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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, 2000 Commission File Number 1-11605
[LOGO OF THE WALT DISNEY COMPANY]
Incorporated in Delaware I.R.S. Employer Identification No.
500 South Buena Vista Street, Burbank, 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 Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Walt Disney Internet Group 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, 2000, the aggregate market values of Disney and the Walt
Disney Internet Group 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 $61.3 billion and $209.4 million, 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 2,079,057,775 shares of Disney common stock outstanding and
43,223,932 shares of Walt Disney Internet Group common stock outstanding as of
December 15, 2000.
Documents Incorporated by Reference
Certain information required for Part III of this report is incorporated
herein by reference to the proxy statement for the 2001 annual meeting of the
Company's stockholders.
THE WALT DISNEY COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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PART I
ITEM 1. Business....................................................... 1
ITEM 2. Properties..................................................... 18
ITEM 3. Legal Proceedings.............................................. 19
ITEM 4. Submission of Matters to a Vote of Security Holders............ 21
PART II
ITEM 5. Market for the Company's Common Stock and Related Stockholder
Matters....................................................... 22
ITEM 6. Selected Financial Data........................................ 23
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 24
ITEM 7A. Market Risk.................................................... 24
ITEM 8. Financial Statements and Supplementary Data.................... 25
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 25
PART III
ITEM 10. Directors and Executive Officers of the Company................ 26
ITEM 11. Executive Compensation......................................... 26
ITEM 12. Security Ownership of Certain Beneficial Owners and Management. 26
ITEM 13. Certain Relationships and Related Transactions................. 26
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................... 27
SIGNATURES............................................................... 30
Annex I Consolidated Financial Information - The Walt Disney Company
Annex II Combined Financial Information - Walt Disney Internet Group
PART I
ITEM 1. Business
The Walt Disney Company, together with its subsidiaries, is a diversified
worldwide entertainment company with operations in five business segments:
Media Networks, Studio Entertainment, Parks & Resorts, Consumer Products and
the Internet Group (formerly known as GO.com). The term "Company" is used to
refer collectively to the parent company and the subsidiaries through which
its various businesses are actually conducted.
Walt Disney Internet Group
On November 17, 1999 the Company completed its acquisition of Infoseek
Corporation (Infoseek) and in connection therewith issued a new class of
common stock intended to reflect the performance of the Company's Internet and
direct marketing businesses including Infoseek. These businesses, originally
designated "GO.com", were renamed "Walt Disney Internet Group" effective
August 2, 2000. The class of common stock tracking the performance of these
businesses was renamed "Disney Internet Group" common stock, and continues to
trade on the New York Stock Exchange under the new name, with the ticker
symbol, "DIG". Upon issuance of the new class of common stock, the Company's
existing common stock was reclassified as "Disney" common stock, which is
intended to reflect the performance of the Company's businesses other than the
Internet Group, plus an allocation of results of the Internet Group
(collectively, Disney). The Company now reports consolidated financial
information and separate financial information for Disney and the Internet
Group. Prior to the Infoseek acquisition, the Company's Internet and direct
marketing businesses were referred to as "Disney's existing Internet business"
or "Internet and Direct Marketing."
Information on revenues, operating income, identifiable assets and
supplemental revenue of the Company's business segments appears in Note 12 to
the Consolidated Financial Statements included in Item 8 hereof. The Company
employed approximately 120,000 people as of September 30, 2000.
DISNEY SEGMENTS
MEDIA NETWORKS
Television and Radio Networks
The Company operates the ABC Television Network, which as of September 30,
2000 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, News,
Children's and Sports. The Company operates the ABC Radio Networks, which
reach more than 130 million domestic listeners weekly and consist of over
8,900 program affiliations on more than 4,500 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 100 countries
worldwide. In addition, the ABC Radio Networks produce and operate Radio
Disney, which targets children ages 6 to 11 and their parents. Radio Disney is
carried on 47 stations that cover over 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.
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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; 32 standard (AM) radio stations; and 18
frequency modulation (FM) radio stations. All of the television stations are
affiliated with the ABC Television Network, and most of the 50 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 15 million people weekly in the top 20 United States
advertising markets. Markets, frequencies and other station details are set
forth in the following tables:
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 Dec. 1, 2006 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 54
WJRT-TV (Flint, MI) 12 Oct. 1, 2005 64
WTVG (TV) (Toledo, OH) 13 Oct. 1, 2005 67
Radio Stations
Frequency Expiration
AM-Kilohertz date of FCC Radio market
Station and Market FM-Megahertz authorization ranking(/2/)
- ------------------ ------------ ------------- ------------
WABC (New York, NY) 770 K Jun. 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
WWJZ (Philadelphia, PA) 640 K Jun. 1, 2006 5
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
WMKI (Boston, MA)(/3/) 1260 K Apr. 1, 2006 8
WMAL (Washington, D.C.) 630 K Oct. 1, 2003 9
KMIC (Houston, TX) 1590 K Aug. 1, 2005 10
WDWD (Atlanta, GA) 590 K Apr. 1, 2004 11
WMYM (Miami, FL) 990 K Feb. 1, 2004 12
KKDZ (Seattle, WA) 1250 K Feb. 1, 2006 14
KMIK (Phoenix, AZ) 1580 K Oct 1, 2005 16
KDIZ (Minneapolis, MN) 1440 K Apr. 1, 2005 17
WSDZ (St. Louis, MO) 1260 K Dec. 1, 2004 19
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Frequency Expiration
AM-Kilohertz date of FCC Radio market
Station and Market FM-Megahertz authorization ranking(/2/)
- ------------------ ------------ ------------- ------------
WWMI (Tampa, FL) 1380 K Feb. 1, 2004 21
WEAE (Pittsburgh, PA) 1250 K Aug. 1, 2006 22
KADZ (Denver, CO) 1550 K Apr. 1, 2005 23
KDDZ (Denver, CO) 1690 K Apr. 1, 2005 23
WWMK (Cleveland, OH) 1260 K Oct. 1, 2004 24
WHRC (Providence, RI)(/3/) 1450 K Apr. 1, 2006 33
WGFY (Charlotte, NC)(/3/) 1480 K Oct. 1, 2003 37
WDZK (Bloomfield, CT)(/3/) 1550 K Apr. 1, 2006 45
WMNE (W. Palm Beach, FL)(/3/) 1600 K Feb. 1, 2004 51
WDZY (Richmond, VA)(/3/) 1290 K Apr. 1, 2006 57
WPLJ (FM) (New York, NY) 95.5 M Jun. 1, 2006 1
KLOS (FM) (Los Angeles, CA) 95.5 M Dec. 1, 2005 2
WXCD (FM) (Chicago, IL) 94.7 M Dec. 1, 2004 3
KMEO (FM) (Dallas-Fort Worth, TX) 96.7 M Aug. 1, 2005 6
KSCS (FM) (Dallas-Fort Worth, TX) 96.3 M Aug. 1, 2005 6
KEMM (FM) (Dallas-Fort Worth, TX) 103.3 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, 2004 7
WRQX (FM) (Washington, D.C.) 107.3 M Oct. 1, 2003 9
WJZW (FM) (Washington, D.C.) 105.9 M Oct. 1, 2003 9
WKHX-FM (Atlanta, GA) 101.5 M Apr. 1, 2004 11
WYAY (FM) (Atlanta, GA) 106.7 M Apr. 1, 2004 11
KQRS-FM (Minneapolis-St.Paul, MN) 92.5 M Apr. 1, 2005 17
KXXR (FM) (Minneapolis-St.Paul, MN) 93.7 M Apr. 1, 2005 17
KZNR (FM) (Minneapolis-St.Paul, MN) 105.1 M Apr. 1, 2005 17
KZNT (FM) (Minneapolis-St.Paul, MN) 105.3 M Apr. 1, 2005 17
KZNZ (FM) (Minneapolis-St.Paul, MN) 105.7 M Apr. 1, 2005 17
- --------
(1) Based on Nielsen Media Research, U.S. Television Household Estimates,
January 1, 2000
(2) Based on 2000 Arbitron Radio Market Rank
(3) Acquired subsequent to September 30, 2000
Cable Networks and International Broadcast Operations
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. The Company owns the Disney Channel, Toon Disney, SoapNet, 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
other international investments.
The Disney Channel, which has nearly 70 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 13 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
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and Malaysia in 1996, France and the Middle East in 1997, Spain and Italy in
1998, Germany in 1999 and a regional Disney Channel for Latin America in 2000.
Further launches are planned in Brazil, Scandinavia and Central Europe. The
Company continues to explore the development of the Disney Channel in other
countries around the world.
Toon Disney is targeted to kids aged two to 11 and features a vast array of
family-friendly animated programming from the Disney library. Toon Disney
reaches 17 million homes. Toon Disney began carrying national advertising on
September 4, 2000.
SoapNet was launched in January 2000 and reached nearly five million homes
as of September 30, 2000. SoapNet offers a wide variety of soap opera
programming 24 hours a day, seven days a week. SoapNet's primetime schedule
features same-day telecasts of the top-rated ABC Daytime series All My
Children, General Hospital, One Life to Live and Port Charles. The network
also airs the popular classic Ryan's Hope and serial dramas such as Knots
Landing, Falcon Crest, Hotel and The Colbys, as well as an original soap news
series, SoapCenter.
ESPN, Inc. operates six domestic television sports networks: ESPN, reaching
nearly 80 million households; ESPN2, at over 73 million homes; ESPN Classic,
at 30 million homes; ESPNEWS, reaching 20 million households , ESPN Now with
news and scheduling information, and ESPN Extra, featuring pay-per-view
events. . ESPN, Inc. programs, owns or has equity interests in 19
international networks, reaching more than 80 million households outside the
United States in more than 140 countries. ESPN, Inc., owns 100% of ESPN
Brazil, ESPN Sur in Argentina and a 50% interest in the ESPN STAR Sports joint
venture, which delivers sports programming throughout most of Asia, and 30% 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 leading all-sports network. ESPN also has several
other brand extensions, including ESPN.com, part of The Walt Disney Internet
Group and leading sports content provider; ESPN Regional Television; ESPN
Radio, which is distributed through ABC Radio to more than 620 stations,
making it the largest radio sports network in the U.S.; ESPN The Magazine
published by Disney Publishing; SportsTicker, the leading supplier of real-
time sports news and scores; and the ESPN Zone, sports-themed dining and
entertainment facilities managed by Disney Regional Entertainment, included in
the Parks & Resorts segment.
The A&E Television Networks are cable programming services devoted to
cultural and entertainment programming. The A&E cable service reaches 79
million subscribers. The History Channel, which is owned by A&E, reaches 69
million subscribers.
Lifetime Entertainment Services owns Lifetime Television, which reaches 78
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 that reaches 66
million cable subscribers and is devoted to the world of entertainment. E!
Entertainment Television also launched "style." in October 1998, a 24-hour
network devoted to style, beauty and home design, which currently reaches 10
million subscribers (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 is
reported under the heading "Corporate and other activities" in the Company's
Consolidated Statements of Income.
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 and Walt Disney 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
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focuses on the development, production and distribution of half-hour comedies
and one-hour dramas for network prime-time broadcast. One-hour dramas Once and
Again, Popular and Felicity were all renewed for the 2000/2001 television
season. New prime-time series that premiered in the fall of 2000 included the
half-hour comedies Geena and Madigan Men, and the one-hour drama Gideon's
Crossing. Midseason orders included the half-hour comedies My Wife and Kids
and Go Fish.
The Company is also producing seven original television movies for The
Wonderful World of Disney, which was renewed for the 2000/2001 television
season and continues to air on ABC on Sunday evenings.
The Company also provides a variety of prime-time specials for exhibition on
network television. Additionally, the Company produces live-action syndicated
programming, which includes Live! with Regis, a daily talk show; Ebert &
Roeper and the Movies, a weekly motion picture review program; Your Big Break,
a weekly variety show; as well as game shows on cable such as Win Ben Stein's
Money and Don't Forget Your Toothbrush.
The Company also licenses its television properties in a number of foreign
television markets. In addition, certain of the Company's television programs
are syndicated by the Company abroad.
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, videocassettes and DVDs. 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, DVDs 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.
The growth in the cable industry's share of viewers 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 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.
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STUDIO ENTERTAINMENT
The Studio Entertainment segment produces live-action and animated motion
pictures, television animation 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 animated 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 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 2001, the Company expects to distribute approximately 16
feature films under the Walt Disney Pictures, Touchstone Pictures and
Hollywood Pictures banners and approximately 29 films under the Miramax and
Dimension banners, including several live-action family films and three full
length animated films, with the remainder targeted to teenagers and/or adults.
In addition, the Company periodically reissues previously released animated
films. As of September 30, 2000, under the banners Walt Disney Pictures,
Touchstone Pictures and Hollywood Pictures, the Company had released 588 full
length live-action features (primarily color), 42 full length animated color
features and approximately 484 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 2000, 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 six consecutive years.
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 three of the top ten selling
home videos, including the top two titles and three of the ten top rental
titles in 2000. As of September 30, 2000, under the banners Walt Disney
Pictures, Touchstone Pictures and Hollywood Pictures, 1,207 produced and
acquired titles, including 864 feature films and 343 cartoon shorts and
animated features, were available to the domestic marketplace and 1,157
produced and acquired titles, including 739 feature films and 418 cartoon
shorts and animated features, were available to the international home
entertainment market.
Television Production and Distribution
The Company develops, produces and distributes animated television
programming to global broadcasters, including the major television networks,
the Disney Channel and other cable broadcasters, under the Walt Disney
Television and Buena Vista Television labels.
The 2000/2001 Saturday morning television season returned with a fourth year
of the two-hour kids' block, 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
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"wrap-around" the weekly series Disney's Recess, Disney's The Weekenders, and
our new fall series Disney's Teacher's Pet. Other television animation series
airing in the fall ABC Saturday morning lineup include Disney's Mouseworks,
the first cartoon series since the 1950's featuring Mickey Mouse and his
friends, Disney/Pixar's Buzz Lightyear of Star Command, Disney's Pepper Ann,
Sabrina, Disney's Doug and The New Adventures of Winnie The Pooh. Premiering
midseason will be all new episodes of Disney's Mouseworks, redubbed Disney's
House of Mouse, a new series Disney's Lloyd In Space, and a redeveloped One
Saturday Morning environment. Additionally, the Company produces first-run
animated syndicated programming. Disney's One Too is a two-hour block, airing
six days per week, including Disney's Recess, Sabrina, Disney/Pixar's Buzz
Lightyear of Star Command and Disney's Pepper Ann.
The Company licenses its theatrical and television animation film library to
the domestic television syndication market. Major packages of the Company's
feature films and animated television programming have been licensed for
broadcast over several years.
The Company also licenses its theatrical and animated 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.
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. The Company has also entered into
multi-year output deals with DirecTv and Indemand for Pay-Per-View exhibition.
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. 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 2000, Beauty and the Beast
entered its seventh year on Broadway. To date, the show has been produced in
twelve international markets. The Lion King continues its Broadway run at the
New Amsterdam Theatre into its third year. The show is also running in Tokyo,
Osaka, London, Toronto and Los Angeles. Under a license agreement, The
Hunchback of Notre Dame entered its second year in Berlin. Elton John and Tim
Rice's Aida opened on Broadway in March 2000 and earned four Tony Awards. A
touring company of Aida is scheduled to open in Minneapolis in early 2001.
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Publishing
Miramax Film Corp.'s joint publishing venture with Hearst Communications,
Inc., publishes a general interest monthly magazine titled Talk. Talk is
intended to target primarily upscale, educated readers between the ages of 25
and 54 and covers current cultural, social and political issues and
personalities.
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.
PARKS & 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, Disney Cruise Line is operated out
of 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.
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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. Disney-MGM Studios
features 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 six
themed areas: Dinoland U.S.A., Africa, Rafiki's Planet Watch, Asia, Safari
Village 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.
Resort Facilities - As of September 30, 2000, the Company owned and operated
12 resort hotels and a complex of villas and suites at the Walt Disney World
Resort, with a total of approximately 20,300 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 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 and home to
the Orlando Rays Minor League Baseball team. 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 aboard the Disney Wonder. On August 12,
2000, the Disney Magic changed its format to a seven-day cruise vacation,
which includes stops at St. Maarten and St. Thomas as well as Castaway Cay and
Nassau or Freeport.
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
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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 531-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 136-unit expansion adjacent to Disney's Wilderness Lodge is
scheduled for opening in January 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, an 18-hole public
golf course, park and recreation areas and a downtown area featuring a variety
of shops and restaurants.
Disneyland Resort
The Company owns 441 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 5 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,
scheduled to open February 8, 2001. The new theme park is under construction
on property adjacent to Disneyland and includes three principal themed areas:
Golden State, Hollywood Pictures Backlot and Paradise Pier. These areas
include rides, attractions, shows, restaurants, merchandise shops and
refreshment stands. Disney's California Adventure will celebrate and pay
tribute to the many attributes of the state of California. As part of the
expansion of the Disneyland Resort, the Company is also building Downtown
Disney, a themed 300,000-square foot complex of entertainment, dining and
shopping venues, located between Disneyland park and Disney's California
Adventure park. The expansion project also includes Disney's Grand Californian
Hotel, a deluxe 750-room hotel located inside Disney's California Adventure
park.
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. In 2000, new ESPN Zones were added in Atlanta and
Washington D.C. In 2001, the Company will open its sixth site in Downtown
Disney at the new Anaheim Resort.
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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.
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.
In July 2000, OLC opened a 504-room Disney-branded hotel adjacent to Tokyo
Disneyland, the Disney Ambassador hotel. The hotel is owned and operated by
OLC under license from a Company subsidiary.
Construction is underway 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.
The Company is 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 Company earns royalties on revenues earned by
the Disneyland Paris theme park, as well as receives management fees from
EuroDisney, which are both reported as "revenues" in the Company's
Consolidated Statements of Income. 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.
In December 1999, the Company subscribed to approximately $91 million of an
equity rights offering, maintaining its 39% interest in Euro Disney. Euro
Disney stockholders approved the increase in share capital to partially
finance the construction of a second theme park, Disney Studios, adjacent to
the Magic Kingdom. Disney Studios is expected to open in the spring of 2002.
Development of the site also continues with the Val d'Europe project near
Disneyland Paris, which is owned by unrelated parties. As part of this
development, an international shopping center was opened in October 2000.
Additional construction is expected, including development of an International
Business Park with a third party developer, and a second suburban rail
station.
Hong Kong Disneyland
On December 10, 1999, the Company and the Government of the Hong Kong
Special Administrative Region signed a master project agreement for the
development and operation of Hong Kong Disneyland. Phase I of the development,
which will be located on 299 acres of land on Lantau Island, includes the Hong
Kong Disneyland theme park, one or more hotels, retail outlets and a dining
and entertainment complex. Subject to the Government's completion of
reclamation and
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infrastructure by specified target dates, Hong Kong Disneyland is currently
targeted to open in late calendar 2005. The master project agreement permits
further phased buildout of the development under certain circumstances.
Construction and operation of the project will be the responsibility of
Hongkong International Theme Parks Limited, an entity in which the Hong Kong
Government owns a 57% interest and a subsidiary of the Company owns the
remaining 43%. A separate Hong Kong subsidiary of the Company is responsible
for managing Hong Kong Disneyland. Based on the current exchange rate between
the Hong Kong and U.S. dollars, the Company's equity contribution obligation
over the next 6 years is limited to U.S.$315 million. As of September 30, 2000
the Company had invested U.S.$7 million of this amount. Once Hong Kong
Disneyland commences operations, Company subsidiaries will be entitled to
receive management fees and royalties from project operations in addition to
the Company's equity interest.
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.
A Company subsidiary owns and operates a National Hockey League franchise,
the Mighty Ducks of Anaheim. Anaheim Sports, Inc. provides management services
to the Mighty Ducks. 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.
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.
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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 2000, the Company opened 15 new stores in the
United States and Canada, 2 in Europe and 8 in the Asia-Pacific area. The
total number of stores was 741 as of September 30, 2000.
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 Family Fun, Disney Adventures and
Discover, a general science magazine.
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. 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.
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WALT DISNEY INTERNET GROUP
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, 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 Disney Catalog, was
combined with the Buena Vista Internet Group to form the Internet and Direct
Marketing business.
On July 10, 1999, the Company entered into an Agreement and Plan of
Reorganization with Infoseek to acquire the remaining interest in Infoseek
that it did not already 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, collectively referred to
as GO.com, subsequently renamed Walt Disney Internet Group.
On July 19, 2000, the Internet Group sold Ultraseek Corporation, a
subsidiary that provides intranet search software, which it had acquired as
part of its acquisitions of Infoseek.
As the Internet business of The Walt Disney Company, the Internet Group
manages some of the Internet's most popular Web sites. The Internet Group also
includes Disney's direct marketing business, which manages merchandise sales
through The Disney Catalog. The Internet Group consists of two business
segments: Internet and Direct Marketing.
Internet
Media. The Internet media business develops, publishes and distributes
content for online services intended to appeal to broad consumer interest in
sports, news, family and entertainment. Internet media Web sites and products
include ABC.com, ABCNEWS.com, Disney.com, ESPN.com, Family.com, GO.com,
Movies.com, Mr. Showbiz, Wall of Sound and Enhanced TV.
ABC.com is the official Web site of the ABC Television Network. Since its
launch in January 2000, the site's online Who Wants to Be a Millionaire game
has been played more than 130 million times. ABC.com seeks to extend the
experience of ABC television viewing by integrating daytime programming, such
as The View and All My Children, as well as prime time programming, with
background, sneak previews and video highlights of ABC programming. ABC.com
also produces Oscar.com in association with the Academy of Motion Picture Arts
and Sciences.
ABCNEWS.com, a news site that draws on the knowledge and expertise of ABC
News correspondents throughout the world, presents information in an
innovative fashion. A recent redesign enables ABCNEWS.com to showcase the ABC
Network's multimedia assets, including audio and video reports, and to provide
users with an opportunity to customize their news on a local basis.
ABCNEWS.com recently increased its coverage of business and financial issues
with the launch of Moneyscope.
The Company also recently launched ABCNEWS4KIDS.com, which offers news
directed toward children. This Web site provides a forum for news coverage,
combining articles with animation, graphics, video and sound. ABCNEWS4KIDS.com
invites children to learn about current events and respond with feedback to
news articles.
Disney.com offers family entertainment content and services spanning the
breadth of The Walt Disney Company, from DisneyStore.com to theme parks, Walt
Disney Pictures and Radio Disney. Members of Disney's subscription service,
Disney's Blast, can also access premium content such as multi-player games and
Internet communication tools with built-in parental controls, and obtain
discounts on merchandise.
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Disney Online International manages and publishes 19 local language Disney
sites outside the United States, including www.disney.co.uk (U.K.),
www.disney.jp (Japan), www.disney.co.au (Australia), and www.disneylatino.com
(Latin America). Each site offers games and interactive activities and
provides a focus for country-specific Disney initiatives, acting as a local
language resource for non-U.S. Disney fans. In addition, Disney licenses
certain premium subscription content, localized and translated into various
languages, to international service providers.
ESPN.com is a comprehensive sports news and information site. The site has
pioneered a wide variety of features using innovative technology, including
GameCast real-time statistics and graphics, Fantasy Leagues and Sortable
Statistics. ESPN.com has plans to streamline its home page so that content
will be delivered more quickly to users and also plans to introduce Page 2, a
more feature- and attitude-oriented page offering a fresh look at sports which
will include articles by celebrity writers not generally associated with
sports writing.
ESPN.com's international operations include Soccernet.com, a soccer site
that provides soccer fans with news, views and opinions on the world's most
popular sport. The site receives traffic from 176 of the 202 countries
affiliated with the Federation Internationale de Football Association,
soccer's world organizing body. The site offers interactivity to soccer fans
via competitions, games, polls and message boards.
Family.com is a leading online parenting resource, combining editorial
content with interactive elements such as chats and bulletin boards. The site
serves as a destination for information on family activities, education, meal
planning, parenting advice, travel tips and the like.
GO.com represents a user-friendly guide to the Web that features an
integrated search, directory and content experience focused on maximizing a
user's "free time." GO.com offers information drawn from its powerful search
engine, an extensive proprietary list of user-rated sites (the GO Guides), and
from content and services within the Internet Group family of sites and
partner sites.
In a split-screen design, search results provided by GO.com appear on the
left-hand side of the page, while targeted services or editorial content
appear on the right-hand side. The result is a search that consumers may find
more targeted than findings on standard "search and directory" portals. At the
same time, the design affords advertisers with targeted advertising
opportunities that enable them to reach audiences with specific interests.
Movies.com, Mr. Showbiz and Wall of Sound are entertainment content Web
sites. Mr. Showbiz offers a wide range of entertainment information, while
Wall of Sound is dedicated to the latest in what's happening in the music
world. Movies.com was launched in May 2000 as a Web site for movie lovers,
providing dedicated pages that include plot overviews, projected release
dates, detailed cast and credits, production rumors, news updates and links to
related official fan sites for major films in production. Movies.com also
screens trailers and photo galleries, and offers assistance in finding local
theater screenings.
Enhanced TV enables television viewers to access live synchronized
programming during ABC and ESPN telecasts. Accessible via the Internet,
Enhanced TV is interactive, offering users customized programming options
while they watch the traditional telecast. During the past twelve months,
users of Enhanced TV programming were able to play Who Wants to Be a
Millionaire online in sync with the popular television show, as well as
interact with Sunday and Monday Night Football games televised on ESPN and
ABC, respectively. Special awards shows, including the Primetime and Daytime
Emmy Awards, have also proven to be popular Enhanced TV vehicles. All of these
programs are designed to be complementary to the live telecast and are a step
toward true "convergence" programming.
Commerce. The Internet commerce business manages Web sites which include
DisneyStore.com, DisneyVacations.com, ABC.com Store, ESPN Store Online and
NASCAR Store Online. Other commerce activities include Ultraseek's intranet
search software prior to the sale of Ultraseek in July 2000, Web site
development and Disney Auctions.
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DisneyStore.com, the online buying resource for Disney, offers a wide
selection of proprietary Disney merchandise in a user-friendly environment.
The site is integrated, where appropriate, with The Disney Store and The
Disney Catalog in terms of design, products and marketing efforts.
DisneyVacations.com is the online home to many Disney vacation destinations
and services, including Disneyland, Walt Disney World, Disneyland Paris, Tokyo
Disneyland, Disney Cruise Line, DisneyQuest and Disney Vacation Club. Visitors
to the site are able to purchase vacation packages and park passes and book
flights and rental cars for destinations.
ABC.com Store, which launched in December 1999, offers merchandise from
ABC's most popular programming, including ABC Daytime, Who Wants to Be a
Millionaire and primetime specials. Visitors can also purchase CDs, books and
videos related to their favorite ABC shows and specials. The site features
several mini-stores - the Millionaire Store, ABC Soap Store, The View Store
and the ABC General Store.
Through Disney Auctions, the Internet Group, in partnership with eBay,
offers consumers the opportunity to purchase authentic Disney memorabilia
sourced directly from business units of the Company. Auction items include
current and vintage, one-of-a-kind and rare Disney products, such as the
original Disneyland Park sign, an Autopia ride car from the Company's theme
parks and authentic documents signed by Walt Disney.
Disney.com, Disney Online International and ABC.com provide Web site
development and management services to businesses affiliated with the Company
that seek to develop such sites. For such services, the Internet Group is
compensated on the basis of actual costs plus a margin of 10%.
In September 2000, ESPN introduced the ESPN.com Mall, replacing the former
ESPN Store Online, which ceased operations during 2000. ESPN.com Mall offers
online sports enthusiasts the opportunity to purchase merchandise from a
variety of sports retailers, including Nike and FanBuzz.
Direct Marketing
The Direct Marketing business operates The Disney Catalog, which markets
Disney-themed merchandise through the direct mail channel. Catalog offerings
include merchandise developed exclusively for The Disney Catalog and
DisneyStore.com, as well as products from The Disney Store, other internal
Disney units and Disney licensees. The Disney Catalog also operates its own
retail outlet stores for the purpose of selling overstock merchandise.
Principal Revenue Streams
The Internet Group derives revenue from four principal revenue streams:
advertising and sponsorship, subscription, licensing and commerce.
Advertising and Sponsorship. These revenues are derived primarily from the
sale of advertisements on the Internet Group's Web sites, which consist
principally of banner advertisements, other on-site promotional and marketing
placements and promotional sponsorships. Advertising contracts are primarily
sold as "run of site" contracts under which a customer is guaranteed a number
of impressions across multiple Internet Group Web sites or as "targeted"
contracts where the customer purchases a specified number of impressions on a
specified area, Web site or service. Revenue is also derived from sponsorship
agreements, pursuant to which customers are granted specific placement within
Web "programming," including possible co-branded content placement in "mini-
sites." Additional revenue is derived from revenue sharing for links to e-
commerce partners.
During September 2000, the Internet Group launched several new advertising
and branding opportunities for its marketing partners. Across several of its
Web sites, advertisers can now obtain the "Big Impression Ad," a more
prominent and well-positioned advertising box that is 30 percent larger than
current standard Web banners and other Internet advertisements. The Big
Impression Ad is currently showcased on ESPN.com, GO.com and ABC.com and is
scheduled to be launched on
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ABCNEWS.com and Family.com by December 2000. The Big Impression Ad will be
incorporated into the Internet Group's other sites throughout fiscal 2001. It
offers the Internet Group's marketing partners a better means of targeting
their messages and an improved branding opportunity.
The Internet Group has begun participating in the traditional television
network up-front marketplace and has sold approximately $30 million in
Internet advertising which it expects to fulfill and recognize as revenue
during fiscal 2001. A growing percentage of transactions are being structured
as integrated advertising agreements that combine traditional offline and
Internet online media services. One of the Internet Group's key strengths is
its ability to attract traditional media partners to purchase placement on its
branded Web sites, leveraging long-standing relationships and ties with
promotional partners of the Company. The Internet Group believes that the
reach of its Web sites and targeted demographics of its Web audience provide
attractive advertising and sponsorship opportunities.
Subscription. The depth and breadth of the Internet Group Web sites and the
strength of its brands provide an opportunity to "upsell" customers to premium
services. For a monthly or yearly subscription fee, Disney.com offers Disney's
Blast, an Internet service for children and families that is one of the
leading subscription services on the Internet. Similarly, ESPN.com offers the
premium subscription service, ESPN Insider, along with sports fantasy leagues
in all major sports. These subscription services provide opportunities for the
Internet Group to extend its relationships with its customers while also
providing a supplemental, recurring revenue stream.
Internationally, the Internet Group provides subscription content to users
of NTT DoCoMo's i-mode wireless Internet platform, which is accessed by
approximately 10 million wireless phone customers in Japan. The Internet
Group's relationship with NTT DoCoMo is a component of the Company's larger
business strategy to distribute content to consumers globally.
Licensing. One of the Internet Group's strategic directives is to seek
distribution of all of its branded content and services, and the Company has a
strategy in place to align with a wide variety of industry partners. In the
wireless space, content and services from ABCNEWS.com, ESPN.com, Movies.com
and GO.com are offered on many types of wireless devices, including smart
phones, hand-held devices and laptop computers. AT&T, Verizon, Point Click,
Valu Page, 3Com and Intel Internet appliances carry content from the Internet
Group's news, sports, entertainment and family properties on their wireless
services. Internet Group content is also featured on Net Zero, Earthlink and
MSN, leading information service providers.
A cornerstone of this effort has been licensing Disney's Blast, a premium
content family Web site, to leading global information service providers.
Disney's Blast, one of the most widely syndicated entertainment content
sources for kids and families in the world, is now available in nine countries
worldwide and is scheduled to be available in 11 more countries by the end of
2001. Disney's Blast is carried by Telefonica via Terra Networks in three
Latin American countries, as well as in Spain, and is scheduled to be launched
in seven additional Latin American countries by the end of 2001. Other
European information service providers carrying Disney's Blast are Planet
Kids, part of NTL in the U.K., and Club Internet, part of T-Online in France.
Disney's Blast is fully localized for the relevant territory and supported by
joint marketing and promotional activity with the licensee, utilizing Disney's
local offline assets.
Commerce. The broad range of Disney-branded products, combined with the end-
to-end fulfillment capability of The Disney Catalog, positions the Internet
Group to participate in vertically integrated e-commerce. The Internet Group's
commerce sites focus on merchandise and travel-related products and services
related to the Company's ABC, Disney and ESPN brands.
Intellectual Property
The Internet Group has licenses to use Disney's intellectual property in the
conduct of its business. In addition, the Internet Group relies on industry
standard architecture and Internet protocol
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technology to distribute its content on the World Wide Web and licenses
certain commercially available technology and hardware to operate its sites.
The Internet Group has also entered into certain licenses for back-end
technology related to its e-commerce platform, community applications and Web
development.
Competitive Position
The Internet Group competes in a new and rapidly evolving marketplace for
Internet products, content and services. The Internet business consists of a
combination of Web sites that offer content, commerce and services, and faces
intense competition in each of these areas. The Internet Group competes for
users, advertisers and customers with general news Web sites, general-purpose
online service providers, browser/software companies offering information
services and large general-interest Web sites, as well as with traditional
media content businesses, such as newspapers, magazines, radio and television,
and brick-and-mortar retailers. Leading Internet companies with which the
Internet Group competes include the following:
. Portal category: Yahoo!, Excite@Home and Lycos;
. News category: cnn.com and msnbc.com;
. Sports category: CBS Sportsline.com, CNN/SI and Yahoo Sports;
. Children and Families category: iVillage and Nick.com;
. Entertainment category: Warner Bros. Online and Sony Online; and
. Network category: NBCi , CBS.com, soapoperadigest.com and E! Online.
In order to successfully compete and attract users, advertisers, customers
and strategic partners, the Internet Group must provide high quality, engaging
content in a timely and cost effective manner and must expand and develop new
content areas, services and products. The business is now focused on areas
where management believes the Internet Group can lead, realize substantial
operating margins over the long-term and leverage the significant assets of
the Company. Additionally, the Internet Group's success depends heavily upon
its exclusive technology, brand names and Internet domain names, and its
business could suffer if it is unable to protect this intellectual property.
Traffic originating from links existing on other Web sites, directories and
navigational tools managed by Internet service providers and Web browser
companies comprises an important segment of the overall traffic on the
Internet Group's Web sites. These linking arrangements are generally short-
term contracts and/or can be terminated with short notice, and there is
intense competition for these types of linking arrangements. For revenue
growth, the Internet business depends on increased acceptance and use of the
Internet, intranets and other interactive online platforms as sources of
information, entertainment and sale of goods and services.
The Internet Group depends on media advertising as a significant source of
its revenue. Most of the Internet Group's advertising and licensing contracts
are short-term. Internet media revenues are influenced by advertiser demand
and visitor traffic. Internet commerce and Direct Marketing revenues fluctuate
with seasonal consumer purchasing behavior, with a significant portion of
annual revenues generated in the first fiscal quarter. The Internet Group's
commerce sales are dependent upon its ability to offer customers sufficient
quantities of products in a timely manner and at competitive prices.
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 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 under the caption Media Networks.
-18-
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. The Company completed construction of a 397,000 square-foot office
building in Burbank, California, in November 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 2.5 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. The Company completed construction of a
142,000 square-foot broadcast facility for KABC-TV in December 2000. In
addition, a subsidiary of the Company has an option to acquire six additional
acres in Glendale, California. This option expires in 2015.
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.
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
office space occupied by subsidiary operations, a building available for third
party occupancy and retail space. 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. The Walt Disney Internet Group leases office, warehouse and
retail outlet 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. William and Geraldine
Brehm and 13 other individuals filed an amended and consolidated complaint on
May 28, 1997 in the Delaware Court of Chancery seeking, among other things, a
declaratory judgment against each of the Company's directors as of December
1996 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. On October 8, 1998, the Delaware Court of Chancery dismissed all
counts of the amended complaint. Plaintiffs appealed, and on February 9, 2000,
the Supreme Court of Delaware affirmed the dismissal but ruled also that
plaintiffs should be permitted to file an amended complaint in accordance with
the Court's opinion. Subsequently, plaintiffs have taken preparatory steps
toward such a filing.
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
-19-
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.
All Pro Sports Camps, Inc., Nicholas Stracick and Edward Russell v. Walt
Disney Company, Walt Disney World Co., Disney Development Company and Steven
B. Wilson. On January 8, 1997, the plaintiff entity and two of its principals
or former principals filed a lawsuit against the Company, two of its
subsidiaries and a former employee in the Circuit Court for Orange County,
Florida. The plaintiffs asserted that the defendants had misappropriated from
them the concept used for the Disney's Wide World of Sports complex at the
Walt Disney World Resort. On August 11, 2000, a jury returned a verdict
against the Company and its two subsidiaries in the amount of $240 million.
Subsequently, the Court awarded plaintiffs an additional $100.00 in exemplary
damages based on particular findings by the jury. The Company intends to
challenge the judgment by way of appeal and believes that there are
substantial grounds for complete reversal or reduction of the verdict.
Management believes that it is not currently possible to estimate the
impact, if any, that the ultimate resolution of these matters will have on the
Company's results of operations, financial position or cash flows.
-20-
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.
At September 30, 2000, the executive officers of the Company were as
follows:
Executive
Officer
Name Age Title Since
- ------------------ --- --------------------------------------------------------------- ---------
Michael D. Eisner 58 Chairman of the Board and Chief Executive Officer 1984
Roy E. Disney 70 Vice Chairman of the Board 1984
Sanford M. Litvack 64 Vice Chairman of the Board /1/ 1991
Robert A. Iger 49 President and Chief Operating Officer /2/ 2000
Peter E. Murphy 37 Senior Executive Vice President and Chief Strategic Officer /3/ 1998
Thomas O. Staggs 39 Senior Executive Vice President and Chief Financial Officer /4/ 1998
Louis M. Meisinger 58 Executive Vice President and General Counsel /5/ 1998
- --------
1 Mr. Litvack resigned from his position as Vice Chairman of the Board
effective December 31, 2000, although he will continue as an employee of
the Company on a part-time basis.
2 Mr. Iger was appointed to his present position in January 2000, having
served (from February 1999 until January 2000) as President of Walt Disney
International and Chairman of the ABC Group. Mr. Iger previously held a
number of increasingly responsible positions at ABC, Inc. and its
predecessor Capital Cities/ABC, Inc., culminating in service as President
and Chief Operating Officer of ABC, Inc. from 1994 to 1999.
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 1995. From August 1997 to May 1998 he served as Chief Financial
Officer of ABC, Inc. In May 1998 he was named Executive Vice President and
Chief Strategic Officer. In October 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 1995. In May 1998, he was named Executive Vice President and
Chief Financial Officer. In October 1999, Mr. Staggs was promoted to Senior
Executive Vice President.
5 Mr. Meisinger was named Executive Vice President and General Counsel of the
Company in July 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.
-21-
PART II
ITEM 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company has two classes of common stock: Disney common stock and Walt
Disney Internet Group common stock, which are listed on the New York and
Pacific stock exchanges (NYSE symbols DIS and DIG, respectively).
Sales Price
------------------------------------
Walt Disney
Disney(/1/) Internet Group
------------------ -----------------
High Low High Low
-------- --------- --------- -------
2000
4th Quarter........................... $42 1/2 $35 3/4 $16 3/8 $ 9 1/2
3rd Quarter........................... 43 5/8 38 3/4 18 15/16 11 1/8
2nd Quarter........................... 41 3/4 29 7/8 32 19 3/4
1st Quarter........................... 29 5/16 23 1/2 35 7/16 21 7/8
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
- --------
(1) First quarter per share market data for the period October 1, 1999 through
November 17, 1999 represents the activity of The Walt Disney Company
common stock. Effective November 18, 1999, The Walt Disney Company common
stock was reclassified as Disney common stock and Walt Disney Internet
Group common stock was issued to reflect the performance of the Company's
Internet and direct marketing businesses.
The Company declared a fourth quarter dividend of $0.21 per Disney share on
November 4, 1999 related to fiscal 1999. The Company declared a fourth quarter
dividend of $0.21 per Disney share on November 28, 2000 related to fiscal
2000.
As of September 30, 2000, the approximate number of record holders of Disney
common stock and Walt Disney Internet Group common stock was 882,000 and
1,000, respectively.
-22-
ITEM 6. Selected Financial Data
(In millions, except per share data)
2000(/2/) 1999(/3/) 1998(/4/) 1997(/5/) 1996(/6/)
--------- --------- --------- --------- ---------
Statements of income
Revenues $25,402 $23,435 $22,976 $22,473 $ 18,739
Operating income 3,244 3,477 4,015 4,447 3,033
Net income 920 1,300 1,850 1,966 1,214
Per share--(/1/)
Disney
Attributed earnings
Diluted $ 0.57 $ 0.62 $ 0.89 $ 0.95 $ 0.65
Basic 0.58 0.63 0.91 0.97 0.66
Dividends(/7/) 0.21 0.21 0.20 0.17 0.14
Internet Group
Attributed earnings--basic
and diluted $ (6.18) n/a n/a n/a n/a
Balance sheets
Total assets $45,027 $43,679 $41,378 $38,497 $ 37,341
Borrowings 9,461 11,693 11,685 11,068 12,342
Stockholders' equity 24,100 20,975 19,388 17,285 16,086
Statements of cash flows
Cash provided by operations $ 6,434 $ 5,588 $ 5,115 $ 5,099 $ 3,707
Investing activities (3,770) (5,310) (5,665) (3,936) (12,546)
Financing activities (2,236) 9 360 (1,124) 8,040
- --------
(1) The earnings and dividends per share have been adjusted to give effect to
the three-for-one split of Disney's common shares effective June 1998. See
Note 9 to the Consolidated Financial Statements. Disney and the Internet
Group are classes of common stock of The Walt Disney Company. Income
attributed to either class of stock should be reviewed in conjunction with
the consolidated results of operations for The Walt Disney Company
presented elsewhere herein.
(2) The 2000 results include pre-tax gains from the sale of Fairchild
Publications ($243 million), Eurosport ($93 million) and Ultraseek ($153
million). See Note 2 to the Consolidated Financial Statements. The diluted
earnings per Disney share impact of these items were $0.00, $0.02 and
$0.01, respectively. The gain on the sale of Ultraseek had an impact of
$0.25 on diluted earnings per Internet Group share.
(3) The 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 Disney share impact of these items
were $0.10, ($0.09) and ($0.04), respectively.
(4) The 1998 results include a $64 million restructuring charge. The diluted
earnings per Disney share impact of the charge was $0.02.
(5) The 1997 results include a $135 million gain from the sale of KCAL-TV. The
diluted earnings per Disney share impact of the gain was $0.04.
(6) The 1996 results include a $300 million non-cash charge for 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 diluted earnings
per Disney share impacts of these charges were $0.10 and $0.07,
respectively.
(7) The 2000 dividend was declared on November 28, 2000, to be paid on
December 22, 2000, to holders of record as of December 8, 2000. See Note 9
to the Consolidated Financial Statements.
-23-
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For information required by Item 7, refer to:
"The Walt Disney Company Consolidated Financial Information" filed as part
of this document in Annex I and
"Walt Disney Internet Group Combined Financial Information" filed as part
of this document in Annex II.
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 exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes in order to allow management to focus on 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 various financial instruments 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 and interest rate
transactions and other financial instruments 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, foreign
exchange and qualifying equity sensitive financial instruments. The VAR model
estimates were made assuming normal market conditions and a 95% confidence
level. Various modeling techniques 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, foreign
currency and equity 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
-24-
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
and qualifying equity investments. 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.
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 13 to the Consolidated Financial Statements regarding the Company's
financial instruments at September 30, 2000 and 1999.)
The estimated maximum potential one-day loss in fair value, calculated using
the VAR model, follows (unaudited, in millions):
Interest
Rate Currency Equity
Sensitive Sensitive Sensitive
Financial Financial Financial Combined
Instruments Instruments Instruments Portfolio
- ---------------------------------------------------------------------------
VAR as of September 30, 2000 $ 5 $21 $14 $20
Average VAR during the year
ended September 30, 2000 $ 8 $17 $ 8 $19
ITEM 8. Financial Statements and Supplementary Data
For information required by Item 8, refer to:
"The Walt Disney Company Consolidated Financial Information" filed as part
of this document in Annex I and
"Walt Disney Internet Group Combined Financial Information" filed as part
of this document in Annex II.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-25-
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 2001 Annual Meeting of
Stockholders (the 2001 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 2001 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
2001 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 2001 Proxy
Statement is hereby incorporated by reference.
-26-
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 Indices to Financial Statements and Supplemental Data in Annex I
and II.
(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 Exhibit 3 to the Form 10-Q of
the Company for the period
ended Mar. 30, 2000
4(a) Form of Registration Rights Agreement Exhibit B to Exhibit 2.1 to
entered into or to be entered into the Current Report on Form
with certain stockholders 8-K of Disney Enterprises,
Inc. ("DEI"), dated July 31,
1995
4(b) Five-Year Credit Agreement, dated as Filed herewith
of Mar. 8, 2000
4(c) Indenture, dated as of Nov. 30, 1990, Exhibit 2 to the Current
between DEI and Bankers Trust Report on Form 8-K of DEI,
Company, as Trustee dated Jan. 14, 1991
4(d) Indenture, dated as of Mar. 7, 1996, Exhibit 4.1(a) to the Current
between the Company and Citibank, Report on Form 8-K of the
N.A., as Trustee Company, dated Mar. 7, 1996
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 Current
France, dated Mar. 25, 1987, and (ii) Report on Form 8-K of DEI,
Letter relating thereto of the dated Apr. 4, 1987
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 June 29, Exhibit 10(a) to the Form 10-
2000, between the Company and Michael Q of the Company for the
D. Eisner period ended June 30, 2000
10(d) Employment Agreement, dated Jan. 24, Exhibit 10 to the Form 10-Q
2000, between the Company and of the Company for the
Robert A. Iger period ended Mar. 30, 2000
-27-
Exhibit Location
------- --------
10(e) Employment Agreement, dated as of Filed herewith
Jan. 1, 2001, between the Company and
Sanford M. Litvack, together with
Life Insurance and Key Plan
agreements ancillary thereto
10(f) Form of Indemnification Agreement for Annex C to the Proxy
certain officers and directors Statement for the 1988
Annual Meeting of DEI
10(g) 1995 Stock Option Plan for Non- Exhibit 20 to the Form S-8
Employee Directors Registration Statement (No.
33-57811) of DEI, dated Feb.
23, 1995
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) of DEI, dated
Nov. 13, 1995
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, dated 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) and 3(b),
and Rules and (iii) 1981 Incentive respectively, to the
Plan and Rules Prospectus contained in the
Form S-8 Registration
Statement (No. 33-26106) of
DEI, dated Dec. 20, 1988
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) Amendment, dated June 26, 2000, to Exhibit 10(b) to the Form 10-
the Company's Stock Incentive Plans Q of the Company for the
period ended June 30, 2000
10(m) Bonus Performance Plan for Executive Exhibit 10(1) to the 1998
Officers Form 10-K of the Company
10(n) Performance-Based Compensation Plan Included in the Proxy
for the Company's Chief Executive Statement dated Jan. 9,
Officer 1997, for the 1997 Annual
Meeting of the Company
10(o) 1997 Non-Employee Directors Stock and Exhibit 4.3 to the Form S-8
Deferred Compensation Plan Registration Statement (No.
333-31012) of the Company,
dated Feb. 24, 2000
10(p) Key Employees Deferred Compensation Exhibit 10(p) to the 1997
and Retirement Plan Form 10-K of the Company
10(q) Group Personal Excess Liability Exhibit 10(x) to the 1997
Insurance Plan Form 10-K of the Company
10(r) Family Income Assurance Plan (summary Exhibit 10(y) to the 1997
description) Form 10-K of the Company
10(s) Disney Salaried Savings and Exhibit 10(s) to the 1995
Investment Plan Form 10-K of DEI
10(t) (i) First Amendment and (ii) Second Exhibits 10(r) and 10(s),
Amendment to the Disney Salaried respectively, to the 1997
Savings and Investment Plan Form 10-K of the Company
10(u) ABC, Inc. Savings & Investment Plan, Exhibit 10(t) to the 1998
as amended Form 10-K of the Company
10(v) 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.
-28-
Exhibit Location
------- --------
10(w) 1991 Stock Option Plan of Capital Exhibit 6(a)(i) to the Form
Cities/ABC, Inc., as amended 10-Q of the Company for the
period ended Mar. 31, 1996
21 Subsidiaries of the Company Filed herewith
23 Consents of PricewaterhouseCoopers Included herein at pages I-
LLP and Ernst & Young LLP 17, II-10 and II-11.
27 Financial Data Schedule Filed herewith
28(a) Financial statements of the Disney Included in the Form 10-K/A
Salaried Savings and Investment Plan of the Company, dated June
for the year ended Dec. 31, 1999 28, 2000
28(b) Financial statements of the ABC Included in the Form 10-K/A
Salaried Savings and Investment Plan of the Company, dated June
for the year ended Dec. 31, 1999 28, 2000
(b) Reports on Form 8-K
None.
-29-
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 20, 2000 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 Chairman of the Board and
MICHAEL D. EISNER Chief Executive Officer December 20, 2000
____________________________________
(Michael D. Eisner)
Principal Financial and Accounting Senior Executive Vice
Officers President
THOMAS O. STAGGS and Chief Financial Officer December 20, 2000
____________________________________
(Thomas O. Staggs)
Senior Vice President -
JOHN J. GARAND Planning and Control December 20, 2000
____________________________________
(John J. Garand)
Directors
REVETA F. BOWERS Director December 20, 2000
____________________________________
(Reveta F. Bowers)
JOHN E. BRYSON Director December 20, 2000
____________________________________
(John E. Bryson)
ROY E. DISNEY Director December 20, 2000
____________________________________
(Roy E. Disney)
MICHAEL D. EISNER Director December 20, 2000
____________________________________
(Michael D. Eisner)
JUDITH L. ESTRIN Director December 20, 2000
____________________________________
(Judith L. Estrin)
STANLEY P. GOLD Director December 20, 2000
____________________________________
(Stanley P. Gold)
SANFORD M. LITVACK Director December 20, 2000
____________________________________
(Sanford M. Litvack)
-30-
Signature Title Date
--------- ----- ----
IGNACIO E. LOZANO, JR. Director December 20, 2000
____________________________________
(Ignacio E. Lozano, Jr.)
MONICA C. LOZANO Director December 20, 2000
____________________________________
(Monica C. Lozano)
GEORGE J. MITCHELL Director December 20, 2000
____________________________________
(George J. Mitchell)
THOMAS S. MURPHY Director December 20, 2000
____________________________________
(Thomas S. Murphy)
LEO J. O'DONOVAN, S.J. Director December 20, 2000
____________________________________
(Leo J. O'Donovan, S.J.)
SIDNEY POITIER Director December 20, 2000
____________________________________
(Sidney Poitier)
IRWIN E. RUSSELL Director December 20, 2000
____________________________________
(Irwin E. Russell)
ROBERT A.M. STERN Director December 20, 2000
____________________________________
(Robert A.M. Stern)
ANDREA L. VAN DE KAMP Director December 20, 2000
____________________________________
(Andrea L. Van de Kamp)
RAYMOND L. WATSON Director December 20, 2000
____________________________________
(Raymond L. Watson)
GARY L. WILSON Director December 20, 2000
____________________________________
(Gary L. Wilson)
-31-
ANNEX I
[LOGO OF THE WALT DISNEY COMPANY]
THE WALT DISNEY COMPANY
CONSOLIDATED FINANCIAL INFORMATION
ANNEX I
THE WALT DISNEY COMPANY
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... I-1
ITEM 8. Consolidated Financial Information of The Walt Disney Company
Report of Independent Accountants and Consent of Independent
Accountants.................................................... I-17
Consolidated Statements of Income for the Years Ended September
30, 2000, 1999 and 1998........................................ I-18
Consolidated Balance Sheets as of September 30, 2000 and 1999... I-19
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1998.............................. I-20
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2000, 1999 and 1998........................ I-21
Notes to Consolidated Financial Statements...................... I-22
Quarterly Financial Summary..................................... I-49
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 notes.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
On November 4, 1999, the Company sold Fairchild Publications, which was
acquired with its 1996 acquisition of ABC, Inc. The sale resulted in a pre-tax
gain of $243 million. Income taxes on the transaction largely offset the pre-
tax gain. 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 (see Note 2 to the Consolidated Financial
Statements). To enhance comparability, certain information for fiscal 2000 and
1999 is presented on a pro forma basis, which assumes that these events had
occurred at the beginning of fiscal 1999. The pro forma results are not
necessarily indicative of the consolidated results that would have occurred
had these events actually occurred at the beginning of fiscal 1999, nor are
they necessarily indicative of future results. The pro forma results include
gains on the sales of Ultraseek of $153 million and Eurosport of $93 million
(see Note 2 to the Consolidated Financial Statements).
Pro forma operating income excludes charges for purchased in-process
research and development costs of $23 million and $73 million for the years
ended September 30, 2000 and 1999.
I-1
CONSOLIDATED RESULTS
(In millions, except per share data)
Pro Forma (unaudited) As Reported
------------------------ -------------------------
%
2000 1999 Change 2000 1999 1998
------- ------- ------ ------- ------- -------
Revenues:
Media Networks $ 9,615 $ 7,970 21 % $ 9,615 $ 7,970 $ 7,433
Studio Entertainment 5,994 6,166 (3)% 5,994 6,166 6,586
Parks & Resorts 6,803 6,139 11 % 6,803 6,139 5,532
Consumer Products 2,608 2,777 (6)% 2,622 2,954 3,165
Internet Group 392 348 13 % 368 206 260
------- ------- ------- ------- -------
Total $25,412 $23,400 9 % $25,402 $23,435 $22,976
======= ======= ======= ======= =======
Operating income:(/1/)
Media Networks $ 2,298 $ 1,580 45 % $ 2,298 $ 1,580 $ 1,757
Studio Entertainment 110 154 (29)% 110 154 749
Parks & Resorts 1,620 1,479 10 % 1,620 1,479 1,288
Consumer Products 454 567 (20)% 455 600 810
Internet Group (396) (208) (90)% (402) (93) (94)
Amortization of
intangible assets (1,351) (1,362) 1 % (1,233) (456) (431)
------- ------- ------- ------- -------
2,735 2,210 24 % 2,848 3,264 4,079
Restructuring charges -- (132) n/m -- (132) (64)
Gain on sale of
Ultraseek 153 -- n/m 153 -- --
Gain on sale of
Fairchild -- -- 243 -- --
Gain on sale of
Starwave -- -- -- 345 --
------- ------- ------- ------- -------
Total operating income 2,888 2,078 39 % 3,244 3,477 4,015
Corporate and other
activities (103) (131) 21 % (105) (140) (164)
Gain on sale of Eurosport 93 -- n/m 93 -- --
Equity in Infoseek loss -- -- (41) (322) --
Net interest expense (554) (595) 7 % (558) (612) (622)
------- ------- ------- ------- -------
Income before income
taxes and minority
interests 2,324 1,352 72 % 2,633 2,403 3,229
Income taxes (1,385) (941) (47)% (1,606) (1,014) (1,307)
Minority interests (107) (88) (22)% (107) (89) (72)
------- ------- ------- ------- -------
Net income $ 832 $ 323 158 % $ 920 $ 1,300 $ 1,850
======= ======= ======= ======= =======
Earnings (loss)
attributed to:
Disney common
stock(/2/) $ 1,149 $ 609 89 % $ 1,196 $ 1,300 $ 1,850
Walt Disney Internet
Group common stock (317) (286) (11)% (276) -- --
------- ------- ------- ------- -------
$ 832 $ 323 158 % $ 920 $ 1,300 $ 1,850
======= ======= ======= ======= =======
Earnings (loss) per share
attributed to:
Disney
Diluted $ 0.55 $ 0.29 90 % $ 0.57 $ 0.62 $ 0.89
======= ======= ======= ======= =======
Basic $ 0.55 $ 0.30 83 % $ 0.58 $ 0.63 $ 0.91
======= ======= ======= ======= =======
Internet Group (basic
and diluted) $ (7.10) $ (6.66) (7)% $ (6.18) $ n/a $ n/a
======= ======= ======= ======= =======
Average number of common
and common
equivalent shares
outstanding:
Disney
Diluted 2,103 2,083 2,103 2,083 2,079
======= ======= ======= ======= =======
Basic 2,074 2,056 2,074 2,056 2,037
======= ======= ======= ======= =======
Internet Group (basic
and diluted) 45 43 45 n/a n/a
======= ======= ======= ======= =======
I-2
- --------
(1) Segment results exclude intangible asset amortization. Segment EBITDA,
which also excludes depreciation, is as follows:
Pro Forma
(unaudited) As Reported
-------------- ----------------------
2000 1999 2000 1999 1998
------ ------ ------ ------ ------
Media Networks $2,438 $1,711 $2,438 $1,711 $1,879
Studio Entertainment 164 218 164 218 864
Parks & Resorts 2,201 1,977 2,201 1,977 1,731
Consumer Products 558 690 559 724 895
Internet Group (359) (184) (367) (85) (84)
------ ------ ------ ------ ------
$5,002 $4,412 $4,995 $4,545 $5,285
====== ====== ====== ====== ======
(2) Including Internet Group losses attributed to Disney common stock.
Earnings attributed to Disney common stock reflect 100% of Internet Group
losses through November 17, 1999, and approximately 71% thereafter.
Consolidated Results
2000 vs. 1999
On a pro forma basis, revenues increased 9% to $25.4 billion, driven by
growth at Media Networks, Parks & Resorts and the Internet Group, partially
offset by decreases in the other segments. Operating income increased 39% to
$2.9 billion and net income increased 158% to $832 million. Diluted earnings
per share attributed to Disney common stock increased 90% to $0.55 and diluted
loss per share attributed to Internet Group common stock increased to $7.10.
The current year includes gains on the sale of Ultraseek and Eurosport
totaling $153 million and $93 million, respectively, which increased diluted
earnings per Disney share by $0.01 and $0.02, respectively. The Ultraseek gain
also had a $0.25 impact on diluted earnings per Internet Group share. The
prior year included restructuring charges that had a $0.04 impact on diluted
earnings per Disney share. Results for the year were driven by increased
operating income, the gains on the sale of Ultraseek and Eurosport, lower net
interest expense and improved Corporate and other activities.
Increased operating income reflected increases in Media Networks and Parks &
Resorts, partially offset by decreases in Studio Entertainment and Consumer
Products as well as higher Internet Group operating losses. Additionally, the
current year includes a $153 million gain on the sale of Ultraseek and the
prior year includes a $132 million restructuring charge discussed in more
detail below. Net interest expense decreased due to lower average debt
balances, partially offset by higher interest rates in the current year. Lower
average debt balances were driven by reductions in debt, which were funded by
increased cash flow. Lower net expense associated with Corporate and other
activities reflected improved results from the Company's cable equity
investments, partially offset by higher corporate general and administrative
expenses.
As previously noted, the Company completed its acquisition of Infoseek
during the quarter ended December 31, 1999. The acquisition resulted in a
significant increase in intangible assets, which are being amortized over
periods ranging from two to nine years.
The impact of amortization related to the November 1998 and November 1999
acquisitions, after the impact of the Ultraseek sale (see Note 2 to the
Consolidated Financial Statements), is expected to be $642 million in 2001,
$597 million in 2002, $89 million in 2003 and $13 million over the remainder
of the amortization period. The Company determined the economic useful life of
acquired goodwill by giving consideration to the useful lives of Infoseek's
identifiable intangible assets, including developed technology, trademarks,
user base, joint venture agreements and in-place workforce. In addition, the
Company considered the competitive environment and the rapid pace of
technological change in the Internet industry.
I-3
On an as-reported basis, net income decreased 29% to $920 million and
operating income decreased 7% to $3.2 billion. The as-reported results reflect
the items described above, as well as the impact of the sale of Fairchild
Publications and equity in Infoseek loss in the current year and the gain on
the sale of Starwave and higher Infoseek equity losses in the prior year. The
prior-year equity in Infoseek loss includes amortization of intangible assets
of $229 million and a charge for purchased in-process research and development
costs of $44 million. Current period as-reported operating income and net
income also reflect increased amortization of intangible assets of $777
million resulting from the Infoseek acquisition and a $23 million charge for
purchased in-process research and development expenditures. The higher
effective tax rate for the current year reflects the income tax impact of the
sale of Fairchild Publications and the impact of higher non-deductible
amortization of intangible assets.
1999 vs. 1998
On an as-reported basis, revenues increased 2% to $23.4 billion, driven by
growth at Parks & 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 the fourth quarter restructuring charges in 1999
and 1998, operating income decreased 20% to $3.3 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 (see discussion in Note 2 to the Consolidated
Financial Statements) and lower net expense associated with Corporate and
other activities. Including the restructuring charges and Infoseek, operating
income decreased 13% to $3.5 billion and net income and diluted earnings per
share decreased 30% to $1.3 billion and $0.62, respectively.
1999 Restructuring Charges
In the third quarter of 1999, 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 15 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
of 1999. 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 included lease and contract termination
costs and severance.
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 included 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 eliminated certain job responsibilities as part of the
consolidation of its retail operations. Related charges for both actions
included severance and asset write-offs.
I-4
A summary of the restructuring charges is as follows (in millions):
Description
-----------
Lease and other contract cancellation costs $ 55
Severance 24
Asset write-offs and write-downs 53
----
Total $132
====
Remaining balances recorded at September 30, 2000 totaled $47 million and
relate principally to lease and other contract cancellation costs, which will
be relieved throughout fiscal 2001 as leases and contracts expire.
The Company's cost-saving initiatives will continue into next year and may
result in additional charges of a similar nature. In addition, in fiscal 2000,
the Company commenced 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.
Results Attributed to Disney Common Stock
In addition to the consolidated results of operations for The Walt Disney
Company, the Company has also presented the operating results attributable to
Disney common stock (NYSE:DIS). Earnings attributed to Disney common stock
represent the results of Disney's operations and the portion of the net loss
of the Internet Group attributed to Disney. For fiscal 2000, the Disney
statement reflects approximately 71% of the Internet Group's net loss. Both
the Disney and Internet Group common stocks are classes of common stock issued
by The Walt Disney Company.
I-5
RESULTS ATTRIBUTED TO DISNEY COMMON STOCK
(In millions, except per share data)
Pro Forma (unaudited) As Reported
------------------------ -------------------------
%
2000 1999 Change 2000 1999 1998
------- ------- ------ ------- ------- -------
Revenues:
Media Networks $ 9,615 $ 7,970 21 % $ 9,615 $ 7,970 $ 7,433
Studio Entertainment 5,994 6,166 (3)% 5,994 6,166 6,586
Parks & Resorts 6,803 6,139 11 % 6,803 6,139 5,532
Consumer Products 2,608 2,777 (6)% 2,622 2,954 3,165
------- ------- ------- ------- -------
Total $25,020 $23,052 9 % $25,034 $23,229 $22,716
======= ======= ======= ======= =======
Operating income:
Media Networks $ 2,298 $ 1,580 45 % $ 2,298 $ 1,580 $ 1,757
Studio Entertainment 110 154 (29)% 110 154 749
Parks & Resorts 1,620 1,479 10 % 1,620 1,479 1,288
Consumer Products 454 567 (20)% 455 600 810
Amortization of
intangible assets (442) (448) 1 % (442) (451) (424)
------- ------- ------- ------- -------
4,040 3,332 21 % 4,041 3,362 4,180
Restructuring Charges -- (132) n/m -- (132) (64)
Gain on sale of
Fairchild -- -- 243 -- --
------- ------- ------- ------- -------
Total operating income 4,040 3,200 26 % 4,284 3,230 4,116
Corporate and other
activities (91) (124) 27 % (93) (124) (152)
Gain on sale of Eurosport 93 -- n/m 93 -- --
Net interest expense (523) (600) 13 % (525) (605) (623)
------- ------- ------- ------- -------
Income before income
taxes, minority
interests and Internet
Group losses 3,519 2,476 42 % 3,759 2,501 3,341
Income taxes (1,458) (1,040) (40)% (1,695) (1,051) (1,343)
Minority interests (127) (91) (40)% (127) (91) (77)
------- ------- ------- ------- -------
Income before Internet
Group losses 1,934 1,345 44 % 1,937 1,359 1,921
Net losses of the
Internet Group
attributed to
Disney(/1/) (785) (736) (7)% (741) (59) (71)
------- ------- ------- ------- -------
Net income attributed to
Disney common stock $ 1,149 $ 609 89 % $ 1,196 $ 1,300 $ 1,850
======= ======= ======= ======= =======
Earnings per share
attributed to Disney
common stock: (/2/)
Diluted $ 0.55 $ 0.29 90 % $ 0.57 $ 0.62 $ 0.89
======= ======= ======= ======= =======
Basic $ 0.55 $ 0.30 83 % $ 0.58 $ 0.63 $ 0.91
======= ======= ======= ======= =======
Earnings per share
attributed to Disney
common stock excluding
Internet Group losses:
(/2/)
Diluted $ 0.92 $ 0.65 42 % $ 0.92 $ 0.65 $ 0.92
======= ======= ======= ======= =======
Basic $ 0.93 $ 0.65 43 % $ 0.93 $ 0.66 $ 0.94
======= ======= ======= ======= =======
Average number of common
and common equivalent
shares outstanding:
Diluted 2,103 2,083 2,103 2,083 2,079
======= ======= ======= ======= =======
Basic 2,074 2,056 2,074 2,056 2,037
======= ======= ======= ======= =======
- -------------
(1) Amounts include non-
cash amortization of
intangible assets as
follows $ 648 $ 658 $ 564 $ 234 $ 7
======= ======= ======= ======= =======
(2) Disney is a class of common stock of The Walt Disney Company. Income
attributed to Disney common stock should be reviewed in conjunction
with the consolidated results of operations for The Walt Disney
Company presented elsewhere herein.
I-6
2000 vs. 1999
On a pro forma basis, revenues increased 9% to $25.0 billion, driven by
growth at Media Networks and Parks & Resorts, partially offset by decreases in
the other segments. Excluding Internet Group losses, operating income, net
income attributed to Disney common stock (Disney net income) and diluted
earnings per share attributed to Disney common stock (Disney diluted earnings
per share) increased 26%, 44% and 42% to $4.0 billion, $1.9 billion and $0.92,
respectively. The current year included the Eurosport gain, which increased
Disney diluted earnings per share by $0.02. The prior year included
restructuring charges, which decreased Disney diluted earnings per share by
$0.04. Including Internet Group losses, Disney net income and Disney diluted
earnings per share increased 89% and 90% to $1.1 billion and $0.55,
respectively. Results for the year were driven by increased operating income,
the gain on the sale of Eurosport, lower net interest expense, improved
Corporate and other activities, partially offset by higher Internet Group
losses.
Increased operating income reflected increases in Media Networks and Parks &
Resorts, partially offset by decreases in Studio Entertainment and Consumer
Products. Additionally, prior-year operating income includes a $132 million
restructuring charge. Net interest expense decreased due to lower average debt
balances, partially offset by higher interest rates in the current year. Lower
average debt balances were driven by reductions in debt, which were funded by
increased cash flow. Lower net expense associated with Corporate and other
activities reflected improved results from the Company's cable equity
investments, partially offset by higher corporate general and administrative
expenses.
On an as-reported basis, Disney net income decreased 8% to $1.2 billion and
operating income increased 33% to $4.3 billion. As-reported results reflect
the items discussed above, as well as the impact of the Infoseek acquisition
on Internet Group losses attributed to Disney and the sale of Fairchild
Publications. Internet Group losses attributed to Disney reflect a gain on the
sale of Starwave of $345 million in the prior year and Infoseek losses and
incremental amortization of acquired intangible assets in the current period.
The higher effective tax rate for the current year reflects the income tax
impact of the sale of Fairchild Publications.
1999 vs. 1998
On an as-reported basis, revenues increased 2% to $23.2 billion, driven by
increases at Parks & Resorts and Media Networks, partially offset by decreases
in the other segments. Operating income decreased 22% to $3.2 billion, and
Disney net income and Disney diluted earnings per share decreased 30% to $1.3
billion and $0.62, respectively. Results for the year were driven by decreased
operating income, partially offset by decreased net expense associated with
Corporate and other activities and lower net interest expense.
Business Segment Results
Media Networks
The following table provides supplemental revenue and operating income
detail for the Media Networks segment (in millions).
2000 1999 1998
------ ------ ------
Revenues:
Broadcasting $6,160 $5,100 $5,008
Cable Networks 3,455 2,870 2,425
------ ------ ------
$9,615 $7,970 $7,433
====== ====== ======
Operating Income:
Broadcasting $1,241 $ 637 $ 998
Cable Networks 1,057 943 759
------ ------ ------
$2,298 $1,580 $1,757
====== ====== ======
I-7
2000 vs. 1999
Revenues increased 21%, or $1.6 billion, to $9.6 billion, driven by
increases of $1.1 billion at Broadcasting and $585 million at the Cable
Networks. Broadcasting revenue growth reflected increased advertising revenues
at the television networks and the Company's owned television stations due to
a strong advertising market, the continued success of Who Wants to Be a
Millionaire and higher overall ratings on network programming. Television
station revenue growth also benefited from higher spot advertising rates
driven by the ABC Television Network placing first in the May and February
sweeps. Additionally, the strong advertising market resulted in revenue growth
at the radio networks and stations. Cable Network revenue growth reflected
increased advertising revenues driven by a strong advertising market and
higher affiliate fees reflecting contractual rate increases and subscriber
growth. International expansion at the Disney Channel also contributed to
increased revenues.
Operating income increased 45%, or $718 million, to $2.3 billion, driven by
increases of $604 million at Broadcasting and $114 million at the Cable
Networks, resulting from revenue growth at both Broadcasting and Cable
Networks, partially offset by increased costs and expenses. Costs and
expenses, which consist primarily of programming rights and amortization,
production costs, distribution and selling expenses and labor costs, increased
15%, or $927 million, driven by higher sports programming costs at the
television and cable networks, principally related to National Football League
(NFL), Major League Baseball (MLB) and National Hockey League (NHL)
broadcasts. In addition, higher costs and expenses reflected start-up costs
associated with the launch of various international Disney Channels and the
January launch of SoapNet.
During the second quarter of 1998, the Company entered into a new agreement
with the NFL for the right to broadcast NFL football games on the ABC
Television Network and ESPN. The contract provides for total payments of
approximately $9 billion over an eight-year period, 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.
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.
There has been softness in the advertising market during the first two
months of fiscal 2001 relative to the strong growth during fiscal 2000.
However, management believes that the Company is well positioned to respond to
market conditions due to ongoing efforts to manage costs and strong results in
this season's upfront markets.
I-8
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 comprises the Cable Networks and the
Company's cable equity investments (unaudited, in millions):
2000 1999 % Change
------ ------ --------
Operating Income:
Cable Networks $1,057 $ 943 12 %
Equity Investments:
A&E Television and Lifetime Television 614 480 28 %
Other(/1/) 211 37 n/m
------ ------
Operating Income from Cable Television
Activities 1,882 1,460 29 %
Partner Share of Operating Income (639) (462) (38)%
------ ------
Disney Share of Operating Income $1,243 $ 998 25 %
====== ======
- --------
(1) The current year includes a pre-tax gain of $93 million from the sale of
Eurosport.
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 25%, or
$245 million to $1.2 billion, driven by increases at the Cable Networks, the
gain on the sale of Eurosport and increased advertising revenues at Lifetime
Television, E! Entertainment Television, The History Channel and A&E
Television, partially offset by start-up costs associated with the launch of
various international Disney Channels, as well as the January launch of
SoapNet.
1999 vs. 1998
Revenues increased 7%, or $537 million, to $8.0 billion, primarily driven by
increases of $445 million at the Cable Networks and $92 million in
Broadcasting. 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. Broadcast revenue growth was
driven by increased network television production and distribution revenues
from four new prime time series and increases at the radio networks and
stations due to a strong advertising market and higher ratings, partially
offset by decreases at the television network and stations. Television network
revenues were impacted by lower ratings, and lower revenues at owned
television stations reflected softness in local advertising markets.
Operating income decreased 10%, or $177 million, to $1.6 billion, reflecting
higher costs and expenses, partially offset by revenue gains. Costs and
expenses increased 13% or $714 million, driven by higher sports programming
costs associated with the NFL contract and other programming costs at the
television network and ESPN.
I-9
Studio Entertainment
2000 vs. 1999
Revenues decreased 3%, or $172 million, to $6.0 billion, driven by declines
of $206 million in network television production and distribution, $168
million in worldwide home video and $58 million in domestic theatrical motion
picture distribution, partially offset by growth of $197 million in
international theatrical motion picture distribution and $82 million in stage
plays. The decline in network television production and distribution revenues
primarily reflected the end of production of Home Improvement in the prior
year, which was a significant contributor to revenues. The decline in
worldwide home video revenues reflected fewer unit sales in the current year,
despite the successful releases of Tarzan and Little Mermaid II: Return to
Sea, as the prior year included the combination of Lion King II: Simba's
Pride, Mulan, Armageddon and Disney/Pixar's A Bug's Life. In domestic
theatrical motion picture distribution, the success of Scary Movie, Dinosaur
and Disney/Pixar's Toy Story 2 faced difficult comparisons to the prior year,
which included The Sixth Sense, Tarzan and The Waterboy. Growth in
international theatrical motion picture distribution revenues reflected the
performances of Toy Story 2, Tarzan and The Sixth Sense. Stage play revenues
increased due to expansion of The Lion King into additional cities, the launch
of Aida and the re-launch of the Beauty and the Beast national tour.
Operating income decreased 29%, or $44 million, to $110 million, due to
declines in worldwide home video and network television production and
distribution, partially offset by growth in international theatrical motion
picture distribution and stage plays. Costs and expenses, which consist
primarily of production cost amortization, distribution and selling expenses,
product costs, labor and leasehold expenses, decreased 2% or $128 million.
Production cost amortization decreased in network television production and
distribution reflecting the production of Home Improvement in the prior year.
In worldwide home video, distribution and selling costs and production cost
amortization decreased due to a reduction in videotape unit sales compared to
the prior year. The Sixth Sense, which drove higher participation costs in
domestic theatrical motion picture distribution in the prior year, had a
similar impact in international theatrical motion picture distribution in the
current year. Cost increases in international theatrical motion picture
distribution also reflected higher overall production cost amortization. Stage
play operating and production cost amortization expenses also increased driven
by revenue increases.
1999 vs. 1998
Revenues decreased 6%, or $420 million to $6.2 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 79%, or $595 million, to $154 million, reflecting
declines in worldwide home video, partially offset by increases in worldwide
theatrical motion picture distribution. Costs and expenses, increased 3% or
$175 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. Improved
results in worldwide theatrical motion picture distribution were partially
offset by higher distribution costs and production cost amortization.
Parks & Resorts
2000 vs. 1999
Revenues increased 11%, or $664 million, to $6.8 billion, driven by growth
of $383 million at the Walt Disney World Resort, reflecting increased guest
spending, record attendance and record occupied
I-10
room nights; $129 million from Disney Cruise Line, reflecting full-year
operations from both cruise ships, the Disney Magic and the Disney Wonder,
compared to just the Disney Magic for the first three and a half quarters of
the prior year; and $35 million from increased attendance and guest spending
at Disneyland. Increased guest spending and record attendance at the Walt
Disney World Resort were driven by the ongoing Millennium Celebration and
record occupied room nights reflected the opening of the All-Star Movies
Resort in the second quarter of the prior year. At Disneyland, the 45th
Anniversary Celebration and the strength of the annual passport program drove
increased attendance and guest spending.
Operating income increased 10%, or $141 million, to $1.6 billion, driven by
revenue growth at the Walt Disney World Resort, improved results at Disney
Cruise Line and higher guest spending and attendance at Disneyland partially
offset by increased costs and expenses. 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 11%, or $523 million, driven by increased volume at the
Walt Disney World Resort resulting from the ongoing Millennium Celebration,
expanded operations at Disney Cruise Line as a result of the addition of the
second ship and increased volume at Disneyland due to the 45th Anniversary
Celebration, as well as pre-opening costs at Disney's California Adventure.
1999 vs. 1998
Revenues increased 11%, or $607 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. reflected consolidation of the operations of the Anaheim
Angels baseball team, following the Company's second quarter purchase of the
75% of the team that it did not previously own.
Operating income increased 15%, or $191 million, to $1.5 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 increased 10%, or $416
million. 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.
Consumer Products
2000 vs. 1999
On a pro forma basis, revenues decreased 6%, or $169 million, to $2.6
billion, reflecting declines of $166 million in worldwide merchandise
licensing and publishing, partially offset by growth of $23 million at Disney
Interactive. Lower merchandise licensing and publishing revenues were
primarily attributable to declines domestically and in Europe. Disney
Interactive revenues increased due to the success of the Who Wants to Be a
Millionaire video games, Pooh learning titles and the Toy Story 2 action game.
On an as-reported basis, revenues decreased 11%, or $332 million, to $2.6
billion, reflecting the items described above, as well as the impact of the
disposition of Fairchild Publications in the first quarter of the current
year.
On a pro forma basis, operating income decreased 20%, or $113 million, to
$454 million, reflecting declines in worldwide merchandise licensing and
publishing, partially offset by increases at the Disney Stores, primarily
driven by a reduction in costs, and at Disney Interactive. Costs and expenses,
which consist primarily of labor, product costs, including product development
costs, distribution and selling
I-11
expenses and leasehold expenses, decreased 3% or $56 million. Cost decreases
at the Disney Stores, which reflected write-downs of underutilized assets and
inventory in the prior year, were partially offset by an increase in
advertising costs.
On an as-reported basis, operating income decreased 24%, or $145 million, to
$455 million, reflecting the items described above, as well as the impact of
the disposition of Fairchild Publications in the first quarter of the current
year.
1999 vs. 1998
On an as-reported basis, revenues decreased 7%, or $211 million, to $3.0
billion, driven by declines of $159 million in worldwide merchandise licensing
and $98 million in domestic Disney Stores, partially offset by growth of $49
million at the Disney Stores internationally and $23 million at Disney
Interactive. Lower merchandise licensing revenues were primarily attributable
to declines domestically and in Japan. Lower revenues at the Disney Stores
domestically reflected a decline in comparative store sales, while
improvements at the Disney Stores internationally reflected an increase in
comparative store sales. Disney Interactive revenue increased due to increased
licensing activity and strong results for video game products.
On an as-reported basis, operating income decreased 26%, or $210 million, to
$600 million, reflecting declines in worldwide merchandise licensing and the
Disney Stores domestically, partially offset by increases at Disney
Interactive. Costs and expenses were comparable to the prior year. Increased
costs at the Disney Stores, which were driven by write-downs of underutilized
assets and inventory, principally domestically, were offset by decreased
operating expenses at publishing, principally domestically.
Internet Group
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.
On November 17, 1999, the stockholders of the Company and Infoseek approved
the Company's acquisition of the remaining interest in Infoseek that the
Company did not already own. The Internet Group's results of operations have
incorporated Infoseek's activity since the date of the acquisition.
The following discussion of 2000 versus 1999 performance includes pro forma
comparisons as if the acquisition of the remaining interest in Infoseek and
subsequent creation of the Internet Group had occurred at the beginning of
fiscal 1999. The discussion of direct marketing does not include pro forma
comparisons, since the pro forma adjustments did not impact this business.
2000 vs. 1999
On a pro forma basis, revenues increased 13%, or $44 million, to $392
million, driven by an increase of $77 million in Internet revenues, partially
offset by a $33 million decrease in direct marketing revenues. Internet
revenue growth reflected higher advertising and sponsorship revenues driven by
increased advertiser demand and higher online site traffic, increased
licensing revenues from international operations, and strong sales at
DisneyStore.com and DisneyVacations.com. Lower direct marketing revenues were
due principally to planned reductions in catalog circulation, fewer product
offerings, lower catalog response rates during the year, changes in the
Company's merchandising strategy and customer migration to the Internet
Group's online business.
On an as-reported basis, revenues increased 79%, or $162 million, to $368
million, driven by a $195 million increase in Internet revenues, partially
offset by a decline of $33 million in direct marketing revenues. The increase
in Internet revenues reflects the items described above, as well as the
operations of Infoseek, which were consolidated into the Internet Group
beginning November 18, 1999.
I-12
On a pro forma basis, operating losses increased 90%, or $188 million, to
$396 million, reflecting higher costs and expenses and lower direct marketing
revenues, partially offset by increased Internet revenues. Cost and expenses,
which consist primarily of cost of revenues, sales and marketing, other
operating expenses and depreciation, increased 42% or $232 million. Cost
increases were primarily due to continued investment in Web site technology
and new product initiatives, growth in infrastructure due to expansion of the
business, ongoing enhancements to existing Web sites, the redesign of the
GO.com Web site, operations at toysmart.com, a one-time employee retention
payment of $17 million required by the 1999 Infoseek acquisition agreement and
a non-cash charge of $31 million to reflect the impairment of goodwill and
certain intangible assets. Increased operating losses from direct marketing
operations resulted primarily from the decline in revenues, which was not
fully offset by cost reductions due to fixed costs which do not fluctuate
significantly from period to period.
On an as-reported basis, operating losses increased 332%, or $309 million,
to $402 million, reflecting higher losses from Internet operations. Increased
losses from Internet operations reflect the items described above, as well as
the operations of Infoseek, which were consolidated into the Internet Group
beginning November 18, 1999.
Going forward, costs and expenses are expected to reflect continued
investment in Web site technology and infrastructure, new product initiatives
and incremental marketing and sales expenditures. The Internet Group has begun
participating in the traditional television network up-front marketplace and
has sold approximately $30 million in Internet advertising which it expects to
fulfill and recognize as revenue during fiscal 2001.
1999 vs. 1998
On an as-reported basis, 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 due to
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
operating losses from direct marketing operations reflected costs relating to
the start-up of the new direct marketing distribution center and the
implementation of new business processes, systems and software applications.
Costs and expenses decreased 16% or $55 million, driven by the change in the
manner of accounting for Starwave and related businesses and lower direct
marketing selling expenses, driven by reduced catalog mailings and lower
outbound shipping costs.
LIQUIDITY AND CAPITAL RESOURCES
During the year, strong operating and other cash flows enabled the Company
to reduce its borrowings by $2.2 billion, even after investing approximately
$4.7 billion in film and television projects and parks, resorts and other
properties, and after paying dividends totaling $434 million and repurchasing
$166 million of its common stock.
Cash provided by operations increased 15%, or $846 million, to $6.4 billion,
driven by higher income before amortization of intangible assets and non-cash
gains and higher amortization of television broadcast rights relative to cash
payments, partially offset by higher income tax payments.
I-13
In 2000, the Company invested $2.7 billion to develop, produce and acquire
rights to film and television properties, a decrease of $341 million compared
to the prior year. The decrease was primarily due to a $310 million payment
related to the acquisition of a film library in the prior year.
During the year, the Company invested $2.0 billion in parks, resorts and
other properties. These expenditures reflected continued expansion activities
related to Disney's California Adventure and certain resort facilities at the
Walt Disney World Resort. The decrease of $121 million from the prior year
reflects the final payment for the second cruise ship, the Disney Wonder, in
the prior year, partially offset by increased spending on Disney's California
Adventure in the current year.
During the year, the Company invested $91 million in Euro Disney S.C.A. to
maintain its 39% ownership interest after a Euro Disney equity rights
offering, the proceeds of which will be used to fund construction of a new
theme park.
Additionally, investing activities included $913 million of cash proceeds
from dispositions primarily related to the sale of Fairchild Publications and
Eurosport. Cash proceeds generated by the sale of investments were driven by
the sale of Inktomi shares acquired through the disposition of Ultraseek.
These proceeds were partially offset by purchases of investments in Internet-
related companies.
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 Disney common stock. Accordingly,
there was no dividend payment during the year ended September 30, 1999. The
Company paid a $434 million dividend ($0.21 per Disney share) during the first
quarter of the current year applicable to fiscal 1999. On November 28, 2000,
the Board of Directors declared a cash dividend, applicable to fiscal 2000, of
$0.21 per Disney share, to be paid on December 22, 2000, to stockholders of
Disney common stock at the close of business December 8, 2000.
During the year, the Company repaid approximately $2.5 billion of term debt,
which matured during the year, and reduced its commercial paper borrowings by
$741 million. These repayments were partially funded by proceeds of $1.1
billion from various financing arrangements. These borrowings have effective
interest rates, including the impact of interest rate swaps, ranging from 5.5%
to 6.9% and maturities in fiscal 2002 through fiscal 2015.
Commercial paper borrowings outstanding as of September 30, 2000 totaled
$940 million, with maturities of up to one year, supported by bank facilities
totaling $4.8 billion, which expire in one to five years and allow for
borrowings at various interest rates. The Company also has the ability to
borrow under a U.S. shelf registration statement and a Euro Medium-term Note
Program, which collectively permit the issuance of up to approximately $4.8
billion of additional debt.
Total commitments to purchase broadcast programming approximated $13.6
billion at September 30, 2000, including approximately $7.1 billion related to
the NFL contract. 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.
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.
I-14
OTHER MATTERS
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.
Implementation of SAB 101
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. During the fourth quarter of the current year, the Company
performed a comprehensive review of its revenue recognition policies and
determined that they are in compliance with SAB 101.
Accounting Changes
Effective October 1, 2000, the Company adopted AICPA Statement of Position
No. 00-2, Accounting by Producers or Distributors of Films (SOP 00-2). The
Company's results of operations and financial position will reflect the impact
of the new standard commencing October 1, 2000 and the Company will record a
one-time after-tax charge for the initial adoption of the standard totaling
$221 million for SOP 00-2 in its financial statements for the quarter ended
December 31, 2000.
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS 133
requires 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 accumulated comprehensive income 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 Company will record a one-time after-tax charge for the initial adoption
of SFAS 133 totaling $51 million in its income statement, as well as an
unrealized gain of $95 million recorded to other accumulated comprehensive
income for the quarter ended December 31, 2000.
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 and the introduction of the euro; 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.
I-15
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 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.
I-16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Walt Disney Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholder's equity, and of cash flows
present fairly, in all material respects, the financial position of The Walt
Disney Company and its subsidiaries (the Company) at September 30, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States of America.
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 of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
November 30, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-26106, 33-35405, 33-39770, 33-57811, 333-91571
and 333-31012) and Form S-3/A (333-52659 and 333-34167) of The Walt Disney
Company of our reports dated November 30, 2000 related to the financial
statements of The Walt Disney Company and The Walt Disney Internet Group which
appear in the Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
December 19, 2000
I-17
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Year Ended September 30 2000 1999 1998
- -----------------------------------------------------------------------------
Revenues $25,402 $23,435 $22,976
Costs and expenses 21,321 19,715 18,466
Amortization of intangible assets 1,233 456 431
Restructuring charges -- 132 64
Gain on sale of Ultraseek 153 -- --
Gain on sale of Fairchild 243 -- --
Gain on sale of Starwave -- 345 --
------- ------- -------
Operating income 3,244 3,477 4,015
Corporate and other activities (105) (140) (164)
Gain on sale of Eurosport 93 -- --
Equity in Infoseek loss (41) (322) --
Net interest expense (558) (612) (622)
------- ------- -------
Income before income taxes and minority interests 2,633 2,403 3,229
Income taxes (1,606) (1,014) (1,307)
Minority interests (107) (89) (72)
------- ------- -------
Net income $ 920 $ 1,300 $ 1,850
======= ======= =======
Earnings (loss) attributed to:
Disney common stock(/1/) $ 1,196 $ 1,300 $ 1,850
Internet Group common stock (276) -- --
------- ------- -------
$ 920 $ 1,300 $ 1,850
======= ======= =======
Earnings (loss) per share attributed to:
Disney(/1/)
Diluted $ 0.57 $ 0.62 $ 0.89
======= ======= =======
Basic $ 0.58 $ 0.63 $ 0.91
======= ======= =======
Internet Group (basic and diluted) $ (6.18) $ n/a $ n/a
======= ======= =======
Average number of common and common equivalent
shares outstanding:
Disney
Diluted 2,103 2,083 2,079
======= ======= =======
Basic 2,074 2,056 2,037
======= ======= =======
Internet Group (basic and diluted)(/2/) 45 n/a n/a
======= ======= =======
- --------
(1) Including Internet Group losses attributed to Disney common stock. Earnings
attributed to Disney common stock reflect 100% of Internet Group losses
through November 17, 1999, and approximately 71% thereafter.
(2) Does not include the interest in the Internet Group retained by Disney,
representing approximately 71% of the entire equity in the Internet Group.
See Notes to Consolidated Financial Statements
I-18
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30 2000 1999
- ----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 842 $ 414
Receivables 3,599 3,633
Inventories 702 796
Film and television costs 3,606 3,598
Deferred income taxes 623 607
Other assets 635 679
------- -------
Total current assets 10,007 9,727
Film and television costs 2,895 2,962
Investments 2,270 2,434
Parks, resorts and other property, at cost
Attractions, buildings and equipment 16,610 15,869
Accumulated depreciation (6,892) (6,220)
------- -------
9,718 9,649
Projects in progress 1,995 1,272
Land 597 425
------- -------
12,310 11,346
Intangible assets, net 16,117 15,695
Other assets 1,428 1,515
------- -------
$45,027 $43,679
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 5,161 $ 4,588
Current portion of borrowings 2,502 2,415
Unearned royalties and other advances 739 704
------- -------
Total current liabilities 8,402 7,707
Borrowings 6,959 9,278
Deferred income taxes 2,833 2,660
Other long term liabilities, unearned royalties and other
advances 2,377 2,711
Minority interests 356 348
Stockholders' Equity
Preferred stock, $.01 par value
Authorized - 100 million shares, Issued - none
Common stock
Common stock - Disney, $.01 par value
Authorized - 3.6 billion shares, Issued - 2.1 billion
shares 9,920 9,324
Common stock - Internet Group, $.01 par value
Authorized - 1.0 billion shares, Issued - 45.3 million
shares 2,181 --
Retained earnings 12,767 12,281
Other accumulated comprehensive income (28) (25)
------- -------
24,840 21,580
Treasury stock, at cost, 31 million Disney shares (689) (605)
Shares held by TWDC Stock Compensation Fund II, at cost
Disney - 1.1 million shares as of September 30, 2000 (40) --
Internet Group - 0.9 million shares as of September 30,
2000 (11) --
------- -------
24,100 20,975
------- -------
$45,027 $43,679
======= =======
See Notes to Consolidated Financial Statements
I-19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended September 30 2000 1999 1998
- -----------------------------------------------------------------------------
NET INCOME $ 920 $ 1,300 $ 1,850
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 2,469 2,472 2,514
Depreciation 962 851 809
Amortization of intangible assets 1,233 456 431
Gain on sale of Ultraseek (153) -- --
Gain on sale of Fairchild (243) -- --
Gain on sale of Eurosport (93) -- --
Gain on sale of Starwave -- (345) --
Minority interests 107 89 72
Equity in Infoseek loss 41 322 --
Impairment charges 67 -- --
Other 54 80 31
CHANGES IN
Receivables 205 376 (664)
Inventories 65 103 (46)
Other assets 183 (165) 73
Accounts and taxes payable and other accrued
liabilities (16) 388 146
Film and television costs--television broadcast
rights 402 (319) (447)
Deferred income taxes 231 (20) 346
------- ------- -------
5,514 4,288 3,265
------- ------- -------
Cash provided by operations 6,434 5,588 5,115
------- ------- -------
INVESTING ACTIVITIES
Dispositions 913 -- --
Film and television costs (2,679) (3,020) (3,335)
Investments in parks, resorts and other property (2,013) (2,134) (2,314)
Investments in Euro Disney (91) -- --
Acquisitions (net of cash acquired) (34) (319) (213)
Proceeds from sale of investments 207 202 238
Purchases of investments (82) (39) (13)
Other 9 -- (28)
------- ------- -------
Cash used by investing activities (3,770) (5,310) (5,665)
------- ------- -------
FINANCING ACTIVITIES
Commercial paper borrowings, net (741) (451) 308
Other borrowings 1,117 2,306 1,522
Reduction of borrowings (2,494) (2,031) (1,212)
Repurchases of common stock (166) (19) (30)
Exercise of stock options and other 482 204 184
Dividends (434) -- (412)
------- ------- -------
Cash (used) provided by financing activities (2,236) 9 360
------- ------- -------
Increase (Decrease) in cash and cash equivalents 428 287 (190)
Cash and cash equivalents, beginning of year 414 127 317
------- ------- -------
Cash and cash equivalents, end of year $ 842 $ 414 $ 127
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid $ 583 $ 659 $ 645
======= ======= =======
Income taxes paid $ 1,170 $ 721 $ 1,107
======= ======= =======
See Notes to Consolidated Financial Statements
I-20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions, except per share data)
TWDC Stock
Other Compensation
Shares Common Stock Accumulated Fund
---------- ------------- Retained Comprehensive Treasury -------------- Stockholder's
DIS DIG DIS DIG Earnings Income Stock DIS DIG Equity Total
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1997 2,013 -- $8,548 $ -- $ 9,543 $(12) $(462) $ (332) $ -- $17,285
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
Net income -- -- -- -- 1,850 -- -- -- -- 1,850
----- --- ------ ------ ------- ---- ----- ------ ----- -------
BALANCE AT
SEPTEMBER 30, 1998 2,050 -- 8,995 -- 10,981 13 (593) (8) -- 19,388
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)
Net income -- -- -- -- 1,300 -- -- -- -- 1,300
----- --- ------ ------ ------- ---- ----- ------ ----- -------
BALANCE AT
SEPTEMBER 30, 1999 2,064 -- 9,324 -- 12,281 (25) (605) -- -- 20,975
Common stock issued -- 44 -- 2,149 -- -- -- -- -- 2,149
Exercise of stock
options, net 27 2 596 32 -- -- (84) 115 -- 659
Common stock
repurchased (5) (1) -- -- -- -- -- (155) (11) (166)
Dividends ($0.21 per
Disney share) -- -- -- -- (434) -- -- -- -- (434)
Cumulative translation
and other (net of tax
benefit of $2
million) -- -- -- -- -- (3) -- -- -- (3)
Net income -- -- -- 920 -- -- -- -- 920
----- --- ------ ------ ------- ---- ----- ------ ----- -------
BALANCE AT SEPTEMBER 30,
2000 2,086 45 $9,920 $2,181 $12,767 $(28) $(689) $ (40) $ (11) $24,100
===== === ====== ====== ======= ==== ===== ====== ===== =======
Comprehensive income is as follows:
2000 1999 1998
---- ------ ------
Net income $920 $1,300 $1,850
Cumulative translation and other (3) (38) 25
---- ------ ------
$917 $1,262 $1,875
==== ====== ======
See Notes to Consolidated Financial Statements
I-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except per share amounts)
1 Description of the Business and Summary of Significant Accounting Policies
The Walt Disney Company, 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, Disney Channel International and
Soapnet. 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. The Company
also produces original television programming for network, first-run
syndication, pay and international syndication markets.
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 animated 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.
PARKS & RESORTS
The Company operates the Walt Disney World Resort in Florida, and the
Disneyland Park, the Disneyland Hotel and Disney's Paradise Pier Hotel in
California. The Walt Disney World Resort includes the Magic Kingdom, Epcot,
Disney-MGM Studios and Disney's Animal Kingdom, twelve 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, Disney Cruise Line is operated out
of 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 and an associated Disney-branded hotel near Tokyo, Japan, which are
owned and operated by an unrelated Japanese corporation. The Company also has
an investment in Euro Disney S.C.A. (Euro Disney), a publicly held French
entity that operates Disneyland Paris and earns royalties on Disneyland Paris
revenues and also receives management fees from Euro Disney. 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
Parks & 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
I-22
Disney Stores, and produces books and magazines for the general public in the
United States and 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 GROUP
The Walt Disney Internet Group (hereinafter referred to as the Internet
Group) has operations in the Internet and Direct Marketing businesses. The
Internet media business develops, publishes and distributes content for online
services intended to appeal to broad consumer interest in sports, news, family
and entertainment. Internet media Web sites and products include ABC.com,
ABCNEWS.com, ABCNEWS4KIDS.com, ABCSports.com, Disney.com, Disney's Blast,
Enhanced TV, ESPN.com, Family.com, GO.com, Movies.com, Mr. Showbiz, NBA.com,
NFL.com, Soccernet.com and Wall of Sound. The Internet commerce business
manages Web sites which include the DisneyStore.com, DisneyVacations.com,
ABC.com Store, ESPN Store Online and NASCAR Store Online. Other commerce
activities include Ultraseek's intranet search software, prior to Ultraseek's
sale on July 19, 2000, Web site development and Disney Auctions. The Direct
Marketing business operates The Disney Catalog, which markets Disney-themed
merchandise through the direct mail channel. Catalog offerings include
merchandise developed exclusively for The Disney Catalog and DisneyStore.com,
as well as products from The Disney Store, other internal Disney partners and
Disney licensees.
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. In December 1999, DVD Financing, Inc. (DFI), a
subsidiary of Disney Vacation Development Inc. and an indirect subsidiary of
the Company, completed a receivable sale transaction. In connection with this
sale, DFI prepares separate financial statements, although its separate assets
and liabilities are also consolidated in these financial statements.
Accounting Changes
Effective October 1, 2000, the Company adopted two new accounting
pronouncements, AICPA Statement of Position No. 00-2, Accounting by Producers
or Distributors of Films (SOP 00-2) and Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). The Company's results of operations and financial
position will reflect the impact of the new standards commencing October 1,
2000. The Company will record a one-time after-tax charge for the initial
adoption of SOP 00-2 totaling approximately $221 million in its Consolidated
Statements of Income for the quarter ending December 31, 2000. The Company
will also record a one-time after-tax charge of approximately $51 million in
its Consolidated Statements of Income and an unrealized gain of $95 million to
other accumulated comprehensive income for the initial adoption of SFAS 133
during the quarter ending December 31, 2000.
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.
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.
I-23
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 of the resulting receivable 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.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. During the fourth quarter of the current year, the Company
performed a comprehensive review of its revenue recognition policies and
determined that they are in compliance with SAB 101.
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.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary. If the
decline in fair value is judged to be other than temporary, the cost basis of
the security is written down to fair value and the amount of the write-down is
included 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.
I-24
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.
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 reviewed using a daypart methodology.
Parks, Resorts and Other Property
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. Upon such
an occurrence, 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 Consolidated Statements of Cash
Flows under the same category as the cash flows from the related assets,
liabilities or anticipated transactions (see Notes 6 and 13).
I-25
Earnings Per Share
The Company presents two earnings per share (EPS) amounts, basic and
diluted. Basic EPS is calculated by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted EPS
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 EPS, for the Company, is
solely attributable to stock options. 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.
For the years ended September 30, 2000, 1999 and 1998, options for 20
million, 28 million and 18 million shares, respectively, were excluded from
the diluted EPS calculation for Disney common stock because they were anti-
dilutive. For the year ended September 30, 2000, all Internet Group options
were anti-dilutive and, accordingly, options for 19 million shares were
excluded from the diluted EPS calculation for Internet Group common stock.
In addition to the consolidated results of operations for The Walt Disney
Company, the Company has also presented the operating results attributable to
Disney common stock (NYSE:DIS). Disney's allocated earnings represent the
results of Disney's operations and the portion of the net loss of the Internet
Group attributed to Disney common stock. For fiscal 2000, the Disney statement
reflects approximately 71% of the Internet Group's net loss. Both the Disney
and Internet Group common stocks are classes of common stock issued by The
Walt Disney Company.
Stock Options
The Company uses the intrinsic-value method of accounting for stock-based
awards granted to employees and, accordingly, does not recognize compensation
expense for its stock-based awards to employees in the Consolidated Statements
of Income. See Note 10 for supplemental information on the impact of the fair-
value method of accounting for stock options.
Reclassifications
Certain reclassifications have been made in the 1999 and 1998 financial
statements to conform to the 2000 presentation.
2 Acquisitions 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. 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.
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
I-26
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 common stock for each
Infoseek share. Upon consummation of the acquisition, the Company combined its
Internet and direct marketing businesses with Infoseek to create a single
Internet and direct marketing business called GO.com. On August 2, 2000, the
Internet and direct marketing business was renamed Walt Disney Internet Group.
Effective November 18, 1999, shares of the Company's existing common stock
were reclassified as Disney common stock, to track the financial performance
of the Company's businesses other than the Internet Group, plus Internet Group
losses attributed to Disney common stock. For fiscal 2000, approximately 71%
of Internet Group losses were attributed to Disney common stock.
The acquisition has been accounted for as a purchase, and the acquisition
cost of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over
the fair value of Infoseek's net assets, has been allocated to identifiable
intangible assets and goodwill of $1.9 billion, and is being amortized over
two to nine years. The Company determined the economic useful life of acquired
goodwill by giving consideration to the useful lives of Infoseek's
identifiable intangible assets, including developed technology, trademarks,
user base, joint venture agreements and in-place workforce. In addition, the
Company considered the competitive environment and the rapid pace of
technological change in the Internet industry.
In November 1999, the Company sold Fairchild Publications which it had
acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax
gain of $243 million.
In June 2000, the Company sold its 33% interest in Eurosport, a European
sports cable service, for $155 million. The sale resulted in a pre-tax gain of
$93 million.
In July 2000, the Company's Internet Group sold Ultraseek Corporation, a
subsidiary that provides intranet search software, which it had acquired as
part of its acquisition of Infoseek. Proceeds from the sale consisted of
shares of common stock of the purchaser, Inktomi Corporation, a publicly held
company, and cash with an aggregate fair value totaling $313 million. The sale
resulted in a pre-tax gain of $153 million ($39 million after tax). Since
October 2000, the stock price of Inktomi shares declined, like those of many
technology companies, and as of November 30, 2000, there was an unrealized
loss of $154 million on the remaining shares of stock that the Company held at
September 30, 2000.
The Company's consolidated results of operations have incorporated
Infoseek's activity, on a consolidated basis, from November 18, 1999 and the
activity of Fairchild Publications through the date of its disposal. The
unaudited pro forma information below presents combined results of operations
as if the Infoseek acquisition and the disposition of Fairchild Publications
had occurred at the beginning of fiscal 1999. The unaudited pro forma
information is not necessarily indicative of results of operations had the
Infoseek acquisition and the disposition of Fairchild Publications occurred at
the beginning of fiscal 1999, nor is it necessarily indicative of future
results.
Year Ended
September 30,
----------------
2000 1999
------- -------
Revenues $25,412 $23,400
Net income 832 323
Diluted earnings (loss) per share attributed to:
Disney common stock 0.55 0.29
Internet Group common stock (7.10) (6.66)
The pro forma amounts above exclude charges for purchased in-process
research and development costs of $23 million and $117 million in 2000 and
1999, respectively.
I-27
3 Financial Information for Disney and Internet Group Common Stock
On November 17, 1999, the Company issued a new class of common stock to
track the performance of its Internet and direct marketing businesses (Note
2). Accordingly, the Company now has two classes of common stock, Disney
common stock (NYSE:DIS) and Internet Group common stock (NYSE:DIG). The
Company presents financial position, results of operations and cash flows for
the businesses that each of its two classes of common stock are intended to
track.
Holders of both Disney and Internet Group common stock are stockholders of
the Company and, as such, are subject to all risks associated with an
investment in the Company and all of its businesses, assets and liabilities.
In any liquidation, holders of Disney common stock and Internet Group common
stock will have only the rights specified in the Company's certificate of
incorporation and will not have any legal rights related to specific assets.
In any liquidation, shareholders of each group will receive a fixed share of
the net assets of the Company, which may not reflect the actual trading prices
of the respective classes of stock at such time.
Financial impacts that affect the Company's consolidated results of
operations or financial position could affect the results of operations or
financial condition of the Internet Group or the market price of the Internet
Group common stock. In addition, any dividends or distributions on, or
repurchases of, Disney common stock will reduce the assets of the Company
legally available for dividends on Internet Group common stock.
I-28
Income statement, balance sheet and cash flow information for the Disney and
Internet Group common stocks for the year ended September 30, 2000 is as
follows:
CONSOLIDATING STATEMENT OF INCOME
Year Ended September 30, 2000
- -------------------------------------------------------------------------------
Disney Internet Group
Common Stock Common Stock Consolidated
------------ -------------- ------------
Revenues $25,034 $ 368 $25,402
Cost and expenses 20,551 770 21,321
Amortization of intangible assets 442 791 1,233
Gain on sale of Ultraseek -- 153 153
Gain on sale of Fairchild 243 -- 243
------- ------- -------
Operating income (loss) 4,284 (1,040) 3,244
Corporate and other activities (93) (12) (105)
Equity in Infoseek loss -- (41) (41)
Gain on sale of Eurosport 93 -- 93
Net interest expense (525) (33) (558)
------- ------- -------
Income (loss) before income taxes and
minority interests 3,759 (1,126) 2,633
Income taxes (1,695) 89 (1,606)
Minority interests (127) 20 (107)
------- ------- -------
Income (loss) before attribution 1,937 (1,017) 920
Income attribution (741) 741 --
------- ------- -------
Attributed net income $ 1,196 $ (276) $ 920
======= ======= =======
Attributed earnings (loss) per share:
Diluted $ 0.57 $ (6.18)
======= =======
Basic $ 0.58 $ (6.18)
======= =======
Average number of common and common
equivalent shares outstanding:
Diluted 2,103 45
======= =======
Basic 2,074 45
======= =======
The unaudited pro forma information below presents combined results of
operations for Disney common stock and Internet Group common stock as if the
Infoseek acquisition and the disposition of Fairchild Publications had
occurred at the beginning of fiscal 1999 (Note 2).
Year Ended September 30,
--------------------------------
Disney Internet Group
Common Stock Common Stock
--------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues $25,020 $23,052 $ 392 $ 348
Attributed net income (loss) 1,149 609 (317) (286)
Diluted earnings (loss) per share 0.55 0.29 (7.10) (6.66)
I-29
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2000
- ------------------------------------------------------------------------------
Internet
Disney Group
Common Common
Stock Stock Eliminations Consolidated
------- -------- ------------ ------------
ASSETS
Current assets $ 9,872 $ 135 $ -- $10,007
Intergroup loan receivable 223 124 (347) --
Film and television costs 2,895 -- -- 2,895
Deferred income taxes -- 6 (6) --
Investments 2,055 215 -- 2,270
Retained interest in the Internet
Group 1,106 -- (1,106) --
Parks, resorts and other property,
at cost, net 12,207 103 -- 12,310
Intangible assets, net 14,748 1,369 -- 16,117
Other assets 1,425 3 -- 1,428
------- ------ ------- -------
$44,531 $1,955 $(1,459) $45,027
======= ====== ======= =======
LIABILITIES AND GROUP EQUITY
Current liabilities $ 8,230 $ 172 -- $ 8,402
Borrowings 6,959 -- -- 6,959
Intergroup loan payable 124 223 (347) --
Deferred income taxes 2,839 -- (6) 2,833
Other long term liabilities,
unearned royalties and other
advances 2,367 10 -- 2,377
Minority interests 356 -- -- 356
Group equity 23,656 1,550 (1,106) 24,100
------- ------ ------- -------
$44,531 $1,955 $(1,459) $45,027
======= ====== ======= =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
Year Ended September 30, 2000
- ---------------------------------------------------------------------------------
Internet
Disney Group
Common Common
Stock Stock Consolidated
------- -------- ------------
CASH PROVIDED BY OPERATIONS $ 6,589 $(155) $ 6,434
------- ----- -------
INVESTING ACTIVITIES
Dispositions 909 4 913
Film and television costs (2,679) -- (2,679)
Investments in parks, resorts and other property (1,955) (58) (2,013)
Intergroup borrowings, net 124 (124) --
Other (37) 46 9
------- ----- -------
(3,638) (132) (3,770)
------- ----- -------
FINANCING ACTIVITIES
Intergroup capital contributions (22) 22 --
Borrowings, net (2,122) 4 (2,118)
Intergroup borrowings, net (251) 251 --
Other (124) 6 (118)
------- ----- -------
(2,519) 283 (2,236)
------- ----- -------
Increase (Decrease) in cash and cash equivalents 432 (4) 428
Cash and cash equivalents, beginning of year 408 6 414
------- ----- -------
Cash and cash equivalents, end of year $ 840 $ 2 $ 842
======= ===== =======
I-30
4 Investment in Euro Disney
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, 2000, the Company's recorded investment in Euro Disney, including accounts
and notes receivable, was $337 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 related
to substantially all of the Disneyland Paris theme park assets, and then
entered into a 12-year sublease agreement with Euro Disney. Remaining lease
rentals at September 30, 2000 of FF 6.7 billion ($909 million) 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 $1.0 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 FF 1.1 billion
($148 million), upon request, bearing interest at PIBOR. As of September 30,
2000, 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 25% of the outstanding common
stock of Euro Disney through June 2004 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 beginning fiscal
year 1999. As a result, the Company earned approximately $30 million and $33
million in royalties and management fees in fiscal year 2000 and 1999,
respectively. 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 raised $238 million.
The net proceeds are to be used to partially finance the construction of a
second theme park, Disney Studios, adjacent to the Magic Kingdom. The Company
subscribed to approximately $91 million of the equity rights offering,
maintaining its 39% interest in Euro Disney. Disney Studios is expected to
open in spring 2002.
5 Film and Television Costs
2000 1999
- -------------------------------------------
Theatrical film costs
Released, less amortization $2,571 $2,246
In-process 1,644 1,966
------ ------
4,215 4,212
------ ------
Television costs
Released, less amortization 682 582
In-process 403 643
------ ------
Television broadcast rights 1,085 1,225
------ ------
1,201 1,123
------ ------
6,501 6,560
Less: current portion 3,606 3,598
------ ------
Non-current portion $2,895 $2,962
====== ======
I-31
Based on management's total gross revenue estimates as of September 30,
2000, approximately 76% of unamortized film and television costs (except in-
process) are expected to be amortized during the next three years.
6 Borrowings
The Company's borrowings at September 30, 2000 and 1999, including interest
rate swaps designated as hedges, are summarized below.
2000
--------------------------------------------------------
Interest rate and
cross-currency
swaps (f)
Stated ------------------ Effective
Interest Pay Interest Swap
Balance Rate (e) Pay Float Fixed Rate (g) Maturities
------- -------- --------- -------- --------- ----------
Commercial paper due
2001 (a) $ 940 6.5% $ -- $ 900 5.5% 2001-2002
U.S. dollar notes and
debentures due 2001-
2093 (b) (h) 7,578 6.4% 3,472 -- 6.8% 2001-2030
Dual currency and
foreign notes due 2001-
2003 (c) 146 6.9% 146 -- 6.5% 2001-2003
Senior participating
notes due 2001 (d) 469 4.2% -- -- n/a n/a
Other due 2000-2027 328 6.4% -- -- n/a n/a
------
9,461 6.3% -- --
Less: current portion 2,502 -- --
------ --------- -------
Total long-term
borrowings $6,959 $ 3,618 $ 900
====== ========= =======
1999
-------------------------------------------------------
Interest rate and
cross-currency
swaps (f)
Stated ----------------- Effective
Interest Pay Pay Interest Swap
Balance Rate (e) Float 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
======= ======== ========
- --------
(a) The Company has established bank facilities totaling $4.8 billion, which
expire in one to five 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 $571 million in 2000 and $722 million in 1999 of minority
interest in a real estate investment trust established by the Company.
I-32
(c) Amounts at September 30, 2000 are denominated in Swiss francs and South
African rands. Amounts at September 30, 1999 are denominated principally
in Japanese yen and Italian lira.
(d) Additional interest may be paid based on the performance of designated
portfolios of films. The effective interest rate was 6.5% and 6.8% at
September 30, 2000 and September 30, 1999, respectively.
(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, 2000 and 1999; 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 $102 million in 2000 and $306 million in 1999 of mandatorily
redeemable preferred stock maturing in 2004.
Borrowings, excluding commercial paper and minority interest, have the
following scheduled maturities:
2001 $2,431
2002 751
2003 179
2004 903
2005 750
Thereafter 2,936
The Company capitalizes interest on assets constructed for its parks,
resorts and other property, and on theatrical and television productions in
process. In 2000, 1999 and 1998, respectively, total interest costs incurred
were $730 million, $826 million and $824 million, of which $132 million,
$109 million and $139 million were capitalized.
I-33
7 Income Taxes
2000 1999 1998
- -----------------------------------------------------------------------------
Income Before Income Taxes and Minority Interests
Domestic (including U.S. exports) $ 2,509 $ 2,288 $ 3,186
Foreign subsidiaries 124 115 43
------- ------- -------
$ 2,633 $ 2,403 $ 3,229
======= ======= =======
Income Tax Provision
Current
Federal $ 977 $ 715 $ 698
State 182 140 119
Foreign (including withholding) 177 174 139
------- ------- -------
1,336 1,029 956
------- ------- -------
Deferred
Federal 247 (21) 303
State 23 6 48
------- ------- -------
270 (15) 351
------- ------- -------
$ 1,606 $ 1,014 $ 1,307
======= ======= =======
Components of Deferred Tax Assets and Liabilities
Deferred tax assets
Accrued liabilities $ (990) $(1,112)
Net operating loss carryforward (41) --
Other, net (16) (82)
------- -------
Total deferred tax assets (1,047) (1,194)
------- -------
Deferred tax liabilities
Depreciable, amortizable and other property 2,541 2,469
Licensing revenues 132 232
Leveraged leases 323 327
Investment in Euro Disney 207 169
------- -------
Total deferred tax liabilities 3,203 3,197
------- -------
Net deferred tax liability before valuation
allowance 2,156 2,003
Valuation allowance 54 50
------- -------
Net deferred tax liability $ 2,210 $ 2,053
======= =======
Reconciliation of Effective Income Tax Rate
Federal income tax rate 35.0% 35.0% 35.0%
Nondeductible amortization of intangible assets 14.8 5.8 4.3
State taxes, net of federal income tax benefit 5.1 4.0 3.4
Dispositions 7.5 -- --
Other, net (1.4) (2.6) (2.2)
------- ------- -------
61.0% 42.2% 40.5%
======= ======= =======
I-34
Deferred tax assets at September 30, 2000, were reduced by a valuation
allowance relating to a portion of the tax benefits attributable to certain
net operating losses (NOLs) reflected on state tax returns of Infoseek and its
subsidiaries for periods prior to the Infoseek acquisition on November 18,
1999 (Note 2), where applicable state tax laws limit the utilization of such
NOLs. Since this valuation allowance relates to acquired deferred tax assets,
the subsequent realization of these tax benefits would result in the
application of the allowance amount as a reduction to goodwill. Deferred tax
assets at September 30, 1999, do not include the NOLs of Infoseek and its
subsidiaries as the Company's investment in Infoseek was accounted for under
the equity method prior to the November 18, 1999 acquisition.
At September 30, 2000, approximately $121 million of NOL carryforwards is
available to offset taxable income through the year 2019. While the
acquisition of Infoseek by the Internet Group constituted a change in
ownership as defined under Section 382 of the Internal Revenue Code, the
resulting annual limitation on the use of Infoseek's pre-acquisition NOLs
exceeds the remaining amount of NOL carryforwards and will not limit their
utilization.
In 2000, 1999 and 1998, income tax benefits attributable to employee stock
option transactions of $197 million, $96 million, and $327 million,
respectively, were allocated to stockholders' equity.
8 Pension and Other Benefit Programs
The Company maintains pension 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
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
Reconciliation of funded status of the
plans and the amounts included in the
Company's Consolidated Balance
Sheets:
Projected benefit obligations
Beginning obligations $(1,779) $(1,793) $ (291) $ (321)
Service cost (87) (89) (10) (12)
Interest cost (131) (119) (21) (21)
Amendments -- (9) (24) --
Actuarial gains (losses) 89 160 (80) 52
Benefits paid 78 71 13 11
Curtailment gains 5 -- -- --
------- ------- ------- -------
Ending obligations (1,825) (1,779) (413) (291)
------- ------- ------- -------
I-35
Pension Postretirement
Plans Benefit Plans
------------ ----------------
2000 1999 2000 1999
----- ----- ------- -------
Reconciliation of funded status of the plans
and the amounts included in the Company's
Consolidated Balance Sheets (continued):
Fair value of plans' assets
Beginning fair value 2,211 2,014 203 185
Actual return on plans' assets 674 249 58 21
Employer contributions 5 36 8 7
Participants' contributions 1 1 -- --
Benefits paid (78) (71) (13) (11)
Expenses (40) (18) -- --
----- ----- ------- -------
Ending fair value 2,773 2,211 256 202
----- ----- ------- -------
Funded status of the plans 948 432 (157) (89)
Unrecognized net gain (779) (275) (38) (85)
Unrecognized prior service (benefit) cost 1 (1) 5 6
----- ----- ------- -------
Net balance sheet asset (liability) $ 170 $ 156 $ (190) $ (168)
===== ===== ======= =======
Amounts recognized in the balance sheet
consist of:
Prepaid benefit cost $ 310 $ 288 $ 31 $ 29
Accrued benefit liability (140) (132) (221) (197)
----- ----- ------- -------
$ 170 $ 156 $ (190) $ (168)
===== ===== ======= =======
Rate Assumptions:
Discount rate 8.0% 7.5% 8.0% 7.5%
Rate of return on plans' assets 10.0% 10.5% 10.0% 10.5%
Salary increases 5.5% 5.1% n/a n/a
Annual increase in cost of benefits n/a n/a 7.5% 6.1%
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 $126 million, $94 million and $0 for
2000, respectively, and $110 million, $83 million and $0 for 1999,
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 $319 million and $90 million for
2000, respectively, and $231 million and $72 million for 1999, 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 $8 million and $66 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 $12 million and $87
million, respectively. The annual increase in cost of postretirement benefits
is assumed to decrease 0.3 percentage points per year until reaching 5.4% and
then decrease by 0.4 percentage points for one year to a 5.0% ultimate rate.
The Company's accumulated pension benefit obligations at September 30, 2000
and 1999 were $1.6 billion, of which 97.7% and 97.6% were vested,
respectively. In addition, the Company contributes to various pension plans
under union and industry-wide agreements.
The income statement expenses (credits) of pension plans for 2000, 1999 and
1998 totaled $(3) million, $11 million and $12 million, respectively. The
discount rate, rate of return on plan assets
I-36
and salary increase assumptions for the pension plans were 6.8%, 10.5% and
4.4%, respectively, in 1998. The income statement expense (credits) for
postretirement benefit plans for 2000, 1999 and 1998 were $6 million, $10
million and $(13) million, respectively. The discount rate, rate of return on
plan assets and annual increase in cost of postretirement benefits assumptions
were 6.8%, 10.5% and 6.4%, respectively, in 1998.
The market values of the Company's shares held by the pension plan master
trust as of September 30, 2000 and 1999 were $107 million and $73 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 2000, 1999 and 1998, the costs of such plans were $30 million,
$29 million and $31 million, respectively.
9 Stockholders' Equity
As described more fully in Note 2, effective November 18, 1999, shares of
the Company's existing common stock were reclassified as Disney common stock,
to track the financial performance of the Company's businesses other than the
Internet Group, plus Internet Group losses attributed to Disney. In addition,
the Company issued a new class of common stock, currently called Internet
Group common stock.
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
authorized Disney common stock from 1.2 billion shares to 3.6 billion shares.
The Board of Directors also approved an increase in the Disney share
repurchase authorization to 133.3 million shares of common stock pre-split or
400 million post-split. All share data included herein have been restated to
reflect the split. For the year, the Company repurchased a total of 4.9
million shares of Disney common stock for approximately $155 million. As of
September 30, 2000, the Company was authorized to repurchase approximately 394
million additional Disney shares.
In April 2000, the Company's Board of Directors approved a share repurchase
program for up to five million shares of Internet Group common stock in the
open market. During the year, the Company's Internet Group repurchased a total
of 0.9 million Internet Group shares for approximately $11 million. The
Company was authorized to repurchase 4.1 million additional Internet Group
shares as of September 30, 2000.
In 1996, the Company established the TWDC Stock Compensation Fund pursuant
to the repurchase program to acquire shares of Company common stock 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. In
December 1999 the Company established the TWDC Stock Compensation Fund II
(Fund II) pursuant to the repurchase program to acquire shares of both Disney
and Internet Group common stock for the purpose of funding certain future
stock-based compensation. Any shares acquired by Fund II that are not utilized
must be disposed of by December 31, 2002.
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. The Company
paid a $434 million dividend ($0.21 per Disney share) during the first quarter
of the current year applicable to fiscal 1999. Accordingly, there was no
dividend payment during the year ended September 30, 1999. On November 28,
2000, the
I-37
Board of Directors declared a cash dividend of $0.21 per Disney share
applicable to fiscal 2000. The dividend is payable December 22, 2000 to
stockholders of Disney common stock at the close of business December 8, 2000.
10 Stock Incentive Plans
Under various plans, the Company may grant stock options and other awards
for both classes of stock 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 for Disney common stock become exercisable over a
five-year period from the grant date and expire 10 years after the date of
grant. Options for Internet Group common stock become exercisable over a four-
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. Disney
and Internet Group shares available for future option grants at September 30,
2000, totaled 76 million and 5 million, respectively.
On November 26, 2000, one of the Company's stock incentive plans expired,
reducing the number of Disney shares available for future option grants by 21
million.
The following table summarizes information about Disney stock option
transactions (shares in millions):
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning
of year 159 $24.29 163 $21.70 183 $17.44
Awards canceled (18) 29.56 (9) 27.35 (10) 20.98
Awards granted 49 32.92 20 32.97 27 33.07
Awards exercised (28) 18.94 (15) 13.92 (37) 9.06
--- --- ---
Outstanding at September
30 162 $27.24 159 $24.29 163 $21.70
=== === ===
Exercisable at September
30 51 $21.22 57 $19.01 51 $16.34
=== === ===
The following table summarizes information about Internet Group stock option
transactions (shares in millions):
2000
----------------------
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding at beginning of year -- --
Options converted(/1/) 11.66 $24.54
Awards canceled (8.75) 28.79
Awards granted 27.63 20.48
Awards exercised (2.36) 7.20
-----
Outstanding at September 30 28.18 $20.70
=====
Exercisable at September 30 1.83 $26.43
=====
- --------
(1) Represents options held by Infoseek shareholders that were converted into
options to purchase Internet Group common stock on November 17, 1999, when
the Company acquired the remaining interest in Infoseek (Note 2).
I-38
The following table summarizes information about Disney stock options
outstanding at September 30, 2000 (shares in millions):
Outstanding Exercisable
-------------------------------------------- -------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Years of Average Number Average
Exercise Prices of Options Contractual Life Exercise Price of Options Exercise Price
- --------------- ---------- ------------------ -------------- ---------- --------------
$ 5-$ 9 1 0.8 $ 9.10 1 $ 9.10
$10-$14 8 3.2 13.59 8 13.58
$15-$19 14 3.6 18.33 14 18.32
$20-$24 42 6.3 21.53 17 21.54
$25-$29 34 8.3 26.89 7 26.78
$30-$34 38 9.1 32.95 2 32.67
$35-$39 14 8.1 37.33 2 37.63
$40-$44 11 10.0 40.96 -- --
--- ---
162 51
=== ===
The following table summarizes information about Internet Group stock
options outstanding at September 30, 2000 (shares in millions):
Outstanding Exercisable
-------------------------------------------- -------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Years of Average Number Average
Exercise Prices of Options Contractual Life Exercise Price of Options Exercise Price
- --------------- ---------- ------------------ -------------- ---------- --------------
$ 0-$ 4 0.29 5.4 $ 1.16 0.27 $ 0.87
$ 5-$ 9 0.29 6.7 8.32 0.21 8.08
$10-$14 14.31 9.7 12.14 0.04 14.36
$15-$19 0.21 7.4 17.11 0.11 17.09
$20-$24 1.47 9.3 21.97 0.04 23.28
$25-$29 5.45 9.2 25.94 0.39 26.56
$30-$34 0.12 8.3 31.90 0.03 32.48
$35-$39 5.36 9.0 35.70 0.46 37.13
$40-$44 0.40 8.3 43.47 0.16 43.51
$45-$100 0.28 7.8 60.86 0.12 60.09
----- ----
28.18 1.83
===== ====
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 (in millions,
except for per share data):
Disney 2000 1999 1998
------ ------- ------ -------
Attributed net income:
As reported $ 1,196 $1,300 $ 1,850
Pro forma 958 1,169 1,749
Diluted earnings per share attributed to Disney
common stock:
As reported 0.57 0.62 0.89
Pro forma 0.46 0.56 0.84
Internet Group 2000
-------------- ------
Attributed net loss:
As reported $ (276)
Pro forma (286)
Diluted loss per share attributed to Internet Group common stock:
As reported (6.18)
Pro forma (6.42)
I-39
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 Disney options at their grant date
during 2000, 1999 and 1998, where the exercise price equaled the market price
on the grant date, were $12.49, $11.11 and $10.82, 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 2000 and 1999. The estimated fair value of each
Disney option granted is calculated using the Black-Scholes option-pricing
model. The weighted average assumptions used in the model were as follows:
Disney Shares 2000 1999 1998
------------- ---- ---- ----
Risk-free interest rate 6.5% 5.3% 5.4%
Expected years until exercise 6.0 6.0 6.0
Expected stock volatility 26% 25% 23%
Dividend yield .59% .69% .71%
The weighted average fair values of the Internet Group options at their
grant date during 2000, where the exercise price equaled the market price on
the grant date, was $15.00. The estimated fair value of each Internet Group
option granted is calculated using the Black-Scholes option-pricing model. The
weighted average assumptions used in the model were as follows:
Internet Group Shares 2000
--------------------- ----
Risk-free interest rate 6.4%
Expected years until exercise 6.0
Expected stock volatility 80%
Dividend yield 0.0%
I-40
11 Detail of Certain Balance Sheet Accounts
2000 1999
------- -------
Current receivables
Trade, net of allowances $ 3,210 $ 3,160
Other 389 473
------- -------
$ 3,599 $ 3,633
======= =======
Other current assets
Prepaid expenses $ 493 $ 515
Other 142 164
------- -------
$ 635 $ 679
======= =======
Intangible assets
Cost in excess of ABC's net assets acquired $13,780 $14,248
Cost in excess of Infoseek's net assets acquired 1,966 --
Trademarks 1,112 1,100
FCC licenses 1,100 1,100
Other 1,080 856
Accumulated amortization (2,921) (1,609)
------- -------
$16,117 $15,695
======= =======
Accounts and taxes payable and other accrued liabilities
Accounts payable $ 4,278 $ 3,628
Payroll and employee benefits 778 802
Other 105 158
------- -------
$ 5,161 $ 4,588
======= =======
12 Segments
The Company is in the leisure and entertainment business and has operations
in five major segments: Media Networks, Studio Entertainment, Parks & Resorts,
Consumer Products and Internet Group, 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 (Note 1).
Operating income amounts evaluated include earnings before Corporate and
other activities, net interest expense, income taxes, minority interests,
restructuring charges and amortization of intangible assets. Corporate and
other activities principally consists of executive management, certain
unallocated administrative support functions and income or loss from equity
investments.
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
I-41
allocations are agreed-upon amounts between the businesses and may differ from
amounts that would be negotiated in an arm's-length transaction.
Business Segments 2000 1999 1998
- ----------------------------------------------------------------------
Revenues
Media Networks $ 9,615 $ 7,970 $ 7,433
------- ------- -------
Studio Entertainment
Third parties 5,913 6,090 6,492
Intersegment 81 76 94
------- ------- -------
5,994 6,166 6,586
------- ------- -------
Parks & Resorts 6,803 6,139 5,532
------- ------- -------
Consumer Products
Third parties 2,703 3,030 3,259
Intersegment (81) (76) (94)
------- ------- -------
2,622 2,954 3,165
------- ------- -------
Internet Group 368 206 260
------- ------- -------
Total Consolidated Revenues $25,402 $23,435 $22,976
======= ======= =======
Operating income
Media Networks $ 2,298 $ 1,580 $ 1,757
Studio Entertainment 110 154 749
Parks & Resorts 1,620 1,479 1,288
Consumer Products 455 600 810
Internet Group (402) (93) (94)
Amortization of intangible assets (1,233) (456) (431)
------- ------- -------
2,848 3,264 4,079
Restructuring charges -- (132) (64)
Gain on sale of Fairchild 243 -- --
Gain on sale of Starwave -- 345 --
Gain on sale of Ultraseek 153 -- --
------- ------- -------
Total Consolidated Operating Income $ 3,244 $ 3,477 $ 4,015
======= ======= =======
Capital expenditures
Media Networks $ 198 $ 159 $ 245
Studio Entertainment 50 51 117
Parks & Resorts 1,523 1,699 1,624
Consumer Products 67 106 77
Internet Group 58 17 27
Corporate 117 102 224
------- ------- -------
Total Consolidated Capital Expenditures $ 2,013 $ 2,134 $ 2,314
======= ======= =======
Depreciation expense
Media Networks $ 140 $ 131 $ 122
Studio Entertainment 54 64 115
Parks & Resorts 581 498 443
Consumer Products 104 124 85
Internet Group 34 8 10
Corporate 49 26 34
------- ------- -------
Total Consolidated Depreciation Expense $ 962 $ 851 $ 809
======= ======= =======
I-42
Business Segments 2000 1999 1998
- -----------------------------------------------------------------------------
Amortization expense
Media Networks $ 418 $ 423 $ 421
Studio Entertainment 1 1 1
Parks & Resorts 21 21 1
Consumer Products 2 6 1
Internet Group 791 5 7
------- ------- -------
Total Consolidated Amortization Expense $ 1,233 456 $ 431
======= ======= =======
Identifiable assets
Media Networks(/1/) $20,049 $20,178 $19,452
Studio Entertainment 7,295 7,606 7,844
Parks & Resorts(/1/) 10,820 10,568 9,554
Consumer Products 1,105 1,548 1,414
Internet Group(/1/) 1,955 706 336
Corporate(/2/) 3,803 3,073 2,778
------- ------- -------
Total Consolidated Assets $45,027 $43,679 $41,378
======= ======= =======
Supplemental revenue data
Media Networks
Advertising $ 6,637 $ 5,486 $ 5,287
Parks & Resorts
Merchandise, food and beverage 2,094 1,860 1,780
Admissions 2,006 1,878 1,739
Geographic Segments 2000 1999 1998
- -----------------------------------------------------------------------------
Revenues
United States $20,771 $18,930 $18,658
U.S. Exports 1,164 1,147 1,036
Europe 2,069 1,920 1,855
Asia Pacific 929 926 900
Latin America, Canada and Other 469 512 527
------- ------- -------
$25,402 $23,435 $22,976
======= ======= =======
Operating income
United States $ 2,987 $ 3,146 $ 3,468
Europe 250 259 369
Asia Pacific 193 227 217
Latin America, Canada and Other 62 115 173
Unallocated expenses (248) (270) (212)
------- ------- -------
$ 3,244 $ 3,477 $ 4,015
======= ======= =======
Identifiable assets
United States $43,284 $41,938 $39,462
Europe 1,235 1,238 1,468
Asia Pacific 281 319 270
Latin America, Canada and Other 227 184 178
------- ------- -------
$45,027 $43,679 $41,378
======= ======= =======
- --------
(1) Included in identifiable assets are equity method investments as follows:
Media Networks $ 738 $ 639 $ 475
Parks & Resorts 337 296 340
Internet Group 21 498 1
(2) Primarily deferred tax assets, other investments, fixed and other assets
I-43
13 Financial Instruments
Investments
As of September 30, 2000 and 1999, the Company held $330 million and $102
million, respectively, of securities classified as available-for-sale.
Realized gains and losses are determined principally on an average cost basis.
In 2000, the Company recognized $41 million in gains on sales of securities,
and recorded non-cash charges of $37 million to reflect impairments in the
value of certain investments. In 1999, the Company recognized $70 million in
gains on sales of securities. In 1998, realized gains and losses were not
material. In 2000, 1999 and 1998, unrealized gains and losses on available-
for-sale securities were not material.
During 2000 and 1999, the Company hedged certain investment holdings using
forward sale and collar contracts. The forward contracts, with notional
amounts totaling $663 million and $718 million in 2000 and 1999, respectively,
expire in four years. The collar contracts were terminated during 1999.
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 2000 and 1999 included pay-
floating and pay-fixed swaps and interest rate caps. Pay-floating swaps
effectively convert medium and long-term obligations to LIBOR 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 one to
two years. The interest rate caps either expired or were terminated in 1999.
As of September 30, 2000, the Company held $186 million of pay-floating swaps
and $786 million of pay-fixed swaps that were not designated as hedges. The
market values of these swaps as of September 30, 2000 have been included in
current earnings.
The following table reflects incremental changes in the notional or
contractual amounts of the Company's interest rate contracts during 2000 and
1999. Activity representing renewal of existing positions is excluded.
September 30, Maturities/ September 30,
1999 Additions Expirations Terminations 2000
------------- --------- ----------- ------------ -------------
Pay-floating swaps $3,840 $1,035 $ (194) $(1,024) $3,657
Pay-fixed swaps 2,200 186 -- (700) 1,686
------ ------ ------- ------- ------
$6,040 $1,221 $ (194) $(1,724) $5,343
====== ====== ======= ======= ======
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
====== ====== ======= ======= ======
I-44
The impact of interest rate risk management activities on income in 2000,
1999 and 1998 was not material. As of September 30, 2000 the Company had net
deferred losses of $87 million from interest rate risk management
transactions. The amount of deferred gains and losses from interest rate risk
management transactions at September 30, 1999 was 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, British
pound and Canadian dollar. The Company also uses forward contracts to hedge
foreign currency assets and liabilities. Cross-currency swaps are used to
hedge foreign currency-denominated borrowings.
At September 30, 2000 and 1999, 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:
2000 1999
--------------------------- ---------------------------
Fiscal Fiscal
Notional Exposure Year Notional Exposure Year
Amount Hedged Maturity Amount Hedged Maturity
-------- -------- --------- -------- -------- ---------
Option contracts $ 734 $ 442 2001-2003 $1,416 $ 524 2000
Forward contracts 1,700 1,473 2001-2002 1,620 1,353 2000
Cross-currency swaps 146 146 2001-2003 765 765 2000-2003
------- ------ ------ ------
$ 2,580 $2,061 $3,801 $2,642
======= ====== ====== ======
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, 2000 and 1999, the
Company had deferred gains of $24 million and $38 million, respectively, and
deferred losses of $7 million and $26 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 2000 and in 1999 was a net
gain of $195 million and $66 million, respectively.
I-45
Fair Value of Financial Instruments
At September 30, 2000 and 1999, 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, 2000 and 1999, the fair values of cash and cash
equivalents, receivables and accounts payable 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:
2000 1999
----------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- --------
Investments $ 732 $ 989 $ 569 $ 832
Borrowings $(8,890) $(8,760) $(10,971) $(10,962)
Risk management contracts:
Foreign exchange forwards $ 16 $ 22 $ (37) $ (27)
Foreign exchange options 27 39 58 69
Interest rate swaps 2 (83) 10 (46)
Forward sale contracts -- 41 -- (36)
Cross-currency swaps 5 (45) 13 (65)
------- ------- -------- --------
$ 50 $ (26) $ 44 $ (105)
======= ======= ======== ========
Credit Concentrations
The Company continually monitors its positions with, and the credit quality
of, the financial institutions that 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, 2000 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, 2000,
financial institution counterparties posted collateral of $18 million to the
Company, and the Company was required to collateralize $46 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, 2000, 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 (the FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), as amended by SFAS No. 137 and SFAS No. 138. SFAS 133 requires 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.
I-46
The Company will record a one-time after-tax charge for the initial adoption
of SFAS 133 totaling $51 million in its income statement and will record an
unrealized gain of $95 million in other accumulated comprehensive income for
the quarter ending December 31, 2000.
14 Commitments and Contingencies
The Company has various contractual commitments, including certain
guarantees, which are primarily for the purchase of broadcast rights for
various feature films, sports and other programming aggregating approximately
$13.6 billion as of September 30, 2000, including approximately $7.1 billion
related to NFL programming. This amount is substantially payable over the next
six years.
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, 2000,
payable as follows:
2001 $ 293
2002 263
2003 232
2004 202
2005 166
Thereafter 1,037
Rental expense for the above operating leases during 2000, 1999 and 1998,
including overages, common-area maintenance and other contingent rentals, was
$482 million, $385 million and $321 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.
All Pro Sports Camps, Inc., Nicholas Stracick and Edward Russell v. Walt
Disney Company, Walt Disney World Co., Disney Development Company and Steven
B. Wilson. On January 8, 1997, the plaintiff entity and two of its principals
or former principals filed a lawsuit against the Company, two of its
subsidiaries and a former employee in the Circuit Court for Orange County,
Florida. The plaintiffs asserted that the defendants had misappropriated from
them the concept used for the Disney's Wide World of Sports complex at the
Walt Disney World Resort. On August 11, 2000, a jury returned a verdict
against the Company and its two subsidiaries in the amount of $240 million.
Subsequently, the Court awarded plaintiffs an additional $100.00 in exemplary
damages based on particular findings by the jury. The Company intends to
challenge the judgement by way of appeal and believes that there are
substantial grounds for complete reversal or reduction of the verdict.
Management believes that it is not currently possible to estimate the
impact, if any, that the ultimate resolution of these matters will have on the
Company's results of operations, financial position or cash flows.
15 Restructuring Charges
In 1999, the Company began an across-the-board assessment of its cost
structure. The Company's efforts were 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.
I-47
In connection with actions taken to streamline operations, restructuring
charges were recorded in the fourth quarter of 1999 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.
Remaining balances recorded at September 30, 2000 totaled $47 million and
relate principally to lease and other contract cancellation costs, which will
be relieved throughout fiscal 2001 as leases and contracts expire.
I-48
QUARTERLY FINANCIAL SUMMARY
(In millions, except per share data)
(unaudited)
December 31 March 31 June 30 September 30
- -------------------------------------------------------------------------------
2000(/1/)(/2/)(/3/)
Revenues $6,932 $6,303 $6,051 $6,116
Operating income 1,164 484 860 736
Net income 315 77 361 167
Earnings per share attributed to:
Disney
Diluted 0.17 0.08 0.21 0.11
Basic 0.17 0.08 0.21 0.12
Internet Group (basic and diluted) (0.95) (1.88) (1.75) (1.61)
1999(/4/)(/5/)(/6/)
Revenues $6,597 $5,516 $5,531 $5,791
Operating income 1,383 735 960 399
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
- --------
(1) Reflects a $243 million pre-tax gain on the sale of Fairchild Publications
in the first quarter of 2000. There was no earnings per Disney share
impact, as the income taxes on the transaction largely offset the pre-tax
gain. See Note 2 to the Consolidated Financial Statements.
(2) Reflects a $93 million pre-tax gain on the sale of the Company's 33%
interest in Eurosport, a European sports cable service, in the third
quarter of 2000. The earnings per Disney share impact of the gain was
$0.02. See Note 2 to the Consolidated Financial Statements.
(3) Reflects a $153 million pre-tax gain on the sale of Ultraseek Corporation
in the fourth quarter of 2000. The earnings per Disney share and Internet
Group share were $0.01 and $0.25, respectively. See Note 2 to the
Consolidated Financial Statements.
(4) Reflects a $345 million pre-tax gain on the sale of Starwave in the first
quarter of 1999. The earnings per Disney share impact of the gain was
$0.10. See Note 2 to the Consolidated Financial Statements.
(5) 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 Disney share impact of the losses were $0.03, $0.02, $0.02
and $0.02, respectively. See Note 2 to the Consolidated Financial
Statements.
(6) Reflects $132 million of restructuring charges in the fourth quarter of
1999. The earnings per Disney share impact of the charges were $0.04. See
Note 15 to the Consolidated Financial Statements.
I-49
ANNEX II
[LOGO OF THE WALT DISNEY COMPANY]
WALT DISNEY INTERNET GROUP
COMBINED FINANCIAL INFORMATION
ANNEX II
WALT DISNEY INTERNET GROUP
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... II-1
ITEM 8. Combined Financial Information of the Walt Disney Internet
Group
Reports of Independent Accountants and Consents of Independent
Accountants................................................... II-10
Combined Statements of Operations for the Years Ended September
30, 2000, 1999 and 1998....................................... II-12
Combined Balance Sheets as of September 30, 2000 and 1999...... II-13
Combined Statements of Cash Flows for the Years Ended September
30, 2000, 1999 and 1998....................................... II-14
Combined Statements of Group Equity for the Years Ended
September 30, 2000, 1999 and 1998............................. II-15
Notes to Combined Financial Statements......................... II-16
Quarterly Financial Summary.................................... II-37
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
On November 17, 1999, the stockholders of the Company and Infoseek approved
the Company's acquisition of the remaining interest in Infoseek that the
Company did not already own. As more fully discussed in Notes 2 and 3 to the
Combined Financial Statements, the acquisition resulted in the creation of the
Internet Group, which comprises all of Disney's Internet businesses and
Infoseek, as well as Disney's direct marketing operations. The Company now
separately reports Internet Group operating results, which reflect the
combination of the Company's businesses that comprise the Internet Group.
The Internet Group's results of operations have incorporated Infoseek's
activity since the date of the acquisition. To enhance comparability,
operating results for fiscal 2000 and fiscal 1999 have been presented on a pro
forma basis, which assumes that the acquisition of the remaining interest in
Infoseek and subsequent creation of the Internet Group had occurred at the
beginning of fiscal 1999. The pro forma results are not necessarily indicative
of the combined results that would have occurred had the acquisition actually
occurred at the beginning of fiscal 1999, nor are they necessarily indicative
of future results.
Pro forma operating loss excludes charges for purchased in-process research
and development costs of $23.3 million and $72.6 million in 2000 and 1999,
respectively, and the Starwave gain in 1999.
II-1
Walt Disney Internet Group
Combined Results
(In thousands, except per share data)
Pro Forma
(unaudited) As Reported
-------------------------------- ---------------------------------
%
2000 1999 Change 2000 1999 1998
----------- ----------- ------ ----------- --------- ---------
Revenues $ 391,982 $ 348,081 13 % $ 368,513 $ 206,413 $ 259,572
Cost of revenues 350,678 244,963 (43)% 334,129 162,248 196,936
Sales and marketing 243,426 210,064 (16)% 233,158 87,967 106,586
Other operating expenses 156,813 77,365 (103)% 168,355 41,615 40,453
Depreciation 36,015 23,222 (55)% 34,134 8,075 9,550
Gain on sale of Ultraseek 152,869 -- n/m 152,869 -- --
Gain on sale of Starwave -- -- -- 345,048 --
----------- ----------- ----------- --------- ---------
(242,081) (207,533) (17)% (248,394) 251,556 (93,953)
Amortization of intangible
assets 909,427 914,289 1 % 790,774 4,613 6,639
----------- ----------- ----------- --------- ---------
Operating (loss) income (1,151,508) (1,121,822) (3)% (1,039,168) 246,943 (100,592)
Corporate and other
activities (11,439) (6,862) (67)% (11,830) (16,442) (11,646)
Equity in Infoseek loss -- -- (40,575) (321,346) --
Net interest (expense)
income (722) 5,348 (114)% (2,150) (7,321) 1,058
Net investment losses (31,060) -- n/m (31,060) -- --
----------- ----------- ----------- --------- ---------
Loss before income taxes
and minority interests (1,194,729) (1,123,336) (6)% (1,124,783) (98,166) (111,180)
Income tax benefit 72,702 98,854 (26)% 88,439 36,587 35,633
Minority interests 20,023 2,743 n/m 20,012 2,323 4,477
----------- ----------- ----------- --------- ---------
Net loss $(1,102,004) $(1,021,739) (8)% $(1,016,332) $ (59,256) $ (71,070)
=========== =========== =========== ========= =========
Net loss attributed to:
Disney common stock $ (785,333) $ (736,398) (7)% $ (740,705) $ (59,256) $ (71,070)
=========== =========== =========== ========= =========
Internet Group common
stock(/1/) $ (316,671) $ (285,341) (11)% $ (275,627) n/a n/a
=========== =========== =========== ========= =========
Loss per share attributed
to Internet Group common
stock:(/1/)(/2/)
Diluted and Basic $ (7.10) $ (6.66) (7)% $ (6.18) n/a n/a
=========== =========== =========== ========= =========
Loss per share attributed
to Internet Group common
stock excluding
amortization of
intangibles:(/1/)(/2/)(/3/)
Diluted and Basic $ (1.40) $ (0.84) (67)% $ (1.34) n/a n/a
=========== =========== =========== ========= =========
Average number of common
and common equivalent
shares outstanding:(/4/)
Diluted and Basic 44,575 42,834 44,575 n/a n/a
=========== =========== =========== ========= =========
- -------
(1) As-reported amounts reflect results for the period from November 18, 1999
(date of issuance of Internet Group common stock) through September 30,
2000.
(2) Walt Disney Internet Group common stock is a class of common stock of The
Walt Disney Company. Losses attributed to the Internet Group common stock
should be reviewed in conjunction with the consolidated results of
operations for The Walt Disney Company presented elsewhere herein.
(3) The Internet Group believes that attributed loss per share excluding
amortization of intangible assets provides additional information useful
in analyzing business results. Attributed loss per share excluding
amortization of intangible assets is a financial metric which is not in
conformity with generally accepted accounting principles (GAAP) and should
be considered in addition to, not as a substitute for, reported attributed
loss per share.
(4) Total shares amount to 155,119 and 153,378 shares for 2000 and 1999,
respectively, including 110,544 shares attributed to Disney.
II-2
Combined Results
2000 vs. 1999
On a pro forma basis, revenues increased 13%, or $43.9 million, to $392.0
million, driven by a $77.3 million increase in Internet revenues, partially
offset by a $33.4 million decline in Direct Marketing revenues. Operating
loss, net loss, net loss attributed to Internet Group common stock and diluted
attributed loss per share increased 3% to $1.2 billion, 8% to $1.1 billion,
11% to $316.7 million and 7% to $7.10, respectively. These increases were
driven by higher operating losses in both the Internet and Direct Marketing
segments and charges of $36.5 million to reflect impairments as of September
30, 2000 in the value of certain investments, partially offset by the gain on
the sale of Ultraseek. In July 2000, the Internet Group sold Ultraseek
Corporation, a subsidiary that provides intranet search software, which it had
acquired as part of its acquisition of Infoseek. Proceeds from the sale
consisted of shares of common stock of the purchaser, Inktomi Corporation, a
publicly held company, and approximately $4 million in cash. The sale resulted
in a pre-tax gain of $152.9 million ($39.3 million, after tax). The lower
effective tax benefit rate primarily reflects the tax expense on the sale of
Ultraseek.
As previously discussed, the Company completed the acquisition of Infoseek
during the quarter ended December 31, 1999 (see Note 2 to the Combined
Financial Statements). The acquisition resulted in a significant increase in
intangible assets. Intangible assets are being amortized over periods ranging
from two to nine years.
The impact of amortization related to the November 1998 and November 1999
Infoseek acquisitions, after the impact of the Ultraseek sale (see Note 2 to
the Combined Financial Statements), is expected to be $642.4 million in 2001,
$596.8 million in 2002, $89.2 million in 2003 and $13.4 million over the
remainder of the amortization period. The Internet Group determined the
economic useful life of acquired goodwill by giving consideration to the
useful lives of Infoseek's identifiable intangible assets, including developed
technology, trademarks, user base, joint venture agreements and in-place
workforce. In addition, the Internet Group considered the competitive
environment and the rapid pace of technological change in the Internet
industry.
On an as-reported basis, revenues increased 79%, or $162.1 million, to
$368.5 million. Operating loss, net loss, net loss attributed to Internet
Group common stock and diluted attributed loss per share were $1.0 billion,
$1.0 billion, $275.6 million and $6.18, respectively. As-reported results
reflect the items described above, as well as the incremental amortization of
intangible assets related to the Infoseek acquisition, the consolidation of
Infoseek's operations beginning November 18, 1999, the gain on the sale of
Starwave in the first quarter of fiscal 1999 and decreased corporate and other
activities due to a change in the manner of accounting for Starwave and
related businesses.
Going forward, costs and expenses are expected to reflect continued
investment in Web site technology and infrastructure, new product initiatives
and incremental marketing and sales expenditures. The Internet Group has begun
participating in the traditional television network up-front marketplace and
has sold approximately $30 million in Internet advertising which it expects to
fulfill and recognize as revenue during fiscal 2001.
1999 vs. 1998
On June 18, 1998, the Internet Group reached an agreement for the
acquisition of Starwave by Infoseek, the purchase of additional shares of
Infoseek common stock and warrants for additional Infoseek shares, for $70
million in cash and a $139 million note payable over five years. On
November 18, 1998, the shareholders of both Infoseek and Starwave approved the
acquisition. As a result of the acquisition and its purchase of additional
shares of Infoseek common stock, pursuant to the merger agreement, the
Internet Group owned approximately 43% of Infoseek's outstanding common stock.
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. On an as-reported basis, this change
II-3
resulted in decreases in revenues, costs and expenses, and operating losses
for the year ended September 30, 1999 versus the year ended September 30, 1998
amounting to $29.8 million, $62.3 million, and $32.5 million, respectively. As
a result of its sale of Starwave to Infoseek and its related acquisition of an
equity interest in Infoseek, the Internet Group recognized a non-cash gain of
$345.0 million and recorded through "Equity in Infoseek loss" charges for
purchased in-process research and development, amortization of intangible
assets and its portion of Infoseek's operating losses totaling $43.6 million,
$228.5 million and $49.3 million, respectively, during the year ended
September 30, 1999. These events had a significant impact on the comparability
of as-reported results of operations between periods.
The following discussion of fiscal 1999 versus 1998 performance includes
comparisons on an as-adjusted basis as if Starwave and the related businesses
had been accounted for using the equity method of accounting during 1998.
Management believes the as-adjusted results represent a meaningful comparative
standard for assessing changes because the as-adjusted results include
comparable operations in each year presented. The discussion of the Direct
Marketing segment does not include as-adjusted comparisons, since the
adjustments do not impact this segment.
Revenues decreased 10% to $206.4 million compared to as-adjusted 1998
results, driven by a $43.7 million decline in Direct Marketing revenues,
partially offset by a $20.4 million increase in Internet revenues. Excluding
the $345.0 million gain on the sale of Starwave, operating losses increased
44%, or $30.0 million.
On an as-reported basis, revenues decreased 20%, or $53.2 million, to $206.4
million, driven by a $43.7 million decline in Direct Marketing revenues and a
$9.5 million decline in Internet revenues. Excluding the $345.0 million gain
on the sale of Starwave, as-reported operating losses decreased 2%, or $2.5
million, to $98.1 million, reflecting lower costs and expenses related to
Direct Marketing operations and the change in the manner of accounting for
Starwave and related businesses from consolidation to the equity method,
partially offset by increased spending on development and growth of Internet
operations.
Net loss improved to $59.3 million, driven by the gain on the sale of
Starwave, partially offset by equity losses of Infoseek of $321.3 million,
increased expenses for corporate and other activities and increased interest
expense driven by the note payable for Infoseek warrants.
II-4
Business Segment Results
The following table provides supplemental revenue and operating
(loss)/income detail for the Internet and Direct Marketing segments (in
thousands):
Pro Forma
(unaudited) As Reported
-------------------------------- --------------------------------
%
2000 1999 Change 2000 1999 1998
----------- ----------- ------ ----------- -------- ---------
Revenues:
Internet
Media $ 200,827 $ 161,691 24 % $ 179,069 $ 34,828 $ 51,604
Commerce 76,389 38,263 100 % 74,678 23,458 16,160
----------- ----------- ----------- -------- ---------
277,216 199,954 39 % 253,747 58,286 67,764
Direct Marketing 114,766 148,127 (23)% 114,766 148,127 191,808
----------- ----------- ----------- -------- ---------
$ 391,982 $ 348,081 13 % $ 368,513 $206,413 $ 259,572
=========== =========== =========== ======== =========
Operating (loss)
income:(/1/)
Internet $ (365,008) $ (184,174) (98)% $ (371,321) $(70,133) $ (75,373)
Direct Marketing (29,942) (23,359) (28)% (29,942) (23,359) (18,580)
----------- ----------- ----------- -------- ---------
(394,950) (207,533) (90)% (401,263) (93,492) (93,953)
Gain on sale of
Ultraseek 152,869 -- n/m 152,869 -- --
Gain on sale of
Starwave -- -- -- 345,048 --
----------- ----------- ----------- -------- ---------
(242,081) (207,533) (17)% (248,394) 251,556 (93,953)
Amortization of
intangible assets (909,427) (914,289) 1 % (790,774) (4,613) (6,639)
----------- ----------- ----------- -------- ---------
$(1,151,508) $(1,121,822) (3)% $(1,039,168) $246,943 $(100,592)
=========== =========== =========== ======== =========
- --------
(1) Segment results exclude intangible asset amortization. Segment EBITDA,
which also excludes depreciation, is as follows:
Internet $ (332,637) $ (164,050) $ (340,831) $(65,156) $ (67,455)
Direct Marketing (26,298) (20,261) (26,298) (20,261) (16,948)
----------- ----------- ----------- -------- ---------
$ (358,935) $ (184,311) $ (367,129) $(85,417) $ (84,403)
=========== =========== =========== ======== =========
Internet
2000 vs. 1999
Pro forma revenues increased 39%, or $77.3 million, to $277.2 million,
reflecting growth in both media and commerce revenues. Media revenues
increased 24%, or $39.1 million, to $200.8 million, reflecting higher
advertising and sponsorship revenues driven by increased advertiser demand and
higher online site traffic at the ABC-branded Web sites, ESPN.com, Disney.com
and Family.com, partially offset by decreases at the GO.com Web site. Media
revenues also benefited from increased licensing revenues from international
operations. Commerce revenues increased 100%, or $38.1 million, to $76.4
million, driven by strong sales at the DisneyStore.com and
DisneyVacations.com, Web site development revenues generated from Web site
services provided to affiliates, and operations at toysmart.com until its
closure in May 2000. Commerce revenue growth reflected a 74% increase over the
prior-year period in the total number of orders per month, as well as an
increase in average order size across the Internet Group's commerce sites.
On an as-reported basis, revenues increased 335%, or $195.5 million, to
$253.7 million, reflecting the items described above, as well as the
operations of Infoseek, ESPN Internet Ventures and ABC News Internet Ventures,
which were consolidated into the Internet Group beginning November 18, 1999.
II-5
Pro forma operating loss increased 98%, or $180.8 million, to $365.0
million, reflecting higher costs and expenses which increased 67%, or $258.1
million, partially offset by increased revenues. Cost of revenues, which
consist primarily of employee compensation, third party development and
engineering costs, and hosting and delivery costs associated with the Web
sites, increased primarily due to continued investment in Web site technology
and new product initiatives, growth in infrastructure due to expansion of the
business, ongoing enhancements to existing Web sites, the redesign of the
GO.com Web site, operations at toysmart.com and a one-time employee retention
payment of $7.9 million required by the 1999 Infoseek acquisition agreement.
Sales and marketing expenses increased primarily due to operations at
toysmart.com, expanded promotion of commerce and media businesses and one-time
employee retention payments of $5.2 million. Increased other operating
expenses were driven by a non-cash charge of $30.8 million to reflect the
impairment of goodwill and certain intangible assets, continued infrastructure
growth, operations at toysmart.com and one-time employee retention payments of
$4.2 million.
On an as-reported basis, operating loss increased $301.2 million to $371.3
million, reflecting the items described above, as well as losses at Infoseek,
which was consolidated into the Internet Group beginning November 18, 1999.
1999 vs. 1998
As discussed above, the following discussion of 1999 versus 1998 Internet
segment performance includes comparisons on an as-adjusted basis as if
Starwave and the related businesses had been accounted for using the equity
method of accounting during 1998.
Internet revenues increased $20.4 million compared to as-adjusted 1998,
driven by strong growth in media and commerce revenues. Media revenues
increased $12.6 million, reflecting increased Web site traffic and page views,
additional advertising and sponsorship agreements and subscription revenues
from subscriber growth at Disney's Blast. Commerce revenues increased $7.8
million, driven by continued growth in DisneyStore.com merchandise sales and
commissions on sales of travel packages and tickets for the Walt Disney World
Resort and Disneyland.
On an as-reported basis, Internet revenues decreased 14%, or $9.5 million,
to $58.3 million, due to the change in the manner of accounting for Starwave
and related businesses from the consolidation method to the equity method,
partially offset by the impact of the items described above.
Operating losses decreased 42%, or $20.6 million, to $70.1 million compared
with as-adjusted 1998, reflecting increased revenues, partially offset by
higher costs and expenses. Costs and expenses increased 47%, or $41.0 million.
On an as-adjusted basis, cost of revenues increased 48%, or $24.6 million.
The increase was driven primarily by the continued development of
entertainment and family Web sites, which were redesigned during 1999 and
operations of toysmart.com and Soccernet.com, two companies acquired during
the fourth quarter of 1999. Sales and marketing increased 18%, or $3.6
million, due to higher marketing and promotional spending to drive visitor
traffic and to establish brand identity. Other operating expenses increased
101%, or $12.1 million, driven by personnel additions to support growth in the
business and related infrastructure.
As-reported operating losses decreased 7%, or $5.2 million, to $70.1
million, reflecting the items described above, as well as the change in the
manner of accounting for Starwave and related businesses from the
consolidation method to the equity method.
Direct Marketing
2000 vs. 1999
Revenues decreased 23%, or $33.4 million, to $114.8 million, resulting from
planned reductions in catalog circulation, fewer product offerings, lower
catalog response rates during changes in the Company's merchandising strategy
and customer migration to the Internet Group's online business.
II-6
Operating loss increased $6.6 million to $29.9 million, compared to $23.4
million in the prior year, primarily reflecting the 23% decline in revenues.
Cost of revenues declined 22%, or $19.2 million, due to the lower sales
volumes. The decrease in revenues was not fully offset by cost reductions due
to fixed costs which do not fluctuate significantly from period to period.
Selling and other operating expenses, decreased 10%, or $8.1 million.
1999 vs. 1998
Revenues decreased 23%, or $43.7 million, to $148.1 million, largely due to
the impact of relocating the Direct Marketing distribution facilities from
Tennessee to South Carolina. As a result of capacity and system constraints
resulting from the winding down of the Tennessee facility, management reduced
catalog circulation during the 1998 holiday season to ensure quality of
customer service during the key holiday period. Lower customer response rates
and one less edition of the catalog in the second quarter of 1999 also
contributed to the decline in revenues.
Operating losses increased 26%, or $4.8 million, to $23.4 million, driven
principally by lower revenues. The decrease in revenues was not fully offset
by cost reductions due to fixed costs which do not fluctuate significantly
from period to period. Costs and expenses decreased 18%, or $38.9 million.
Cost of revenues decreased 22%, or $24.2 million, due to reduced sales
volume. Selling expenses, which consist primarily of catalog production,
delivery, marketing and variable labor costs for customer service and order
fulfillment, decreased 16%, or $12.6 million. The decrease was driven by
reduced mailings and lower outbound shipping costs, partially offset by higher
expenses from inefficiencies relating to the relocation of the distribution
center, the transition to the new facility and the implementation of new
business processes, systems and software applications. The relocation and
related systems implementation was completed as of June 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Internet Group's cash needs are funded by Disney and such funding is
accounted for as either a capital contribution from Disney (i.e., as an
increase in the Internet Group's group equity and Internet Group results
attributable to Disney), or as a loan.
Disney may account for all cash transfers from Disney or the Internet Group
to or for the account of the other as inter-group loans, other than transfers
in return for assets or services rendered or transfers in respect to dividends
attributable to Disney paid on Internet Group common stock. These loans bear
interest at the rate at which Disney could borrow such funds. The Company's
Board of Directors has discretion to determine, in the exercise of its
business judgment, that a given transfer or type of transfer should be
accounted for as a long-term loan, a capital contribution increasing Disney's
retained interest in the Internet Group or a return of capital reducing
Disney's retained interest in the Internet Group. The Company has agreed,
however, that advances from Disney to the Internet Group up to $250.0 million
on a cumulative basis will be accounted for as short-term or long-term loans
at interest rates at which Disney could borrow such funds and will not be
accounted for as capital contributions.
For the year ended September 30, 2000, cash used by operations of $154.5
million was driven by higher pre-tax losses before non-cash items, partially
offset by tax benefits attributed to the Internet Group's operations, an
increase in accounts payable outstanding and a reduction in inventory levels.
The Internet Group has invested in Internet-related companies. Total
investment purchases were $75.5 million for the year ended September 30, 2000.
Cash proceeds of $119.8 million generated from the sale of Inktomi shares
acquired in the Ultraseek sale were loaned to Disney.
From October 1, 1999 through the November 17, 1999 Infoseek acquisition, the
Internet Group received $21.5 million in capital contribution funding from
Disney.
II-7
The Internet Group's net borrowings from Disney during the year ended
September 30, 2000, totaled $222.9 million and represent advances from Disney
to be accounted for as a loan.
In November 2000, the Internet Group entered into an agreement to purchase
approximately $40.0 million in computer equipment and services over a three-
year period.
In April 2000, the Company's Board of Directors approved a share repurchase
program for up to five million shares of Internet Group common stock in the
open market. During 2000, the Internet Group repurchased 908,533 shares at a
cost of $11.4 million under this program. The Company was authorized to
repurchase approximately 4.1 million additional Internet Group shares as of
September 30, 2000.
OTHER MATTERS
Shipping and Handling Fees and Costs
In September 2000, the Financial Accounting Standards Board Emerging Issues
Task Force (EITF) reached a final consensus on EITF Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs. This consensus requires
that all amounts billed to a customer in a sale transaction related to
shipping and handling, be classified as revenue. The Internet Group
historically has netted shipping charges to customers with shipping and
handling costs which are included in operating expenses in the Combined
Statements of Operations. With respect to the classification of costs related
to shipping and handling incurred by the seller, the EITF determined that the
classification of such costs is an accounting policy decision that should be
disclosed. The Internet Group will adopt the consensus in the Issue in fiscal
2001.
Revenue Reporting
In July 2000, the EITF reached a consensus on EITF Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent. This consensus
provides guidance concerning under what circumstances a company should report
revenue based on (a) the gross amount billed to a customer because it has
earned revenue from the sale of the goods or services or (b) the net amount
retained (that is, the amount billed to the customer less the amount paid to a
supplier) because it has earned a commission or fee. Application of the
provisions of this consensus did not change the Internet Group's existing
accounting policies.
Web Site Development Costs
In April 2000, the EITF issued EITF Issue No. 00-2, Accounting for Web Site
Development Costs. The Internet Group adopted the consensus in the Issue in
the fourth quarter of fiscal 2000, and the effect of the adoption was not
material to its combined results of operations and financial position.
Implementation of SAB 101
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. During the fourth quarter of the current year, the Internet Group
performed a comprehensive review of its revenue recognition policies and
determined that they are in compliance with SAB 101.
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
Internet Group. The Internet Group and its representatives may from time to
time make written or oral statements that the Internet Group believes are
"forward-looking," including statements contained in this report and other
filings with the Securities and Exchange Commission and in reports to the
Internet Group stockholders. The Internet
II-8
Group believes that all statements that express expectations and projections
with respect to future matters, including the launching or prospective
development of new business initiatives and Internet projects, are forward-
looking statements within the meaning of the Act. These statements are made on
the basis of management's views and assumptions, as of the time the statements
are made, regarding future events and business performance. There can be no
assurance, however, that management's expectations will necessarily come to
pass.
Factors that may affect forward-looking statements. A wide range of factors
could materially affect future developments and performance. A list of such
factors is set forth in the Company's Discussion and Analysis of Financial
Condition and Results of Operations included in Annex I, presented elsewhere
herein, under the heading "Factors that may affect forward-looking
statements."
II-9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Walt Disney Company
In our opinion, based on our audits and the report of other auditors, the
accompanying combined balance sheets and the related combined statements of
operations, cash flows and group equity, present fairly, in all material
respects, the financial position of the Walt Disney Internet Group (the
Internet Group), as defined in Note 1, at September 30, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in
the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of The Walt Disney Company's (the Company's)
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Infoseek Corporation (Infoseek), an investment of the Internet Group accounted
for under the equity method, which statements reflect shareholders' equity of
$841.3 million and net loss of $265.2 million as of October 2, 1999 and for
the year then ended, respectively. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Infoseek,
is based solely on the report of the other auditors. We conducted our audits
of these statements in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Internet Group is a
division of the Company; accordingly, the financial statements of the Internet
Group should be read in conjunction with the audited financial statements of
the Company.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
November 30, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-26106, 33-35405, 33-39770, 33-57811, 333-91571
and 333-31012) and Form S-3/A (Nos. 333-34167 and 333-52659) of The Walt
Disney Company of our reports dated November 30, 2000 related to the financial
statements of The Walt Disney Company and Walt Disney Internet Group, which
appear in the Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
December 19, 2000
II-10
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Infoseek Corporation
We have audited the consolidated balance sheets of Infoseek Corporation as
of October 2, 1999 and October 3, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year
ended October 2, 1999, for the nine months ended October 3, 1998 and for the
year ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Infoseek Corporation at October 2, 1999 and October 3, 1998, and the
consolidated results of its operations and its cash flows for the year ended
October 2, 1999, for the nine months ended October 3, 1998 and for the year
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
San Jose, California
October 28, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-26106, 33-35405, 33-39770, 33-57811, 333-91571 and 333-31012
and Form S-3/A Nos. 333-34167 and 333-52659) of The Walt Disney Company of our
report dated October 28, 1999, with respect to the consolidated financial
statements of Infoseek Corporation, included in this Annual Report (Form 10-K
of The Walt Disney Company) for the year ended September 30, 2000. Such
consolidated financial statements of Infoseek Corporation are not included or
incorporated by reference in the Annual Report (Form 10-K).
ERNST & YOUNG LLP
San Jose, California
December 19, 2000
II-11
WALT DISNEY INTERNET GROUP
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
Year Ended September 30 2000 1999 1998
- -------------------------------------------------------------------------
Revenues $ 368,513 $ 206,413 $ 259,572
Costs and expenses
Cost of revenues 334,129 162,248 196,936
Sales and marketing 233,158 87,967 106,586
Other operating 168,355 41,615 40,453
Depreciation 34,134 8,075 9,550
Amortization of intangible assets 790,774 4,613 6,639
Gain on sale of Ultraseek 152,869 -- --
Gain on sale of Starwave -- 345,048 --
----------- --------- ---------
Operating (loss) income (1,039,168) 246,943 (100,592)
Corporate and other activities (11,830) (16,442) (11,646)
Equity in Infoseek loss (40,575) (321,346) --
Net interest (expense) income (2,150) (7,321) 1,058
Net investment losses (31,060) -- --
----------- --------- ---------
Loss before income taxes and minority
interests (1,124,783) (98,166) (111,180)
Income tax benefit 88,439 36,587 35,633
Minority interests 20,012 2,323 4,477
----------- --------- ---------
Net loss $(1,016,332) $ (59,256) $ (71,070)
=========== ========= =========
Net loss attributed to:
Disney common stock $ (740,705) $ (59,256) $ (71,070)
=========== ========= =========
Internet Group common stock(/1/) $ (275,627) n/a n/a
=========== ========= =========
- --------
(1) Walt Disney Internet Group common stock is a class of common stock of The
Walt Disney Company. Losses attributed to the Internet Group common stock
should be reviewed in conjunction with the consolidated results of
operations for The Walt Disney Company presented elsewhere herein.
See Notes to Combined Financial Statements
II-12
WALT DISNEY INTERNET GROUP
COMBINED BALANCE SHEETS
(In thousands)
September 30 2000 1999
- ------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,938 $ 5,530
Receivables (net of allowance for doubtful accounts of
$9,535 and $4,791) 38,765 17,763
Inventories 30,315 43,521
Deferred income taxes 46,357 8,993
Prepaid and other assets 17,987 13,905
---------- --------
Total current assets 135,362 89,712
Loan receivable from Disney 124,089 --
Investments 215,166 505,210
Property and equipment, at cost 195,016 53,509
Accumulated depreciation (92,012) (18,928)
---------- --------
103,004 34,581
Projects in progress -- 6,112
---------- --------
103,004 40,693
Intangible assets, net 1,369,145 64,389
Deferred income taxes 6,022 --
Other assets 2,459 6,420
---------- --------
$1,955,247 $706,424
========== ========
LIABILITIES AND GROUP EQUITY
Current Liabilities
Accounts payable and other accrued liabilities $ 143,475 $ 90,997
Current portion of borrowings -- 28,313
Unearned revenue 28,398 6,312
---------- --------
Total current liabilities 171,873 125,622
Loan payable to Disney 222,867 19,000
Borrowings -- 90,350
Other long-term liabilities, unearned royalties and
other advances 9,737 --
Deferred income taxes -- 58,396
Minority interests -- 42,041
Group equity 1,550,770 371,015
---------- --------
$1,955,247 $706,424
========== ========
See Notes to Combined Financial Statements
II-13
WALT DISNEY INTERNET GROUP
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended September 30 2000 1999 1998
- --------------------------------------------------------------------------
NET LOSS $(1,016,332) $ (59,256) $(71,070)
ITEMS NOT REQUIRING CASH OUTLAYS
Depreciation 34,134 8,075 9,550
Amortization of intangibles 790,774 4,613 6,639
Charge for in-process research and
development 23,322 -- --
Impairment charges 67,341 -- --
Gain on sale of Ultraseek (152,869) -- --
Gain on sale of Starwave -- (345,048) --
Realized gain on sale of investments (5,475) -- --
Equity in Infoseek loss 40,575 321,346 --
Losses from equity investments 3,559 8,952 --
Minority interests' share of net loss (20,012) (2,323) (4,477)
Other 1,607 304 --
CHANGES IN
Receivables 5,167 (2,334) (6,568)
Inventories 8,250 9,824 (22,308)
Prepaid and other assets (7,700) (4,886) 1,066
Accounts payable and other accrued
liabilities 72,354 26,017 (1,799)
Deferred income taxes 827 4,504 (3,105)
----------- --------- --------
861,854 29,044 (21,002)
----------- --------- --------
Cash used in operations (154,478) (30,212) (92,072)
----------- --------- --------
INVESTING ACTIVITIES
Investments in property and equipment (57,760) (16,930) (26,592)
Funds loaned to Disney (124,089) -- --
Acquisitions (net of cash acquired) 2,362 (102,293) --
Dispositions 3,500 -- --
Purchases of investments (75,545) (6,000) --
Proceeds from sale of investments 119,768 -- --
Investments in affililates -- (11,327) --
----------- --------- --------
Cash used in investing activities (131,764) (136,550) (26,592)
----------- --------- --------
FINANCING ACTIVITIES
Capital contributions from Disney, net 21,514 166,458 95,781
Borrowings 7,214 -- --
Reduction of borrowings (2,594) (20,850) --
Borrowings from Disney, net 250,705 19,000 --
Repurchases of common stock (11,364) -- --
Stock options exercised 17,175 -- --
Minority interests -- -- 8,219
----------- --------- --------
Cash provided by financing activities 282,650 164,608 104,000
----------- --------- --------
Decrease in Cash and Cash Equivalents (3,592) (2,154) (14,664)
Cash and Cash Equivalents, Beginning of
Year 5,530 7,684 22,348
----------- --------- --------
Cash and Cash Equivalents, End of Year $ 1,938 $ 5,530 $ 7,684
=========== ========= ========
Supplemental disclosure of cash flow
information:
Interest paid $ 86 $ 6,459 $ 41
=========== ========= ========
See Notes to Combined Financial Statements
II-14
WALT DISNEY INTERNET GROUP
COMBINED STATEMENTS OF GROUP EQUITY
(In thousands)
Total Group Comprehensive
Equity Loss
- -------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 $ 96,368
Capital contributions from Disney, net 237,219
Unrealized holding losses, net (191) $ (191)
Net loss (71,070) (71,070)
----------- -----------
BALANCE AT SEPTEMBER 30, 1998 262,326 $ (71,261)
===========
Capital contributions from Disney, net 166,458
Unrealized holding gains, net 1,487 $ 1,487
Net loss (59,256) (59,256)
----------- -----------
BALANCE AT SEPTEMBER 30, 1999 371,015 $ (57,769)
===========
Issuance of common stock in Infoseek merger 2,125,614
Issuance of common stock for Soccernet acquisition 23,700
Exercise of stock options, net 32,418
Common stock repurchased, at cost (11,364)
Capital contributions from Disney, net 38,236
Unrealized holding losses (net of tax benefit of
$6.5 million) (12,347) $ (12,347)
Cumulative translation (170) (170)
Net loss (1,016,332) (1,016,332)
----------- -----------
BALANCE AT SEPTEMBER 30, 2000 $ 1,550,770 $(1,028,849)
=========== ===========
See Notes to Combined Financial Statements
II-15
WALT DISNEY INTERNET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Tabular dollars in thousands, except per share amounts)
1 Description of the Business and Summary of Significant Accounting Policies
On November 17, 1999, The Walt Disney Company (the Company) completed its
acquisition of the remaining interest in Infoseek Corporation (Infoseek) that
it did not already own via the creation and issuance of a new class of common
stock called GO.com common stock (Note 2). Effective August 2, 2000, GO.com
adopted a new name, Walt Disney Internet Group.
Walt Disney Internet Group common stock is a class of common stock of The
Walt Disney Company. The accompanying combined financial statements reflect
the combination of the Company's Internet and direct marketing businesses
including Infoseek (collectively, the Internet Group). The Internet Group has
extensive transactions and relationships with affiliated businesses (Note 13).
Upon issuance of the Internet Group common stock, the Company's existing
common stock was reclassified as Disney common stock, which is intended to
reflect the performance of the Company's businesses other than the Internet
Group, plus Internet Group lossess attributed to Disney (collectively,
Disney).
Holders of Internet Group common stock (Note 3) are common stockholders of
the Company and, as such, are subject to all risks associated with an
investment in the Company and all of its businesses, assets and liabilities.
In any liquidation, holders of Disney common stock and Internet Group common
stock will only have the rights specified in the Company certificate of
incorporation and will not have any legal rights related to specific assets of
either group and in any liquidation will receive a fixed share of the net
assets of the Company, which may not reflect the actual trading prices of the
respective groups at such time.
Financial impacts arising from Disney that affect the Company's consolidated
results of operations or financial position could affect the results of
operations or financial condition of the Internet Group or the market price of
the Internet Group common stock. In addition, any dividends or distributions
on, or repurchases of, Disney common stock (Note 3) will reduce the assets of
the Company legally available for dividends on Internet Group common stock.
Accordingly, financial information for the Internet Group should be read in
conjunction with the Company's consolidated financial information.
The Internet Group has operations in the following businesses:
INTERNET
The Internet media business develops, publishes and distributes content for
online services intended to appeal to broad consumer interest in sports, news,
family and entertainment. Internet media Web sites and products include
ABC.com, ABCNEWS.com, ABCNEWS4KIDS.com, ABCSports.com, Disney.com, Disney's
Blast, Enhanced TV, ESPN.com, Family.com, GO.com, Movies.com, Mr. Showbiz,
NBA.com, NFL.com, Soccernet.com and Wall of Sound.
The Internet commerce business manages Web sites which include the
DisneyStore.com, DisneyVacations.com, ABC.com Store, ESPN Store Online, NASCAR
Store Online, and toysmart.com prior to its closure on May 19, 2000. Other
commerce activities include Ultraseek's intranet search software, prior to the
sale of Ultraseek on July 19, 2000, Web site development and Disney Auctions.
DIRECT MARKETING
The Direct Marketing business operates The Disney Catalog, which markets
Disney-themed merchandise through the direct mail channel. Catalog offerings
include merchandise developed exclusively for The Disney Catalog and
DisneyStore.com, as well as products from The Disney Store, other internal
Disney partners and Disney licensees. The Disney Catalog also operates its own
retail outlet stores for the purpose of liquidating overstock merchandise.
II-16
SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of the Internet
Group, as defined above, after elimination of intercompany accounts and
transactions.
For financial reporting purposes, outside investors' shares of net assets
and results of operations have been recorded as minority interests in the
Combined Balance Sheets and Combined Statements of Operations, respectively.
At September 30, 2000, minority interests resulted from outside ownership
interests in certain ESPN online operations. At September 30, 1999, minority
interests resulted from outside ownership interests in certain ESPN online
operations, toysmart.com and Soccernet.com.
On November 18, 1998, the Internet Group exchanged its ownership interest in
Starwave plus $70.0 million in cash for a 43% equity interest in Infoseek
(Note 2). This transaction resulted in a change in the manner of accounting
for ESPN Internet Ventures (EIV) and ABC News Internet Ventures (AIV), which
were joint ventures between the Internet Group and Starwave, from the
consolidation method to the equity method. With the Infoseek acquisition on
November 17, 1999 (Note 2), the Internet Group regained controlling ownership
interests in the ventures. Accordingly, the transaction resulted in a change
in the manner of accounting for the ventures from the equity method, back to
the consolidation method, effective November 18, 1999.
As of September 30, 1999, the Internet Group's total equity investment in
the ventures was approximately $1.3 million.
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.
Revenue Recognition
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 of the resulting receivable is probable. Certain
advertising contracts include guarantees of a minimum number of impressions.
To the extent the minimum guaranteed impressions are not met, revenue
recognition is deferred until the guaranteed impression levels are achieved.
Advertising revenues also reflect the exchange of advertising space on the
Internet Group's Web sites for reciprocal advertising space from other
entities. Revenues from these exchange transactions are recorded at the
estimated fair value of the services surrendered, if the fair value of the
advertising surrendered is determinable based on the Internet Group's recent
cash transactions with similar characteristics. Advertising revenues
recognized under these trading activities totaled $8.7 million for 2000 and
were immaterial for 1999 and 1998.
The Internet Group provides services, such as advertising and Web site
development, in exchange for equity in certain of its customers. Revenue is
recognized as the services are performed based on the fair value of the
services provided or the equity received, whichever is more readily
determinable. Such revenue was immaterial in 2000, 1999 and 1998.
Revenues from subscription-based fees and services are recognized ratably
over the term of the related contracts. Unearned revenue represents advance
payments received for online subscriptions and customer advertising.
Licensing revenues are generally recognized ratably over the life of the
applicable contracts.
II-17
Direct Marketing and Internet-based merchandise commerce revenues are
recognized upon shipment of product to customers.
Web site development revenues are recognized as services are performed and
reflect costs incurred plus a 10% fee. These revenues are derived from
entities affiliated with Disney (Note 13).
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. During the fourth quarter of the current year, the Internet Group
performed a comprehensive review of its revenue recognition policies and
determined that they are in compliance with SAB 101.
Web Site Development Expenses
Web site development expenses relate to the development of new online
services and consist principally of employee compensation, as well as costs
for content, facilities and equipment. In the fourth quarter of 2000, the
Internet Group adopted the consensus in the Financial Accounting Standards
Board Emerging Issues Task Force (EITF) Issue No. 00-2, Accounting for Web
Site Development Costs, which requires that certain costs to develop Web sites
be capitalized or expensed, depending on the nature of the costs. During 2000,
development expenses of $2.6 million have been capitalized and are being
amortized over a period of 18 months.
Research and Development Expenses
Research and development costs are charged to expense as incurred. Research
and development costs were $6.0 million in 2000 and were immaterial for 1999
and 1998.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities
with original maturities of three months or less.
Inventories
Carrying amounts of merchandise are generally determined on a moving average
cost basis and are stated at the lower of cost or market.
Investments
Marketable equity securities are classified as "available-for-sale" and are
recorded at fair value with unrealized gains and losses included in group
equity. All other equity securities are accounted for using either the cost
method or the equity method. The Internet Group's share of earnings or losses
in its equity investments accounted for under the equity method, other than
Infoseek for 1999, is included in corporate and other activities in the
Combined Statements of Operations.
The Internet Group continually reviews its investments to determine whether
a decline in fair value below the cost basis is other than temporary. If the
decline in fair value is judged to be other than temporary, the cost basis of
the security is written down to fair value and the amount of the write-down is
included in the Combined Statements of Operations.
For the period from November 18, 1998 to November 17, 1999, the Internet
Group included an equity investment in Infoseek, a publicly held Internet
search company (Note 2). Differences between the carrying amount of the
investment and the underlying equity in the net assets were assigned to
intangible assets, which are being amortized over periods ranging from two to
five years. As of October 2, 1999, Infoseek's total assets were $991.6
million. As of September 30, 1999, the Internet Group owned approximately 42%
of Infoseek's outstanding common stock with an approximate fair value of
$815.2 million.
II-18
During 1999, EIV and AIV were accounted for under the equity method since
the Internet Group did not control a majority voting interest in either
venture. Under each of the respective joint venture agreements, required
funding and losses were split 40%/60% between the Internet Group and Infoseek,
respectively, for such periods.
Advertising Expenses
The costs of advertising are expensed as incurred except for direct-response
advertising which is capitalized and amortized over the expected period of
future benefit. Direct-response advertising consists primarily of catalog
production and mailing costs, which are capitalized and amortized over the
expected future revenue stream, generally up to six months from the date
catalogs are mailed. Catalog costs are accounted for in accordance with AICPA
Statement of Position (SOP) 93-7, Reporting on Advertising Costs (SOP 93-7).
SOP 93-7 requires that advertising costs be amortized based on the ratio of
the current period's revenues for a catalog cost pool to estimated total
revenues for that catalog cost pool.
As of September 30, 2000 and 1999, capitalized advertising costs totaled
$6.4 million and $7.7 million, respectively. Advertising expense amounted to
$139.2 million, $46.2 million and $54.9 million in 2000, 1999 and 1998,
respectively.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets.
Leasehold improvements are amortized over their estimated useful lives, or the
life of the related lease, whichever is shorter, using the straight-line
method.
Useful
Lives
(years) 2000 1999
--------------------------------------------------
Computer equipment 3 $147,018 $28,825
Machinery and equipment 3-10 10,313 10,863
Furniture and fixtures 5-10 12,771 8,135
Leasehold improvements 5-15 24,914 5,686
-------- -------
$195,016 $53,509
======== =======
Intangible/Other Assets
Intangible assets are amortized over periods ranging from two to nine years.
The Internet Group continually reviews the recoverability of the carrying
value of these assets using the methodology prescribed in Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The Internet
Group also reviews long-lived assets and the related intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of such assets may not be recoverable. Upon the occurrence of
such an event or change in circumstance, 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.
During 2000, the Internet Group recorded a $30.8 million non-cash impairment
charge, which is reported in other operating expenses, related to goodwill and
other intangible assets for an Internet business. Based upon a significant
decrease in revenues relative to budget, the Internet Group performed an
impairment assessment in accordance with SFAS No. 121, and accordingly wrote
the assets, primarily intangibles, down to their fair value, which was
determined based upon projected discounted future cash flows of that business.
II-19
Risk Management Contracts
The Company manages most treasury activities on a centralized basis,
including interest rate and foreign currency risk management. 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 and
foreign currency exchange rates, 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. Gains and losses on
hedging instruments attributed to the Internet Group were not material.
Stock Options
The Internet Group uses the intrinsic-value method of accounting for stock-
based awards granted to employees and, accordingly, does not recognize
compensation expense for its stock-based awards to employees in the Combined
Statements of Operations. See Note 8 for supplemental information on the
impact of the fair-value method of accounting for stock options.
Earnings Per Share
Walt Disney Internet Group common stock is a class of common stock of The
Walt Disney Company. Loss per share attributed to the Internet Group common
stock is presented in the consolidated results of operations for The Walt
Disney Company presented elsewhere herein.
2 Acquisitions and Dispositions
Starwave Acquisition
In April 1997, the Company acquired a 42% equity interest, and a majority
voting interest, in Starwave for $82.0 million in cash. The acquisition was
accounted for as a purchase. The excess of the purchase price over the fair
market value of net assets acquired of $66.4 million was attributed to
goodwill and is being amortized over five years. On May 1, 1998, the Company
acquired an additional 48% of Starwave in exchange for Company common stock
valued at approximately $141.2 million, increasing its equity ownership from
42% to 90%. The excess of the purchase price over the fair market value of net
assets acquired of $141.2 million was attributed to goodwill and is being
amortized over five years. The assets, liabilities and results of operations
related to Starwave were included in the Combined Financial Statements from
the date of acquisition through November 17, 1998. Starwave was acquired by
Infoseek on November 18, 1998.
During May 1998, as part of the Company's Internet strategy, management
committed to a plan to dispose of its interest in Starwave. Accordingly, the
Internet Group accounted for Starwave as held for sale effective in the third
quarter of 1998, and ceased depreciation and amortization of Starwave's
assets. At that time, the Internet Group's interest in Starwave's net assets
was $201.0 million, and from that period through September 30, 1998, after
elimination of intercompany revenues and expenses, Starwave had net revenues
of $400,000 and operating losses of $3.1 million. From October 1, 1998 through
November 17, 1998, Starwave's results of operations were not material.
Infoseek Acquisition/Starwave Disposition
On June 18, 1998, the Company reached an agreement for the acquisition of
Starwave by Infoseek, the purchase of additional shares of Infoseek common
stock for $70.0 million and the purchase of warrants for $139.0 million,
enabling it, under certain circumstances, to achieve a majority stake in
Infoseek. 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.
II-20
Upon completion of this transaction, the Company recognized a non-cash gain
of $345.0 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 Internet Group recorded intangible assets of $460.2 million,
including $420.8 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.
For the period from November 18, 1998 to November 17, 1999, the Internet
Group accounted for the investment in Infoseek under the equity method of
accounting. For the year ended September 30, 1999, the Internet Group recorded
$228.4 million of amortization related to intangible assets, a charge of $43.6
million for acquired in-process research and development costs, and its
portion of Infoseek's operating losses of $49.3 million. These amounts have
been reflected in equity in Infoseek loss in the Combined Statements of
Operations. As of September 30, 1999, the Internet Group's recorded investment
in Infoseek was $494.8 million.
The Company agreed to provide promotional services to Infoseek pursuant to a
promotion agreement entered into by the Company and Infoseek effective
November 18, 1998. The promotion agreement, which has been superseded by the
promotion policy described in Note 13 after the issuance of Internet Group
common stock discussed more fully below, provided that Infoseek pay the
Company $165.0 million over a five-year period. Annual charges under the
agreement ranged from $25.0 million to $41.0 million, with specific amounts
subject to each year's marketing plan to be agreed upon between the parties.
For the year ended September 30, 1999, the Company recorded revenues and
Infoseek recorded expenses amounting to $19.4 million under the terms of the
promotion agreement. Disney and the Internet Group also engaged in cross
promotion of their respective brands, intellectual property and programming.
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 Internet Group common stock, in exchange for outstanding
Infoseek shares, at an exchange rate of 1.15 shares of Internet Group common
stock for each Infoseek share. Upon consummation of the acquisition, the
Company combined its Internet and direct marketing businesses with Infoseek to
create a single Internet and direct marketing business called the Walt Disney
Internet Group.
The acquisition has been accounted for as a purchase, and the acquisition
cost of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over
the fair value of Infoseek's net assets, has been allocated to identifiable
intangible assets and goodwill of $1.9 billion, and is being amortized over
two to nine years. The Company determined the economic useful life of acquired
goodwill by giving consideration to the useful lives of Infoseek's
identifiable intangible assets, including developed technology, trademarks,
user base, joint venture agreements and in-place workforce. In addition, the
Company considered the competitive environment and the rapid pace of
technological change in the Internet industry. During the quarter ended
December 31, 1999, the Internet Group recorded charges for purchased in-
process research and development totaling $23.3 million, which are reported in
other operating expenses in the Combined Statements of Operations.
As discussed above, $43.6 million and $23.3 million, respectively, of the
November 18, 1998 and November 17, 1999 Infoseek purchase prices represent
purchased in-process technology that had not yet reached technological
feasibility and had no alternative future use. Accordingly, upon
II-21
consummation of the respective acquisitions, these amounts were immediately
expensed in the Combined Statements of Operations. The values assigned to
purchased in-process technology, based on valuations prepared by an
independent third-party appraisal company, were determined by identifying
research projects in areas for which technological feasibility had not been
established. The in-process technology development included development
efforts in Infoseek's core systems for its infrastructure, features and
content. The value was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows to their present value.
The Internet Group's combined results of operations have incorporated
Infoseek's activity on a consolidated basis since November 18, 1999.
The unaudited pro forma information below presents combined results of
operations of the Internet Group, as if the Infoseek acquisition had occurred
at the beginning of 1999. The unaudited pro forma information is not
necessarily indicative of the results of operations of the combined group had
the Infoseek acquisition occurred at the beginning of fiscal 1999, nor is it
necessarily indicative of future results.
Year Ended
September 30,
------------------------
(unaudited) 2000 1999
-------------------------------------------- ----------- -----------
Revenues $ 391,982 $ 348,081
Net loss (1,102,004) (1,021,739)
Net loss attributed to Internet Group common
stock (316,671) (285,341)
The pro forma amounts for the year exclude charges for purchased in-process
research and development costs of $23.3 million and $116.2 million in 2000 and
1999, respectively, and the Starwave gain in fiscal 1999.
Soccernet.com Acquisition
On June 30, 1999, the Internet Group acquired a 60% interest in a
partnership that owns Soccernet.com, a U.K. Web site, in exchange for Internet
Group common stock valued at approximately $23.7 million. The purchase price
was reflected as a liability in the Combined Balance Sheets until the Internet
Group stock was issued in November 1999. The Internet Group agreed to
guarantee the value of the stock for one year from the date of delivery. The
acquisition was accounted for as a purchase, and the excess of the purchase
price over the fair market value of net assets acquired of $39.5 million was
attributed to goodwill and is being amortized over three years. The assets,
liabilities and results of operations related to Soccernet.com have been
included in the Combined Financial Statements from the date of this
acquisition.
On June 30, 2000, the Internet Group acquired the remaining 40% interest in
Soccernet.com that it did not already own for $15.2 million in cash. The
acquisition has been accounted for as a purchase. The excess of the purchase
price over the fair value of the net assets acquired was $15.2 million and has
been recorded as goodwill, which is being amortized over its estimated useful
life of two years.
Toysmart.com Acquisition
On August 12, 1999, the Internet Group acquired a 61% interest in
toysmart.com, an online commerce business, in exchange for a commitment to
provide $25.0 million in cash and $20.0 million in promotional services
through December 2000. The Internet Group contributed $14.9 million and $19.0
million in cash and $14.5 million and $1.2 million in promotional services
pursuant to the agreement, during 2000 and 1999, respectively.
The acquisition was accounted for as a purchase, and the excess of the
purchase price over the fair market value of net assets acquired of $29.5
million was attributed to goodwill with an estimated
II-22
life of three years. In addition, $9.0 million was capitalized with respect to
deferred compensation resulting from the acquisition with an estimated useful
life of four years.
The assets, liabilities and results of operations related to toysmart.com
have been included in the combined financial statements from the date of
acquisition. As a result of toysmart.com's bankruptcy filing on June 9, 2000,
the Internet Group changed its method of accounting for toysmart.com from the
consolidation method to the cost method, effective June 9, 2000. The Internet
Group's investment in toysmart.com as of September 30, 2000 was not
significant.
Ultraseek Disposition
In July 2000, the Internet Group sold Ultraseek Corporation, a subsidiary
that provides intranet search software, which it had acquired as part of its
acquisitions of Infoseek. Proceeds from the sale consisted of shares of common
stock of the purchaser, Inktomi Corporation, a publicly held company, and
approximately $4 million in cash. As of the acquisition date, the Inktomi
stock was valued at $309.2 million. The sale resulted in a pre-tax gain of
$152.9 million ($39.3 million after tax). The Internet Group has sold 929,000
shares of the Inktomi common stock generating cash proceeds of $119.8 million
and a realized gain of $5.4 million. Since October 2000, the stock price of
Inktomi shares has declined, like those of many technology companies,
resulting in an unrealized loss of $153.6 million as of November 30, 2000 on
the remaining shares held by the Internet Group.
3 Reorganization
On July 10, 1999, the Company entered into an Agreement and Plan of
Reorganization (the Reorganization Agreement) with Infoseek. Pursuant to the
Reorganization Agreement, the Company proposed to acquire the remaining 58% of
Infoseek that it did not already own by issuing 1.15 shares of a new class of
common stock (Internet Group common stock) for each outstanding share of
Infoseek common stock.
The Infoseek merger and issuance of Internet Group common stock required
approvals by Infoseek and Company stockholders, respectively. Once approvals
were obtained, the Company combined its Internet and direct marketing
operations with Infoseek to establish a new reporting entity, the Internet
Group, and issued approximately 42.2 million shares of Internet Group common
stock, which trade under the ticker symbol "DIG," to track the performance of
the Internet Group. The Company also converted outstanding Infoseek stock
options into options exercisable for shares of Internet Group common stock.
As of November 18, 1999, the effective date of the Infoseek merger, Disney
retained an initial equity interest of approximately 72% in the Internet Group
and former Infoseek stockholders owned the remaining 28%. Shares of the
Company's existing common stock were renamed Disney common stock, and reflect
the performance of the Company's businesses other than the Internet Group,
plus Internet Group losses attributed to Disney.
Pursuant to the Reorganization Agreement, the Company has the right to
acquire an additional 18 million shares of Internet Group common stock,
representing an approximately 3% increase in Disney's initial retained
interest, at a 20% premium to market value, subject to a maximum price of
$43.48 per share.
II-23
In addition, the Company's Board of Directors may at any time after the
first anniversary of the effective date of the merger convert each outstanding
share of Internet Group common stock into Disney common stock at a rate equal
to the applicable percentage on the conversion dates below, of the market
value ratio, as defined, of Internet Group common stock to Disney common stock
prior to the notice of such conversion:
Any conversion date
occurring after the
following
anniversary of the Percentage of market
effective date of value ratio of
the merger and on or Internet Group
prior to the next common stock to
such anniversary: Disney common stock:
-------------------- --------------------
First 120%
Second 115%
Third through ninth 110%
Tenth and thereafter 105%
4 Borrowings
On November 18, 1998, the Internet Group purchased warrants from Infoseek
(Note 2) in exchange for a note payable over five years bearing interest at
6.5% annually, with principal and interest payable in 20 quarterly
installments, beginning February 18, 1999. At September 30, 1999, borrowings
under the Infoseek note payable totaled $118.2 million, of which $27.8 million
has been included in the current portion of borrowings in the Combined Balance
Sheets. Effective November 18, 1999, the Internet Group acquired the remaining
58% of Infoseek that it did not already own (Note 2), and as a result the
Infoseek note payable is no longer outstanding.
II-24
5 Income Taxes
2000 1999 1998
- ----------------------------------------------------------------------------
Loss Before Income Taxes and Minority
Interests $(1,124,783) $(98,166) $(111,180)
=========== ======== =========
Income Tax (Benefit) Provision
Current
Federal $ (115,891) $(41,523) $ (30,449)
State (7,139) (4,549) (2,080)
----------- -------- ---------
(123,030) (46,072) (32,529)
----------- -------- ---------
Deferred
Federal 34,551 8,548 (2,905)
State 40 937 (199)
----------- -------- ---------
34,591 9,485 (3,104)
----------- -------- ---------
$ (88,439) $(36,587) $ (35,633)
=========== ======== =========
Components of Deferred Tax Assets and
Liabilities
Deferred tax assets
Net operating loss carryforward $ (40,807) $ --
Unearned revenue (2,057) (2,057)
Accrued liabilities (12,141) (6,936)
Investments (20,046) --
----------- --------
Total deferred tax assets (75,051) (8,993)
----------- --------
Deferred tax liabilities
Depreciable, amortizable and other
property 18,810 2,905
Investments -- 55,491
----------- --------
Total deferred tax liabilities 18,810 58,396
----------- --------
Net deferred tax (asset) liability
before valuation allowance (56,241) 49,403
Valuation allowance 3,862 --
----------- --------
Net deferred tax (asset) liability $ (52,379) $ 49,403
=========== ========
Reconciliation of Effective Income Tax
Rate
Federal income tax rate (35.0)% (35.0)% (35.0)%
Nondeductible amortization of
intangible assets 22.7 -- 2.2
State taxes, net of federal income tax
benefit (0.4) (2.4) (2.4)
Effect of valuation allowance -- -- 3.1
Dispositions 4.7 -- --
Other, net 0.1 0.1 0.1
----------- -------- ---------
(7.9)% (37.3)% (32.0)%
=========== ======== =========
Deferred tax assets at September 30, 2000, were reduced by a valuation
allowance relating to a portion of the tax benefits attributable to certain
net operating losses (NOLs) reflected on state tax returns of Infoseek and its
subsidiaries for periods prior to the acquisition of Infoseek by the Internet
Group on November 17, 1999 (Note 2), where applicable state tax laws limit the
utilization of such NOLs. Since this valuation allowance relates to acquired
deferred tax assets, the subsequent realization of these tax benefits would
result in the application of the allowance amount as a reduction to goodwill.
Deferred tax assets at September 30, 1999, do not include the NOLs of Infoseek
and its subsidiaries, as the Internet Group's investment in Infoseek was
accounted for under the equity method prior to the November 17, 1999
acquisition.
At September 30, 2000, approximately $121.0 million of NOL carryforwards is
available to offset taxable income of both Disney and the Internet Group
through the year 2019. While the acquisition of
II-25
Infoseek by the Company constituted a change in ownership as defined under
Section 382 of the Internal Revenue Code, the resulting annual limitation on
the use of Infoseek's pre-change NOLs exceeds the remaining amount of NOL
carryforwards and will not limit their utilization.
The Company files a consolidated federal income tax return and certain state
income tax returns that include Internet Group and Disney results. Income tax
benefits have been allocated to the Internet Group in amounts equal to the
Federal and state tax effects that its operations have had on the Company's
consolidated income tax provisions.
If the Internet Group were required to prepare its federal and state income
tax returns on a separate return basis, the tax benefits attributed to the
Internet Group by Disney would not be realizable in the current periods, as
presented in the Combined Statements of Operations. In addition, on a separate
return basis, the deferred tax assets presented above and in the Combined
Balance Sheets would be fully reserved.
In 2000, income tax benefits of $15.3 million attributable to employee stock
option transactions were credited to group equity.
II-26
6 Pension and Other Benefit Programs
The Company maintains pension 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 Securities Act of 1974. Pension
benefits are generally based on years of service and/or compensation.
Obligations and costs related to the Internet Group's postretirement medical
benefit plans are not material to the Internet Group's financial condition or
results of operations.
The following chart summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated
with the pension plans for the Internet Group.
Pension Plans
-----------------
2000 1999
-------- -------
Reconciliation of funded status of the plans and the
amounts included in the Combined Balance Sheets:
Projected benefit obligations
Beginning obligations $ (2,021) $(2,176)
Service cost (457) (501)
Interest cost (151) (147)
Actuarial gains 514 803
Curtailment gain 195 --
-------- -------
Ending obligations (1,920) (2,021)
-------- -------
Fair value of plans' assets
Beginning fair value 1,510 1,356
Actual return on plans' assets 461 167
Expenses (27) (13)
-------- -------
Ending fair value 1,944 1,510
-------- -------
Funded status of the plans 24 (511)
Unrecognized net (gain) loss (658) 147
-------- -------
Net balance sheet liability $ (634) $ (364)
======== =======
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 86 $ 144
Accrued benefit liability (914) (689)
Accumulated other comprehensive income 194 181
-------- -------
$ (634) $ (364)
======== =======
Rate Assumptions:
Discount rate 8.0% 7.5%
Rate of return on plans' assets 10.0% 10.5%
Salary increases 5.5% 5.1%
Annual increase in cost of benefits n/a n/a
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 $1.6 million, $1.6 million and $0.9
million for 2000, respectively, and $1.4 million, $1.3 million and $0.7
million for 1999, respectively.
The Internet Group's accumulated pension benefit obligations at September
30, 2000 and 1999 were $1.9 million and $1.8 million, of which 69.5% and 60.0%
were vested, respectively.
II-27
Pension plan expense for 2000, 1999 and 1998 totaled $0.5 million, $0.6
million and $0.1 million, respectively. The discount rate, rate of return on
plan assets and salary increase assumptions for the pension plans were 6.8%,
10.5% and 4.4%, respectively, in 1998.
After July 1, 2000, Internet Group employees were no longer eligible to
participate in the pension plans. As a result, the Internet Group recorded a
$0.2 million curtailment gain in 2000.
On April 1, 2000, the Company established the GO.com Savings and Investment
Plan, which allows eligible employees to allocate up to 15% of their salary to
the plan through payroll deductions. The Company matches 50% of the employee's
pre-tax contributions up to plan limits. Total plan expense was $0.8 million
for 2000.
7 Group Equity
As described more fully in Note 2, effective November 17, 1999, the Company
completed its acquisition of Infoseek via the creation and issuance of a new
class of common stock, called Internet Group common stock. Upon issuance of
the Internet Group common stock, shares of the Company's existing common stock
were reclassified as Disney common stock, to track the financial performance
of the Company's businesses other than the Internet Group, plus Internet Group
losses attributed to Disney.
In April 2000, the Company's Board of Directors approved a share repurchase
program for up to five million shares of Internet Group common stock in the
open market. During 2000, the Internet Group repurchased 908,533 shares at a
cost of $11.4 million under this program. The Company was authorized to
repurchase approximately 4.1 million additional Internet Group shares as of
September 30, 2000.
8 Stock Incentive Plans
Eligible employees of the Internet Group participate in various Company
stock option plans. Under the 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 for Disney common stock become exercisable over a five-year
period from the grant date and expire 10 years after the date of grant.
Options for Internet Group common stock become exercisable over a four-year
period from the grant date and expire 10 years after the date of grant.
Internet Group shares available for future option grants at September 30, 2000
totaled 5.1 million.
The following table summarizes information about Disney stock option
transactions related to Internet Group employees (shares in thousands):
2000 1999 1998
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year 4,872 $28.60 2,920 $27.58 1,164 $21.58
Transfers, net(/1/) 485 22.91 1,566 26.38 --
Awards canceled (1,462) 30.16 (678) 26.90 (509) 27.87
Awards granted 1,481 30.22 1,127 32.93 2,407 30.16
Awards exercised (521) 24.04 (63) 21.57 (142) 21.03
------ ----- -----
Outstanding at September 30 4,855 $28.55 4,872 $28.60 2,920 $27.58
====== ===== =====
Exercisable at September 30 1,704 $24.90 1,319 $22.93 611 $22.60
====== ===== =====
- --------
(1) Primarily represents options for Disney shares that employees received
prior to their transfer to the Internet Group.
II-28
The following table summarizes information about Internet Group stock option
transactions (shares in thousands):
2000
----------------
Weighted
Average
Exercise
Shares Price
------ --------
Outstanding at beginning of year 11,661 $24.54
Options converted(/1/) (8,749) 28.79
Awards granted 27,632 20.48
Awards exercised (2,366) 7.20
------
Outstanding at September 30 28,178 $20.70
======
Exercisable at September 30 1,834 $26.43
======
- --------
(1) Represents options held by Infoseek shareholders that were converted into
options to purchase Internet Group common stock on November 17, 1999, when
the Company acquired the remaining interest in Infoseek (Note 2).
The following table summarizes information about Disney stock options
outstanding at September 30, 2000 related to Internet Group employees (shares
in thousands):
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 44 0.2 $ 8.15 44 $ 8.15
$10-$14 191 3.7 13.41 173 13.34
$15-$19 298 3.4 16.90 120 17.86
$20-$24 773 5.5 21.46 616 21.45
$25-$29 1,445 8.5 26.71 312 26.69
$30-$34 811 8.7 33.75 107 33.95
$35-$39 1,147 7.2 36.79 332 37.34
$40-$44 146 9.7 40.37 -- --
----- -----
4,855 1,704
===== =====
The following table summarizes information about Internet Group stock
options outstanding at September 30, 2000 (shares in thousands):
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
-------- ---------- ------------------ -------- ---------- --------
$ 0-$ 4 291 5.4 $ 1.16 265 $ 0.87
$ 5-$ 9 288 6.7 8.32 206 8.08
$10-$14 14,306 9.7 12.14 38 14.36
$15-$19 212 7.4 17.11 112 17.09
$20-$24 1,471 9.3 21.97 36 23.28
$25-$29 5,450 9.2 25.94 393 26.56
$30-$34 120 8.3 31.90 32 32.48
$35-$39 5,360 9.0 35.70 463 37.13
$40-$44 403 8.3 43.47 165 43.51
$45-$100 277 7.8 60.86 124 60.09
------ -----
28,178 1,834
====== =====
II-29
The following table reflects pro forma net loss attributed to the Internet
Group had the Internet Group elected to adopt the fair value approach of SFAS
123:
2000 1999 1998
----------- -------- --------
Net loss:
As reported $(1,016,332) $(59,256) $(71,070)
Pro forma (1,052,966) (64,558) (74,369)
Net loss attributed to Internet Group common
stock:
As reported $ (275,627)
Pro forma (286,153)
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 Disney options at their grant date
during 2000, 1999 and 1998, where the exercise price equaled the market price
on the grant date, were $12.49, $11.11 and $10.82, 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 2000 and 1999. The estimated fair value of each
Disney option granted is calculated using the Black-Scholes option-pricing
model. The weighted average assumptions used in the model were as follows:
Disney Shares 2000 1999 1998
------------- ---- ---- ----
Risk-free interest rate 6.5% 5.3% 5.4%
Expected years until exercise 6.0 6.0 6.0
Expected stock volatility 26% 25% 23%
Dividend yield .59% .69% .71%
The weighted average fair values of the Internet Group options at their
grant date during 2000, where the exercise price equaled the market price on
the grant date, was $15.00. The estimated fair value of each Internet Group
option granted is calculated using the Black-Scholes option-pricing model. The
weighted average assumptions used in the model were as follows:
Internet Group Shares 2000
--------------------- ----
Risk-free interest rate 6.4%
Expected years until exercise 6.0
Expected stock volatility 80.0%
Dividend yield 0.0%
II-30
9 Detail of Certain Balance Sheet Accounts
2000 1999
- -----------------------------------------------------------------------------
Prepaid and other assets
Prepaid costs $ 15,507 $10,408
Other 2,480 3,497
---------- -------
$ 17,987 $13,905
========== =======
Intangible assets, net
Costs in excess of net assets acquired $2,106,114 $69,002
Accumulated amortization (736,969) (4,613)
---------- -------
$1,369,145 $64,389
========== =======
Accounts payable and other accrued liabilities
Accounts payable $ 38,595 $21,391
Payroll and employee benefits 31,410 4,473
Accrued liabilities 73,470 35,662
Liability related to acquisition of Soccernet (Note 2) -- 23,700
Other -- 5,771
---------- -------
$ 143,475 $90,997
========== =======
10 Segments
The operating segments reported below are the segments of the Internet Group
for which separate financial information is available and for which operating
income or loss amounts are evaluated regularly by executive management in
deciding how to allocate resources and in assessing performance. The
accounting policies of the business segments are the same as those described
in the summary of significant accounting policies (Note 1).
Operating income (loss) amounts evaluated include earnings (loss) before
amortization of intangible assets, corporate and other activities, equity in
Infoseek loss, net interest expense or income, income taxes and minority
interests. Corporate and other activities principally consists of executive
management, certain unallocated administrative support functions and income or
loss from equity investments, excluding Infoseek.
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, all
significant intersegment transactions have been eliminated.
Business Segments 2000 1999 1998
- ---------------------------------------------------------------------------
Revenues
Direct Marketing $ 114,766 $148,127 $ 191,808
Internet 253,747 58,286 67,764
----------- -------- ---------
Total Combined Revenues $ 368,513 $206,413 $ 259,572
=========== ======== =========
Operating (loss) income
Direct Marketing $ (29,942) $(23,359) $ (18,580)
Internet(/1/) (371,321) (70,133) (75,373)
----------- -------- ---------
(401,263) (93,492) (93,953)
Gain on sale of Ultraseek 152,869 -- --
Gain on sale of Starwave -- 345,048 --
----------- -------- ---------
(248,394) 251,556 (93,953)
Amortization of intangible assets 790,774 4,613 6,639
----------- -------- ---------
Total Combined Operating (Loss) Income $(1,039,168) $246,943 $(100,592)
=========== ======== =========
II-31
Business Segments 2000 1999 1998
- -------------------------------------------------------------------
Capital expenditures
Direct Marketing $ 3,720 $ 7,698 $ 16,973
Internet 54,040 9,232 9,619
---------- -------- --------
Total Combined Capital Expenditures $ 57,760 $ 16,930 $ 26,592
========== ======== ========
Depreciation expense
Direct Marketing $ 3,644 $ 3,098 $ 1,632
Internet 30,490 4,977 7,918
---------- -------- --------
Total Combined Depreciation Expense $ 34,134 $ 8,075 $ 9,550
========== ======== ========
Amortization expense
Direct Marketing $ -- $ -- $ --
Internet 790,774 4,613 6,639
---------- -------- --------
Total Combined Amortization Expense $ 790,774 $ 4,613 $ 6,639
========== ======== ========
Identifiable assets
Direct Marketing $ 67,790 $ 81,705 $ 91,723
Internet(/2/) 1,887,457 624,719 244,222
---------- -------- --------
Total Combined Assets $1,955,247 $706,424 $335,945
========== ======== ========
Supplemental revenue data
Internet
Media $ 179,069 $ 34,828 $ 51,604
Commerce--Third Parties 47,468 12,649 7,560
Commerce--Affiliates 27,210 10,809 8,600
---------- -------- --------
Total Internet Revenues $ 253,747 $ 58,286 $ 67,764
========== ======== ========
Geographic Segments 2000 1999 1998
- -------------------------------------------------------------------
Revenues
United States $ 344,466 $203,844 $ 259,572
Europe 11,709 2,514 --
Asia Pacific 10,894 55 --
Latin America, Canada and Other 1,444 -- --
----------- -------- ---------
$ 368,513 $206,413 $ 259,572
=========== ======== =========
Operating (loss) income
United States(/1/) $(1,005,610) $254,536 $(100,592)
Europe (19,952) (6,741) --
Asia Pacific (15,082) (856) --
Latin America, Canada and Other 1,476 4 --
----------- -------- ---------
$(1,039,168) $246,943 $(100,592)
=========== ======== =========
Identifiable assets
United States(/2/) $ 1,915,491 $668,488 $ 335,945
Europe 33,314 37,936 --
Asia Pacific 6,442 -- --
----------- -------- ---------
$ 1,955,247 $706,424 $ 335,945
=========== ======== =========
- --------
(1) The 2000 balance includes an impairment charge of $30.8 million related to
goodwill and other intangible assets.
(2) Included in amounts are equity investments totaling $21.4 million, $497.5
million and $0.7 million for 2000, 1999 and 1998, respectively.
II-32
11 Financial Instruments
Investments
As of September 30, 2000 and 1999, the aggregate fair values of securities
classified as available-for-sale were $196 million and $7.7 million,
respectively. Realized gains and losses are determined principally on an
average cost basis. Total proceeds from sales of available-for-sale securities
were $119.8 million in 2000. In 2000, the Internet Group recognized $5.4
million in gains on sales of securities. The Internet Group has assessed the
recoverability of certain investments and has determined that it will be
unable to recover a portion of the carrying amount of such investments as of
September 30, 2000. Accordingly, the Internet Group has recorded a charge of
$36.5 million to reflect impairments as of September 30, 2000 in the values of
these investments. In 2000, gross unrealized losses on available-for-sale
securities were $18.8 million. In 1999, gross unrealized gains on available-
for-sale securities were $1.5 million.
Fair Value of Financial Instruments
At September 30, 2000 and 1999, the Internet Group's financial instruments
included cash, cash equivalents, receivables and accounts payable. The fair
values of these financial instruments approximated carrying values because of
the short-term nature of these instruments. The estimated fair values of the
Internet Group's investments subject to fair value disclosures, determined
based on broker quotes or quoted market prices, were equal to the carrying
values at September 30, 2000 and 1999.
Credit Concentrations
The Company manages most treasury activities on a centralized basis. 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. In
addition, the Company limits its exposure to any one financial institution and
has policies requiring collateral under certain circumstances to mitigate
default risk. Consequently, the Internet Group would not realize a material
loss as of September 30, 2000 in the event of nonperformance by any Company
counterparty.
The Internet Group's trade receivables do not represent a significant
concentration of credit risk at September 30, 2000 due to its diverse customer
base. The Internet Group generally does not require collateral and its trade
receivables are unsecured.
12 Commitments and Contingencies
The Company has various real estate operating leases, including leases for
the Internet Group's office space for general and administrative purposes.
Costs for facilities and related services have been allocated to the Internet
Group based upon anticipated usage, and such amounts have been reported as
rent expense. However, the Internet Group is not obligated to the Company
under any formal lease agreements. In addition, the Internet Group occupies
facilities under terms of non-cancelable operating leases, subject to
extensions in certain cases at the Internet Group's option. The Company's
future minimum lease payments on the Internet Group occupied facilities and
the Internet Group's future minimum lease payments for its warehouses and
other facilities under non-cancelable operating leases totaled $89.1 million
at September 30, 2000, payable as follows:
2001 $16,437
2002 15,478
2003 13,109
2004 10,855
2005 9,526
Thereafter 23,682
II-33
Rental expense during 2000, 1999 and 1998, was $16.2 million, $2.6 million
and $1.0 million, respectively.
During 2000, the Company, along with the Internet Group, committed to
funding a joint venture investment vehicle. The Internet Group's share of the
committed funding is approximately $35 million, plus additional amounts for
funding of the joint venture's operations.
In November 2000, the Internet Group entered into an agreement to purchase
approximately $40.0 million in computer equipment and services over a three-
year period.
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 or the Internet
Group 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 or the
Internet Group's liquidity or operating results.
13 Related Party Transactions
The terms of all material transactions, relationships and other matters
between Disney and the Internet Group, including those as to which Disney and
the Internet Group may have potentially divergent interests, are determined on
a basis that the Company's Board of Directors, or management following
guidelines or principles established by the Company's Board of Directors,
considers to be in the best interests of the Company and its stockholders as a
whole. It is not a requirement that any such material transaction,
relationship or other matter be on terms that would be considered commercially
reasonable in the context of a transaction between unrelated parties, or that
would be considered comparable to terms that could be obtained through arm's-
length negotiations between unrelated parties, or that would be considered
satisfactory under any other similar standard of review.
Disney has provided all necessary funding for the operations and investments
of the Internet Group from the time of its inception until the Infoseek merger
on November 17, 1999 (Note 2). Such funding, with the exception of $19.0
million, was accounted for as capital contributions from Disney. Capital
contributions during 2000, 1999 and 1998 were $38.2 million, $166.5 million
and $237.2 million, respectively.
Through a separate agreement dated August 18, 1999, Disney and Infoseek
agreed that the funding provided for the Internet Group's investment in
toysmart (Note 2) of $19.0 million would be treated as a loan from Disney.
During 1999, interest charges related to the loan totaled $0.2 million.
The Company will account for all cash transfers from the Internet Group to
Disney or vice versa (other than transfers in return for assets or services
rendered or transfers in respect to dividends attributable to Disney paid on
Internet Group common stock) as inter-group short-term loans unless the
Company's Board of Directors determines that a given transfer (or type of
transfer) should be accounted for (1) as a long-term loan, (2) as a capital
contribution increasing Disney's retained interest in the Internet Group or
(3) as a return of capital reducing Disney's retained interest in the Internet
Group. There are no specific criteria to determine when the Company will
account for a cash transfer as a long-term loan, a capital contribution or a
return of capital, rather than an inter-group short-term loan. However, cash
advances from Disney to the Internet Group on or after November 18, 1999 up to
$250.0 million on a cumulative basis, will be accounted for as short-term or
long-term loans at interest rates at which the Company could borrow such funds
and will not be accounted for as capital contributions. At September 30, 2000,
the Internet Group had a loan payable to Disney of $222.9 million bearing
interest at a weighted average interest rate of 6.6% for 2000. During 2000,
interest charges related to the loan totaled $1.9 million.
II-34
Cash proceeds generated from the Internet Group's sale of Inktomi shares
acquired in the Ultraseek sale (Note 2) were loaned to Disney. The loan
receivable balance, which includes principal and interest, was $124.1 million
as of September 30, 2000. The loan receivable bears interest at a rate equal
to the Euro Currency Rate plus the Euro Currency Rate Margin (7.1% at
September 30, 2000) and is due on July 31, 2005. During 2000, interest income
related to the loan totaled $0.8 million.
The Internet Group derived revenues from the development of Web sites for
Disney business units totaling $20.7 million, $8.7 million and $8.4 million
during 2000, 1999 and 1998, respectively.
In 1998, the Internet Group began selling tickets and travel packages online
for Disney's theme parks and resorts. The Internet Group received commissions
from Disney of 5% of ticket and 10% of travel package revenues, amounting to
$6.5 million, $2.0 million and $0.2 million in the aggregate during 2000, 1999
and 1998, respectively.
The Direct Marketing operations acquire Disney-themed merchandise for resale
directly from other Disney businesses and through Disney units acting as
brokers in sourcing merchandise from diverse manufacturers. The Internet
Group's direct purchases amounted to $3.8 million, $5.1 million and $10.8
million in 2000, 1999 and 1998, respectively. For the same periods, the
Internet Group's purchases through Disney sourcing entities amounted to $29.5
million, $30.0 million and $50.2 million, respectively.
During 1998, the Internet Group paid Disney $1.0 million for the use of the
Internet Zone site within the Innoventions attraction at the Epcot theme park.
Promotional services are provided by Disney for the Internet Group. The
form, amount and cost allocations are determined by or under the supervision
of the Company's Board of Directors. Cost allocations are on terms and rates
no less favorable to the Internet Group than those that would apply to
comparable services provided to unaffiliated third parties and may be on
substantially more favorable terms. Total promotional service charges amounted
to $1.0 million during 2000 and were immaterial in 1999 and 1998.
The Company allocates the cost of corporate general and administrative (G&A)
services and facilities to the Internet Group generally based on utilization.
Where determinations based on utilization alone are impracticable, the Company
uses other methods and criteria that management believes to be equitable and
to provide a reasonable estimate of costs attributable to the Internet Group.
Corporate G&A allocations included in the Combined Statements of Operations
include charges for legal, accounting (tax and financial), treasury, tax
planning and strategic planning services; risk management; employee benefit
plans and administration thereof; information and telecommunications services;
purchasing and material procurement; public and investor relations; corporate
travel; and corporate offices, warehouses and other facilities. G&A
allocations include, without limitation, all costs and expenses of personnel
employed in connection with such services and facilities, including payroll,
payroll taxes and fringe benefit costs; all overhead costs and expenses
directly related to such personnel and the services or facilities provided by
them; and all materials used in connection with such services or facilities.
The Company believes that the costs allocated are comparable to the costs that
would be incurred if the Internet Group would have been operating on a stand-
alone basis.
The Internet Group incurred direct charges from Disney, primarily related to
facilities, legal, sourcing and information system services, totaling $9.2
million, $7.7 million and $5.8 million during 2000, 1999 and 1998,
respectively.
Corporate and other activities includes charges from Disney for indirect
corporate G&A expenses. Total indirect charges amounted to $7.5 million, $7.5
million and $12.5 million during 2000, 1999 and 1998, respectively.
II-35
Disney has licensed to the Internet Group the nonexclusive right to use
Disney's intellectual property in the conduct of its business, as defined, in
exchange for a royalty equal to 1.25% of defined net revenues, excluding
revenues derived from the operation of DisneyStore.com. Royalties will not be
deemed earned by Disney until the first full year in which the Internet Group
generates positive earnings before interest, taxes and amortization (EBITA).
Royalties in any year may not exceed 25% of the Internet Group's EBITA. No
royalties were payable in 2000, 1999 or 1998.
Royalties equal to 8% of actual costs, as defined, for Disney-branded
merchandise purchased by DisneyStore.com are earned by and payable to Disney
at the completion of the first full year in which the Internet Group generates
positive EBITA. Such royalties may not exceed 30% of DisneyStore.com's EBITA
in any year. No royalties were payable in 2000, 1999 or 1998.
14 Subsequent Event
In November 2000, the Internet Group entered into an agreement to sell
Infoseek Japan K.K., a Japanese subsidiary that operates a search portal
business in Japan, for total cash consideration of 9.0 billion yen or
approximately $81 million. The transaction is expected to close in the first
quarter of fiscal 2001.
II-36
WALT DISNEY INTERNET GROUP
QUARTERLY FINANCIAL SUMMARY
(In thousands)
(unaudited)
December 31 March 31 June 30 September 30
- ----------------------------------------------------------------------------
2000
Revenues $ 102,143 $ 97,576 $ 86,346 $ 82,448
Operating loss(/1/) (203,428) (359,838) (313,936) (161,966)
Net loss(/2/) (202,466) (292,203) (272,168) (249,495)
1999
Revenues $ 76,586 $ 41,567 $ 41,645 $ 46,615
Operating income (loss)(/3/) 341,378 (18,130) (20,930) (55,375)
Net income (loss)(/4/) 151,905 (64,238) (63,434) (83,489)
- --------
(1) Reflects a $152.9 million gain on sale of Ultraseek in the fourth quarter
of 2000. See Note 2 to the Combined Financial Statements.
(2) Reflects equity in Infoseek loss of $40.6 million in the first quarter of
2000. See Note 2 to the Combined Financial Statements.
(3) Reflects $345 million gain on the sale of Starwave in the first quarter of
1999. See Note 2 to the Combined Financial Statements.
(4) Reflects equity in Infoseek loss of $95.3 million, $76.8 million, $73.5
million and $75.8 million for each of the four quarters in 1999,
respectively. See Note 2 to the Combined Financial Statements.
II-37
[DISNEY RECYCLING LOGO]