-----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, UhlWFC+gSeBDL7wr512Awr2YxdPMJcuq6xzOBqNk8QtDLGbQf5gmLuy1gWAOrOlj S9z9EhT91BvcvL8g/XqAmg== 0001001039-99-000011.txt : 19990518 0001001039-99-000011.hdr.sgml : 19990518 ACCESSION NUMBER: 0001001039-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALT DISNEY CO/ CENTRAL INDEX KEY: 0001001039 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 954545390 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11605 FILM NUMBER: 99627301 BUSINESS ADDRESS: STREET 1: 500 SOUTH BUENA VISTA ST CITY: BURBANK STATE: CA ZIP: 91521 BUSINESS PHONE: 8185601000 MAIL ADDRESS: STREET 1: 500 SOUTH BUENA VISTA ST CITY: BURBANK STATE: CA ZIP: 91521 FORMER COMPANY: FORMER CONFORMED NAME: DC HOLDCO INC DATE OF NAME CHANGE: 19950918 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1999 Commission File Number 1-11605 The Walt Disney Company Incorporated in Delaware I.R.S. Employer Identification No. 95-4545390 500 South Buena Vista Street, Burbank, California 91521 (818) 560-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO There were 2,059,309,922 shares of common stock outstanding as of May 11, 1999 PART I. FINANCIAL INFORMATION THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME In millions, except per share data (unaudited) [CAPTION] Three Months Six Months Ended Ended March 31 March 31 ------------------ ----------------- 1999 1998 1999 1998 -------- -------- -------- --------- Revenues $5,510 $5,242 $12,099 $11,581 Costs and expenses (4,781) (4,393) (10,340) (9,240) Gain on sale of Starwave - - 345 - -------- -------- -------- --------- Operating income 729 849 2,104 2,341 Corporate and other activities (85) (48) (137) (126) Equity in Infoseek loss (75) - (159) - Net interest expense (174) (150) (338) (284) -------- -------- -------- --------- Income before income taxes 395 651 1,470 1,931 Income taxes (169) (267) (622) (792) -------- -------- -------- --------- Net income $ 226 $ 384 $ 848 $1,139 ======== ======== ======== ========= Earnings per share Diluted $ 0.11 $ 0.18 $ 0.41 $ 0.55 ======== ======== ======== ========= Basic $ 0.11 $ 0.19 $ 0.41 $ 0.56 ======== ======== ======== ========= Average number of common and common equivalent shares outstanding Diluted 2,089 2,079 2,083 2,073 ======== ======== ======== ========= Basic 2,054 2,037 2,052 2,028 ======== ======== ======== =========
See Notes to Condensed Consolidated Financial Statements THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS In millions, except share data [CAPTION] March 31, September 30, 1999 1998 ----------- ---------- (unaudited) ASSETS Current Assets Cash and cash equivalents $ 790 $ 127 Receivables 4,036 3,999 Inventories 850 899 Film and television costs 3,381 3,223 Deferred income taxes 455 463 Other assets 814 664 ----- ------ Total current assets 10,326 9,375 Film and television costs 2,575 2,506 Investments 2,549 1,814 Theme parks, resorts and other property, at cost Attractions, buildings and equipment 14,775 14,037 Accumulated depreciation (5,769) (5,382) ------ ------ 9,006 8,655 Projects in progress 1,361 1,280 Land 414 411 ---- ---- 10,781 10,346 Intangible assets, net 15,800 15,769 Other assets 1,443 1,568 ----- ----- $ 43,474 $41,378 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts and taxes payable and other $ 4,210 $ 4,767 accrued liabilities Current portion of borrowings 2,017 2,123 Unearned royalties and other advances 893 635 ----- ----- Total current liabilities 7,120 7,525 Borrowings 10,523 9,562 Deferred income taxes 2,804 2,488 Other long term liabilities, unearned 2,672 2,415 royalties and other advances Stockholders' Equity Preferred stock, $.01 par value Authorized - 100 million shares Issued - none Common stock, $.01 par value Authorized - 3.6 billion shares Issued - 2.1 billion shares 9,145 8,995 Retained earnings 11,829 10,981 Cumulative translation and other (6) 13 ------ ----- 20,968 19,989 Treasury stock, at cost, 29 million shares (605) (593) Shares held by TWDC Stock Compensation Fund, at cost - (8) (8) ---- ---- 0.3 million and 0.4 million shares 20,355 19,388 ------ ------ $ 43,474 $ 41,378 ====== ======
See Notes to Condensed Consolidated Financial Statements THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS In millions (unaudited) [CAPTION] Six Months Ended March 31 -------------------------- 1999 1998 ---------- ---------- NET INCOME $ 848 $ 1,139 ------- -------- OPERATING ITEMS NOT REQUIRING CASH OUTLAYS Amortization of film and television costs 1,287 1,159 Depreciation 408 373 Amortization of intangibles 215 213 Gain on sale of Starwave (345) - Other 164 (26) CHANGES IN Assets and Liabilities (98) (321) ------- -------- 1,631 1,398 ------- -------- CASH PROVIDED BY OPERATIONS 2,479 2,537 ------- -------- INVESTING ACTIVITIES Film and television costs (1,625) (1,683) Investments in theme parks, resorts and (737) (864) other property Acquisitions (net of cash acquired) (230) (183) Other 2 175 ------- -------- ------- (2,590) (2,555) ------- -------- FINANCING ACTIVITIES Commercial paper borrowings, net 134 456 Other borrowings 1,318 995 Reduction of borrowings (758) (1,050) Dividends - (197) Repurchases of common stock (19) - Other 99 94 ------- -------- 774 298 ------- -------- Increase in Cash and Cash Equivalents 663 280 Cash and Cash Equivalents, Beginning of Period 127 317 ------- -------- Cash and Cash Equivalents, End of Period $ 790 $ 597 ======= ========
See Notes to Condensed Consolidated Financial Statements THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Operating results for the quarter are not necessarily indicative of the results that may be expected for the year ending September 30, 1999. Certain reclassifications have been made in the fiscal 1998 financial statements to conform to the fiscal 1999 presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1998. 2. During the six months, the Company received net proceeds of approximately $134 million from commercial paper activity and an additional $1.3 billion through other financing arrangements having effective interest rates ranging from 4.75% to 5.29% and maturities in fiscal 2000 through 2039. Some of this debt is denominated in foreign currencies, which the Company has converted into U.S. dollar-denominated LIBOR-based variable rate debt by entering into cross-currency swaps. 3. 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 owns approximately 43% of Infoseek's outstanding common stock. THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 quarter and six months ended March 31, 1999, the Company recorded $60 million and $90 million of amortization related to intangible assets, respectively. During the first quarter, the Company recorded 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 Condensed Consolidated Statements of Income. As of March 31, 1999, the Company's recorded investment in Infoseek was $644 million. The quoted market value of the Company's Infoseek shares at March 31, 1999 was approximately $1.9 billion. 4. Dividends per share for the quarter and six months ended March 31, 1998 were $0.05 and $0.09, respectively. On September 29, 1998, the Company's Board of Directors adopted a policy of considering the declaration and payment of dividends on an annual, rather than a quarterly basis, to reduce costs and simplify payments to stockholders. Accordingly, there were no dividend payments for the six month period ended March 31, 1999. 5. Diluted earnings per share amounts are calculated using the treasury stock method and are based upon the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation in periods in which they would have an anti-dilutive effect. The difference between basic and diluted earnings per share for the Company is solely attributable to stock options, which are considered anti-dilutive when option exercise prices exceed the weighted average market price per share of common stock during the period. For the quarters ended March 31, 1999 and 1998, options for 17 million and 6 million shares, respectively, were excluded from the diluted earnings per share calculation. For the six-month periods, options for 22 million and 9 million shares, respectively, were excluded. THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6. In the first quarter, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement requires that the Company present comprehensive income, a measure that reflects all nonowner changes in equity, in addition to net income. Comprehensive income (loss) for the periods ended March 31, 1999 and 1998 is as follows (in millions): [CAPTION] Three Months Ended Six Months Ended March 31, March 31, --------------------- --------------------- 1999 1998 1999 1998 --------- ---------- ---------- ---------- Cumulative translation and other adjustments, net of tax$ (3) $ 18 $(11) $ 12 Net income 226 384 848 1,139 ---- ---- --- ----- Comprehensive income $223 $ 402 $837 $1,151 === ==== === =====
The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations SEASONALITY The Company's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and six months ended March 31, 1999 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year. Creative Content revenues fluctuate based upon the timing of theatrical motion picture and home video releases and seasonal consumer purchasing behavior. Release dates for theatrical and home video products are determined by several factors, including timing of vacation and holiday periods and competition in the market. Broadcasting revenues are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall. Theme Parks and Resorts revenues fluctuate with changes in theme 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. RESULTS OF OPERATIONS Consolidated Results - Quarter [CAPTION] For the Quarter Ended March 31, (unaudited; in millions, except per share data) 1999 1998 % Change Revenues $5,510 $5,242 5% Costs and expenses (4,781) (4,393) (9)% ------- ------- Operating income 729 849 (14)% Corporate and other (85) (48) (77)% activities Equity in Infoseek loss (75) - n/m Net interest expense (174) (150) (16)% ------ ------- Income before income taxes 395 651 (39)% Income taxes (169) (267) 37% ------ ------- Net income $ 226 $ 384 (41)% === === Earnings per share Diluted $ 0.11 $ 0.18 (39)% ==== ===== Basic $ 0.11 $ 0.19 (42)% ==== ===== Amortization of intangible assets included in operating income $ 107 $ 107
The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net income and diluted earnings per share for the quarter decreased 41% and 39% to $226 million and $0.11, respectively. These results were driven by a decline in operating income, an increase in net interest expense, equity in Infoseek's loss, which includes amortization of intangible assets of $60 million, and higher net expense associated with corporate and other activities. Excluding the impact of Infoseek, net income and earnings per share were $269 million and $0.13, respectively. Decreased operating income reflected significantly lower results from Creative Content, partially offset by improvements from Theme Parks and Resorts and Broadcasting. The increase in net expense associated with corporate and other activities reflected a one-time $38 million gain on the sale of the Company's investment in Scandinavian Broadcast System in the prior year quarter, offset by improved results from the Company's equity investments, including Euro Disney, A&E Television and Lifetime Television in the current period. Net interest expense increased due to gains from sales of investments in the prior year and higher average debt balances in the current quarter. Consolidated Results - Six Months [CAPTION] For the Six Months Ended March 31, (unaudited; in millions, except per share data) 1999 1998 % Change Revenues $12,099 $11,581 4% Costs and expenses (10,340) (9,240) (12)% Gain on sale of Stawave 345 - n/m ------ ------ Operating income 2,104 2,341 (10)% Corporate and other activities (137) (126) (9)% Equity in Infoseek loss (159) - n/m Net interest expense (338) (284) (19)% Income before income taxes 1,470 1,931 (24)% taxes Income taxes (622) (792) 21% ---- ---- Net income $ 848 $ 1,139 (26)% === Earnings per share Diluted $ 0.41 $ 0.55 (25)% ==== ===== Basic $ 0.41 $ 0.56 (27)% ==== ===== Amortization of intangible assets included in operating income $ 215 $ 213 === ===
The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net income and diluted earnings per share decreased 26% and 25% to $848 million and $0.41, respectively. These results were driven by a decrease in operating income, equity in Infoseek's loss, which includes amortization of intangible assets of $90 million and a $44 million charge for purchased in-process research and development expenditures, and increases in net interest expense and net expense associated with corporate and other activities, partially offset by the gain on the sale of Starwave, as discussed below. Excluding the impact of Infoseek, operating income, net income and earnings per share were $1.8 billion, $739 million and $0.36, respectively. Decreased operating income reflected significantly lower results from Creative Content and Broadcasting activities, partially offset by improvements from Theme Parks and Resorts. Net interest expense increased due to gains from sales of investments in the prior year and higher average debt balances in the current year. Net expense associated with corporate and other activities reflected a one-time gain on the sale of the Company's investment in Scandinavian Broadcast System in the prior period, partially offset by improved results from the Company's equity investments, including Euro Disney, A&E Television and Lifetime Television in the current period. While the Company expects operating results to improve somewhat during the second half of the year compared to the prior year, these improvements are not expected to overcome the declines experienced in the first six months of the year. As a result, the Company is in the process of taking a number of steps, including an across-the-board assessment of its cost structure, to address the situation. On November 18, 1998, the Company completed its acquisition of a 43% equity interest in Infoseek, an internet search company (discussed more fully in footnote 3 to the financial statements). In that transaction, Infoseek exchanged shares of its common stock for the Company's interest in Starwave Corporation, an internet technology company. As a result of the exchange of its Starwave investment, the Company recognized a non-cash gain of $345 million. Also during the six months, the Company recorded $90 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" on the Company's Condensed Consolidated Statements of Income. Acquired intangible assets are being amortized over a period of two years. The impact of such charges is expected to be $120 million for the remaining six months of 1999, $240 million in 2000 and $39 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. The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Business Segment Results - Quarter [CAPTION] For the Quarter Ended March 31, (unaudited; in millions) ----------------------------------- 1999 1998 %Change Revenues: Creative Content $2,393 $2,409 (1)% Broadcasting 1,709 1,589 8% Theme Parks & Resorts 1,408 1,244 13% ----- ----- Total $5,510 $5,242 5% ===== ===== Operating Income: (1) Creative Content $ 163 $ 339 (52)% Broadcasting 261 239 9% Theme Parks & Resorts 305 271 13% --- --- Total $ 729 $ 849 (14)% === === (1) Includes depreciation and amortization (excluding film costs) of: Creative Content $ 50 $ 50 Broadcasting 138 135 Theme Parks & Resorts 113 104 $ 301 $ 289 === ===
Creative Content Revenues decreased 1% or $16 million to $2.4 billion, driven by declines of $154 million in domestic home video, $76 million in worldwide character merchandise licensing and $16 million in the Disney Stores domestically, partially offset by growth of $141 million in worldwide theatrical motion picture distribution, $51 million in international home video and $16 million in international television distribution. The decline in domestic home video revenues reflected fewer unit sales, despite the successful release of Mulan, which faced difficult comparisons to the combined revenue from The Little Mermaid and Peter Pan in the prior year quarter. Softness in worldwide character merchandise licensing revenues was primarily attributable to lower activity domestically, as sales of merchandise associated with this year's film and television programming fell short of prior year performance, and continued economic weakness abroad. Lower revenues in the Disney Stores resulted from a decline in comparative store sales domestically. Growth in worldwide theatrical motion picture distribution revenues was primarily attributable to the box office successes of A Bug's Life, Enemy of the State and Armageddon internationally and A Civil Action domestically. Improved international home video revenues were driven by the successful release of The Lion King II: Simba's Pride. Growth in international television distribution revenue reflected increased activity, primarily in Europe. The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Operating income decreased 52% or $176 million to $163 million, reflecting declines in domestic home video, worldwide character merchandise licensing and The Disney Stores domestically. These decreases were partially offset by increased results in worldwide theatrical motion picture distribution, international home video and international television distribution. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, participations, product cost, labor and occupancy, increased 8% or $160 million. Increases in production cost amortization and selling expenses, primarily due to an increase in the proportion of recent titles versus classic animated library titles in the current quarter compared to the prior year quarter, contributed to the decline in domestic home video results. Improved results in worldwide theatrical motion picture distribution, international home video and international television distribution were partially offset by higher distribution costs and production cost amortization. Broadcasting Revenues increased 8% or $120 million to $1.7 billion, driven by growth of $59 million at ESPN and the Disney Channel, $48 million at the television network and $23 million at the radio network and stations. Revenue growth at ESPN was driven by increased advertising revenues and subscriber growth, and increases at the Disney Channel were due to subscriber growth and international expansion. Despite the continuing decline in viewership at all major networks, revenues at the television network increased due to strength in the primetime national advertising market. Increases at the radio network and stations were driven by strength in local advertising markets. Operating income increased 9% or $22 million to $261 million, reflecting increased revenues at the cable, television and radio networks as well as at the radio stations, partially offset by ongoing softness in local television station advertising revenues and higher programming costs. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 7% or $98 million, driven by higher cost television network and cable programming. Theme Parks and Resorts Revenues increased 13% or $164 million to $1.4 billion, driven by growth of $94 million at the Walt Disney World Resort, due primarily to record theme park attendance and increased guest spending, and $42 million from the Disney Cruise Line, which launched in the fourth quarter of the prior year. Record attendance at the Walt Disney World Resort was driven by the new theme park, Disney's Animal Kingdom. The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Operating income increased $34 million or 13% to $305 million, resulting primarily from record theme park attendance at the Walt Disney World Resort and a full quarter of operations at the Disney Cruise Line. 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 $130 million or 13%. Increased operating costs were driven by higher theme park attendance and Disney Cruise Line operations. [CAPTION] Business Segment Results - Six Months For the Six Months Ended March 31, (unaudited; in millions) ----------------------------------- 1999 1998 %Change ---- ---- Revenues: Creative Content $5,334 $5,424 (2)% Broadcasting 3,923 3,653 7% Theme Parks & Resorts 2,842 2,504 13% ----- ----- Total $12,099 $11,581 4% ====== ====== Operating Income: (1) Creative Content $ 593 $1,039 (43)% Broadcasting 526 744 (29)% Theme Parks & Resorts 640 558 15% ---- --- 1,759 2,341 (25)% Gain on Sale of Starwave 345 - n/m ----- ----- Total $2,104 $ 2,341 (10)% ===== ===== (1) Includes depreciation and amortization (excluding film costs) of: Creative Content $ 101 $ 102 Broadcasting 275 269 Theme Parks & Resorts 233 202 $ 609 $ 573 === ===
Creative Content Revenues decreased 2% or $90 million to $5.3 billion, driven by declines of $256 million in domestic home video, $90 million in worldwide character merchandise licensing, and $33 million in the Disney Stores, primarily in the domestic market, partially offset by growth of $252 million in worldwide theatrical motion picture distribution. In domestic home video, The Lion King II: Simba's Pride and Mulan, while successful, faced difficult comparisons to the combined results of The Little Mermaid, Hercules, Peter Pan and the live-action release of George of the Jungle in the prior year. Lower character merchandise licensing revenues were primarily attributable to declines in domestic activity and continued economic weakness abroad. Lower revenues from The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) the Disney Stores reflected a decline in comparative store sales domestically. Growth in worldwide theatrical motion picture distribution revenues was primarily attributable to the box office successes of The Waterboy, A Bug's Life and Enemy of the State domestically and A Bug's Life and Armageddon internationally. Operating income decreased 43% or $446 million to $593 million, reflecting declines in home video, primarily domestically, worldwide character merchandise licensing and the Disney Stores domestically. These decreases were partially offset by improved results in worldwide theatrical motion picture distribution. Costs and expenses increased 8% or $356 million. Increases in production cost amortization and selling expenses, primarily due to an increase in the proportion of recent titles versus classic animated library titles in the current period, contributed to the decline in home video results. The impact from fewer library releases is expected to continue, as there are no additional library releases planned for the remainder of the year. The improved results in worldwide theatrical motion picture distribution were partially offset by higher distribution costs and production and participation cost amortization. Increases in production cost amortization 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. Broadcasting Revenues increased 7% or $270 million to $3.9 billion, driven by growth of $213 million at ESPN and the Disney Channel, $42 million at the television network and $38 million at the radio network and stations. Revenue growth at ESPN was driven by increased advertising revenues and subscriber growth as well as additional NFL games under the 1998 NFL contract. Increases at the Disney Channel were due to subscriber growth and international expansion. Television network revenues grew as a result of strength in the primetime national advertising market, while growth at the radio network and stations was driven by strength in local advertising markets. Notwithstanding the growth in revenues in the national television advertising market, 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. Operating income decreased 29% or $218 million to $526 million, reflecting increased programming costs at the television network and ESPN, partially offset by revenue increases at the cable, television and radio networks and radio stations. Costs and expenses increased 17% or $488 million, driven by higher NFL and other programming costs at the television network and ESPN. In addition, higher program The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) amortization at the television network reflected a reduction in benefits from the ABC acquisition. The programming rights fees under the 1998 NFL 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 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. 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. 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. Theme Parks and Resorts Revenues increased 13% or $338 million to $2.8 billion, driven by growth of $169 million at the Walt Disney World Resort, due primarily to record theme park attendance and increased guest spending, and $93 million from the Disney Cruise Line, which launched in the fourth quarter of the prior year. Revenues also increased $35 million due to record attendance at Disneyland. Record attendance at the Walt Disney World Resort was driven by the new theme park, Disney's Animal Kingdom. Record attendance at Disneyland was due in part to a successful Christmas holiday program during the first quarter. Operating income increased $82 million or 15% to $640 million, resulting primarily from record theme park attendance at both the Walt Disney World Resort and Disneyland and a full period of operations at the Disney Cruise Line. Costs and expenses increased $256 million or 13%. Increased operating costs were driven by higher theme park attendance and Disney Cruise Line operations. Financial Condition For the six months ended March 31, 1999, cash provided by operations decreased $58 million to $2.5 billion, driven by decreased net income, partially offset by lower tax payments, due to timing, and higher film and television amortization. The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) During the six months, the Company invested $1.3 billion to develop, produce and acquire rights to film and television properties and $310 million in connection with a prior year agreement to acquire a film library. During the six months, the Company invested $737 million 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. Total commitments to purchase broadcast programming approximated $13.1 billion at March 31, 1999, including approximately $8 billion related to NFL programming. Substantially all of this amount is payable over the next six years. The Company expects the ABC Television Network, ESPN and the Company's television and radio stations to continue to enter into programming commitments to purchase the broadcast rights for various feature films, sports and other programming. During the six months, the Company received approximately $134 million from net commercial paper activity and $1.3 billion from other financing arrangements. Commercial paper borrowings outstanding as of March 31, 1999 totaled $2.5 billion, with maturities of up to one year, supported by bank facilities totaling $4.5 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 $4.5 billion of additional debt. 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 During the quarter, the Company continued its efforts to minimize the risk of 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. The Company's overall plan to address the Y2K problem is described more fully in its 1998 Annual Report on Form 10-K, and the following is an update of the information included therein. The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) IT Systems. Remediation efforts (including testing and certification) continued with respect to the Company's previously identified "critical" and "important" business ("information technology" or "IT") systems. The Company continues to expect that the bulk of these systems will be tested and certified as Y2K compliant by July 31, 1999, although remediation of a small number of critical or important business systems may not be completed until October 1999. Non-IT Systems. The Company has completed its inventory of third-party and internal embedded, or "non-IT" systems. Company representatives continue to meet with vendors of equipment used in the Company's theme parks, hotels and owned office buildings and with property managers of important leased properties worldwide to ensure that the equipment is Y2K compliant. Testing for these embedded systems is expected to be completed by July 31, 1999. Additionally, testing plans are being developed and some vendor validation has occurred for other key embedded systems, such as satellite transmission, broadcast and cruise line navigation and propulsion systems. Testing for some of these systems will require taking them off-line for varying periods, which may cause temporary interruptions in particular business operations, although such interruptions are not expected to materially impact operations. In appropriate cases, the Company will be relying upon vendors' laboratory testing and certification documents to validate that the related systems are Y2K compliant. Where the Company does not have adequate assurance that remediation efforts by third parties are on schedule, contingency plans are being developed to minimize potential disruption from embedded system failures. Validation efforts are expected to continue through October 1999. Business Partners. The Company continued testing its online interfaces to many businesses that provide services and products to the Company, but the Company anticipates that many of these third parties will not be prepared to conduct online systems tests with the Company's systems until the Fall of 1999. This will put a significant burden on the Company's IT staff to complete all testing in a timely fashion. Where appropriate, manual or other semi-automated workarounds are being considered. Contingency Planning. Contingency planning has also continued at all business units under the leadership of the Company's Y2K task force. These plans are intended to provide guidance and alternatives for unexpected failures of internal systems, as well as external failures (such as electricity, communications and transportation) that may impede any business unit's ability to operate normally. Plans also provide for staffing of crisis management teams; identification of methods for ensuring prioritization of remedial efforts; storage of emergency inventories, and the development of plans for business resumption in the event of extended disruptions. The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Costs. Total anticipated expenditures related to the Y2K project remain on target at approximately $261 million, of which approximately $142 million is expected to be capitalized. Based upon its efforts to date, the Company continues to believe that the vast majority of both its IT and its 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. At this time, the Company continues to believe that the most likely "worst-case" scenario involves potential disruptions in areas in which the Company's operations must rely on 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 at present estimate either the likelihood or the potential cost of such failures. The nature and focus of the Company's efforts to address the Year 2000 problem may be revised periodically as interim goals are achieved or new issues are identified. In addition, 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. FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that the Company believes are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to the Company's stockholders. The Company believes that all statements that express expectations and projections with respect to future matters, including the launching or prospective development of new business initiatives; anticipated motion picture or television releases; internet or theme park and resort projects; Y2K remediation efforts, are forward-looking statements within the meaning of the Act. These statements are made on the basis of management's views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management's expectations will necessarily come to pass. The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Factors that may affect forward-looking statements. For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance. A list of such factors is set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 1998 under the heading "Factors that may affect forward-looking statements." PART II. OTHER INFORMATION THE WALT DISNEY COMPANY Item 4. Submission of Matters to a Vote of Security Holders The following matters were submitted to a vote of security holders during the Company's Annual Meeting of Stockholders held February 23, 1999. Description of Matter [CAPTION] Votes Cast For Authority Withheld 1. Election of directors Judith L. Estrin 1,734,676,782 22,132,174 Sanford M. Litvack 1,734,603,541 22,205,415 Sidney Poitier 1,733,433,653 23,375,303 Robert A.M. Stern 1,734,350,781 22,458,175 Andrea Van de Kamp 1,733,589,317 23,219,639
[CAPTION] Votes Cast Broker For Against Abstentions Non-votes ------------ ----------- ------------ ---------- 2. Ratification of 1,706,645,736 43,671,217 6,492,003 - PricewaterhouseCoopers LLP as independent accountants 3. Stockholder 84,549,897 1,204,387,715 23,650,885 444,220,499 proposal with respect to year 2000 4. Stockholder 101,992,772 1,120,603,787 89,985,043 444,227,354 proposal with respect to contract supplier standards 5. Stockholder 502,444,149 785,315,976 24,820,246 444,228,585 proposal with respect to future adoption of a shareholder rights plan
PART II. OTHER INFORMATION THE WALT DISNEY COMPANY Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 Letter agreement, dated December 29, 1998, between the Company and Michael D. Eisner (b) Reports on Form 8-K None THE WALT DISNEY COMPANY SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE WALT DISNEY COMPANY (Registrant) By /s/ Thomas O. Staggs Thomas O. Staggs Executive Vice President and Chief Financial Officer May 17, 1999 Burbank, California EX-27 2 FDS
5 This schedule contains summary information extracted from the condensed consolidated balance sheet and condensed consolidated statement of income found in the Company's form 10-Q for the six months ended March 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 U.S. DOLLARS 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 1 790 0 4,036 0 850 10,326 16,550 5,769 43,474 7,120 12,540 0 0 9,145 11,210 43,474 0 12,099 0 9,995 296 0 338 1,470 622 848 0 0 0 848 .41 .41
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