such areas as television programming acquisition and motion picture production and marketing; Legal and regulatory developments that may affect particular business units, such as regulatory actions affecting environmental activities, consumer products, broadcasting or Internet activities or the protection of intellectual properties, the imposition by foreign countries of trade restrictions or motion picture or television content requirements or quotas, and changes in international tax laws or currency controls; Adverse weather conditions or natural disasters, such as hurricanes and earthquakes, which may, among other things, impair performance at the Company's theme parks and resorts; Technological developments that may affect the distribution of the Company's creative products or create new risks to the Company's ability to protect its intellectual property; Labor disputes, which may lead to increased costs or disruption of operations in any of the Company's business units; and Changing public and consumer taste, which may affect the Company's entertainment, broadcasting and consumer products businesses. This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. -33- ITEM 7A. Market Risk The Company is exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market values of its investments. Policies and Procedures In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates, fluctuations in the value of foreign currencies and the fair market value of certain of its investments in debt and equity securities using a variety of financial instruments. The Company's objectives in managing its exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company primarily uses interest rate swaps and caps to manage net exposure to interest rate changes related to its portfolio of borrowings. The Company maintains fixed rate debt as a percentage of its net debt between a minimum and maximum percentage, which is set by policy. The Company's objective in managing the exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency assets, liabilities, commitments and anticipated foreign currency revenues. The Company uses option strategies that provide for the sale of foreign currencies to hedge probable, but not firmly committed, revenues. The principal currencies hedged are the Japanese yen, European euro, Australian dollar, British pound and Canadian dollar. The Company also uses forward contracts to hedge foreign currency assets and liabilities in the same principal currencies. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures for periods not to exceed five years. The gains and losses on these contracts offset changes in the value of the related exposures. In addition, the Company uses forward sale contracts to minimize the exposure to changes in fair market value of certain of its investments in debt and equity securities. It is the Company's policy to enter into foreign currency, interest rate transactions and forward sale contracts only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions for speculative purposes. Value at Risk The Company utilizes a "Value-at-Risk" (VAR) model to determine the maximum potential one-day loss in the fair value of its interest rate and foreign exchange sensitive financial instruments. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. There are various modeling techniques which can be used in the VAR computation. The Company's computations are based on the interrelationships between movements in various currencies and interest rates (a "variance/co-variance" technique). These interrelationships were determined by observing interest rate and foreign currency market changes over the preceding quarter for the calculation of VAR amounts at year-end and over each of the four quarters for the calculation of average VAR amounts during the year. The model includes all of the Company's debt as well as all interest rate and foreign exchange derivative contracts. The values of foreign exchange options do not change on a one-to-one basis with the underlying currencies, as exchange rates vary. Therefore, the hedge coverage assumed to be obtained from each option has been adjusted to reflect its respective sensitivity to changes in currency values. Anticipated transactions, firm commitments and receivables and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, were excluded from the model. -34- The VAR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market factors. (See Note 12 to the Consolidated Financial Statements regarding the Company's financial instruments at September 30, 1999 and 1998.) The estimated maximum potential one-day loss in fair value, calculated using the VAR model, follows (unaudited, in millions):
Interest Rate Currency Sensitive Financial Sensitive Financial Combined Instruments Instruments Portfolio - ------------------------------------------------------------------------------- VAR as of September 30, 1999 $15 $22 $27 Average VAR during the year $13 $17 $23 ended September 30, 1999
New Accounting Guidance In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133), subsequently amended by SFAS No. 137, which the Company is required to adopt effective October 1, 2000. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other stockholders' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretative guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position. ITEM 8. Financial Statements and Supplementary Data See Index to Financial Statements and Supplemental Data on page 42. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -35- PART III ITEM 10. Directors and Executive Officers of the Company Directors Information regarding directors appearing under the caption "Election of Directors" in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders (the 2000 Proxy Statement) is hereby incorporated by reference. Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3). ITEM 11. Executive Compensation Information appearing under the captions "How are directors compensated?" and "Executive Compensation" in the 2000 Proxy Statement is hereby incorporated by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management Information setting forth the security ownership of certain beneficial owners and management appearing under the caption "Stock Ownership" in the 2000 Proxy Statement is hereby incorporated by reference. ITEM 13. Certain Relationships and Related Transactions Information regarding certain related transactions appearing under the caption "Certain Relationships and Related Transactions" in the 2000 Proxy Statement is hereby incorporated by reference. -36- PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits and Financial Statements and Schedules (1) Financial Statements and Schedules See Index to Financial Statements and Supplemental Data at page 42. (2) Exhibits The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.
Exhibit Location ------- -------- 3(a) Amended and Restated Certificate of Annex C to the Joint Proxy Incorporation of the Company Statement, Prospectus included in the Registration Statement on Form S-4 (No. 333-88105) of the Company, filed Sept. 30, 1999 3(b) Bylaws of the Company Filed herewith 4(a) Form of Registration Rights Agreement Exhibit B to Exhibit 2.1 to entered into or to be entered into the Form 8-K, dated July 31, with certain stockholders 1995, of Disney Enterprises, Inc. ("DEI") 4(b) Five-Year Credit Agreement, dated as Exhibit 4(d) to the 1996 Form of Oct. 30, 1996 10-K of the Company 4(c) Indenture, dated as of Nov. 30, 1990, Exhibit 2 to the Current between DEI and Bankers Trust Report on Form 8-K, dated Company, as Trustee Jan. 14, 1991, of DEI 4(d) Indenture, dated as of Mar. 7, 1996, Exhibit 4.1(a) to the Form 8- between the Company and Citibank, K, dated Mar. 7, 1996, of the N.A., as Trustee Company 4(e) Other long-term borrowing instruments are omitted pursuant to Item 601(b) (4) (iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Commission upon request. 10(a) (i) Agreement on the Creation and the Exhibits 10(b) and 10(a), Operation of Euro Disneyland en respectively, to the Form 8- France, dated Mar. 25, 1987, and (ii) K, dated Apr. 24, 1987, of Letter relating thereto of the DEI Chairman of Disney Enterprises, Inc., dated Mar. 24, 1987 10(b) Composite Limited Recourse Financing Exhibit 10(b) to the 1997 Facility Agreement, dated as of Apr. Form 10-K of the Company 27, 1988, between DEI and TDL Funding Company, as amended 10(c) Employment Agreement, dated as of Exhibit 10.2 to the Form 10-Q Jan. 8, 1997, between the Company and for the period ended Dec. 31, Michael D. Eisner 1996, of the Company 10(d) (i) Profit Participation Contract, Exhibits 1 and 3, dated Dec. 14, 1979, with E. Cardon respectively, to the 1980 Walker and (ii) Amendment thereto, Form 10-K of DEI dated Aug. 8, 1980
-37-
Exhibit Location ------- -------- 10(e) Form of Indemnification Agreement for Annex C to the Proxy certain officers and directors of DEI Statement for the 1988 Annual Meeting of DEI 10(f) 1995 Stock Option Plan for Non- Exhibit 20 to the Form S-8 Employee Directors Registration Statement (No. 33-57811), dated Feb. 23, 1995, of DEI 10(g) 1990 Stock Incentive Plan and Rules Exhibits 28(a) and 28(b), respectively, to the Form S-8 Registration Statement (No. 33-39770), dated Apr. 5, 1991, of DEI 10(h) Amended and Restated 1990 Stock Appendix B-2 to the Joint Incentive Plan and Rules Proxy Statement/Prospectus included in the Form S-4 Registration Statement (No. 33-64141), dated Nov. 13, 1995, of DEI 10(i) Amended and Restated 1995 Stock Annex E to the Joint Proxy Incentive Plan and Rules Statement/Prospectus included in the Registration Statement on Form S-4 (No. 333-88105) of the Company filed Sept. 30, 1999 10(j) (i) 1987 Stock Incentive Plan and Exhibits 1(a), 1(b), 2(a), Rules, (ii) 1984 Stock Incentive Plan 2(b), 3(a), 3(b) and 4, and Rules, (iii) 1981 Incentive Plan respectively, to the and Rules and (iv) 1980 Stock Option Prospectus contained in the Plan Form S-8 Registration Statement (No. 33-26106), dated Dec. 20, 1988, of DEI 10(k) Contingent Stock Award Rules under Exhibit 10(t) to the 1986 DEI's 1984 Stock Incentive Plan Form 10-K of DEI 10(l) Bonus Performance Plan for Executive Exhibit 10(1) to the 1998 Officers Form 10-K of the Company 10(m) Performance-Based Compensation Plan Included in the Proxy for the Company's Chief Executive Statement dated Jan. 9, 1997, Officer for the 1997 Annual Meeting of the Company 10(n) Key Employees Deferred Compensation Exhibit 10(p) to the 1997 and Retirement Plan Form 10-K of the Company 10(o) Group Personal Excess Liability Exhibit 10(x) to the 1997 Insurance Plan Form 10-K of the Company 10(p) Family Income Assurance Plan (summary Exhibit 10(y) to the 1997 description) Form 10-K of the Company 10(q) Disney Salaried Savings and Exhibit 10(s) to the 1995 Investment Plan Form 10-K of DEI 10(r) First Amendment to the Disney Exhibit 10(r) to the 1997 Salaried Savings and Investment Plan Form 10-K of the Company 10(s) Second Amendment to the Disney Exhibit 10(s) to the 1997 Salaried Savings and Investment Plan Form 10-K of the Company 10(t) ABC, Inc. Savings and Investment Exhibit 10(t) to the 1998 Plan, as amended Form 10-K of the Company 10(u) Employee Stock Option Plan of Capital Exhibit 10(f) to the 1992 Cities/ABC, Inc., as amended Form 10-K of Capital Cities/ABC, Inc. 10(v) 1991 Stock Option Plan of Capital Exhibit 6(a)(i) to the Form Cities/ABC, Inc., as amended 10-Q for the period ended Mar. 31, 1996, of the Company 21 Subsidiaries of the Company Filed herewith 23 Consent of PricewaterhouseCoopers LLP Included herein at page 43. 27 Financial Data Schedule Filed herewith 28(a) Financial statements of the Disney Included in Form 10-K/A, Salaried Savings and Investment Plan dated June 29, 1998, of the for the year ended Dec. 31, 1998 Company
-38-
Exhibit Location ------- -------- 28(b) Financial statements of the ABC Included in Form 10-K/A, Salaried Savings and Investment Plan dated June 29, 1998, of the for the year ended Dec. 31, 1997 Company 99 Pro forma financial information for Exhibit 99 to the 1997 Form 1997 events. 10-K of the Company
(b) Reports on Form 8-K (i) Current report on Form 8-K dated July 12, 1999, with respect to the proposed acquisition of Infoseek Corporation. -39- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE WALT DISNEY COMPANY ----------------------------------------------------- (Registrant) Date: December 17, 1999 By: MICHAEL D. EISNER ----------------------------------------------------- (Michael D. Eisner, Chairman of the Board and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Principal Executive Officer MICHAEL D. EISNER Chairman of the Board and December 17, 1999 ____________________________________ Chief Executive Officer (Michael D. Eisner) Principal Financial and Accounting Officers THOMAS O. STAGGS Executive Vice President and December 17, 1999 ____________________________________ Chief Financial Officer (Thomas O. Staggs) JOHN J. GARAND Senior Vice President- December 17, 1999 ____________________________________ Planning and Control (John J. Garand) Directors REVETA F. BOWERS Director December 17, 1999 ____________________________________ (Reveta F. Bowers) ROY E. DISNEY Director December 17, 1999 ____________________________________ (Roy E. Disney) MICHAEL D. EISNER Director December 17, 1999 ____________________________________ (Michael D. Eisner) JUDITH ESTRIN Director December 17, 1999 ____________________________________ (Judith Estrin) STANLEY P. GOLD Director December 17, 1999 ____________________________________ (Stanley P. Gold) SANFORD M. LITVACK Director December 17, 1999 ____________________________________ (Sanford M. Litvack) IGNACIO E. LOZANO, JR. Director December 17, 1999 ____________________________________ (Ignacio E. Lozano, Jr.)
-40-
Signature Title Date --------- ----- ---- GEORGE J. MITCHELL Director December 17, 1999 ____________________________________ (George J. Mitchell) THOMAS S. MURPHY Director December 17, 1999 ____________________________________ (Thomas S. Murphy) LEE J. O'DONOVAN, S.J. Director December 17, 1999 ____________________________________ (Lee J. O'Donovan, S.J.) SIDNEY POITIER Director December 17, 1999 ____________________________________ (Sidney Poitier) IRWIN E. RUSSELL Director December 17, 1999 ____________________________________ (Irwin E. Russell) ROBERT A.M. STERN Director December 17, 1999 ____________________________________ (Robert A.M. Stern) ANDREA VAN DE KAMP Director December 17, 1999 ____________________________________ (Andrea Van de Kamp) RAYMOND L. WATSON Director December 17, 1999 ____________________________________ (Raymond L. Watson) GARY L. WILSON Director December 17, 1999 ____________________________________ (Gary L. Wilson)
-41- THE WALT DISNEY COMPANY AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page ---- Report of Independent Accountants and Consent of Independent Accountants.. 43 Consolidated Financial Statements of The Walt Disney Company and Subsidiaries Consolidated Statements of Income for the Years Ended September 30, 1999, 1998 and 1997.................................................... 44 Consolidated Balance Sheets as of September 30, 1999 and 1998........... 45 Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997.................................................... 46 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1999, 1998 and 1997...................................... 47 Notes to Consolidated Financial Statements.............................. 48 Quarterly Financial Summary............................................. 69
Schedules other than those listed above are omitted for the reason that they are not applicable or the required information is included in the financial statements or related notes. -42- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The Walt Disney Company In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Walt Disney Company and its subsidiaries (the Company) at September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California November 22, 1999 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-26106, 33-35405 and 33-39770) and Form S-3 (Nos. 33-49891 and 333-52659) of The Walt Disney Company of our report dated November 22, 1999 which appears above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California December 17, 1999 -43- CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share data)
Year Ended September 30 1999 1998 1997 - ----------------------------------------------------------------------------- Revenues $ 23,402 $ 22,976 $ 22,473 Costs and expenses (19,715) (18,466) (17,722) Amortization of intangible assets (456) (431) (439) Restructuring charges (132) (64) -- Gain on sale of Starwave 345 -- -- Gain on sale of KCAL -- -- 135 -------- -------- -------- Operating income 3,444 4,015 4,447 Corporate and other activities (196) (236) (367) Equity in Infoseek loss (322) -- -- Net interest expense (612) (622) (693) -------- -------- -------- Income before income taxes 2,314 3,157 3,387 Income taxes (1,014) (1,307) (1,421) -------- -------- -------- Net income $ 1,300 $ 1,850 $ 1,966 ======== ======== ======== Earnings per share Diluted $ 0.62 $ 0.89 $ 0.95 ======== ======== ======== Basic $ 0.63 $ 0.91 $ 0.97 ======== ======== ======== Average number of common and common equivalent shares outstanding Diluted 2,083 2,079 2,060 ======== ======== ======== Basic 2,056 2,037 2,021 ======== ======== ========
See Notes to Consolidated Financial Statements -44- CONSOLIDATED BALANCE SHEETS (In millions)
September 30 1999 1998 - ---------------------------------------------------------------------------- ASSETS Current Assets $ 414 $ 127 Cash and cash equivalents Receivables 3,633 3,999 Inventories 796 899 Film and television costs 4,071 3,223 Deferred income taxes 607 463 Other assets 679 664 ------- ------- Total current assets 10,200 9,375 Film and television costs 2,489 2,506 Investments 2,434 1,821 Theme parks, resorts and other property, at cost Attractions, buildings and equipment 15,869 14,037 Accumulated depreciation (6,220) (5,382) ------- ------- 9,649 8,655 Projects in progress 1,272 1,280 Land 425 411 ------- ------- 11,346 10,346 Intangible assets, net 15,695 15,787 Other assets 1,515 1,543 ------- ------- $43,679 $41,378 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 4,588 $ 4,767 Current portion of borrowings 2,415 2,123 Unearned royalties and other advances 704 635 ------- ------- Total current liabilities 7,707 7,525 Borrowings 9,278 9,562 Deferred income taxes 2,660 2,488 Other long term liabilities, unearned royalties and other advances 3,059 2,415 Stockholders' Equity Preferred stock, $0.01 par value Authorized--100 million shares Issued--none Common stock, $0.01 par value 9,324 8,995 Authorized--3.6 billion shares Issued--2.1 billion shares Retained earnings 12,281 10,981 Cumulative translation and other (25) 13 ------- ------- 21,580 19,989 Treasury stock, at cost, 29 million shares (605) (593) Shares held by TWDC Stock Compensation Fund, at cost-- 0.4 million shares as of September 30, 1998 -- (8) ------- ------- 20,975 19,388 ------- ------- $43,679 $41,378 ======= =======
See Notes to Consolidated Financial Statements -45- CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Year Ended September 30 1999 1998 1997 - ------------------------------------------------------------------------------- NET INCOME $ 1,300 $1,850 $1,966 ITEMS NOT REQUIRING CASH OUTLAYS Amortization of film and television costs 2,472 2,514 1,995 Depreciation 851 809 738 Amortization of intangible assets 456 431 439 Gain on sale of Starwave (345) -- -- Equity in Infoseek loss 322 -- -- Gain on sale of KCAL -- -- (135) Other 80 31 (15) CHANGES IN Receivables 376 (664) (177) Inventories 103 (46) 8 Other assets (165) 73 (441) Accounts and taxes payable and other accrued liabilities 477 218 608 Film and television costs television broadcast rights (319) (447) (179) Deferred income taxes (20) 346 292 ------- ------ ------ 4,288 3,265 3,133 ------- ------ ------ CASH PROVIDED BY OPERATIONS 5,588 5,115 5,099 ------- ------ ------ INVESTING ACTIVITIES Film and television costs (3,020) (3,335) (3,089) Investments in theme parks, resorts and other property (2,134) (2,314) (1,922) Acquisitions (net of cash acquired) (319) (213) (180) Proceeds from sale of investments 202 238 31 Purchases of investments (39) (13) (56) Investment in and loan to E! Entertainment -- (28) (321) Proceeds from disposal of publishing operations -- -- 1,214 Proceeds from disposal of KCAL -- -- 387 ------- ------ ------ (5,310) (5,665) (3,936) ------- ------ ------ FINANCING ACTIVITIES Change in commercial paper borrowings (451) 308 (2,088) Other borrowings 2,306 1,522 2,437 Reduction of borrowings (2,031) (1,212) (1,990) Repurchases of common stock (19) (30) (633) Exercise of stock options and other 204 184 180 Dividends -- (412) (342) Proceeds from formation of REITs -- -- 1,312 ------- ------ ------ 9 360 (1,124) ------- ------ ------ Increase (Decrease) in Cash and Cash Equivalents 287 (190) 39 Cash and Cash Equivalents, Beginning of Year 127 317 278 ------- ------ ------ Cash and Cash Equivalents, End of Year $ 414 $ 127 $ 317 ======= ====== ====== Supplemental disclosure of cash flow information: Interest paid $ 575 $ 555 $ 777 ======= ====== ====== Income taxes paid $ 721 $1,107 $ 958 ======= ====== ======
See Notes to Consolidated Financial Statements -46- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In millions, except per share data)
TWDC Stock- Cumulative Stock holders' Compre- Common Retained Translation Treasury Compensation Equity hensive Shares Stock Earnings and Other Stock Fund Total Income - ----------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 2,022 $8,590 $ 7,919 $ 39 $(462) $ -- $16,086 $ -- Exercise of stock options, net 15 (42) -- -- -- 301 259 -- Common stock repurchased (24) -- -- -- -- (633) (633) -- Dividends ($0.17 per share) -- -- (342) -- -- -- (342) -- Cumulative translation and other (net of tax benefit of $37 million) -- -- -- (51) -- -- (51) (51) Net income -- -- 1,966 -- -- -- 1,966 1,966 ----- ------ ------- ---- ----- ----- ------- ------ BALANCE AT SEPTEMBER 30, 1997 2,013 8,548 9,543 (12) (462) (332) 17,285 $1,915 ====== Common stock issued 4 160 -- -- -- -- 160 $ -- Exercise of stock options, net 34 287 -- -- (131) 354 510 -- Common stock repurchased (1) -- -- -- -- (30) (30) -- Dividends ($0.20 per share) -- -- (412) -- -- -- (412) -- Cumulative translation and other (net of tax expense of $18 million) -- -- -- 25 -- -- 25 25 Net income -- -- 1,850 -- -- -- 1,850 1,850 ----- ------ ------- ---- ----- ----- ------- ------ BALANCE AT SEPTEMBER 30, 1998 2,050 8,995 10,981 13 (593) (8) 19,388 $1,875 ====== Exercise of stock options, net 14 329 -- -- (12) 17 334 $ -- Common stock reissued 1 -- -- -- -- 10 10 -- Common stock repurchased (1) -- -- -- -- (19) (19) -- Cumulative translation and other (net of tax benefit of $30 million) -- -- -- (38) -- -- (38) (38) Net income -- -- 1,300 -- -- -- 1,300 1,300 ----- ------ ------- ---- ----- ----- ------- ------ BALANCE AT SEPTEMBER 30, 1999 2,064 $9,324 $12,281 $(25) $(605) $ -- $20,975 $1,262 ===== ====== ======= ==== ===== ===== ======= ======
See Notes to Consolidated Financial Statements -47- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in millions, except per share amounts) 1Description of the Business and Summary of Significant Accounting Policies The Walt Disney Company owns 100% of Disney Enterprises, Inc. (DEI) which, together with its subsidiaries (the Company), is a diversified worldwide entertainment company with operations in the following businesses. MEDIA NETWORKS The Company operates the ABC Television Network, which has affiliated stations providing coverage to U.S. television households. The Company also owns television and radio stations, most of which are affiliated with either the ABC Television Network or the ABC Radio Networks. The Company's cable and international broadcast operations are principally involved in the production and distribution of cable television programming, the licensing of programming to domestic and international markets and investing in foreign television broadcasting, production and distribution entities. Primary cable programming services, which operate through consolidated subsidiary companies, are ESPN- branded networks, the Disney Channel and Disney Channel International. Other programming services that operate through joint ventures, and are accounted for under the equity method, include A&E Television Networks, Lifetime Entertainment Services and E! Entertainment Television. STUDIO ENTERTAINMENT The Company produces and acquires live-action and animated motion pictures for distribution to the theatrical, home video and television markets. The Company also produces original television programming for network, first-run syndication, pay and international syndication markets, stage plays and musical recordings. The Company distributes these products through its own distribution and marketing companies in the United States and most foreign markets. THEME PARKS AND RESORTS The Company operates the Walt Disney World Resort in Florida, and Disneyland Park, the Disneyland Hotel and the Disneyland Pacific Hotel in California. The Walt Disney World Resort includes the Magic Kingdom, Epcot, Disney-MGM Studios and Disney's Animal Kingdom, thirteen resort hotels and a complex of villas and suites, a retail, dining and entertainment complex, a sports complex, conference centers, campgrounds, golf courses, water parks and other recreational facilities. In addition, the resort operates Disney Cruise Line from Port Canaveral, Florida. Disney Regional Entertainment designs, develops and operates a variety of new entertainment concepts based on Disney brands and creative properties, operating under the names ESPN Zone and DisneyQuest. The Company earns royalties on revenues generated by the Tokyo Disneyland theme park near Tokyo, Japan, which is owned and operated by an unrelated Japanese corporation. The Company also has an investment in Euro Disney S.C.A., a publicly-held French entity that operates Disneyland Paris. The Company's Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The Company also manages and markets vacation ownership interests in the Disney Vacation Club. Included in Theme Parks and Resorts are the Company's National Hockey League franchise, the Mighty Ducks of Anaheim, and the Anaheim Angels, a Major League Baseball team. CONSUMER PRODUCTS The Company licenses the name "Walt Disney," as well as the Company's characters, visual and literary properties, to various consumer manufacturers, retailers, show promoters and publishers throughout the world. The Company also engages in direct retail distribution principally through the Disney Stores, and produces books and magazines for the general public in the United States and -48- Europe. In addition, the Company produces audio and computer software products for the entertainment market, as well as film, video and computer software products for the educational marketplace. INTERNET AND DIRECT MARKETING The Internet business develops, publishes and distributes content for online services intended to appeal to broad consumer interest in sports, news, family and entertainment. Internet websites include Disney.com, Family.com, ESPN.com, ABCNEWS.com, ABCSports.com and ABC.com. The Internet business also produces Disney's Club Blast, an entertainment and educational online subscription service for kids. Internet commerce activities include the DisneyStore.com, which markets Disney-themed merchandise online, Disney Travel Online, which offers travel packages to the Walt Disney World Resort and other Disney destinations and ESPNStore.com, which offers ESPN-themed and other sports- related merchandise. The Direct Marketing business operates the Walt Disney Catalog, which markets Disney-themed merchandise via direct mail. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of the Company include the accounts of The Walt Disney Company and its subsidiaries after elimination of intercompany accounts and transactions. Accounting Changes Effective September 30, 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131 Disclosure about Segments of an Enterprise and Related Information (SFAS 131) (see Note 11). During the first quarter, the Company adopted SFAS No. 130 Reporting Comprehensive Income, which requires that the Company present comprehensive income, a measure that reflects all non-owner changes in equity, in addition to net income. Comprehensive income has been reflected in the accompanying Consolidated Statements of Stockholders' Equity. During 1998, the Company adopted SFAS No. 128 Earnings Per Share (SFAS 128), which specifies the method of computation, presentation and disclosure for earnings per share (EPS). SFAS 128 requires the presentation of two EPS amounts, basic and diluted. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS includes the dilution that would occur if outstanding stock options and other dilutive securities were exercised and is comparable to the EPS the Company has historically reported. The Company uses the treasury stock method to calculate the impact of outstanding stock options. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. During 1997, the Company adopted SFAS No. 123 Accounting for Stock-Based Compensation (SFAS 123), which requires disclosure of the fair value and other characteristics of stock options (see Note 9). The Company has chosen under the provisions of SFAS 123 to continue using the intrinsic-value method of accounting for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. -49- Revenue Recognition Revenues from the theatrical distribution of motion pictures are recognized when motion pictures are exhibited. Revenues from video sales are recognized on the date that video units are made widely available for sale by retailers. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecasting by the licensee and when certain other conditions are met. Broadcast advertising revenues are recognized when commercials are aired. Revenues from television subscription services related to the Company's primary cable programming services are recognized as services are provided. Internet advertising revenues are recognized on the basis of impression views in the period the advertising is displayed, provided that no significant obligations remain and collection is probable. Direct Marketing and Internet- based merchandise revenues (commerce) are recognized upon shipment to customers. Revenues from participants and sponsors at the theme parks are generally recorded over the period of the applicable agreements commencing with the opening of the related attraction. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. Investments Debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and reported at amortized cost. Debt securities not classified as held-to-maturity and marketable equity securities are classified as either "trading" or "available-for-sale," and are recorded at fair value with unrealized gains and losses included in earnings or stockholders' equity, respectively. All other equity securities are accounted for using either the cost method or the equity method. The Company's share of earnings or losses in its equity investments accounted for under the equity method, other than Infoseek, is included in "Corporate and other activities" in the Consolidated Statements of Income. Inventories Carrying amounts of merchandise, materials and supplies inventories are generally determined on a moving average cost basis and are stated at the lower of cost or market. Film and Television Costs Film and television costs are stated at the lower of cost, less accumulated amortization, or net realizable value. Television broadcast program licenses and rights and related liabilities are recorded when the license period begins and the program is available for use. Film and television production and participation costs are expensed based on the ratio of the current period's gross revenues to estimated total gross revenues from all sources on an individual production basis. Television network and station rights for theatrical movies and other long-form programming are charged to expense primarily on accelerated bases related to the usage of the programs. Television network series costs and multi-year sports rights are charged to expense based on the ratio of the current period's gross revenues to estimated total gross revenues from such programs. Estimates of total gross revenues can change significantly due to a variety of factors, including the level of market acceptance of film and television products, advertising rates and subscriber fees. Accordingly, revenue estimates are reviewed periodically and amortization is adjusted if necessary. -50- Such adjustments could have a material effect on results of operations in future periods. The net realizable value of television broadcast program licenses and rights is performed using a daypart methodology. Theme Parks, Resorts and Other Property Theme parks, resorts and other property are carried at cost. Depreciation is computed on the straight-line method based upon estimated useful lives ranging from three to fifty years. Intangible/Other Assets Intangible assets are amortized over periods ranging from two to forty years. The Company continually reviews the recoverability of the carrying value of these assets using the methodology prescribed in SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company also reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount, including associated intangible assets, of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. Risk Management Contracts In the normal course of business, the Company employs a variety of off- balance-sheet financial instruments to manage its exposure to fluctuations in interest, foreign currency exchange rates and investments in equity and debt securities, including interest rate and cross-currency swap agreements, forward, option, swaption and spreadlock contracts and interest rate caps. The Company designates and assigns the financial instruments as hedges of specific assets, liabilities or anticipated transactions. When hedged assets or liabilities are sold or extinguished or the anticipated transactions being hedged are no longer expected to occur, the Company recognizes the gain or loss on the designated hedging financial instruments. The Company classifies its derivative financial instruments as held or issued for purposes other than trading. Option premiums and unrealized losses on forward contracts and the accrued differential for interest rate and cross- currency swaps to be received under the agreements are recorded in the balance sheet as other assets. Unrealized gains on forward contracts and the accrued differential for interest rate and cross-currency swaps to be paid under the agreements are included in accounts and taxes payable and other accrued liabilities. Unrealized gains and losses on forward sale contracts that hedge investments in equity and debt securities are accounted for off-balance sheet until the contracts are settled, at which time any gain or loss is recognized net of the gain or loss on the underlying investment. Costs associated with forward sale contracts are deferred and included in the basis of the underlying investment. Realized gains and losses from hedges are classified in the income statement consistent with the accounting treatment of the items being hedged. The Company accrues the differential for interest rate and cross-currency swaps to be paid or received under the agreements as interest and exchange rates shift as adjustments to net interest expense over the lives of the swaps. Gains and losses on the termination of swap agreements, prior to their original maturity, are deferred and amortized to net interest expense over the remaining term of the underlying hedged transactions. Cash flows from hedges are classified in the statement of cash flows under the same category as the cash flows from the related assets, liabilities or anticipated transactions (see Notes 5 and 12). -51- Earnings Per Share Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. The difference between basic and diluted earnings per share, for the Company, is solely attributable to stock options. For the years ended September 30, 1999, 1998 and 1997, options for 28 million, 18 million and 15 million shares, respectively, were excluded from diluted earnings per share because they were anti-dilutive. Earnings per share amounts have been adjusted for all years presented, to reflect the three-for-one split of the Company's common shares effective June 1998 (see Note 8). Reclassifications Certain reclassifications have been made in the 1998 and 1997 financial statements to conform to the 1999 presentation, including changes in segment information as a result of adopting SFAS 131. 2Acquisitions and Dispositions In April 1997, the Company purchased a significant equity stake in Starwave Corporation (Starwave), an Internet technology company. In connection with the acquisition, the Company was granted an option to purchase substantially all the remaining shares of Starwave, which the Company exercised during the quarter ended June 30, 1998. Thereafter, the accounts of Starwave were included in the Company's Consolidated Financial Statements. On June 18, 1998, the Company reached an agreement for the acquisition of Starwave by Infoseek Corporation (Infoseek), a publicly held Internet search company, the purchase of additional shares of Infoseek common stock for $70 million and the purchase of warrants for $139 million, enabling it, under certain circumstances, to achieve a majority stake in Infoseek. These warrants vest over a three-year period and expire in five years. On November 18, 1998, the shareholders of both Infoseek and Starwave approved the acquisition. As a result of the acquisition and the Company's purchase of additional shares of Infoseek common stock pursuant to the merger agreement, the Company acquired approximately 43% of Infoseek's outstanding common stock. Upon completion of this transaction, the Company recognized a non-cash gain of $345 million. The gain reflected the market value of the Infoseek shares received under a partial sale accounting model. As a result of its investment in Infoseek, the Company recorded intangible assets of $460 million, including $421 million of goodwill, which are being amortized over an estimated useful life of two years. The Company determined the economic useful life of the acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, consisting of developed technology, trademarks and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. The Company accounts for its investment in Infoseek under the equity method of accounting. For the year ended September 30, 1999, the Company recorded $229 million of amortization related to intangible assets, and a charge of $44 million for purchased in-process research and development expenditures. The amortization of intangible assets and the charge for research and development expenditures have been reflected in "Equity in Infoseek loss" in the Company's Consolidated Statements of Income. As of September 30, 1999, the Company's recorded investment in Infoseek was $495 million. The quoted market value of the Company's Infoseek shares at September 30, 1999 was approximately $815 million. On November 17, 1999, Infoseek became a wholly-owned subsidiary of the Company (see Note 15). On February 9, 1996, the Company completed its acquisition of ABC. The aggregate consideration paid to ABC shareholders consisted of $10.1 billion in cash and 155 million shares of Company -52- common stock valued at $8.8 billion based on the stock price as of the date the transaction was announced. As a result of the ABC acquisition, the Company sold its independent Los Angeles television station, KCAL, during the first quarter of 1997 for $387 million, resulting in a gain of $135 million. The Company completed its final purchase price allocation and determination of related goodwill, deferred taxes and other accounts during the second quarter of 1997. During the third and fourth quarters of 1997, the Company disposed of most of the publishing businesses acquired with ABC to various third parties for consideration approximating their carrying amount. Proceeds consisted of $1.2 billion in cash, $1.0 billion in debt assumption and preferred stock convertible to common stock with a market value of $660 million. The unaudited pro forma information below presents results of operations as if the finalization of purchase price allocation and the disposition of certain ABC publishing assets in 1997 had occurred at the beginning of that year. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had these events occurred at the beginning of the year presented, nor is it necessarily indicative of future results.
1997 ------- Revenues $21,613 Net income 1,772 Earnings per share Diluted $ 0.86 Basic $ 0.88
3Investment in Euro Disney Euro Disney S.C.A. (Euro Disney) operates the Disneyland Paris theme park and resort complex on a 4,800-acre site near Paris, France. The Company accounts for its 39% ownership interest in Euro Disney using the equity method of accounting. As of September 30, 1999, the Company's recorded investment in Euro Disney was $296 million. The quoted market value of the Company's Euro Disney shares at September 30, 1999 was approximately $433 million. In connection with the financial restructuring of Euro Disney in 1994, Euro Disney Associes S.N.C. (Disney SNC), a wholly-owned affiliate of the Company, entered into a lease arrangement with a noncancelable term of 12 years (the Lease) related to substantially all of the Disneyland Paris theme park assets, and then entered into a 12-year sublease agreement (the Sublease) with Euro Disney. Remaining lease rentals at September 30, 1999 of FF 7.5 billion ($1.2 billion) receivable from Euro Disney under the Sublease approximate the amounts payable by Disney SNC under the Lease. At the conclusion of the Sublease term, Euro Disney will have the option to assume Disney SNC's rights and obligations under the Lease. If Euro Disney does not exercise its option, Disney SNC may purchase the assets, continue to lease the assets or elect to terminate the Lease, in which case Disney SNC would make a termination payment to the lessor equal to 75% of the lessor's then outstanding debt related to the theme park assets, estimated to be $1.2 billion; Disney SNC could then sell or lease the assets on behalf of the lessor to satisfy the remaining debt, with any excess proceeds payable to Disney SNC. Also as part of the restructuring, the Company agreed to arrange for the provision of a 10-year unsecured standby credit facility of approximately $177 million, upon request, bearing interest at PIBOR. As of September 30, 1999, Euro Disney had not requested that the Company establish this facility. The Company also agreed, as long as any of the restructured debt is outstanding, to maintain ownership of at least 34% of the outstanding common stock of Euro Disney until June 1999, at least 25% for the subsequent five years and at least 16.67% for an additional term thereafter. After a five-year waiver resulting from the restructuring, royalties and management fees from Euro Disney were partially reinstated in fiscal year 1999. As a result, the Company earned approximately -53- $33 million in royalties and management fees in fiscal year 1999. Royalties will be fully reinstated beginning in fiscal year 2004 and management fees will be progressively reinstated through fiscal year 2018. In November 1999, Euro Disney stockholders approved an increase in share capital through an equity rights offering. The offering has been underwritten to raise $238 million by the end of December 1999. The net proceeds will be used to partially finance the construction of a second theme park, Disney Studios, adjacent to the Magic Kingdom. The Company subscribed to approximately $93 million of the equity rights offering, maintaining its 39% interest in Euro Disney. Disney Studios is expected to open in spring 2002. 4Film and Television Costs 1999 1998 - ------------------------------------------- Theatrical film costs Released, less amortization $2,246 $2,035 In-process 1,966 2,041 ------ ------ 4,212 4,076 ------ ------ Television costs Released, less amortization 582 374 In-process 643 589 ------ ------ 1,225 963 ------ ------ Television broadcast rights 1,123 690 ------ ------ 6,560 5,729 Less: current portion 4,071 3,223 ------ ------ Non-current portion $2,489 $2,506 ====== ======
Based on management's total gross revenue estimates as of September 30, 1999, approximately 82% of unamortized film and television costs (except in- process) are expected to be amortized during the next three years. 5Borrowings The Company's borrowings at September 30, 1999 and 1998, including interest rate swaps designated as hedges, are summarized below.
1999 --------------------------------------------------------------- Stated Interest rate and cross- Effective Interest currency swaps (f) Interest Swap Balance Rate (e) Pay Float Pay Fixed Rate (g) Maturities ------- -------- ------------ ------------ --------- ---------- Commercial paper due 2000 (a) $ 1,748 5.1% $ -- $ 1,700 5.4% 2001-2002 U.S. dollar notes and debentures due 2000- 2093 (b) (h) 7,545 6.3% 3,840 500 6.1% 2000-2029 Dual currency and foreign notes due 2000- 2003 (c) 765 6.4% 765 -- 5.1% 2000-2003 Senior participating notes due 2000-2001 (d) 1,247 2.7% -- -- n/a n/a Other due 2000-2027 388 5.5% -- -- n/a n/a ------- 11,693 5.7% -- -- Less current portion 2,415 -- -- ------- ------------ ------------ Total long-term borrowings $ 9,278 $ 4,605 $ 2,200 ======= ============ ============
-54-
1998 --------------------------------------------------------------- Stated Interest rate and cross- Effective Interest currency swaps (f) Interest Swap Balance Rate (e) Pay Float Pay Fixed Rate (g) Maturities ------- -------- ------------ ------------ --------- ---------- Commercial paper due 1999 (a) $ 2,225 5.5% $ -- $ 2,225 6.2% 1999 U.S. dollar notes and debentures due 1999- 2093 (b) 6,321 6.6% 2,886 675 6.4% 1999-2012 Dual currency and foreign notes due 1999- 2003 (c) 1,678 5.8% 1,678 -- 5.4% 1999-2003 Senior participating notes due 2000-2001 (d) 1,195 2.7% -- -- n/a n/a Other due 1999-2027 266 5.2% -- -- n/a n/a ------- 11,685 5.8% -- -- Less current portion 2,123 -- -- ------- ------------ ------------ Total long-term borrowings $ 9,562 $ 4,564 $ 2,900 ======= ============ ============
- -------- (a) The Company has established bank facilities totaling $4.8 billion, which expire in one to three years. Under the bank facilities, the Company has the option to borrow at various interest rates. Commercial paper is classified as long-term since the Company intends to refinance these borrowings on a long-term basis through continued commercial paper borrowings supported by available bank facilities. (b) Includes $722 million in 1999 and $771 million in 1998 representing minority interest in a real estate investment trust established by the Company. (c) Denominated principally in U.S. dollars, Japanese yen and Italian lira. (d) Additional interest may be paid based on the performance of designated portfolios of films. The effective interest rate at September 30, 1999 and 1998 was 6.8%. (e) The stated interest rate represents the weighted-average coupon rate for each category of borrowings. For floating rate borrowings, interest rates are based upon the rates at September 30, 1999 and 1998; these rates are not necessarily an indication of future interest rates. (f) Amounts represent notional values of interest rate swaps. (g) The effective interest rate reflects the effect of interest rate and cross-currency swaps entered into with respect to certain of these borrowings as indicated in the "Pay Float" and "Pay Fixed" columns. (h) Includes $306 million in 1999, representing mandatorily redeemable preferred stock maturing in 2004. Borrowings, excluding commercial paper and minority interest, have the following scheduled maturities: 2000 $2,350 2001 2,184 2002 628 2003 203 2004 1,111 Thereafter 2,747
The Company capitalizes interest on assets constructed for its theme parks, resorts and other property, and on theatrical and television productions in process. In 1999, 1998 and 1997, respectively, total interest costs incurred were $826 million, $824 million and $841 million, of which $109 million, $139 million and $100 million were capitalized. -55- 6Income Taxes
1999 1998 1997 - ----------------------------------------------------- Income before income taxes Domestic (including U.S. exports) $ 2,199 $ 3,114 $3,193 Foreign subsidiaries 115 43 194 ------- ------- ------ $ 2,314 $ 3,157 $3,387 ======= ======= ====== Income tax provision Current Federal $ 715 $ 698 $1,023 State 140 119 203 Foreign (including withholding) 174 139 190 ------- ------- ------ 1,029 956 1,416 ------- ------- ------ Deferred Federal (21) 303 21 State 6 48 (16) ------- ------- ------ (15) 351 5 ------- ------- ------ $ 1,014 $ 1,307 $1,421 ======= ======= ====== Components of Deferred Tax Assets and Liabilities Deferred tax assets Accrued liabilities $(1,112) $(1,051) Other, net (82) (61) ------- ------- Total deferred tax assets (1,194) (1,112) ======= ======= Components of Deferred Tax Assets and Liabilities Deferred tax liabilities Depreciable, amortizable and other property 2,469 2,396 Licensing revenues 232 249 Leveraged leases 327 313 Investment in Euro Disney 169 129 ------- ------- Total deferred tax liabilities 3,197 3,087 ------- ------- Net deferred tax liability before valuation allowance 2,003 1,975 Valuation allowance 50 50 ------- ------- Net deferred tax liability $ 2,053 $ 2,025 ======= ======= Reconciliation of Effective Income Tax Rate Federal income tax rate 35.0% 35.0% 35.0% Nondeductible amortization of intangible assets 6.0 4.4 4.4 State taxes, net of federal income tax benefit 4.1 3.4 3.6 Other, net (1.3) (1.4) (1.0) ------- ------- ------ 43.8% 41.4% 42.0% ======= ======= ======
In 1999, 1998 and 1997, income tax benefits attributable to employee stock option transactions of $96 million, $327 million and $81 million, respectively, were allocated to stockholders' equity. -56- 7 Pension and Other Benefit Programs The Company maintains pension plans and postretirement medical benefit plans covering most of its domestic employees not covered by union or industry-wide plans. Employees hired after January 1, 1994 are not eligible for postretirement medical benefits. With respect to its qualified defined benefit pension plans, the Company's policy is to fund, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Pension benefits are generally based on years of service and/or compensation. The following chart summarizes the balance sheet impact, as well as the benefit obligations, assets, funded status and rate assumptions associated with the pension and postretirement medical benefit plans.
Postretirement Pension Plans Benefit Plans ---------------- ---------------- 1999 1998 1999 1998 ------- ------- ------- ------- Reconciliation of funded status of the plans and the amounts included in the Company's consolidated balance sheets: Projected benefit obligations Beginning obligations $(1,793) $(1,438) $ (321) $ (293) Service cost (89) (71) (12) (11) Interest cost (119) (109) (21) (22) Amendments (9) 9 -- (3) Actuarial gains (losses) 160 (247) 52 (2) Benefits paid 71 63 11 10 ------- ------- ------- ------- Ending obligations (1,779) (1,793) (291) (321) ------- ------- ------- ------- Fair value of plans' assets Beginning fair value 2,014 1,726 185 162 Actual return on plans' assets 249 294 21 26 Employer contributions 36 75 7 7 Participants' contributions 1 1 -- -- Benefits paid (71) (63) (11) (10) Expenses (18) (19) -- -- ------- ------- ------- ------- Ending fair value 2,211 2,014 202 185 ------- ------- ------- ------- Funded status of the plans 432 221 (89) (136) Unrecognized net gain (275) (80) (85) (30) Unrecognized prior service (benefit) cost (1) (11) 6 1 Fourth quarter contributions -- 33 -- -- ------- ------- ------- ------- Net balance sheet asset (liability) $ 156 $ 163 $ (168) $ (165) ======= ======= ======= ======= Rate Assumptions Discount rate 7.5% 6.8% 7.5% 6.8% Rate of return on plans' assets 10.5% 10.5% 10.5% 10.5% Salary increases 5.1% 4.4% n/a n/a Annual increase in cost of benefits n/a n/a 6.1% 6.4%
-57- The projected benefit obligations, accumulated benefit obligations and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $110 million, $83 million and $0 for 1999, respectively, and $96 million, $74 million and $0 for 1998, respectively. The accumulated postretirement benefit obligations and fair value of plan assets for postretirement plans with accumulated postretirement benefit obligations in excess of plan assets were $231 million and $72 million for 1999, respectively, and $254 million and $67 million for 1998, respectively. Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement medical benefit plans. A one percentage point decrease in the assumed health care cost trend rates would reduce total service and interest costs and postretirement benefit obligations by $9 million and $44 million, respectively. A one percentage point increase in the assumed health care cost trend rates would increase total service and interest costs and postretirement benefit obligations by $13 million and $59 million, respectively. The annual increase in cost of postretirement benefits is assumed to decrease .3 percentage points per year until reaching 4.9%. The Company's accumulated pension benefit obligations at September 30, 1999 and 1998 were $1.6 billion, of which 97.6% and 97.7% were vested, respectively. In addition, the Company contributes to various pension plans under union and industry-wide agreements. The income statement expenses of pension plans for 1999, 1998 and 1997 totaled $11 million, $12 million and $45 million, respectively. The discount rate, rate of return on plan assets and salary increase assumptions for the pension plans were 7.8%, 10.5% and 5.4%, respectively, in 1997. The income statement expense (credits) for postretirement benefit plans for 1999, 1998 and 1997 were $10 million, $(13) million and $(18) million, respectively. The discount rate, rate of return on plan assets and annual increase in cost of postretirement benefits assumptions were 7.8%, 10.5% and 6.7%, respectively, in 1997. The market values of the Company's shares held by the pension plan master trust as of September 30, 1999 and 1998 were $73 million and $71 million, respectively. For eligible employees, the Company has savings and investment plans which allow eligible employees to allocate up to 10% or 15% of salary through payroll deductions depending on the plan in which the employee participates. The Company matches 50% of the employee's pre-tax contributions, up to plan limits. In 1999, 1998 and 1997, the costs of such plans were $29 million, $31 million and $32 million, respectively. 8 Stockholders' Equity 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 the more than 2.7 million shareholders of Company common stock. Accordingly, there was no dividend payment during the year ended September 30, 1999. On November 4, 1999, the Board of Directors declared an annual cash dividend of 21 cents per share applicable to fiscal 1999. The dividend is payable December 17, 1999 to shareholders of Disney common stock at the close of business November 16, 1999. In June 1998, the Company effected a three-for-one split of its common stock, by means of a special stock dividend. Stockholders' equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying from retained earnings to common stock the par value of additional shares issued pursuant to the split. In connection with the common stock split, the Company amended its corporate charter to increase the Company's authorized common stock from 1.2 billion shares to 3.6 billion shares. The Board of Directors also approved an increase in the Company's share repurchase authorization to 133.3 million shares of common stock pre- split or 400 million post-split. All share and per share data included herein have been restated to reflect the split. -58- In 1996, the Company established the TWDC Stock Compensation Fund (Fund) pursuant to the repurchase program to acquire shares of the Company for the purpose of funding certain stock-based compensation. All shares acquired by the Fund were disposed of and the Fund was dissolved in April 1999. The Company has established TWDC Stock Compensation Fund II (Fund II) to fund certain future stock-based compensation. Any shares acquired by Fund II that are not utilized must be disposed of by December 31, 2002. 9 Stock Incentive Plans Under various plans, the Company may grant stock options and other awards to key executive, management and creative personnel at exercise prices equal to or exceeding the market price at the date of grant. In general, options become exercisable over a five-year period from the grant date and expire 10 years after the date of grant. In certain cases for senior executives, options become exercisable over periods up to 10 years and expire up to 15 years after date of grant. Shares available for future option grants at September 30, 1999, totaled 108 million. The following table summarizes information about stock option transactions (shares in millions):
1999 1998 1997 --------------- --------------- --------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- Outstanding at beginning of year 163 $21.70 183 $17.44 189 $15.84 Awards canceled (9) 27.35 (10) 20.98 (18) 19.32 Awards granted 20 32.97 27 33.07 27 25.64 Awards exercised (15) 13.92 (37) 9.06 (15) 11.14 --- --- --- Outstanding at September 30 159 $24.29 163 $21.70 183 $17.44 === === === Exercisable at September 30 57 $19.01 51 $16.34 63 $11.77 === === ===
The following table summarizes information about stock options outstanding at September 30, 1999 (shares in millions):
Outstanding Exercisable -------------------------------------- ------------------- Weighted Weighted Range of Weighted Average Average Average Exercise Number Remaining Years of Exercise Number Exercise Prices of Options Contractual Life Price of Options Price -------- ---------- ------------------ -------- ---------- -------- $ 5-$ 9 3 1.52 $ 8.74 3 $ 8.78 $10-$14 15 4.14 13.51 12 13.44 $15-$19 21 5.73 18.34 17 18.37 $20-$24 55 6.79 21.51 18 21.45 $25-$29 30 8.41 27.13 5 26.59 $30-$34 17 8.65 33.30 1 31.76 $35-$39 15 8.77 37.15 1 37.91 $40-$44 3 7.00 42.21 -- -- --- --- 159 57 === ===
During 1997, the Company adopted SFAS 123 and, pursuant to its provisions, elected to continue using the intrinsic-value method of accounting for stock- based awards granted to employees in accordance with APB 25. Accordingly, the Company has not recognized compensation expense for its -59- stock-based awards to employees. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of SFAS 123:
1999 1998 1997 ------ ------ ------ Net income: As reported $1,300 $1,850 $1,966 Pro forma 1,169 1,749 1,870 Diluted earnings per share: As reported 0.62 0.89 0.95 Pro forma 0.56 0.84 0.91
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The weighted average fair values of options at their grant date during 1999, 1998 and 1997, where the exercise price equaled the market price on the grant date, were $11.11, $10.82 and $9.09, respectively. The weighted average fair value of options at their grant date during 1998, where the exercise price exceeded the market price on the grant date, was $8.55. No such options were granted during 1999 and 1997. The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. The weighted average assumptions used in the model were as follows:
1999 1998 1997 ---- ---- ---- Risk-free interest rate 5.3% 5.4% 6.4% Expected years until exercise 6.0 6.0 6.1 Expected stock volatility 25% 23% 23% Dividend yield .69% .71% .71%
10 Detail of Certain Balance Sheet Accounts
1999 1998 - -------------------------------------------------------------- Current receivables Trade, net of allowances $ 3,160 $ 3,447 Other 473 552 ------- ------- $ 3,633 $ 3,999 ======= ======= Other current assets Prepaid expenses $ 515 $ 483 Other 164 181 ------- ------- $ 679 $ 664 ======= ======= Intangible assets Cost in excess of ABC's net assets acquired $14,248 $14,248 Trademark 1,100 1,100 FCC licenses 1,100 1,100 Other 856 492 Accumulated amortization (1,609) (1,153) ------- ------- $15,695 $15,787 ======= =======
-60-
1999 1998 - ------------------------------------------------------------------------ Accounts and taxes payable and other accrued liabilities Accounts payable $3,628 $ 3,792 Payroll and employee benefits 802 853 Other 158 122 ------ ------- $4,588 $ 4,767 ====== ======= Other current liabilities Unearned royalties and other advances $ 669 $ 566 Other 35 69 ------ ------- $ 704 $ 635 ====== =======
11 Segments During the year the Company changed the manner in which it reports operating segments. The Company is in the leisure business and has operations in five major segments: Media Networks, Studio Entertainment, Theme Parks and Resorts, Consumer Products and Internet and Direct Marketing, as described in Note 1. The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating income amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies (see Note 1). Operating income amounts evaluated include earnings before Corporate and other activities, net interest expense, income taxes, restructuring charges and amortization of intangible assets. Corporate and other activities principally consists of executive management, certain unallocated administrative support functions, income or loss from equity investments and minority interest from ESPN. The following segment results include allocations of certain costs, including certain information technology costs, pension, legal and other shared services, which are allocated based on consumption. In addition, while all significant intersegment transactions have been eliminated, Studio Entertainment revenues and operating income include an allocation of Consumer Products revenues, which is meant to reflect a portion of Consumer Products revenues attributable to certain film properties. These allocations are agreed-upon amounts between the businesses and may differ from amounts that would be negotiated in an arms-length transaction.
Business Segments 1999 1998 1997 - --------------------------------------------------------- Revenues Media Networks $ 7,512 $ 7,142 $ 6,522 ------- ------- ------- Studio Entertainment Third parties 6,472 6,755 6,840 Intersegment 76 94 141 ------- ------- ------- 6,548 6,849 6,981 ------- ------- ------- Theme Parks and Resorts 6,106 5,532 5,014 ------- ------- ------- Consumer Products Third parties 3,106 3,287 3,923 Intersegment (76) (94) (141) ------- ------- ------- 3,030 3,193 3,782 ------- ------- ------- Internet and Direct Marketing 206 260 174 ------- ------- ------- Total Consolidated Revenues $23,402 $22,976 $22,473 ======= ======= =======
-61-
Business Segments 1999 1998 1997 - --------------------------------------------------------------------- Operating income Media Networks $ 1,611 $ 1,746 $ 1,699 Studio Entertainment 116 769 1,079 Theme Parks and Resorts 1,446 1,288 1,136 Consumer Products 607 801 893 Internet and Direct Marketing (93) (94) (56) Amortization of intangible assets (456) (431) (439) ------- ------- ------- 3,231 4,079 4,312 Restructuring charges (132) (64) -- Gain on sale of Starwave 345 -- -- Gain on sale of KCAL -- -- 135 ------- ------- ------- Total Consolidated Operating Income $ 3,444 $ 4,015 $ 4,447 ======= ======= ======= Capital expenditures Media Networks $ 159 $ 245 $ 152 Studio Entertainment 51 117 171 Theme Parks and Resorts 1,758 1,693 1,266 Consumer Products 106 77 109 Internet and Direct Marketing 17 27 21 Corporate 43 155 203 ------- ------- ------- Total Consolidated Capital Expenditures $ 2,134 $ 2,314 $ 1,922 ======= ======= ======= Depreciation expense Media Networks $ 131 $ 122 $ 104 Studio Entertainment 64 115 86 Theme Parks and Resorts 498 443 408 Consumer Products 124 85 95 Internet and Direct Marketing 8 10 6 Corporate 26 34 39 ------- ------- ------- Total Consolidated Depreciation Expense $ 851 $ 809 $ 738 ======= ======= ======= Amortization expense Media Networks $ 423 $ 421 $ 405 Studio Entertainment 1 1 -- Theme Parks and Resorts 21 1 -- Consumer Products 6 1 27 Internet and Direct Marketing 5 7 7 ------- ------- ------- Total Consolidated Amortization Expense $ 456 $ 431 $ 439 ======= ======= =======
Identifiable assets Media Networks $19,326 $18,749 $18,415 Studio Entertainment 7,865 8,089 6,864 Theme Parks and Resorts 10,272 9,214 8,051 Consumer Products 1,964 1,975 2,065 Internet and Direct Marketing 214 336 168 Corporate* 4,038 3,015 2,934 ------- ------- ------- Total Consolidated Assets $43,679 $41,378 $38,497 ======= ======= ======= Supplemental revenue data Media Networks Advertising $ 5,486 $ 5,287 $ 4,937 Theme Parks and Resorts Merchandise, food and beverage 1,878 1,780 1,754 Admissions 1,860 1,739 1,603
-62- Geographic Segments 1999 1998 1997 - ----------------------------------------------------------- Revenues United States $18,657 $18,106 $17,868 U.S. Exports 1,147 1,036 874 Europe 2,059 2,215 2,073 Asia Pacific 974 996 987 Latin America, Canada and Other 565 623 671 ------- ------- ------- $23,402 $22,976 $22,473 ======= ======= ======= Operating income United States $ 3,142 $ 3,468 $ 3,712 Europe 229 369 499 Asia Pacific 228 217 335 Latin America, Canada and Other 115 173 62 Unallocated expenses (270) (212) (161) ------- ------- ------- $ 3,444 $ 4,015 $ 4,447 ======= ======= ======= Identifiable assets United States $41,938 $39,462 $36,706 Europe** 1,238 1,468 1,275 Asia Pacific 319 270 341 Latin America, Canada and Other 184 178 175 ------- ------- ------- $43,679 $41,378 $38,497 ======= ======= =======
* Primarily investments accounted for under the equity method, deferred tax assets, other investments, fixed and other assets ** Primarily current assets and investment in Euro Disney 12 Financial Instruments Investments As of September 30, 1999 and 1998, the Company held $102 million and $126 million, respectively, of securities classified as available for sale. Realized gains and losses are determined principally on an average cost basis. In 1999, the Company recognized $70 million in gains on sales of securities; in 1998 and 1997, realized gains and losses were not material. In 1999, 1998 and 1997, unrealized gains and losses on available-for-sale securities were not material. During the year, the Company hedged certain investment holdings using collar and forward sale contracts. The collar contracts were terminated during the year, and the forward contracts, with notional amounts totaling $718 million, expire in five years. Interest Rate Risk Management The Company is exposed to the impact of interest rate changes. The Company's objective is to manage the impact of interest rate changes on earnings and cash flows and on the market value of its investments and borrowings. The Company maintains fixed rate debt as a percentage of its net debt between a minimum and maximum percentage, which is set by policy. The Company uses interest rate swaps and other instruments to manage net exposure to interest rate changes related to its borrowings and investments and to lower its overall borrowing costs. Significant interest rate risk management instruments held by the Company during 1999 and 1998 included pay- floating and pay-fixed swaps and interest rate caps. Pay-floating swaps effectively convert medium and long-term obligations to LIBOR or commercial paper rate indexed variable rate instruments. These swap agreements expire in one to 30 years. Pay-fixed swaps and interest rate caps effectively convert floating rate obligations to fixed rate instruments. The pay-fixed swaps expire in two to three years. The interest rate caps either expired or were terminated during the year. -63- The following table reflects incremental changes in the notional or contractual amounts of the Company's interest rate contracts during 1999 and 1998. Activity representing renewal of existing positions is excluded.
September 30, Maturities/ September 30, 1998 Additions Expirations Terminations 1999 - ---------------------------------------------------------------------------------- Pay-floating swaps $2,886 $ 4,704 $ (925) $(2,825) $3,840 Pay-fixed swaps 2,900 2,200 (2,900) -- 2,200 Interest rate caps 1,100 2,500 (1,100) (2,500) -- ------ ------- ------- ------- ------ $6,886 $ 9,404 $(4,925) $(5,325) $6,040 ====== ======= ======= ======= ====== September 30, Maturities/ September 30, 1997 Additions Expirations Terminations 1998 - ---------------------------------------------------------------------------------- Pay-floating swaps $2,086 $ 950 $ (50) $ (100) $2,886 Pay-fixed swaps 950 6,000 (4,050) -- 2,900 Interest rate caps -- 3,100 (2,000) -- 1,100 Swaption contracts 300 -- (300) -- -- ------ ------- ------- ------- ------ $3,336 $10,050 $(6,400) $ (100) $6,886 ====== ======= ======= ======= ======
The impact of interest rate risk management activities on income in 1999, 1998 and 1997, and the amount of deferred gains and losses from interest rate risk management transactions at September 30, 1999 and 1998 were not material. Foreign Exchange Risk Management The Company transacts business in virtually every part of the world and is subject to risks associated with changing foreign exchange rates. The Company's objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency assets and liabilities, commitments and anticipated foreign currency revenues. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures for periods not to exceed five years. The gains and losses on these contracts offset changes in the value of the related exposures. It is the Company's policy to enter into foreign currency transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for speculative purposes. The Company uses option strategies that provide for the sale of foreign currencies to hedge probable, but not firmly committed, revenues. While these hedging instruments are subject to fluctuations in value, such fluctuations are offset by changes in the value of the underlying exposures being hedged. The principal currencies hedged are the European euro, Japanese yen, Australian dollar, Canadian dollar and British pound. The Company also uses forward contracts to hedge foreign currency assets and liabilities. Cross- currency swaps are used to hedge foreign currency-denominated borrowings. -64- At September 30, 1999 and 1998, the notional amounts of the Company's foreign exchange risk management contracts, net of notional amounts of contracts with counterparties against which the Company has a legal right of offset, the related exposures hedged and the contract maturities are as follows:
1999 1998 ---------------------------- ---------------------------- Fiscal Fiscal Notional Exposures Year Notional Exposures Year Amount Hedged Maturity Amount Hedged Maturity -------- --------- --------- -------- --------- --------- Option contracts $1,416 $ 524 2000 $2,966 $1,061 1999-2000 Forward contracts 1,620 1,353 2000 2,053 1,773 1999-2000 Cross-currency swaps 765 765 2000-2003 1,678 1,678 1999-2003 ------ ------ ------ ------ $3,801 $2,642 $6,697 $4,512 ====== ====== ====== ======
Gains and losses on contracts hedging anticipated foreign currency revenues and foreign currency commitments are deferred until such revenues are recognized or such commitments are met, and offset changes in the value of the foreign currency revenues and commitments. At September 30, 1999 and 1998, the Company had deferred gains of $38 million and $245 million, respectively, and deferred losses of $26 million and $118 million, respectively, related to foreign currency hedge transactions. Deferred amounts to be recognized can change with market conditions and will be substantially offset by changes in the value of the related hedged transactions. The impact of foreign exchange risk management activities on operating income in 1999 and in 1998 was a net gain of $66 million and $227 million, respectively. Fair Value of Financial Instruments At September 30, 1999 and 1998, the Company's financial instruments included cash, cash equivalents, investments, receivables, accounts payable, borrowings and interest rate, forward and foreign exchange risk management contracts. At September 30, 1999 and 1998, the fair values of cash and cash equivalents, receivables, accounts payable and commercial paper approximated carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures, determined based on broker quotes or quoted market prices or rates for the same or similar instruments, and the related carrying amounts are as follows:
1999 1998 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Investments $ 569 $ 832 $ 686 $ 765 Borrowings $(10,971) $(10,962) $(10,914) $(11,271) Risk management contracts: Foreign exchange forwards $ (37) $ (27) $ 49 $ 18 Foreign exchange options 58 69 58 178 Interest rate swaps 10 (46) 30 181 Forward sale contracts -- (36) -- -- Cross-currency swaps 13 (65) 25 (89) -------- -------- -------- -------- $ 44 $ (105) $ 162 $ 288 ======== ======== ======== ========
-65- Credit Concentrations The Company continually monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments, and does not anticipate nonperformance by the counterparties. The Company would not realize a material loss as of September 30, 1999 in the event of nonperformance by any one counterparty. The Company enters into transactions only with financial institution counterparties that have a credit rating of A- or better. The Company's current policy regarding agreements with financial institution counterparties is generally to require collateral in the event credit ratings fall below A- or in the event aggregate exposures exceed limits as defined by contract. In addition, the Company limits the amount of investment credit exposure with any one institution. At September 30, 1999, financial institution counterparties had not posted any collateral to the Company, and the Company was required to collateralize $176 million of its financial instrument obligations. The Company's trade receivables and investments do not represent a significant concentration of credit risk at September 30, 1999, due to the wide variety of customers and markets into which the Company's products are sold, their dispersion across many geographic areas, and the diversification of the Company's portfolio among instruments and issuers. New Accounting Guidance In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended by SFAS No. 137, which the Company is required to adopt effective October 1, 2000. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other stockholders' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretative guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position. 13 Commitments and Contingencies The Company is committed to the purchase of broadcast rights for various feature films, sports and other programming aggregating approximately $13.3 billion as of September 30, 1999, including approximately $7.9 billion related to NFL programming. This amount is substantially payable over the next six years. -66- The Company has various real estate operating leases, including retail outlets for the distribution of consumer products and office space for general and administrative purposes. Future minimum lease payments under these non- cancelable operating leases totaled $2.2 billion at September 30, 1999, payable as follows: 2000 $ 297 2001 262 2002 239 2003 216 2004 185 Thereafter 1,019
Rental expense for the above operating leases during 1999, 1998 and 1997, including overages, common-area maintenance and other contingent rentals, was $385 million, $321 million and $327 million, respectively. The Company, together with, in some instances, certain of its directors and officers, is a defendant or co-defendant in various legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses. Management does not expect the Company to suffer any material liability by reason of such actions, nor does it expect that such actions will have a material effect on the Company's liquidity or operating results. 14 Restructuring Charges In the third quarter of the current year, the Company began an across-the- board assessment of its cost structure. The Company's efforts are directed toward leveraging marketing and sales efforts, streamlining operations, identifying new markets and further developing distribution channels, including its Internet sites and cable and television networks. In connection with actions taken to streamline operations, restructuring charges were recorded in the fourth quarter and amounted to $132 million ($0.04 per share). The restructuring activities primarily related to severance and lease and other contract cancellation costs, primarily in connection with the consolidation of operations in the Company's broadcasting, television production and regional entertainment businesses. The charge included cash charges of $24 million for severance and $55 million for lease and other contract cancellation costs, and non-cash charges for asset write-offs and write-downs of underutilized assets of $53 million. Accrued balances at September 30, 1999 relate principally to lease and other contract cancellation costs and will be relieved throughout fiscal 2000, as leases and contracts expire. 15 Subsequent Event 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. As of the effective date of the Infoseek acquisition, the Company retained an initial interest of approximately 72% in GO.com. Former Infoseek stockholders initially owned the remaining 28%. Shares of the Company's existing common stock were reclassified as Disney Group common stock, and -67- track Disney Group financial performance, which reflects the Company's businesses other than GO.com, plus the Company's retained interest in GO.com. The Infoseek acquisition will be accounted for as a purchase. Accordingly, operating results for Infoseek and amortization of its intangible assets, which is expected to be substantial, will be reflected in the Company's financial statements from the effective date of the transaction. The unaudited pro forma information below presents results of operations of the businesses that are tracked by the Disney Group common stock and the go.com common stock, as if the Infoseek acquisition and issuance of go.com common stock had occurred at the beginning of the year. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had these events occurred at the beginning of the year presented, nor is it necessarily indicative of future results.
Pro forma 1999 (unaudited) ---------------- Disney Group GO.com ------- ------- Revenues $23,196 $ 348 ======= ======= Net income (loss) 1,364 (1,097) Disney Group retained interest in GO.com: (790) 790 ------- ------- Net income (loss) attributable to shareholders: $ 574 $ (307) ======= ======= Diluted and basic earnings (loss) per share attributable to shareholders: $ 0.28 $ (7.28) ======= =======
In November 1999, the Company sold the Fairchild Publishing assets acquired with its acquisition of ABC. The Company is currently finalizing the accounting for the transaction. The sale is not expected to have a material effect on the Company's financial position. -68- QUARTERLY FINANCIAL SUMMARY (In millions, except per share data) (unaudited) December 31 March 31 June 30 September 30 - ------------------------------------------------------------------- 1999 (/1/)(/2/)(/3/) Revenues $6,589 $5,510 $5,522 $5,781 Operating income 1,375 729 951 389 Net income 622 226 367 85 Earnings per share (/4/) Diluted 0.30 0.11 0.18 0.04 Basic 0.30 0.11 0.18 0.04 1998 (/3/) Revenues $6,339 $5,242 $5,248 $6,147 Operating income 1,492 849 923 751 Net income 755 384 415 296 Earnings per share (/4/) Diluted 0.37 0.18 0.20 0.14 Basic 0.37 0.19 0.20 0.14
- -------- (1) Reflects a $345 million gain on the sale of Starwave in the first quarter of 1999. The earnings per share impact of the gain was $0.10. See Note 2 to the Consolidated Financial Statements. (2) Reflects Equity in Infoseek loss of $84 million, $75 million, $87 million and $76 million for each of the four quarters in 1999, respectively. The earnings per share impacts of the losses were $0.03, $0.02, $0.02 and $0.02, respectively. See Notes 2 and 15 to the Consolidated Financial Statements. (3) Reflects $132 million and $64 million of restructuring charges in the fourth quarter of 1999 and 1998, respectively. The earnings per share impacts of the charges were $0.04 and $0.02, respectively. See Note 14 to the Consolidated Financial Statements. (4) Amounts have been adjusted to give effect to the three-for-one split of the Company's common shares effective June 1998. See Note 8 to the Consolidated Financial Statements. -69- [DISNEY RECYCLING LOGO] EX-3.2 2 BYLAWS OF THE COMPANY Exhibit 3.2 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. 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 -1- 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 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. -2- (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 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 -3- an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. "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 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 -4- 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 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 -5- 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. (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." -6- 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. 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. 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. Directors need not be stockholders. Section 2. Nomination of Directors. Only persons who are nominated --------- ----------------------- in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation at the Annual Meeting may be made at such meeting by or at the direction of the Board of Directors, by any committee or persons appointed by the Board of Directors or by any stockholder of the Corporation entitled to -7- vote for the election of directors at the meeting who complies with the notice procedures set forth in this Article III, Section 2. Such nominations by any stockholder shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the person, (c) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person, and (d) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the Rules and Regulations of the Securities and Exchange Commission under Section 14 of the Securities Exchange Act of 1934, as amended; and (ii) as to the stockholder giving the notice (a) the name and record address of the stockholder and (b) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The officer of the Corporation presiding at an Annual Meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 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 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 -8- 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 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 -9- 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 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. -10- 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. 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. -11- 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 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, -12- 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. (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 -13- 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 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 -14- 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. 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 -15- 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 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 -16- 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. 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 -17- 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 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. -18- 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. -19- EX-21 3 THE WALT DISNEY COMPANY AND SUBSIDIARIES Exhibit 21 THE WALT DISNEY COMPANY AND SUBSIDIARIES Name of subsidiary State of Incorporation --------------------------------------------------------- ABC, Inc. New York ABC Holding Company Inc. Delaware Disney Enterprises, Inc. Delaware Walt Disney World Co. Delaware ESPN, Inc. Delaware Buena Vista Entertainment, Inc. California ABC Daytime Circle, Inc. Delaware
EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOUND ON THE COMPANY'S FORM 10-K FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 1,000,000 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 414 2,434 3,633 0 796 10,200 17,566 6,220 43,679 7,707 9,278 0 0 9,324 11,651 43,679 23,402 23,402 0 19,958 518 0 612 2,314 1,014 1,300 0 0 0 1,300 0.63 0.62
-----END PRIVACY-ENHANCED MESSAGE-----