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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, 1997 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
(818) 560-1000 95-4545390
Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange
Title of Each Class on Which Registered
New York Stock Exchange
Common Stock, $.01 par value Pacific 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, 1997, the aggregate market value of registrant's common
stock held by non-affiliates (based on the closing price on such date as
reported on the New York Stock Exchange-Composite Transactions) was $62.1
billion. 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 677,912,655 shares of common stock outstanding as of December 17,
1997 (including 170 shares held by TWDC Stock Compensation Fund, an affiliate
of the Company).
Documents Incorporated by Reference
Certain information required for Part III of this report is incorporated
herein by reference to an amendment to this report on Form 10-K/A to be filed
within 120 days after the end of the fiscal year covered by this report.
PART I
ITEM 1. BUSINESS
The Walt Disney Company, together with its subsidiaries, is a diversified
worldwide entertainment company with operations in three business segments:
Creative Content, Broadcasting and Theme Parks and Resorts. Information on
revenues, operating income, identifiable assets and supplemental revenue of
the Company's business segments appears in Note 11 to the Consolidated
Financial Statements included in Item 8 hereof. The Company employs
approximately 108,000 people.
On February 9, 1996, the Company completed its acquisition of ABC, Inc.
("ABC"). Information on the acquisition appears in Note 2 to the Consolidated
Financial Statements included in Item 8 hereof. As a result of the
acquisition, a new parent company, with the name "The Walt Disney Company,"
replaced the old parent company of the same name. For convenience, the term
"Company" is used in this report to refer to both the old and the new parent
company. Unless the context otherwise requires, the term is also used to refer
collectively to the parent company and the subsidiaries through which its
various businesses are actually conducted.
CREATIVE CONTENT
The Creative Content segment produces live-action and animated motion
pictures, television programs and musical recordings, licenses the Company's
characters and other intellectual property for use in connection with
merchandise and publications, and publishes books and magazines. Within the
segment, films and characters are often promoted through the release of
audiocassettes and compact discs, children's books and magazines. In addition,
television programs have been created that contain characters originated in
animated films. Character merchandising and publications licensing promote the
Company's films and television programs, as well as the Company's other
operations. The Company also operates the Disney Stores, which are direct
retail distribution outlets for products based on the Company's characters and
films. The Company is also engaged directly in the home video and television
distribution of its film and television library.
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 producing original television programming for the
network and first-run syndication markets. In addition, the Company produces
music recordings and live stage plays. The Company licenses the name "Walt
Disney," as well as the Company's characters, visual and literary properties
and songs and music, to various consumer manufacturers, retailers, show
promoters and publishers throughout the world. Company subsidiaries also
engage in direct retail distribution through The Disney Stores; publish books,
magazines and comics in the United States and Europe; and produce popular
music, children's audio products and computer software for all markets, as
well as film and video products for the educational marketplace.
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, Hollywood Pictures and
Caravan Pictures. Another subsidiary, Miramax Film Corp., acquires and
produces motion pictures that are primarily distributed under the Miramax
banner. The Company also produces and distributes animated motion pictures
under the banner Walt Disney Pictures. In addition, the Company distributes
films produced or acquired by certain independent production companies.
The Company is in the process of implementing a new motion pictures
strategy, which is being phased-in over the next several years. The Company
intends to release fewer films, but increase per film expenditures.
Accordingly, total film expenditures are expected to approximate current
levels.
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During 1998, the Company expects to distribute approximately 20 feature films
under the Company's various banners and approximately 30 additional films
under the Miramax banner, including several live-action family feature films
and one to two full-length animated films, with the remainder targeted to
teenagers and adults. In addition, the Company periodically reissues
previously released animated films. As of September 30, 1997, the Company had
released 480 full-length live-action features (primarily color), 35 full-
length animated color features and approximately 476 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 1997, 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 three 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. In 1997, the Company distributed seven of the ten
top-selling home videos. As of September 30, 1997, approximately 1,100
produced and acquired titles, including 531 feature films and 408 cartoon
shorts and animated features, were available to the domestic marketplace.
Approximately 880 produced and acquired titles, including 468 feature films
and 415 cartoon shorts and animated features, were available to the
international home entertainment market.
TELEVISION PRODUCTION AND DISTRIBUTION
The Company develops, produces and distributes television programming to
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 focuses on the development, production and
distribution of half-hour comedies and one-hour dramas for network prime-time
broadcast. The fall 1997 series included renewals of the half-hour comedies
Home Improvement, Ellen, Boy Meets World and Spin City. New half-hour series
premiering in fall 1997 included Soul Man, Hiller and Diller and Teen Angel.
The Company is also producing 18 original television movies for the relaunch
of The Wonderful World of Disney, which began airing on ABC Sunday evenings in
fall 1997. The 1997-98 television season features the launch of Disney's One
Saturday Morning on ABC. One Saturday Morning is a two-hour live-action show
comprised of audience participation segments, cartoons and pre-recorded comedy
segments that "wrap-around" the weekly series Brand Spankin' New Doug,
Disney's Recess and Disney's Pepper Ann. Other television Animation series on
ABC include 101 Dalmatians: The Series, Jungle Cubs and The New Adventures of
Winnie The Pooh.
The Company also provides a variety of prime-time specials for exhibition on
network television. Additionally, the Company produces first-run animated and
live-action syndicated programming. The Disney Afternoon is a 1 1/2 hour
block, airing five days per week, including 101 Dalmatians, Quack Pack, Mighty
Ducks and Ducktales. Live-action programming includes Live! With Regis and
Kathie Lee, a daily talk show; The Keenen Ivory Wayans Show, a daily late-
night talk show; Honey, I Shrunk the Kids, a weekly family action hour; Siskel
& Ebert, a weekly motion picture review program; Disney Presents, Bill Nye the
Science Guy, and Sing Me a Story with Belle, weekly educational programs for
children as well as daily game shows on cable including Debt, Make Me Laugh,
and Win Ben Stein's Money.
The Company licenses the theatrical and television film library to the
domestic television syndication market. Television programs in off-network
syndication or cable include Home Improvement, Boy Meets World, Blossom,
Dinosaurs, Golden Girls and Empty Nest. Major packages of the Company's
feature films and television programming have been licensed for broadcast over
several years.
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The Company also licenses its theatrical and television properties in a
number of foreign television markets. In addition, certain of the Company's
television programs are syndicated by the Company abroad, including The Disney
Club, a weekly series that the Company produces for foreign markets.
The Company has licensed to the Encore pay television service, over a multi-
year period, exclusive domestic pay television rights to certain films
released under the Miramax, Touchstone, Hollywood and Walt Disney Pictures
banners.
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, television programs and records and exploits the song
copyrights created for the Company by licensing others to produce and
distribute printed music, records, audiovisual devices and public
performances.
Domestic retail sales of compact discs, audiocassettes and records are the
largest source of music-related revenues, while direct marketing, which
utilizes catalogs, coupon packages and television, is a secondary means of
music distribution for the Company.
The Company's Hollywood Records subsidiary develops, produces and markets
recordings from new talent across the spectrum of popular music, as well as
soundtracks from certain of the Company's live-action motion pictures. The
Company also has a Nashville-based music label, Lyric Street Records.
In September 1997, the Company purchased Mammoth Records, which develops,
produces and markets a diverse group of artists in the popular and alternative
music fields.
WALT DISNEY THEATRICAL PRODUCTIONS
In 1994, the Company produced an adaptation of its animated feature film
Beauty and the Beast for the Broadway stage. The production celebrated its
fourth anniversary on Broadway this year and is currently touring the United
States. The show has also been produced in six countries around the world. In
November 1997, the Broadway production of The Lion King opened at the newly
renovated New Amsterdam Theatre.
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, watches, toys, gifts,
housewares, stationery, sporting goods and domestic items such as sheets and
towels. 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 1997, the Company opened 58 new stores in the
United States and Canada, 19 in Europe and 29 in the Asia-Pacific area,
bringing the total number of stores to 636 as of
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September 30, 1997. The Company expects to open additional stores in the
future in selected markets throughout the United States, as well as in Asia-
Pacific, European and Latin American countries.
BOOKS AND MAGAZINES
The Company has book imprints in the United States offering books for
children and adults. The Company also produces several magazines including W,
Jane, Los Angeles, Family Fun, Disney Adventures as well as Discover, a
general science magazine. In addition, the Company is a partner in a joint
venture which produces children's books and magazines and computer software
magazines in France.
MULTIMEDIA
Disney Interactive is a software business that licenses, develops and
markets entertainment and educational computer software and video game titles
for home and school. The Disney Online business develops, publishes and
distributes content for narrow-band on-line services, the interactive software
market, interactive television platforms, Internet web sites, including
Disney.com and Disney's Daily Blast, and other emerging technology ventures.
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 success of the Creative Content operations is heavily dependent upon
public taste, which is unpredictable and subject to change. In addition,
filmed entertainment operating results fluctuate due to the timing and
performance of theatrical and home video releases. Release dates are
determined by several factors, including timing of vacation and holiday
periods and competition. 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.
The Company's Creative Content 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, sponsor live theater, and/or
produce interactive software. 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 of the Company's Creative
Content businesses.
The Company competes in its character merchandising and other licensing,
publishing and retail activities with other licensers, publishers and
retailers of character, brand and celebrity names. Although public information
is limited, the Company believes it is the largest worldwide licenser of
character-based merchandise and producer/distributor of children's audio and
film-related products.
BROADCASTING
TELEVISION AND RADIO NETWORKS
The Company operates the ABC Television Network, which as of September 30,
1997 had 223 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" and types as follows: Monday through Friday
Early Morning, Daytime and Late Night, Monday through Sunday Prime Time and
News, Children's and Sports. The Company also operates the ABC Radio Networks,
which reach more than 140 million domestic listeners weekly and consists of
over 7,200 program affiliations on more than 2,900 radio stations. During
1997, the Company launched Radio Disney, a 24-hour
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children's radio network. The ABC Radio Networks also produce and distribute a
number of radio program series for radio stations nationwide and can be heard
in more than 90 countries worldwide.
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 dependent on many
factors, primarily the quantitative and qualitative audience that the network
can deliver to the advertiser, as well as overall advertiser demand for time
in the network marketplace.
TELEVISION AND RADIO STATIONS
The Company owns nine very high frequency (VHF) television stations, five of
which are located in the top ten markets in the United States; one ultra high
frequency (UHF) television station; eleven standard (AM) radio stations; and
fifteen frequency modulation (FM) radio stations. All of the television
stations are affiliated with the ABC Television Network, and 21 of the 26
radio stations are affiliated with the ABC Radio Networks. The Company's
television stations reach 24% of the nation's television households,
calculated using the multiple ownership rules of the Federal Communications
Commission (FCC). The Company's radio stations reach more than 14 million
people weekly in the top twenty 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, 1999 1
KABC-TV (Los Angeles, CA)................ 7 Dec. 1, 1998 2
WLS-TV (Chicago, IL)..................... 7 (2) 3
WPVI-TV (Philadelphia, PA)............... 6 Aug. 1, 1999 4
KGO-TV (San Francisco, CA)............... 7 Dec. 1, 1998 5
KTRK-TV (Houston, TX).................... 13 Aug. 1, 1998 11
WTVD-TV (Raleigh-Durham, NC)............. 11 Dec. 1, 2004 29
KFSN-TV (Fresno, CA)..................... 30 Dec. 1, 1998 55
WJRT-TV (Flint, MI)...................... 12 Oct. 1, 2005 63
WTVG-TV (Toledo, OH)..................... 13 Oct. 1, 2005 66
RADIO STATIONS
FREQUENCY EXPIRATION RADIO
AM-KILOHERTZ DATE OF FCC MARKET
STATION AND MARKET FM-MEGAHERTZ AUTHORIZATION RANKING (3)
- ------------------ ------------ ------------- -----------
WABC (New York, NY)...................... 770 K Jun. 1, 1998 1
KABC (Los Angeles, CA)................... 790 K (2) 2
KTZN (Los Angeles, CA)................... 710 K (2) 2
WLS (Chicago, IL)........................ 890 K Dec. 1, 2004 3
KGO (San Francisco, CA).................. 810 K (2) 4
KSFO (San Francisco, CA)................. 560 K (2) 4
WJR (Detroit-MI)......................... 760 K Oct. 1, 2004 6
WBAP (Dallas-Fort Worth, TX)............. 820 K Aug. 1, 2005 7
WMAL (Washington, DC).................... 630 K Oct. 1, 2003 8
WDWD (Atlanta, GA)....................... 590 K Apr. 1, 2004 12
KDIZ (Minneapolis-St.Paul, MN)........... 1440 K Apr. 1, 2005 16
WPLJ (FM) (New York, NY)................. 95.5 M Jun. 1, 1998 1
KLOS (FM) (Los Angeles, CA).............. 95.5 M (2) 2
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FREQUENCY EXPIRATION RADIO
AM-KILOHERTZ DATE OF FCC MARKET
STATION AND MARKET FM-MEGAHERTZ AUTHORIZATION RANKING (3)
- ------------------ ------------ ------------- -----------
WXCD (FM) (Chicago, IL).................. 94.7 M (2) 3
WPLT (FM) (Detroit, MI).................. 96.3 M Oct. 1, 2004 6
WDRQ (FM) (Detroit, MI).................. 93.1 M Oct. 1, 2001 6
KSCS (FM) (Dallas-Fort Worth, TX)........ 96.3 M Aug. 1, 2005 7
WRQX (FM) (Washington, DC)............... 107.3 M Oct. 1, 2003 8
WJZW (FM) (Washington, DC)............... 105.9 M Oct. 1, 2001 8
WKHX (FM) (Atlanta, GA).................. 101.5 M Apr. 1, 2004 12
WYAY (FM) (Atlanta, GA).................. 106.7 M Apr. 1, 2004 12
KQRS (FM) (Minneapolis-St.Paul, MN)...... 92.5 M Apr. 1, 2005 16
KXXR (FM) (Minneapolis-St.Paul, MN)...... 93.7 M Apr. 1, 2005 16
KZNR (FM) (Minneapolis-St.Paul, MN))..... 105.1 M Apr. 1, 2005 16
KZNT (FM) (Minneapolis-St.Paul, MN)...... 105.3 M Apr. 1, 2005 16
KZNZ (FM) (Minneapolis-St.Paul, MN)...... 105.7 M Apr. 1, 2005 16
- --------
(1) Based on Nielsen U.S. Television Household Estimates, September 1997
(2) See "Federal Regulation" and "Renewals"
(3) Based on 1996 Arbitron Radio Market Rank
CABLE AND INTERNATIONAL BROADCAST
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
investment in joint ventures in foreign-based television operations and
television production and distribution entities. The Company owns The Disney
Channel, 80% of ESPN Inc., 37.5% of the A&E Television Networks, 50% of
Lifetime Entertainment Services, 34.4% of E! Entertainment Television and has
various other international investments. During the first quarter of 1998, the
Company acquired the Classic Sports Network.
The Disney Channel, which has approximately 30 million domestic and 7
million international 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(R) and Disneyland
Park(R). 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 Taiwan and U.K. premiered in 1995,
followed by the launch of The Disney Channel Australia in 1996. The Company
began broadcasting The Disney Channel Malaysia in October 1996, The Disney
Channel France in March 1997 and The Disney Channel Middle East in April 1997.
Planned launches in 1998 include, The Disney Channel Italy and Spain. The
Company continues to explore the development of The Disney Channel in other
countries around the world.
ESPN Inc. operates ESPN, a cable and satellite sports programming service
reaching 72 million subscribers domestically and 152 million households in 190
countries internationally, ESPN2, which reaches 50 million domestic
subscribers, and in 1997 began broadcasting ESPNews, a 24-hour sports news
cable channel, that reaches approximately 5 million subscribers nationwide.
ESPN also owns 33% of Eurosport, a pan-European satellite-delivered cable and
direct-to-home sports programming service, 25% of Sportsvision Australia and
50% of ESPN Brazil. ESPN owns a 50% interest in the ESPN STAR joint venture
which delivers sports programming throughout most of Asia and 33% of the Net
Star venture which owns The Sports Network, among other media properties in
Canada.
The A&E Television Network is a cable programming service devoted to
cultural and entertainment programming reaching 78 million subscribers. The
History Channel, which is owned by A&E, reaches 36 million subscribers.
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Lifetime Entertainment Services owns Lifetime Television, which reaches 69
million cable subscribers and is devoted to women's lifestyle programming.
The Classic Sports Network is a cable programming service devoted to
memorable sporting events reaching 10 million subscribers.
The Company's share of the financial results of the cable and international
broadcast services, other than The Disney Channel and ESPN Inc., are reported
under the heading "Corporate activities and other" in the Company's
consolidated statements of income.
COMPETITIVE POSITION
The ABC Television Network, The Disney Channel, ESPN and other broadcasting
affiliates primarily compete for viewers with the other television networks,
independent television stations, other video media such as cable television,
satellite television program services and videocassettes. In the sale of
advertising time, the broadcasting operations compete with other television
networks, independent television stations, suppliers of cable television
programs and other advertising media such as newspapers, magazines and
billboards. Substantial competition also exists for exclusive broadcasting
rights for television programs such as Monday Night Football. The ABC Radio
Networks likewise compete with other radio networks and radio programming
services, independent radio stations and other advertising media.
The Company's television and radio stations are in competition with other
television and radio stations, cable television systems, satellite television
program services, videocassettes and other advertising media such as
newspapers, magazines and billboards. Such competition occurs primarily in
individual market areas. A television station in one market does not compete
directly with other stations in other market areas.
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.
RENEWALS
Broadcasting licenses are granted for a maximum period of eight years, and
are renewable upon application therefor if the Commission finds that the
public interest would be served thereby. During certain periods when a renewal
application is pending, other parties may file petitions to deny the
application for renewal of a license. Renewal applications are now pending for
WLS-TV, KABC, KTZN, KGO, KSFO, KLOS (FM) and WXCD (FM). All of the Company's
other owned stations have been granted license renewals by the FCC for maximum
terms.
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THEME PARKS AND RESORTS
The Company operates the Walt Disney World Resort in Florida and the
Disneyland Park and two hotels in California. The Company also earns royalties
on revenues generated by the Tokyo Disneyland(R) 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 three theme parks (the Magic Kingdom, Epcot and the Disney-MGM
Studios), hotels and villas, an entertainment complex, a shopping village,
conference centers, campgrounds, golf courses, water parks and other
recreational facilities designed to attract visitors for an extended stay. A
fourth theme park, Disney's Animal Kingdom, will open in spring 1998 and will
feature thrill rides, exotic landscapes and close encounters with wild
animals.
The Company markets the entire Walt Disney World destination resort through
a variety of national, international and local advertising and promotional
activities. The Walt Disney World Resort began a 15-month-long celebration of
its 25th Anniversary in October 1996 with a series of promotional and special
events. 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, New
Tomorrowland, Fantasyland, Adventureland and Mickey's Toontown Fair. These
areas feature themed rides and attractions, restaurants, refreshment stands
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"), and 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 pavilion, 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.
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.
RESORT FACILITIES - As of September 30, 1997, the Company owned and operated
13 resort hotels and a complex of villas and suites at the Walt Disney World
Resort, with a total of approximately 16,700 rooms and 318,000 square feet of
conference meeting space. Included among the resort hotels is Disney's
Coronado Springs Resort, a 1,967 room moderately priced hotel and convention
center themed around Mexico and the American Southwest, which opened in August
1997. Currently under development is phase three of Disney's All-Star Resorts
with an additional 1,920 rooms expected to be completed in 1999. In addition,
Disney's Fort Wilderness camping and recreational area offers approximately
1,200 campsites and wilderness homes. The resort also offers professional
development and personal enrichment programs at The Disney Institute.
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Recreational activities available at the resort facilities include five
championship golf courses, miniature golf courses, full-service spas, an
animal sanctuary, 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 shopping facility and
entertainment complex known as Downtown Disney, which consists of the Disney
Village Marketplace, Pleasure Island and The West Side. In addition to more
than 20 specialty retail shops and restaurants, the Disney Village Marketplace
is home to the 50,000-square-foot World of Disney, which opened in October
1996 and is the largest Disney retail outlet. Pleasure Island, an
entertainment center adjacent to the Disney Village Marketplace, includes
restaurants, night clubs and shopping facilities. The West Side, with phased-
in openings that began in fall 1997, is situated on 66 acres on the west side
of Pleasure Island and includes several third-party operations, including the
House of Blues, a New Orleans-style restaurant and live entertainment
facility; Wolfgang Puck's Cafe, a California cuisine restaurant; Virgin
Records Megastore, a music, video and book showplace; Cirque du Soleil, a high
energy acrobatics and modern dance show; Bongos Cuban Cafe, a cafe/night club;
and an AMC theater complex, the largest theater complex in Florida.
The recently opened Disney's Wide World of Sports is an international 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,
basketball, softball, track and field, football and soccer. Its 7,500-seat
stadium will be the spring training site for the Atlanta Braves. In addition,
the Harlem Globetrotters use the facility for their official training site and
holiday-season 12-game series. The Amateur Athletic Union hosts more than 30
events a year at the facility and guests are able to enjoy various retail
stores and food outlets.
Currently under development are Celebration, a 4,900-acre town, and Disney
Cruise Line, a cruise vacation line that will include two 85,000-ton ships--
Disney Magic and Disney Wonder. The maiden voyage of Disney Magic is scheduled
for spring 1998. Both ships will cater to children, families and adults, with
distinctly themed areas for each group, and will feature 875 staterooms which
offer 25% more living space than the current cruise line industry average.
Disney Wonder is expected to enter service at the end of calendar 1998. Each
cruise vacation will include a visit to Disney's Castaway Cay, a 1,000-acre
private Bahamian island in the Abacos. The Company plans to package cruise
vacations with visits to the Walt Disney World Resort.
At the Disney Village Marketplace Hotel Plaza, seven independently operated
hotels are situated on property leased from the Company. These hotels have a
capacity of approximately 3,700 rooms. Additionally, two hotels--the Walt
Disney World Swan and the Walt Disney World Dolphin, with an aggregate
capacity of approximately 2,300 rooms--are independently operated on property
leased from the Company near Epcot.
DISNEYLAND
The Company owns 330 acres and has under long-term lease an additional 39
acres of land in Anaheim, California. 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 1,100-room
Disneyland Hotel and the 500-room Disneyland Pacific Hotel near Disneyland.
During 1997, the Company began the renovation of Tomorrowland, which is
scheduled to reopen with new rides and attractions in the spring of 1998.
-9-
The Company has begun construction on a new theme park, Disney's California
Adventure, projected to open in the year 2001. The new theme park will be
constructed on property adjacent to the park. Disney's California Adventure
will celebrate the many attributes of the state of California and will feature
Disneyland Center, a themed complex of shopping, dining and entertainment
venues; the Grand Californian, a deluxe 750-room hotel located inside the
park; and an assortment of California-themed areas with associated rides and
attractions.
DISNEY VACATION CLUB
In 1995, the Company completed the 497-unit Disney Old Key West Resort at
the Walt Disney World Resort. In addition, 175 units in Vero Beach, Florida
opened in October 1995, and 102 units on Hilton Head Island, South Carolina
and 383 villas located at Disney's BoardWalk Resort opened in 1996. Available
units at each facility are intended to be sold under a vacation ownership plan
and operated partially as rental property until the units are sold.
DISNEY REGIONAL ENTERTAINMENT
The Company is developing a variety of new entertainment concepts to be
located in metropolitan and suburban locations in the United States and around
the world. These businesses may include sports concepts, interactive
entertainment venues, family play centers and other operations that are based
on Disney brands and creative properties.
In February 1997, the Company opened its first Club Disney, a 25,000-square-
foot community playsite oriented toward creative activities for children and
their grownups. Club Disney offers an array of diverse environments designed
to entertain and educate, as well as a cafe, unique retail merchandise and
themed birthday party rooms. Additional Club Disney openings are planned in
various suburban markets.
The Company is also developing The ESPN Zone, a sports-themed dining and
entertainment venue. The first facility is expected to open in the summer of
1998 in Baltimore, Maryland.
Also expected to open in the summer of 1998 is the Company's first
DisneyQuest, an indoor entertainment venue for guests of all ages. DisneyQuest
combines the magic of Disney with interactive technologies and classic story-
telling in four distinct environments, as well as retail merchandise and food
areas. The initial facility will be at the Walt Disney World Resort's Downtown
Disney complex.
TOKYO DISNEYLAND
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 November 1997, OLC announced its intent to proceed with the construction
of a second theme park designed by the Company, which will be called Tokyo
DisneySea, together with a 500-room Disney-branded hotel and monorail system.
Tokyo DisneySea is scheduled to open in fall 2001.
OLC is also in the preliminary stages of developing a retail, dining and
entertainment complex adjacent to Tokyo Disneyland in what is known as the
Maihama Station Area, which will include a 500-room Disney-branded hotel owned
and operated by OLC under license from a Company subsidiary.
Construction costs on the development projects are being borne by OLC, which
is also reimbursing the Company for its design, technical and operational
assistance costs. Under the Company's agreements with OLC, the Company will be
entitled to royalties from Tokyo DisneySea and the new hotels.
-10-
DISNEYLAND PARIS
Disneyland Paris is located on a 4,800-acre site at Marne-la-Vallee,
approximately 20 miles east of Paris, France. The theme park, which opened in
April 1992, features 42 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 has been developed pursuant to a 1987
master agreement with French governmental authorities by Euro Disney S.C.A., a
publicly held French company in which the Company holds a 39% equity interest
and which is managed by a subsidiary of the Company. The financial results of
the Company's investment in Euro Disney are reported under the heading
"Corporate activities and other" in the Company's consolidated statements of
income.
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 for the Company's operations.
ANAHEIM SPORTS, INC.
The Company owns and operates a National Hockey League franchise, the Mighty
Ducks of Anaheim. In addition, the Company manages the Anaheim Angels Major
League Baseball team, owning a 25% general partnership interest, with an
option to purchase the entire team at a later date.
COMPETITIVE POSITION
All of the theme parks and most of the associated resort facilities are
operated on a year-round basis. Historically, the theme parks and resorts
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 which are not
directly controllable, such as economic conditions, amount of available
leisure time, oil and transportation prices and weather patterns.
ITEM 2. PROPERTIES
The Walt Disney World Resort, Disneyland Park and other properties of the
Company and its subsidiaries are described in Item 1 under the caption Theme
Parks and Resorts. Film library properties are described in Item 1 under the
caption Creative Content. Radio and television stations owned by the Company
are described under the caption Broadcasting.
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. Other 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 1.8 million square feet of
office buildings on approximately 96 acres in Glendale, California. The
buildings are used for the Company's operations and also contain space leased
to third parties.
The Company's broadcasting segment corporate offices are located in a
Company-owned building in New York City. The Company also owns the ABC
Television Center adjacent to the corporate offices and ABC Radio Networks'
studios, also in New York City.
-11-
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, DC and a computer facility in Hackensack, New Jersey, under leases
expiring on various dates through 2034. The Company's 80%-owned subsidiary
ESPN owns ESPN Plaza in Bristol, Connecticut, from which it conducts its
technical operations. The Company owns the majority of its other broadcast
studios and offices and broadcast transmitter sites elsewhere, and those which
it does not own are occupied under leases expiring on various dates through
2039.
A U.K. subsidiary of the Company owns buildings on a four-acre parcel under
long-term lease in London, England. The mixed-use development consists of
140,000 square feet of office space occupied by subsidiary operations, a
27,000 square foot building leased to a third party and 65,000 square feet of
retail space. A second phase of this development is under construction, due to
be completed in 1998, including a 142,000 square foot office building to be
occupied by Company subsidiaries. Company subsidiaries also lease office space
in other parts of Europe and Asia.
The Disney Stores and Disney Regional Entertainment lease retail space for
their operations.
It is the Company's practice to obtain United States and foreign legal
protection for its theatrical and television product and its other original
works, including the various names and designs of the animated characters and
the publications and music which have been created in connection with the
Company's filmed products. The Company owns all rights to the name, likeness
and portrait of Walt Disney.
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.
On January 3, 1997, two purported stockholders, Richard and David Kaplan,
filed a putative derivative action in the Superior Court of the State of
California, Los Angeles County (the "California Court"), alleging that certain
current and former directors of the Company breached their fiduciary duties of
loyalty and care and wasted corporate assets in connection with entering into
and terminating the Company's employment agreement with its former president,
Michael S. Ovitz. On January 7, 1997, two other purported stockholders,
William and Geraldine Brehm, filed a substantially identical complaint in the
Court of Chancery for the State of Delaware, New Castle County (the "Delaware
Court"), and another purported stockholder, Michael Grening, filed a similar
complaint in the Delaware Court. On January 14, 1997, Mr. Grening, together
with other purported stockholders Michelle De Benedictis, Peter Lawrence and
Judith B. Wohl, filed a similar complaint in the California Court. On February
7, 1997, other purported stockholders, Thomas Malloy, Richard Kaser, Carol
Kaser, Melvyn Zupnick, Michael Caesar, Robert S. Goldberg and Michael Shores,
filed a similar claim in the California Court.
On May 28, 1997, all these claimants together filed an amended complaint in
the Delaware Court, which names as defendants all of the Company's current
directors, together with Mr. Ovitz and Stephen F. Bollenbach, the Company's
former Chief Financial Officer and a former director. The complaint seeks,
among other things, a declaratory judgment that Mr. Ovitz's employment
agreement was void or, alternatively, that Mr. Ovitz's termination should be
deemed a termination "for cause" and any severance payments to him forfeited ,
and compensatory or rescissory damages and injunctive and other equitable
relief from the named defendants. It also seeks class action status to pursue
a claim for damages and invalidation of the 1997 election of directors, based
upon allegations of insufficient disclosures concerning, among other things,
Mr. Ovitz's termination and Mr. Eisner's compensation.
The Company believes that the allegations in the complaint are without
merit.
-12-
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, Litvack and Murphy have been employed by the Company as executive
officers for more than five years.
At September 30, 1997, the executive officers were as follows:
Executive
Officer
Name Age Title Since
------------------ --- ------------------------------------------ ---------
Michael D. Eisner 55 Chairman of the Board and Chief Executive 1984
Officer
Roy E. Disney 67 Vice Chairman of the Board 1984
Sanford M. Litvack 61 Senior Executive Vice President and Chief 1991
of Corporate Operations
Richard D. Nanula 37 Senior Executive Vice President and Chief 1996
Financial Officer /1/
John F. Cooke 55 Executive Vice President-Corporate Affairs /2/ 1995
Lawrence P. Murphy 45 Executive Vice President and Chief 1985
Strategic Officer and Chairman of
Disney Cruise Line
- --------
/1/ Mr. Nanula joined the Company's strategic planning operation in 1986 and
was named Vice President-Treasurer of the Company in January 1990. He was
named Senior Vice President and Chief Financial Officer in August 1991,
Executive Vice President in February 1994 and President of The Disney
Stores, Inc. in November 1994, where he served until assuming his present
position in February 1996.
/2/ Mr. Cooke served as President of the The Disney Channel from 1985 until
assuming his present position in February 1995.
-13-
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York and Pacific stock
exchanges (NYSE symbol DIS). The following sets forth the high and low
composite closing sale prices for the fiscal periods indicated.
Sale Prices
------------------
High Low
--------- --------
1997
4th Quarter........................................... $80 15/16 $75 3/16
3rd Quarter........................................... 84 1/2 71 1/8
2nd Quarter........................................... 78 1/8 67 3/8
1st Quarter........................................... 76 62 1/2
1996
4th Quarter........................................... $63 5/8 $53 3/8
3rd Quarter........................................... 65 5/8 58 1/4
2nd Quarter........................................... 69 3/4 59 1/2
1st Quarter........................................... 62 7/8 55 3/8
The Company declared a first quarter dividend of $.11 per share and three
subsequent quarterly dividends of $.1325 per share in 1997, and in 1996,
declared a first quarter dividend of $.09 per share and three subsequent
quarterly dividends of $.11 per share.
As of September 30, 1997, the approximate number of record holders of the
Company's common stock was 588,000.
-14-
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
1997(1) 1996(2),(3) 1995 1994 1993(4)
------- ----------- ------- ------- -------
Statements of income
Revenues $22,473 $18,739 $12,151 $10,090 $ 8,531
Operating income 4,447 3,033 2,466 1,972 1,722
Income before cumulative
effect of accounting changes 1,966 1,214 1,380 1,110 671
Cumulative effect of
accounting changes -- -- -- -- (371)
Net income 1,966 1,214 1,380 1,110 300
Per share
Earnings before cumulative
effect of accounting changes $ 2.86 $ 1.96 $ 2.60 $ 2.04 $ 1.23
Cumulative effect of
accounting changes -- -- -- -- (.68)
Earnings 2.86 1.96 2.60 2.04 .55
Dividends .51 .42 .35 .29 .24
Balance sheets
Total assets $37,776 $36,626 $14,606 $12,826 $11,751
Borrowings 11,068 12,342 2,984 2,937 2,386
Stockholders' equity 17,285 16,086 6,651 5,508 5,031
Statements of cash flows
Cash provided by operations $ 7,064 $ 4,625 $ 3,510 $ 2,808 $ 2,145
Investing activities (5,901) (13,464) (2,288) (2,887) (2,660)
Financing activities (1,124) 8,040 (332) (97) 113
- --------
(1) 1997 results include a $135 million gain from the sale of KCAL-TV. The
earnings per share impact of the gain was $.11. See Note 2 to the
Consolidated Financial Statements.
(2) These amounts reflect the impact of the acquisition of ABC. See Note 2 to
the Consolidated Financial Statements.
(3) 1996 results include a $300 million non-cash charge pertaining to the
implementation of SFAS 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and a $225 million
charge for costs related to the acquisition of ABC. The earnings per share
impacts of these charges were $.30 and $.22, respectively. See Notes 2 and
11 to the Consolidated Financial Statements.
(4) In 1993, the Company changed its accounting policy for project-related
pre-opening costs, adopted SFAS 106 Employers' Accounting for
Postretirement Benefits Other Than Pensions and adopted SFAS 109
Accounting for Income Taxes. The cumulative effect of these accounting
changes on the 1993 results follows.
Earnings
Net per
income share
------ --------
Expense pre-opening costs as incurred $(271) $(.50)
Adopt SFAS 106 (130) (.24)
Adopt SFAS 109 30 .06
----- -----
$(371) $(.68)
===== =====
Operating and net income for 1993 also reflect a $350 million charge to
fully reserve the Company's outstanding receivables from Euro Disney and the
Company's commitment to help fund Euro Disney for a limited period. The
earnings per share impact of the charge, net of income tax benefit, was
$.40.
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company acquired the operations of ABC, Inc. ("ABC") on February 9, 1996
and completed its final purchase price allocation and determination of the
related intangible assets during the second quarter of 1997. To enhance
comparability, certain information for 1996 and 1995 is presented on a "pro
forma" basis, which assumes the ABC acquisition and the related final purchase
price allocation occurred at the beginning of these periods. 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 these
periods.
The Company's 1997 results, prior-year pro forma amounts and as reported
results since the date of the ABC acquisition reflect the impacts of the
acquisition including the use of purchase accounting as well as significant
increases in amortization of intangible assets, interest expense, the
effective income tax rate and shares outstanding.
CONSOLIDATED RESULTS
(in millions, except per share data)
PRO FORMA
AS REPORTED (unaudited)
------------------------- ----------------
1997 1996 1995 1996 1995
------- ------- ------- ------- -------
Revenues:
Creative Content $10,937 $10,159 $ 7,736 $10,607 $ 9,086
Broadcasting 6,522 4,078 414 6,129 5,862
Theme Parks and Resorts 5,014 4,502 4,001 4,502 4,001
------- ------- ------- ------- -------
Total $22,473 $18,739 $12,151 $21,238 $18,949
======= ======= ======= ======= =======
Operating income: (1)
Creative Content $ 1,882 $ 1,561 $ 1,531 $ 1,555 $ 1,565
Broadcasting 1,294 782 76 1,100 982
Theme Parks and Resorts 1,136 990 859 990 859
Gain on sale of KCAL 135 -- -- -- --
Accounting change -- (300) -- (300) --
------- ------- ------- ------- -------
Total 4,447 3,033 2,466 3,345 3,406
Corporate activities and other (367) (309) (239) (249) (255)
Net interest expense (693) (438) (110) (698) (775)
Acquisition-related costs -- (225) -- -- --
------- ------- ------- ------- -------
Income before income taxes 3,387 2,061 2,117 2,398 2,376
Income taxes (1,421) (847) (737) (1,067) (1,069)
------- ------- ------- ------- -------
Net income $ 1,966 $ 1,214 $ 1,380 $ 1,331 $ 1,307
======= ======= ======= ======= =======
Earnings per share $ 2.86 $ 1.96 $ 2.60 $ 1.93 $ 1.91
======= ======= ======= ======= =======
Net income excluding non-
recurring items (2) $ 1,886 $ 1,534 $ 1,380 $ 1,514 $ 1,307
======= ======= ======= ======= =======
Earnings per share excluding
non-recurring items (2) $ 2.75 $ 2.48 $ 2.60 $ 2.20 $ 1.91
======= ======= ======= ======= =======
Amortization of intangible
assets included in operating
income $ 439 $ 301 $ -- $ 476 $ 476
======= ======= ======= ======= =======
Average number of common and
common equivalent shares
outstanding 687 619 530 689 685
======= ======= ======= ======= =======
- --------
(1) Includes depreciation and amortization (excluding film cost) of:
Creative Content $ 222 $ 186 $ 107 $ 230 $ 199
Broadcasting 508 382 8 521 510
Theme Parks and Resorts 408 358 335 358 335
------- ------- ------- ------- -------
$ 1,138 $ 926 $ 450 $ 1,109 $ 1,044
======= ======= ======= ======= =======
-16-
(2) The 1997 results include a $135 million gain from the sale of KCAL-TV. See
Note 2 to the Consolidated Financial Statements. The 1996 results include
two non-recurring charges. The Company adopted Statement of Financial
Accounting Standards No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, which resulted in the
Company recognizing a $300 million non-cash charge. In addition, the
Company recognized a $225 million charge for costs related to the
acquisition of ABC. See Notes 2 and 11 to the Consolidated Financial
Statements.
The following discussion of 1997 versus 1996 and 1996 versus 1995
performance is primarily based on pro forma results for 1996 and 1995. The
Company believes pro forma results represent the best comparative standard for
assessing net income, changes in net income and earnings trends, as the pro
forma presentation combines a full year of the results of the Company and its
acquired ABC operations. The discussion of consolidated results also includes
"as reported" comparisons to the extent there have been material changes in
reported amounts. The discussion of Theme Parks and Resorts segment results is
on an as reported basis since the pro forma adjustments did not impact this
segment.
CONSOLIDATED RESULTS
1997 VS. 1996
Compared to 1996 pro forma results, revenues increased 6% to $22.5 billion,
reflecting growth in all business segments. Net income and earnings per share,
excluding non-recurring items, increased 25% to $1.9 billion and $2.75,
respectively. These results were driven by increased operating income across
all business segments, partially offset by an increase in corporate activities
and other driven by certain non-recurring items in both the current and prior
year. The current year reflects settlements with former senior executives and
the prior year reflects certain gains at ABC, primarily related to the sale of
an investment in a cellular communications company.
The effective income tax rate compared to 1996 pro forma results decreased
in 1997 primarily as a result of a reduction in the ratio of nondeductible
amortization of intangible assets to total income before income taxes.
As reported revenues increased 20%, reflecting increases in all business
segments and the impact of the acquisition of ABC. Net income, excluding the
non-recurring items, increased 23% driven by increased operating income for
each business segment. Earnings per share, excluding non-recurring items,
increased 11%, reflecting net income growth, partially offset by the impact of
additional shares issued in connection with the acquisition. Results for 1997
included a full period of ABC's operations.
1996 VS. 1995
Pro forma revenues increased 12% to $21.2 billion, reflecting growth in all
business segments. Net income, excluding non-recurring charges, increased 16%
to $1.5 billion, and earnings per share increased 15% to $2.20. These results
were driven by increased operating income at the Theme Parks and Resorts and
Broadcasting segments.
Pro forma net interest expense decreased 10% to $698 million reflecting
lower interest rates and a reduction in net borrowings (the Company's
borrowings less cash and liquid investments).
As reported revenues increased 54% to $18.7 billion, reflecting increases in
all business segments and the impact of the acquisition of ABC. Net income,
excluding the non-recurring charges, increased 11% to $1.5 billion driven by
increased operating income for each business segment. Earnings per share,
excluding the non-recurring charges, decreased 5% to $2.48, reflecting the
impact of additional shares issued in connection with the acquisition.
As reported corporate activities and other increased 29% to $309 million,
reflecting higher corporate general and administrative costs and a $55 million
gain in 1995 related to the sale of a portion of the Company's investment in
Euro Disney. Net interest expense increased to $438 million, reflecting new
borrowings in connection with the acquisition, partially offset by lower
interest rates.
-17-
BUSINESS SEGMENT RESULTS
CREATIVE CONTENT
1997 VS. 1996
Revenues increased 3% or $330 million compared with pro forma 1996 to $10.9
billion, driven by growth of $210 million in the Disney Stores, $143 million
in character merchandise licensing, $104 million in television distribution
and $88 million in home video, partially offset by declines in publishing
revenues of $187 million. Growth at the Disney Stores reflected continued
worldwide expansion with 106 new stores opening in 1997, bringing the total
number of stores worldwide to 636. New stores contributed $109 million in
revenues in the current year. Increases in character merchandise licensing
reflected the strength of Winnie the Pooh and Toy Story domestically, and
standard characters and 101 Dalmatians worldwide. The increase in television
revenues was driven by an increase in the distribution of film and television
product in the international television market. Home video results reflected
the successful performance of Toy Story, The Hunchback of Notre Dame and 101
Dalmatians worldwide and Bambi and Sleeping Beauty domestically. The decline
in publishing revenues related to the operations disposed of during the year.
Operating income increased 21% or $327 million compared with pro forma 1996
to $1.9 billion, reflecting improved results for theatrical distribution,
character merchandise licensing and television distribution, partially offset
by a reduction in home video results. Costs and expenses, which consist
primarily of production cost amortization, distribution and selling expenses,
product cost, labor and leasehold expense, were flat at $9.1 billion,
reflecting increased amortization in the home video market and continued
expansion of the Disney Stores, offset by a reduction in distribution costs in
the domestic theatrical market, lower overall costs resulting from the
disposition of certain publishing businesses during the year and the write-off
of certain theatrical development projects in the prior year.
1996 VS. 1995
Pro forma revenues increased 17% or $1.5 billion to $10.6 billion, driven by
growth of $500 million in home video, $274 million in theatrical, $197 million
in the Disney Stores and $151 million in character merchandise licensing. Home
video revenues reflected Pocahontas, Cinderella and The Aristocats animated
titles and The Santa Clause, While You Were Sleeping and Crimson Tide live-
action titles domestically, as well as The Lion King and the animated version
of 101 Dalmatians internationally. Theatrical revenues reflected the worldwide
box office performance of Toy Story, The Rock and The Hunchback of Notre Dame,
the international performance of Pocahontas and the domestic performance of
Phenomenon. Revenues growth at the Disney Stores was driven by the opening of
101 new stores in 1996, bringing the total number of stores to 530. Comparable
store sales declined 2%, primarily due to the strength of The Lion King
merchandise in 1995, and new stores contributed $103 million of sales growth.
Merchandise licensing revenues increased due to the strength of standard
characters worldwide and the success of targeted marketing programs.
Television revenues from program distribution were comparable to 1995,
reflecting the success of live-action titles in pay television, offset by the
syndication sale of Home Improvement in 1995.
Pro forma operating income remained flat at $1.6 billion, reflecting
improved results in home video and worldwide merchandise licensing offset by
lower theatrical results. Costs and expenses increased 20% or $1.5 billion.
The increase was primarily due to higher theatrical distribution and home
video selling costs, higher production cost amortization, expansion of the
Disney Stores and the write-off of certain theatrical development projects.
BROADCASTING
1997 VS. 1996
Revenues increased 6% or $393 million compared with pro forma 1996 to $6.5
billion, driven by increases of $336 million at ESPN and The Disney Channel,
and $74 million at the television network. The increases at ESPN and The
Disney Channel were due primarily to higher advertising revenues
-18-
and affiliate fees due primarily to expansion, subscriber growth and improved
advertising rates. Growth in revenues at the television network was primarily
the result of improved performance of sports, news and latenight programming,
partially offset by a decline in prime time ratings.
Operating income increased 18% or $194 million compared with pro forma 1996
to $1.3 billion, reflecting increases in revenues at ESPN and The Disney
Channel, as well as improved results at the television stations, partially
offset by decreases at the television network. Results at the television
network reflected the impact of lower ratings, partially offset by benefits
arising from current period sporting events, improvements in children's
programming, continued strength in the advertising market and decreased
program amortization. Costs and expenses increased 4% or $199 million. This
increase reflected increased programming rights and production costs, driven
by international growth at ESPN and increases at the television network,
partially offset by benefits arising from reductions in program amortization
and other costs at the television network, primarily attributable to the
acquisition.
The Company has continued to invest in its existing cable television
networks and in new cable ventures to diversify and expand the available
distribution channels for acquired and Company programming. During 1997, the
Company acquired an equity stake in E! Entertainment Television, an
entertainment-related network, invested in a number of international cable
ventures and continued its worldwide expansion of The Disney Channel with
launches in France and the Middle East. During the first quarter of 1998, the
Company acquired the Classic Sports Network, a cable network devoted to
memorable sporting events.
The Company's cable operations continue to provide strong earnings growth.
The Company's results for 1997 reflect an increase in income before income
taxes of $182 million or 28% for mature cable properties compared with pro
forma 1996 results, which include the Company's share of earnings from ESPN,
The Disney Channel, A&E Television and Lifetime Television. These increases
were partially offset by the Company's recognition of its proportionate share
of losses associated with start-up cable ventures. Start-up cable ventures are
generally operations that are in the process of establishing distribution
channels and a subscriber base and that have not reached their full level of
normalized operations. These include various ESPN and Disney Channel start-up
cable ventures. Overall, the Company's cable results increased 29% compared
with pro forma 1996.
The financial results of ESPN and The Disney Channel are included in
Broadcasting operating income. The Company's share of all other cable
operations and the ESPN minority interest deduction are reported in "Corporate
activities and other" in the consolidated statements of income.
1996 VS. 1995
Pro forma revenues increased 5% or $267 million to $6.1 billion, reflecting
a $309 million increase in revenues at ESPN and The Disney Channel, resulting
from higher advertising revenues and affiliate fees due primarily to
expansion, subscriber growth and improved advertising rates. Increases in
revenues were partially offset by a $61 million decrease at the television
network and stations due to the impact of ratings deterioration and the
absence of the Super Bowl in 1996.
Pro forma operating income increased 12% or $118 million to $1.1 billion,
reflecting decreased costs and expenses at the television network, increased
revenues at ESPN and The Disney Channel and lower program write-offs at KCAL.
Costs and expenses increased 3% or $149 million, reflecting increased program
rights and production costs driven by growth at ESPN and The Disney Channel
internationally, partially offset by significantly decreased program
amortization at the television network, primarily attributable to the
acquisition, and lower program write-offs at KCAL.
-19-
THEME PARKS AND RESORTS
1997 VS. 1996
Revenues increased 11% or $512 million to $5.0 billion, reflecting growth at
the Walt Disney World Resort, which celebrated its 25th Anniversary. Growth at
the resort included $272 million from greater guest spending, $111 million
from increased occupied rooms and $97 million due to record theme park
attendance. Higher guest spending reflected increased merchandise and food and
beverage sales, higher admission prices and increased room rates at hotel
properties. Increased merchandise spending reflected sales of the 25th
Anniversary products and the performance of the World of Disney, the largest
Disney retail outlet, which opened in October 1996. The increase in occupied
rooms reflected higher occupancy and a complete year of operations at Disney's
BoardWalk Resort, which opened in the fourth quarter of 1996. Occupied rooms
also increased due to the opening of Disney's Coronado Springs Resort in
August 1997. Record theme park attendance resulted from growth in domestic
tourist visitation. Disneyland's revenues for the year were flat due to higher
guest spending offset by reduced attendance from the prior-year's record
level.
Operating income increased 15% or $146 million to $1.1 billion, resulting
primarily from higher guest spending, increased occupied rooms and record
theme park attendance at the Walt Disney World Resort. 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 10% or $366 million. Increased operating costs were
associated with growth in theme park attendance and occupied rooms, higher
guest spending and increased marketing and sales expenses primarily associated
with Walt Disney World Resort's 25th Anniversary celebration. Additional cost
increases resulted from theme park and resort expansions including Disney's
Animal Kingdom and Disney Cruise Line, which will begin operations in 1998.
1996 VS. 1995
Revenues increased 13% or $501 million to $4.5 billion, reflecting growth of
$191 million due to record theme park attendance, $148 million from greater
guest spending, and $52 million due to increased occupied rooms, primarily at
the Walt Disney World Resort. Record theme park attendance at both the Walt
Disney World Resort and Disneyland Park in 1996 reflected growth in domestic
and international tourist visitation. Increased guest spending resulted from
higher admission prices, increased sales of food and beverages due to pricing
and expanded locations, and higher room rates at hotel and resort properties.
The increase in occupied rooms at the Walt Disney World Resort resulted from
higher occupancy and a complete year of operations at Disney's All-Star Music
Resort, which opened in phases during 1995. Occupied rooms also increased due
to the opening of Disney's BoardWalk Resort in the fourth quarter of 1996.
Operating income increased 15% or $131 million to $990 million, resulting
primarily from higher theme park attendance, increased guest spending and
increased occupied rooms at the Walt Disney World Resort. Costs and expenses
increased 12% or $370 million, primarily due to increased operating hours in
response to higher attendance, expansion of theme park attractions and
resorts, increased marketing and sales expenses and increased costs associated
with higher guest spending and increased occupied rooms.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash from operations and has substantial
borrowing capacity to meet its operating and discretionary spending
requirements. Cash provided by operations increased 53% or $2.4 billion to
$7.1 billion in 1997, which includes a full-year's impact of ABC's operations.
In 1997, the Company invested $5.1 billion to develop, produce and acquire
rights to film and television properties and $1.9 billion to design and
develop new theme park attractions, resort properties, real estate
developments and other properties. 1996 investments totaled $3.7 billion and
$1.7 billion, respectively.
-20-
The $1.4 billion increase in investment in film and television properties
was primarily driven by a full year of ABC's television spending.
The $177 million increase in investment in theme parks, resorts and other
properties resulted primarily from initiatives including Disney's Animal
Kingdom, Disney's Coronado Springs Resort and Disney's California Adventure.
Capital spending is expected to increase in 1998 from continued spending at
Disney's Animal Kingdom as well as increases related to Disney Cruise Line,
Disney's California Adventure, Disney Regional Entertainment and phase three
of the Disney All-Star Resort at Walt Disney World.
The Company acquires shares of its stock on an ongoing basis and is
authorized as of September 30, 1997 to purchase up to an additional 88 million
shares. During 1997, a subsidiary of the Company acquired 8 million shares of
the Company's common stock for $633 million. The Company also used $342
million to fund dividend payments during the year.
Since the acquisition of ABC, the Company has reduced its total borrowings
and replaced a substantial portion of its commercial paper with longer-term
financing. During 1997, total borrowings decreased $1.3 billion to $11.1
billion. The Company borrowed approximately $1.2 billion in 1997 with
effective interest rates ranging from 4.4% to 5.9% and maturities in fiscal
1999 through fiscal 2057. Certain of these financing agreements are
denominated in foreign currencies for which the Company has entered into
cross-currency swap agreements effectively converting these obligations into
U.S. dollar denominated LIBOR-based variable rate debt instruments. The
Company also established two real estate investment trusts (REITs) and issued
equity interests in the REITs to third-party investors in exchange for $1.3
billion. During the fourth quarter of 1997, the Company dissolved one of the
REITs and repaid investors $468 million. During the second quarter of 1997,
the Company issued approximately $1.2 billion in debt secured by certain
assets of its newspaper operations. The secured debt has an interest rate
based on one-month LIBOR and a maturity date of September 15, 1999. During the
third quarter, $990 million of this debt was assumed by Knight-Ridder, Inc. in
connection with the disposition of certain of the Company's newspaper
operations. The Company has the capacity to issue up to $2.0 billion in
additional debt under a U.S. shelf registration filed in March 1996, and $936
million under a European medium-term note program established in June 1996.
The Company's financial condition remains strong. The Company believes that
its cash, other liquid assets, operating cash flows and access to capital
markets, 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.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market value 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 and
fluctuations in the value of foreign currencies using a variety of financial
instruments.
The Company's objective in managing its exposure to interest rate changes is
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 to manage net exposure to interest rate
changes related to its portfolio of borrowings. The Company maintains fixed
rate debt as a percentage of its net debt between a minimum and maximum
percentage, which is set by policy.
The Company's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management
-21-
to focus its attention on its core business issues and challenges.
Accordingly, the Company enters into various contracts which 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 which provide for the sale of
foreign currencies to hedge probable, but not firmly committed, revenues. The
principal currencies hedged are the Japanese yen, French franc, German mark,
British pound, Canadian dollar, Italian lira and Spanish peseta. By policy,
the Company maintains hedge coverage between minimum and maximum percentages
of its anticipated foreign exchange exposures for each of the next 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 and interest rate
transactions only to the extent considered necessary to meet its objectives as
stated above. The Company does not enter into foreign currency or interest
rate transactions for speculative purposes.
VALUE AT RISK
The Company utilizes a "Value-at-Risk" (VAR) model to determine the maximum
potential one-day loss in the fair value of its interest rate and foreign
exchange sensitive financial instruments. The VAR model estimates were made
assuming normal market conditions and a 95% confidence level. There are
various modeling techniques which can be used in the VAR computation. The
Company's computations are based on the interrelationships between movements
in various currencies and interest rates (a "variance/co-variance" technique).
These interrelationships were determined by observing interest rate and
foreign currency market changes over the preceding quarter for the calculation
of VAR amounts at yearend and over each of the four quarters for the
calculation of average VAR amounts during the year. The model includes all of
the Company's debt as well as all interest rate and foreign exchange
derivatives contracts. The value of foreign exchange options do not change on
a one-to-one basis with the underlying currency, 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 12 to the Consolidated Financial Statements regarding the Company's
financial instruments at September 30, 1997 and 1996).
The estimated maximum potential one-day loss in fair value, calculated using
the VAR model, follows (in millions):
Interest Rate Currency
Sensitive Financial Sensitive Financial Combined
Instruments Instruments Portfolio
- -------------------------------------------------------------------------------
VAR as of September 30, 1997 $27 $24 $33
Average VAR during the year 31 22 34
ended September 30, 1997
Since the Company utilizes currency sensitive derivative instruments for
hedging anticipated foreign currency transactions, a loss in fair value for
those instruments is generally offset by increases in the value of the
underlying anticipated transactions.
-22-
OTHER MATTERS
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
However, if the Company, its customers or vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk. Accordingly, the Company plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Supplemental Data on page 30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-23-
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 1998 Annual Meeting of
Stockholders (the "1998 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 DIRECTORS' REMUNERATION; ATTENDANCE
and EXECUTIVE COMPENSATION in the 1998 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 OF CERTAIN
BENEFICIAL OWNERS and STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS in
the 1998 Proxy Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain related transactions appearing under the
caption RELATED TRANSACTIONS in the 1998 Proxy Statement is hereby
incorporated by reference.
-24-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statements and Schedules
(1) Financial Statements and Schedules
See Index to Financial Statements and Supplemental Data at page 30.
(2) Exhibits
3(a) Restated Certificate of Incorporation of the Company, filed as
Exhibit 3(a) to the Form 8-B/A, dated January 23, 1996, is hereby
incorporated by reference.
3(b) Amended Bylaws of the Company, dated November 24, 1997.
4(a) Form of Registration Rights Agreement entered into or to be
entered into with certain stockholders of the Company, filed as
Exhibit B to Exhibit 2.1 to the Current Report on Form 8-K, dated
July 31, 1995, of Disney Enterprises, Inc., is hereby incorporated
by reference.
4(b) Rights Agreement dated as of November 8, 1995 between the Company
and The Bank of New York, as rights agent, filed as Exhibit 4.2 to
the Registration Statement on Form S-4, dated November 13, 1995,
(No. 33-64141), is hereby incorporated by reference.
4(c) Five-Year Credit Agreement, dated October 30, 1996, among the
Company, as Borrower, Citicorp USA, Inc., as Administrative Agent,
Credit Suisse and Bank of America National Trust and Savings
Association, as Co-Administrative Agents and the Financial
Institutions named therein, filed as exhibit 4(d) to the Company's
Annual Report on Form 10-K for the year ended September 30, 1996,
is hereby incorporated by reference.
4(d) Indenture, dated as of November 30, 1990, between Disney
Enterprises, Inc. and Bankers Trust Company, as Trustee, with
respect to certain senior debt securities of Disney Enterprises,
Inc., filed as Exhibit 2 to Disney Enterprises, Inc.'s Current
Report on Form 8-K, dated January 14, 1991, is hereby incorporated
by reference.
4(e) Indenture, dated as of March 7, 1996, between the Company and
Citibank, N.A., as Trustee, with respect to certain senior debt
securities of the Company, filed as Exhibit 4.1(a) to the
Company's Current Report on Form 8-K, dated March 7, 1996, is
hereby incorporated by reference.
4(f) Other long-term borrowing instruments issued by the Company 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 Operation of Euro Disneyland
en France, dated March 25, 1987, and (ii) Letter relating thereto
of Michael D. Eisner, Chairman Disney Enterprises, Inc., dated
March 24, 1987, filed as Exhibits 10(b) and 10(a), respectively,
to Disney Enterprises, Inc.'s Current Report on Form 8-K dated
April 24, 1987, are hereby incorporated by reference.
10(b) Composite Limited Recourse Financing Facility Agreement, dated as
of April 27, 1988, between Disney Enterprises, Inc., and TDL
Funding Company, as amended.
10(c) Employment Agreement, dated as of January 8, 1997, between the
Company and Michael D. Eisner, filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1996, is hereby incorporated by reference.
10(d) (i) Contract, dated December 14, 1979, with E. Cardon Walker, to
purchase a 2% interest in certain motion pictures to be produced
by Disney Enterprises, Inc. and to acquire an additional 2% profit
participation; and (ii) Amendment thereto, dated August 8, 1980,
filed as Exhibits 1 and 3, respectively, to Disney Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended September 30,
1980, are hereby incorporated by reference.
-25-
10(e) Form of Indemnification Agreement entered into or to be entered
into by certain officers and directors of Disney Enterprises, Inc.
as determined from time to time by the Board of Directors,
included as Annex C to the Proxy Statement for Disney Enterprises,
Inc.'s 1988 Annual Meeting of Stockholders, is hereby incorporated
by reference.
10(f) 1995 Stock Option Plan for Non-Employee Directors, filed as
Exhibit 20 to Disney Enterprises, Inc.'s Registration Statement on
Form S-8 (No. 33-57811), dated February 23, 1995, is hereby
incorporated by reference.
10(g) (i) 1990 Stock Incentive Plan and Rules, filed as Exhibits 28(a)
and 28(b), respectively, to Disney Enterprises, Inc.'s
Registration Statement on Form S-8 (No. 33-39770), dated April 5,
1991, and (ii) Amended and Restated 1990 Stock Incentive Plan and
Rules, attached as Appendix B-2 to Disney Enterprises, Inc.'s
Joint Proxy Statement/Prospectus included in the Registration
Statement on Form S-4, dated November 13, 1995 (No. 33-64141), is
hereby incorporated by reference.
10(h) 1995 Stock Incentive Plan and Rules, attached as Appendix B-1 to
Disney Enterprises, Inc.'s Joint Proxy Statement/Prospectus
included in the Registration Statement on Form S-4, dated November
13, 1995 (File No. 33-64141), is hereby incorporated by reference.
10(i) (i) 1987 Stock Incentive Plan and Rules, (ii) 1984 Stock Incentive
Plan and Rules, (iii) 1981 Incentive Plan and Rules and (iv) 1980
Stock Option Plan, all as set forth as Exhibits 1(a), 1(b), 2(a),
2(b), 3(a), 3(b) and 4, respectively, to the Prospectus contained
in Part I of Disney Enterprises, Inc.'s Registration Statement on
Form S-8 (No. 33-26106), dated December 20, 1988, are hereby
incorporated by reference.
10(j) Contingent Stock Award Rules under Disney Enterprises, Inc.'s 1984
Stock Incentive Plan, filed as Exhibit 10(t) to Disney
Enterprises, Inc.'s Annual Report on Form 10-K for the year ended
September 30, 1986, is hereby incorporated by reference.
10(k) 1996 Cash Bonus Performance Plan, filed as Exhibit 10(m) to Disney
Enterprises, Inc.'s Annual Report on Form 10-K for the year ended
September 30, 1995, is hereby incorporated by reference.
10(l) 1997 Cash Bonus Performance Plan for Executive Officers, filed as
Annex 1 to the Proxy Statement dated January 9, 1997, for the
Company's 1997 Annual Meeting of Stockholders, is hereby
incorporated by reference.
10(m) Annual Bonus Performance Plan for Executive Officers.
10(n) 1997 Non-Employee Directors Stock and Deferred Compensation Plan.
10(o) Performance-Based Compensation Plan for the Company's Chief
Executive Officer, included in the Proxy Statement, dated January
9, 1997, for the Company's 1997 Annual Meeting of Stockholders, is
hereby incorporated by reference.
10(p) The Walt Disney Company and Associated Companies Key Employees
Deferred Compensation and Retirement Plan, filed as Exhibit 10(u)
to Disney Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended September 30, 1985, is hereby incorporated by
reference.
10(q) Disney Salaried Savings and Investment Plan, as amended and
restated, filed as Exhibit 10(s) to Disney Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended September 30, 1995,
is hereby incorporated by reference.
10(r) First Amendment to the Disney Salaried Savings and Investment
Plan.
10(s) Second Amendment to the Disney Salaried Savings and Investment
Plan.
10(t) ABC, Inc. Savings and Investment Plan, restated and effective as
of June 1, 1994, and amendments thereto filed as Exhibit 4.3 to
the Company's Registration Statement on Form S-8 (No. 333-00287),
dated January 18, 1996, is hereby incorporated by reference.
10(u) Amendments to ABC, Inc. Savings and Investment Plan effective as
of January 1, 1989, December 1, 1996, January 18, 1996, January
26, 1996 and December 26, 1996.
10(v) Employee Stock Option Plan of Capital Cities/ABC, Inc., as amended
through December 15, 1987, filed as Exhibit 10(f) to Capital
Cities/ABC, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1992, is hereby incorporated by reference.
-26-
10(w) Amended and Restated 1991 Stock Option Plan of Capital Cities/ABC,
Inc., filed as Exhibit 6(a)(i) to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1996, is hereby
incorporated by reference.
10(x) Group Personal Excess Liability Insurance Plan.
10(y) Family Income Assurance Plan (summary description).
10(z) Agreement, dated as of December 27, 1996, between the Company and
Michael S. Ovitz filed as exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1996, is
hereby incorporated by reference.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP, the Company's independent
accountants, is included herein at page 31.
27 Financial Data Schedule.
99 Pro forma financial information for certain 1997 events.
(b) Reports on Form 8-K
(i) Report on Form 8-K, dated August 21, 1997, with respect to the
unaudited pro forma combined condensed consolidated statement of income
of the Company for the year ended September 30, 1996.
-27-
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 19, 1997 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 December 19, 1997
MICHAEL D. EISNER Chairman of the Board and
- ---------------------------------- Chief Executive Officer
(Michael D. Eisner)
Principal Financial and Accounting
Officers
RICHARD D. NANULA Senior Executive Vice President December 19, 1997
- ---------------------------------- President and Chief Financial Officer
(Richard D. Nanula)
JOHN J. GARAND Senior Vice President- December 19, 1997
- ---------------------------------- Planning and Control
(John J. Garand)
Directors
ROY E. DISNEY Director December 19, 1997
- ----------------------------------
(Roy E. Disney)
MICHAEL D. EISNER Director December 19, 1997
- ----------------------------------
(Michael D. Eisner)
STANLEY P. GOLD Director December 19, 1997
- ----------------------------------
(Stanley P. Gold)
SANFORD M. LITVACK Director December 19, 1997
- ----------------------------------
(Sanford M. Litvack)
IGNACIO E. LOZANO, JR. Director December 19, 1997
- ----------------------------------
(Ignacio E. Lozano, Jr.)
GEORGE J. MITCHELL Director December 19, 1997
- ----------------------------------
(George J. Mitchell)
THOMAS S. MURPHY Director December 19, 1997
- ----------------------------------
(Thomas S. Murphy)
RICHARD A. NUNIS Director December 19, 1997
- ----------------------------------
(Richard A. Nunis)
-28-
Signature Title Date
--------- ----- ----
LEO J. O'DONOVAN, S.J. Director December 19, 1997
- ---------------------------
(Leo J. O'Donovan, S.J.)
SIDNEY POITIER Director December 19, 1997
- ---------------------------
(Sidney Poitier)
IRWIN E. RUSSELL Director December 19, 1997
- ---------------------------
(Irwin E. Russell)
ROBERT A.M. STERN Director December 19, 1997
- ---------------------------
(Robert A.M. Stern)
E. CARDON WALKER Director December 19, 1997
- ---------------------------
(E. Cardon Walker)
RAYMOND L. WATSON Director December 19, 1997
- ---------------------------
(Raymond L. Watson)
GARY L. WILSON Director December 19, 1997
- ---------------------------
(Gary L. Wilson)
-29-
THE WALT DISNEY COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page
----
Report of Independent Accountants and Consent of Independent Accountants.. 31
Consolidated Financial Statements of The Walt Disney Company and
Subsidiaries
Consolidated Statements of Income for the Years Ended September 30,
1997, 1996 and 1995.................................................... 32
Consolidated Balance Sheets as of September 30, 1997 and 1996........... 33
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995.................................................... 34
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995...................................... 35
Notes to Consolidated Financial Statements.............................. 36
Quarterly Financial Summary............................................. 52
Schedules other than those listed above are omitted for the reason that they
are not applicable or the required information is included in the financial
statements or related notes.
-30-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Walt Disney Company
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of The Walt Disney Company and its subsidiaries (the "Company") at
September 30, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1997,
in conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standard Board's Statement
of Financial Accounting Standards 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in fiscal 1996.
PRICE WATERHOUSE LLP
Los Angeles, California
November 18, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 33-26106,
33-35405 and 33-39770) and Form S-3 (Nos. 33-49891 and 33-62777) of The Walt
Disney Company of our report dated November 18, 1997 which appears above.
PRICE WATERHOUSE LLP
Los Angeles, California
December 19, 1997
-31-
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Year Ended September 30 1997 1996 1995
- ----------------------------------------------------------------------------
Revenues $ 22,473 $ 18,739 $12,151
Costs and expenses (18,161) (15,406) (9,685)
Gain on sale of KCAL 135 -- --
Accounting change -- (300) --
-------- -------- -------
Operating income 4,447 3,033 2,466
Corporate activities and other (367) (309) (239)
Net interest expense (693) (438) (110)
Acquisition-related costs -- (225) --
-------- -------- -------
Income before taxes 3,387 2,061 2,117
Income taxes (1,421) (847) (737)
-------- -------- -------
Net income $ 1,966 $ 1,214 $ 1,380
======== ======== =======
Earnings per share $ 2.86 $ 1.96 $ 2.60
======== ======== =======
Average number of common and common equivalent
shares outstanding 687 619 530
======== ======== =======
See Notes to Consolidated Financial Statements
-32-
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30 1997 1996
- ----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 317 $ 278
Receivables 3,726 3,343
Inventories 942 951
Film and television costs 4,401 3,259
Investments 1,897 1,009
Theme parks, resorts and other property, at cost
Attractions, buildings and equipment 11,787 11,019
Accumulated depreciation (4,857) (4,448)
------- -------
6,930 6,571
Projects in process 1,928 1,342
Land 93 118
------- -------
8,951 8,031
Intangible assets, net 16,011 18,045
Other assets 1,531 1,710
------- -------
$37,776 $36,626
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued liabilities $ 5,577 $ 5,694
Income taxes payable 995 582
Borrowings 11,068 12,342
Unearned royalty and other advances 1,172 1,179
Deferred income taxes 1,679 743
Stockholders' equity
Preferred stock, $.01 par value
Authorized--100 million shares
Issued--none
Common stock, $.01 par value
Authorized--1.2 billion shares
Issued--683 million shares and 682 million shares 8,534 8,576
Retained earnings 9,557 7,933
Cumulative translation and other (12) 39
------- -------
18,079 16,548
Treasury stock, at cost, 8 million shares (462) (462)
Shares held by TWDC Stock Compensation Fund, at cost,
4 million shares (332) --
------- -------
17,285 16,086
------- -------
$37,776 $36,626
======= =======
See Notes to Consolidated Financial Statements
-33-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended September 30 1997 1996 1995
- -------------------------------------------------------------------------------
NET INCOME $ 1,966 $ 1,214 $ 1,380
ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 3,781 2,762 1,383
Depreciation 738 672 470
Amortization of intangible assets 439 301 --
Gain on sale of KCAL (135) -- --
Accounting change -- 300 --
Other (15) 22 133
CHANGES IN
Investments in trading securities -- 85 1
Receivables (386) (426) (122)
Inventories (6) (95) (156)
Other assets (169) (160) (288)
Accounts and taxes payable and accrued liabilities 566 (246) 415
Unearned royalty and other advances (7) 274 161
Deferred income taxes 292 (78) 133
------- -------- -------
5,098 3,411 2,130
------- -------- -------
CASH PROVIDED BY OPERATIONS 7,064 4,625 3,510
------- -------- -------
INVESTING ACTIVITIES
Proceeds from disposal of KCAL 387 -- --
Proceeds from disposal of publishing operations 1,214 -- --
Acquisition of ABC, net of cash acquired -- (8,432) --
Film and television costs (5,054) (3,678) (1,886)
Investments in theme parks, resorts and other
property (1,922) (1,745) (896)
Investment in and loan for E! Entertainment (321) -- --
Purchases of marketable securities (56) (18) (1,033)
Proceeds from sales of marketable securities 31 409 1,460
Other (180) -- 67
------- -------- -------
(5,901) (13,464) (2,288)
------- -------- -------
FINANCING ACTIVITIES
Borrowings 2,437 13,560 786
Proceeds from formation of REITs 1,312 -- --
Reduction of borrowings (4,078) (4,872) (772)
Repurchases of common stock (633) (462) (349)
Dividends (342) (271) (180)
Exercise of stock options and other 180 85 183
------- -------- -------
(1,124) 8,040 (332)
------- -------- -------
Increase (Decrease) in Cash and Cash Equivalents 39 (799) 890
Cash and Cash Equivalents, Beginning of Year 278 1,077 187
------- -------- -------
Cash and Cash Equivalents, End of Year $ 317 $ 278 $ 1,077
======= ======== =======
Supplemental disclosure of cash flow information:
Interest paid $ 777 $ 379 $ 123
======= ======== =======
Income taxes paid $ 958 $ 689 $ 557
======= ======== =======
See Notes to Consolidated Financial Statements
-34-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions, except per share data)
TWDC
Cumulative Stock
Common Retained Translation Treasury Compensation
Shares Stock Earnings and Other Stock Fund Total
- -------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1994 524 $ 945 $5,790 $ 59 $(1,286) $ -- $ 5,508
Exercise of stock
options, net 8 281 -- -- -- -- 281
Common stock
repurchased, net (8) -- -- -- (317) -- (317)
Dividends ($.35 per
share) -- -- (180) -- -- -- (180)
Cumulative translation
and other -- -- -- (21) -- -- (21)
Net income -- -- 1,380 -- -- -- 1,380
--- ------ ------ ---- ------- ----- -------
BALANCE AT
SEPTEMBER 30, 1995 524 1,226 6,990 38 (1,603) -- 6,651
ABC acquisition impact 155 7,206 -- -- 1,603 -- 8,809
Exercise of stock
options, net 3 144 -- -- -- -- 144
Common stock
repurchased (8) -- -- -- (462) -- (462)
Dividends ($.42 per
share) -- -- (271) -- -- -- (271)
Cumulative translation
and other -- -- -- 1 -- -- 1
Net income -- -- 1,214 -- -- -- 1,214
--- ------ ------ ---- ------- ----- -------
BALANCE AT
SEPTEMBER 30, 1996 674 8,576 7,933 39 (462) -- 16,086
Exercise of stock
options, net 5 (42) -- -- -- 301 259
Common stock
repurchased (8) -- -- -- -- (633) (633)
Dividends ($.51 per
share) -- -- (342) -- -- -- (342)
Cumulative translation
and other -- -- -- (51) -- -- (51)
Net income -- -- 1,966 -- -- -- 1,966
--- ------ ------ ---- ------- ----- -------
BALANCE AT
SEPTEMBER 30, 1997 671 $8,534 $9,557 $(12) $ (462) $(332) $17,285
=== ====== ====== ==== ======= ===== =======
See Notes to Consolidated Financial Statements
-35-
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 international entertainment organization with operations in the
following businesses.
CREATIVE CONTENT
The Company produces and acquires live-action and animated motion pictures
for distribution to the theatrical, home video and television markets. The
Company also produces original television programming for the network and
first-run syndication markets. The Company distributes its filmed product
through its own distribution and marketing companies in the United States and
most foreign markets.
The Company licenses the name "Walt Disney," as well as the Company's
characters, visual and literary properties and songs and music, to various
consumer manufacturers, retailers, show promoters and publishers throughout
the world. The Company also engages in direct retail distribution principally
through the Disney Stores, and produces books and magazines for the general
public in the United States and Europe. In addition, the Company produces
audio products for all markets, as well as film, video and computer software
products for the educational marketplace.
BROADCASTING
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 the ABC
Television Network and 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 joint ventures in
foreign-based television operations and television production and distribution
entities. The primary domestic cable programming services, which operate
principally through joint ventures, are ESPN, the A&E Television Networks,
Lifetime Television and E! Entertainment Television. The Company provides
programming for and operates The Disney Channel, a cable and satellite
television programming service.
THEME PARKS AND RESORTS
The Company operates the Walt Disney World Resort(R) in Florida, and
Disneyland Park(R), the Disneyland Hotel and the Disneyland Pacific Hotel in
California. The Walt Disney World Resort includes the Magic Kingdom, Epcot and
the Disney-MGM Studios, thirteen resort hotels and a complex of villas and
suites, a nighttime entertainment complex, a shopping village, conference
centers, campgrounds, golf courses, water parks and other recreational
facilities. The Company earns royalties on revenues generated by the Tokyo
Disneyland(R) theme park near Tokyo, Japan, which is owned and operated by an
unrelated Japanese corporation. The Company also has an investment in Euro
Disney S.C.A. ("Euro Disney"), a publicly held French corporation that
operates Disneyland Paris. The Company's Walt Disney Imagineering unit designs
and develops new theme park concepts and attractions, as well as resort
properties. The Company also manages and markets vacation ownership interests
in the Disney Vacation Club. Included in Theme Parks and Resorts are the
Company's National Hockey League franchise, the Mighty Ducks of Anaheim, and
its ownership interest in the Anaheim Angels, a Major League Baseball team.
SIGNIFICANT ACCOUNT 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.
-36-
Accounting Changes
During 1997, the Company adopted SFAS 123 Accounting for Stock-Based
Compensation ("SFAS 123"), which requires disclosure of the fair value and
other characteristics of stock options (see Note 9). The Company has chosen
under the provisions of SFAS 123 to continue using the intrinsic-value method
of accounting for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to
Employees ("APB 25").
During 1996, the Company adopted SFAS 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121")
(see Note 11).
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.
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.
Revenues from participants and sponsors at the theme parks are generally
recorded over the period of the applicable agreements commencing with the
opening of the related attraction.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities
with original maturities of three months or less.
Investments
Debt securities that the Company has the positive intent and ability to hold
to maturity are classified as "held-to-maturity" and reported at amortized
cost. Debt securities not classified as held-to-maturity and marketable equity
securities are classified as either "trading" or "available-for-sale," and are
recorded at fair value with unrealized gains and losses included in earnings
or stockholders' equity, respectively. All other equity securities are
accounted for using either the cost method or the equity method. The Company's
share of earnings or losses in its equity investments accounted for under the
equity method is included in "Corporate activities and other" 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 production and participation costs are expensed based on
the ratio of the current period's gross revenues to estimated total gross
revenues from all sources on an individual production basis. Estimates of
total gross revenues can change significantly due to the level of market
acceptance of film and television products. Accordingly, revenue estimates are
reviewed periodically
-37-
and amortization is adjusted. Such adjustments could have a material effect on
results of operations in future periods.
Television broadcast program licenses and rights and related liabilities are
recorded when the license period begins and the program is available for use.
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 program. Television network series costs and multi-year
sports rights are charged to expense based on the flow of anticipated revenue.
Theme Parks, Resorts and Other Property
Theme parks, resorts and other property are carried at cost. Depreciation is
computed on the straight-line method based upon estimated useful lives ranging
from three to fifty years.
Intangible/Other Assets
Intangible assets are amortized over periods ranging from two to forty
years. The Company continually reviews the recoverability of the carrying
value of these assets using the methodology prescribed in SFAS 121. The
Company also reviews long-lived assets and the related intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of such assets may not be recoverable. Recoverability of these assets
is determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate, to the carrying amount including
associated intangible assets of such operation. If the operation is determined
to be unable to recover the carrying amount of its assets, then intangible
assets are written down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
Risk Management Contracts
In the normal course of business, the Company employs a variety of off-
balance-sheet financial instruments to manage its exposure to fluctuations in
interest and foreign currency exchange rates, including interest rate and
cross-currency swap agreements, forward, option, swaption and spreadlock
contracts.
The Company designates and assigns the financial instruments as hedges for
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 payable and other accrued liabilities.
Gains and losses from hedges are classified in the income statement consistent
with the accounting treatment of the items being hedged. Cash flows from
hedges are classified in the statement of cash flows under the same category
as the cash flows from the related assets, liabilities or anticipated
transactions.
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 interest income or expense over the life of the
swaps. Gains and losses on the termination of swap agreements, prior to their
original maturity, are deferred and amortized over the remaining term of the
underlying hedged transactions.
Gains and losses arising from foreign currency forward and option contracts
are recognized as offsets of gains and losses resulting from the items being
hedged.
-38-
Earnings Per Share
Earnings per share amounts are based upon the weighted average number of
common and common equivalent shares outstanding during the year. Common
equivalent shares are excluded from the computation in periods in which they
have an anti-dilutive effect.
In February 1997, the Financial Accounting Standards Board issued SFAS 128
Earnings per Share ("SFAS 128"), which specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS"). It
replaces the presentation of primary and fully diluted EPS with basic and
diluted EPS. Basic EPS excludes all dilution. It is based upon the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company will adopt SFAS 128 as of the first quarter of fiscal 1998 and
restate all previously reported per share amounts to conform to the new
presentation. (See Note 8 regarding the impact of SFAS 128 on the Company's
reported EPS.)
Reclassifications
Certain reclassifications have been made in the 1996 and 1995 financial
statements to conform to the 1997 presentation including the reclassification
of certain equity investments out of other assets into investments in the
consolidated balance sheets.
2 Acquisition and Dispositions
On February 9, 1996, the Company completed its acquisition of ABC. The
aggregate consideration paid to ABC shareholders consisted of $10.1 billion in
cash and 155 million shares of Company common stock valued at $8.8 billion
based on the stock price as of the date the transaction was announced.
The acquisition has been accounted for as a purchase and the acquisition
cost of $18.9 billion was allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $4.0 billion (of which $1.5 billion was cash) and liabilities assumed
were $4.3 billion. A total of $19.0 billion, representing the excess of
acquisition cost over the fair value of ABC's net tangible assets, was
allocated to intangible assets and is being amortized over forty years. The
Company completed its final purchase price allocation and determination of
related goodwill, deferred taxes and other accounts during the second quarter
of 1997. At that time, the Company also reclassified certain provisions for
acquired broadcast programming out of accrued liabilities into film and
television costs in the consolidated balance sheets.
In connection with the acquisition, all common shares of the Company
outstanding immediately prior to the effective date of the acquisition were
canceled and replaced with new common shares and all treasury shares were
canceled and retired.
The Company's consolidated results of operations have incorporated ABC's
activity from the effective date of the acquisition. The unaudited pro forma
information below presents combined results of operations as if the
acquisition had occurred at the beginning of the respective years presented.
The unaudited pro forma information is not necessarily indicative of the
results of operations of the combined company had the acquisition occurred at
the beginning of the years presented, nor is it necessarily indicative of
future results.
Year Ended September 30,
-------------------------
1996 1995
------------ ------------
Revenues $ 21,238 $ 18,949
Net income (a) 1,331 1,307
Earnings per share (a) 1.93 1.91
- --------
(a) 1996 includes the impact of a $300 million non-cash charge related to the
initial adoption of a new accounting standard (see Note 11). The charge
reduced earnings per share by $0.27 for the year.
-39-
During the second quarter of 1996, the Company recognized a $225 million
charge for costs related to the acquisition, which is not included in the
above pro forma amounts. Acquisition-related costs consist principally of
interest costs related to imputed interest for the period from the effective
date of the acquisition until March 14, 1996, the date that cash and stock
consideration was issued to ABC shareholders.
As a result of the ABC acquisition, the Company sold its independent Los
Angeles television station KCAL during the first quarter of 1997 for $387
million, resulting in a gain of $135 million.
During the third and fourth quarters of 1997, the Company disposed of most
of the publishing businesses acquired with ABC to various third parties for
consideration approximating their carrying amount. Proceeds consisted of $1.2
billion in cash, $1.0 billion in debt assumption and preferred stock
convertible to common stock with a market value of $660 million. Results of
operations for the publishing businesses included in the Creative Content
segment were as follows:
Year Ended September 30,
------------------------
1997 1996 (a)
---- --------
Revenues $839 $714
Operating income 189 93
- --------
(a) 1996 amounts reflect the publishing operations from the date of the ABC
acquisition.
3 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, 1997, the Company's recorded investment in Euro Disney was $355 million.
The quoted market value of the Company's Euro Disney shares at September 30,
1997 was approximately $415 million.
In connection with the financial restructuring of Euro Disney in 1994, Euro
Disney Associes S.N.C. ("Disney SNC"), a wholly owned affiliate of the
Company, entered into a lease arrangement with a noncancelable term of 12
years (the "Lease") related to substantially all of the Disneyland Paris theme
park assets, and then entered into a 12-year sublease agreement (the
"Sublease") with Euro Disney. Remaining lease rentals at September 30, 1997 of
FF 9.1 billion ($1.6 billion) receivable from Euro Disney under the Sublease
approximate the amounts payable by Disney SNC under the Lease. At the
conclusion of the Sublease term, Euro Disney will have the option to assume
Disney SNC's rights and obligations under the Lease. If Euro Disney does not
exercise its option, Disney SNC may purchase the assets, continue to lease the
assets or elect to terminate the Lease, in which case Disney SNC would make a
termination payment to the lessor equal to 75% of the lessor's then
outstanding debt related to the theme park assets, estimated to be $1.3
billion; Disney SNC could then sell or lease the assets on behalf of the
lessor to satisfy the remaining debt, with any excess proceeds payable to
Disney SNC.
Also as part of the restructuring, the Company agreed to arrange for the
provision of a 10-year unsecured standby credit facility of approximately $185
million, upon request, bearing interest at PIBOR. As of September 30, 1997,
Euro Disney had not requested the Company establish this facility. The Company
also agreed, as long as any of the restructured debt is outstanding, to
maintain ownership of at least 34% of the outstanding common stock of Euro
Disney until June 1999, at least 25% for the subsequent five years and at
least 16.67% for an additional term thereafter.
Euro Disney's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in France ("French GAAP"). U.S.
generally accepted accounting principles ("U.S. GAAP") differ in certain
significant respects from French GAAP applied by Euro Disney, principally as
they relate to accounting for leases and the calculation of interest expense
relating to debt affected by Euro Disney's financial restructuring. The
Company records its equity share of Euro Disney's operating results calculated
in accordance with U.S. GAAP.
-40-
4 Film and Television Costs
1997 1996
- -------------------------------------------
Theatrical film costs
Released, less amortization $1,691 $1,419
In-process 1,855 1,472
------ ------
3,546 2,891
------ ------
Television costs
Released, less amortization 276 246
In-process 279 96
------ ------
555 342
------ ------
Television broadcast rights 300 26
------ ------
$4,401 $3,259
====== ======
Based on management's total gross revenue estimates as of September 30, 1997,
approximately 79% of unamortized film and television costs (except in-process)
are expected to be amortized during the next three years.
5 Borrowings
Effective Fiscal
Interest Year
Rate Maturity 1997 1996
- -------------------------------------------------------------------------
Commercial paper (a) 6.2% 1998 $ 2,019 $ 4,185
U.S. dollar notes and debentures (b) 6.5 1998-2093 5,796 4,399
Dual currency and foreign notes (c) 5.4 1998-2001 1,854 1,987
Senior participating notes (d) 6.3 2000-2001 1,145 1,099
Other 8.2 1998-2027 254 672
------- -------
6.3 $11,068 $12,342
======= =======
- --------
(a) The Company has established bank facilities totaling $3.2 billion which
expire in four years. Under the bank facilities, the Company has the
option to borrow at various interest rates. The effective interest rate
reflects the effect of interest rate swaps entered into with respect to
certain of these borrowings.
(b) Includes an $821 million minority interest in a real estate investment
trust established by the Company and $300 million of borrowings due in
2093. The effective interest rate reflects the effect of interest rate
swaps entered into with respect to certain of these borrowings.
(c) Denominated principally in U.S. dollars, Japanese yen, Australian dollars
and Italian lira. The effective interest rate reflects the effect of
interest rate and cross-currency swaps entered into with respect to
certain of these borrowings.
(d) The average coupon rate is 2.7% on $1.3 billion face value of notes.
Additional interest may be paid based on the performance of designated
portfolios of films.
Borrowings, excluding commercial paper, have the following scheduled
maturities:
1998 $ 844
1999 1,472
2000 1,360
2001 2,026
2002 --
Thereafter 3,347
-41-
The Company capitalizes interest on assets constructed for its theme parks,
resorts and other property, and on theatrical and television productions in
process. In 1997, 1996 and 1995, respectively, total interest costs incurred
were $841 million, $545 million and $236 million, of which $100 million, $66
million and $58 million were capitalized.
6 Income Taxes
1997 1996 1995
- --------------------------------------------------------------------------
Income before income taxes
Domestic (including U.S. exports) $ 3,193 $ 1,822 $1,908
Foreign subsidiaries 194 239 209
------- ------- ------
$ 3,387 $ 2,061 $2,117
======= ======= ======
Income tax provision
Current
Federal $ 1,023 $ 389 $ 325
State 203 101 68
Foreign (including withholding) 190 235 184
------- ------- ------
1,416 725 577
------- ------- ------
Deferred
Federal 21 106 170
State (16) 16 (10)
------- ------- ------
5 122 160
------- ------- ------
$ 1,421 $ 847 $ 737
======= ======= ======
Components of Deferred Tax Assets and
Liabilities 1997 1996
- --------------------------------------------------------------------------
Deferred tax assets
Accrued liabilities $(1,129) $(1,622)
Other, net (35) (111)
------- -------
Total deferred tax assets (1,164) (1,733)
------- -------
Deferred tax liabilities
Depreciable, amortizable and other property 2,266 1,907
Licensing revenues 179 215
Leveraged leases 258 254
Investment in Euro Disney 90 50
------- -------
Total deferred tax liabilities 2,793 2,426
------- -------
Net deferred tax liability before valuation
allowance 1,629 693
Valuation allowance 50 50
------- -------
Net deferred tax liability $ 1,679 $ 743
======= =======
Reconciliation of Effective Income Tax Rate 1997 1996 1995
- --------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Nondeductible amortization of intangible assets 4.4 5.1 --
State taxes, net of federal income tax benefit 3.6 3.7 1.9
Other, net (1.0) (2.7) (2.1)
------- ------- ------
42.0% 41.1% 34.8%
======= ======= ======
In 1997, 1996 and 1995, income tax benefits attributable to employee stock
option transactions of $81 million, $44 million and $90 million, respectively,
were allocated to stockholders' equity.
-42-
7 Pension and Other Benefit Programs
The Company maintains pension plans and postretirement medical benefit plans
covering most of its domestic employees not covered by union or industry-wide
plans. Employees hired after January 1, 1994 are not eligible for the
postretirement medical benefits. 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
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
Reconciliation of funded status of the
plans and the amounts included in the
Company's consolidated balance
sheets:
Projected benefit obligations
Beginning obligations $(1,402) $ (604) $ (271) $ (162)
ABC's plans at acquisition -- (774) -- (99)
Service cost (73) (68) (10) (12)
Interest cost (106) (81) (21) (16)
Gains 9 88 5 10
Benefits paid 62 37 9 8
Other 72 -- (5) --
------- ------- ------- -------
Ending obligations (1,438) (1,402) (293) (271)
------- ------- ------- -------
Fair value of plans' assets
Beginning fair value 1,442 632 138 107
ABC's plans at acquisition -- 631 -- --
Actual return on plans' assets 304 149 27 20
Contributions 111 74 6 23
Benefits paid (71) (44) (9) (12)
Other (60) -- -- --
------- ------- ------- -------
Ending fair value 1,726 1,442 162 138
------- ------- ------- -------
Funded status of the plans 288 40 (131) (133)
Unrecognized net gain (219) (42) (20) (9)
Unrecognized prior service benefit (2) (2) (34) (75)
Other 28 -- -- --
------- ------- ------- -------
Net balance sheet asset (liability) $ 95 $ (4) $ (185) $ (217)
======= ======= ======= =======
Rate assumptions
Discount rate 7.8% 7.8% 7.8% 7.8%
Rate of return on plans' assets 10.5% 10.0% 10.5% 10.0%
Salary increases 5.4% 5.6% N/A n/a
Annual increase in cost of benefits N/A n/a 6.7% 7.0%
The annual increase in cost of postretirement benefits of 6.7% is assumed to
decrease .3ppts per year until stabilizing at 5.5%. An increase in the assumed
benefits cost trend of 1ppt for each year would increase the postretirement
benefit obligation at September 30, 1997 by $51 million.
The Company's accumulated pension benefit obligation at September 30, 1997
was $1.3 billion, of which 97.8% was vested. The accumulated postretirement
benefit obligation for all plans at September 30, 1997 comprised 48% retirees,
18% fully eligible active participants and 34% other active participants.
-43-
The income statement cost of the pension plans for 1997, 1996 and 1995
totaled $45 million, $58 million and $33 million, respectively. The income
statement credit for the postretirement benefit plans for the same years was
$18 million, $16 million and $43 million, respectively. The discount rate,
salary increase rate, rate of return on plans' assets and annual increase in
cost of benefits were 7.5%, 5.8%, 9.5%, and 7.0%, respectively, in 1995.
8 Stockholders' Equity
The Company has historically attempted to increase the long-term value of
its shares by the acquisition of its stock. As of September 30, 1997, the
Company's share repurchase program authorized the purchase of up to 88 million
shares. In December 1996, the Company established the TWDC Stock Compensation
Fund pursuant to the repurchase program to acquire shares of the Company for
the purpose of funding certain stock-based compensation. Any shares acquired
by the fund that are not utilized must be disposed of by December 31, 1999.
In the first quarter of 1998, the Company will adopt the provisions of SFAS
128, which will require the presentation of diluted and basic EPS. Early
adoption of SFAS 128 is not permitted. Diluted EPS under the new standard does
not differ from the Company's current EPS. If SFAS 128 had been adopted for
the periods presented, the basic EPS amounts would have been $2.92, $1.98 and
$2.65 for 1997, 1996 and 1995, respectively.
The Company has a stockholder's rights plan, which becomes operative in
certain events involving the acquisition of 25% or more of the Company's
common stock by any person or group in a transaction not approved by the
Company's Board of Directors. Upon the occurrence of such an event, each
right, unless redeemed by the Board, entitles its holder to purchase for $350
an amount of common stock of the Company, or in certain circumstances the
acquirer, having a $700 market value. In connection with the rights plan, 7
million shares of preferred stock were reserved.
9 Stock Incentive Plans
Under various plans, the Company may grant stock options and other awards to
key executive, management and creative personnel at exercise prices equal to
or exceeding the market price at the date of grant. In general, options become
exercisable over a five-year period from the grant date and expire 10 years
after the date of grant. In certain cases for senior executives, options
become exercisable over periods up to 10 years and expire up to 15 years after
date of grant. Shares available for future option grants at September 30,
1997, totaled 45 million.
The following table summarizes information about stock option transactions
(shares in millions):
1997 1996 1995
--------------- --------------- ---------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year 63 $47.51 35 $33.60 39 $27.73
Awards canceled (6) 57.95 (2) 51.29 (4) 35.99
Awards granted 9 76.93 32 58.90 8 49.42
Awards exercised (5) 33.41 (3) 31.59 (8) 22.02
Awards transferred (ABC) -- 1 33.15 --
--- --- ---
Outstanding at September 30 61 $52.32 63 $47.51 35 $33.60
=== === ===
Exercisable at September 30 21 $35.31 17 $28.21 15 $24.58
=== === ===
-44-
The following table summarizes information about stock options outstanding at
September 30, 1997 (shares in millions):
Weighted
Average
Remaining Weighted Weighted
Range of Number Years of Average Number Average
Exercise of Options Contactual Exercise of Options Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ---------- -------- ----------- --------
$13-$ 20 8 1.27 $17.70 7 $17.70
$20-$ 30 4 3.31 26.16 3 26.04
$30-$ 40 3 5.06 36.30 2 35.33
$40-$ 50 7 6.48 42.95 4 42.81
$50-$ 60 8 7.82 56.46 4 56.82
$60-$ 70 20 9.17 63.45 1 62.89
$70-$ 80 7 10.23 76.52 --
$80-$ 90 2 9.73 81.44 --
$90-$127 2 14.00 110.80 --
--- ---
61 21
=== ===
During fiscal year 1997, the Company adopted SFAS 123 and under the
provisions of the new standard has elected to continue using the intrinsic-
value method of accounting for stock-based awards granted to employees in
accordance with APB 25. Accordingly, the Company has not recognized
compensation expense for its stock-based awards to employees. The following
table reflects pro forma net income and earnings per share had the Company
elected to adopt the fair value approach of SFAS 123:
1997 1996
------ ------
Net income:
As reported $1,966 $1,214
Pro forma 1,870 1,185
Earnings per share:
As reported 2.86 1.96
Pro forma 2.73 1.91
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years.
The weighted average fair values of options at their grant date during 1997
and 1996, where the exercise price equals the market price on the grant date,
were $27.26 and $23.01, respectively. The weighted average fair value of
options at their grant date during 1996, where the exercise price exceeds the
market price on the grant date, was $18.61. No such options were granted
during 1997. The estimated fair value of each option granted is calculated
using the Black-Scholes option-pricing model. The following summarizes the
weighted average of the assumptions used in the model:
1997 1996
---- ----
Risk-free interest rate 6.4% 6.2%
Expected years until exercise 6.1 7.1
Expected stock volatility 23% 23%
Dividend yield .71% .69%
-45-
10 Detail of Certain Balance Sheet Accounts
1997 1996
- -----------------------------------------------------------------
Receivables
Trade, net of allowances $ 3,104 $ 2,875
Other 622 468
------- -------
$ 3,726 $ 3,343
======= =======
Accounts payable and other accrued liabilities
Accounts payable $ 4,609 $ 4,835
Payroll and employee benefits 847 757
Other 121 102
------- -------
$ 5,577 $ 5,694
======= =======
Intangible assets
Cost in excess of ABC's net assets acquired $14,307 $16,079
Trademark 1,100 1,100
FCC licenses 1,100 1,100
Other 211 79
Accumulated amortization (707) (313)
------- -------
$16,011 $18,045
======= =======
-46-
11 Segments
Business Segments 1997 1996 1995
- ---------------------------------------------------------
Revenues
Creative Content $10,937 $10,159 $ 7,736
Broadcasting 6,522 4,078 414
Theme Parks and Resorts 5,014 4,502 4,001
------- ------- -------
$22,473 $18,739 $12,151
======= ======= =======
Operating income
Creative Content $ 1,882 $ 1,561 $ 1,531
Broadcasting 1,294 782 76
Theme Parks and Resorts 1,136 990 859
KCAL gain 135 -- --
Accounting change -- (300) --
------- ------- -------
$ 4,447 $ 3,033 $ 2,466
======= ======= =======
Capital expenditures
Creative Content $ 301 $ 359 $ 232
Broadcasting 152 113 8
Theme Parks and Resorts 1,266 1,196 635
Corporate 203 77 21
------- ------- -------
$ 1,922 $ 1,745 $ 896
======= ======= =======
Depreciation expense
Creative Content $ 187 $ 163 $ 107
Broadcasting 104 104 8
Theme Parks and Resorts 408 358 335
Corporate 39 47 20
------- ------- -------
$ 738 $ 672 $ 470
======= ======= =======
Identifiable assets
Creative Content $ 8,832 $ 8,837 $ 5,232
Broadcasting 19,036 19,576 564
Theme Parks and Resorts 8,051 7,066 6,149
Corporate 1,857 1,147 2,661
------- ------- -------
$37,776 $36,626 $14,606
======= ======= =======
Supplemental revenues data
Creative Content
Theatrical product $ 5,540 $ 5,306 $ 4,453
Consumer products 2,992 2,597 2,120
Broadcasting
Advertising 4,937 3,092 98
Theme Parks and Resorts
Merchandise, food and beverage 1,754 1,555 1,424
Admissions 1,603 1,493 1,346
-47-
Geographic Segments 1997 1996 1995
- ------------------------------------------------
Revenues
United States $17,868 $14,422 $ 8,876
United States export 874 746 608
Europe 2,073 2,086 1,677
Rest of world 1,658 1,485 990
------- ------- -------
$22,473 $18,739 $12,151
======= ======= =======
Operating income
United States $ 3,712 $ 2,229 $ 1,665
Europe 499 633 486
Rest of world 397 382 402
Unallocated expenses (161) (211) (87)
------- ------- -------
$ 4,447 $ 3,033 $ 2,466
======= ======= =======
Identifiable assets
United States $35,985 $34,762 $13,438
Europe 1,275 1,495 1,060
Rest of world 516 369 108
------- ------- -------
$37,776 $36,626 $14,606
======= ======= =======
During the second quarter of 1996, the Company implemented SFAS 121. This
new accounting standard changes the method that companies use to evaluate the
carrying value of such assets by, among other things, requiring companies to
evaluate assets at the lowest level at which identifiable cash flows can be
determined. The implementation of SFAS 121 resulted in the Company recognizing
a $300 million non-cash charge related principally to certain assets included
in the Theme Parks and Resorts segment.
12 Financial Instruments
Investments
As of September 30, 1997 and 1996, the Company held $137 million and $104
million, respectively, of securities classified as available-for-sale. In 1997
and 1996, realized gains and losses on available-for-sale securities,
determined principally on an average cost basis, and unrealized gains and
losses on available-for-sale securities were not material.
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 to lower its
overall borrowing costs. Significant interest rate risk management instruments
held by the Company at September 30, 1997 and 1996 included pay-floating and
pay-fixed swaps and swaption contracts. Pay-fixed swaps effectively converted
floating rate obligations to fixed rate instruments. Pay-floating swaps
effectively converted medium-term obligations and senior participating notes
to commercial paper or LIBOR-based variable rate instruments. These swap
agreements expire in one to 15 years. Swaption contracts were designated as
hedges of floating rate debt and expire within one year.
-48-
The following table reflects incremental changes in the notional or
contractual amounts of the Company's interest rate contracts during 1997 and
1996. Activity representing renewal of existing positions is excluded.
September 30, Maturities/ September 30,
1996 Additions Expirations Terminations 1997
- ------------------------------------------------------------------------------------
Pay-floating swaps $1,520 $2,479 $ -- $(1,913) $2,086
Pay-fixed swaps 900 850 (200) (600) 950
Swaption contracts -- 1,100 -- (800) 300
Option contracts -- 593 -- (593) --
Spreadlock contracts -- 470 (470) -- --
------ ------ ----- ------- ------
$2,420 $5,492 $(670) $(3,906) $3,336
====== ====== ===== ======= ======
September 30, Maturities/ September 30,
1995 Additions Expirations Terminations 1996
- ------------------------------------------------------------------------------------
Pay-floating swaps $ 719 $1,195 $(115) $ (279) $1,520
Pay-fixed swaps 4,680 1,460 -- (5,240) 900
Forward contracts -- 93 (93) -- --
Futures contracts 123 6 -- (129) --
Option contracts 102 12 (40) (74) --
------ ------ ----- ------- ------
$5,624 $2,766 $(248) $(5,722) $2,420
====== ====== ===== ======= ======
The impact of interest rate risk management activities on income in 1997 and
1996 and the amount of deferred gains and losses from interest rate risk
management transactions at September 30, 1997 and 1996 were not material.
Foreign Exchange Risk Management
The Company transacts business in virtually every part of the world and is
subject to risks associated with changing foreign exchange rates. The
Company's objective is to reduce earnings and cash flow volatility associated
with foreign exchange rate changes to allow management to focus its attention
on its core business issues and challenges. Accordingly, the Company enters
into various contracts which 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 each of the next 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 which 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 Japanese yen, French franc, German
mark, British pound, Canadian dollar, Italian lira and Spanish peseta. The
Company also uses forward contracts to hedge foreign currency assets,
liabilities and foreign currency payments the Company is committed to make in
connection with the construction of two cruise ships (see Note 13). Cross-
currency swaps are used to hedge foreign currency-denominated borrowings.
-49-
At September 30, 1997 and 1996, 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:
1997 1996
------------------------------ ------------------------------
NOTIONAL EXPOSURES FISCAL YEAR Notional Exposures Fiscal Year
AMOUNT HEDGED MATURITY Amount Hedged Maturity
-------- --------- ----------- -------- --------- -----------
Option contracts $3,460 $1,633 1998-1999 $5,563 $3,386 1997-1999
Forward contracts 2,284 1,725 1998-1999 1,981 1,174 1997-1999
Cross-currency swaps 1,812 1,812 1998-2001 2,308 2,536 1997-2001
------ ------ ------ ------
$7,556 $5,170 $9,852 $7,096
====== ====== ====== ======
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, 1997 and 1996, the
Company had deferred gains of $486 million and $335 million, respectively, and
deferred losses of $220 million and $307 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 1997 was a net gain of $166
million and in 1996 was not material.
Fair Value of Financial Instruments
At September 30, 1997 and 1996, the Company's financial instruments included
cash, cash equivalents, investments, receivables, accounts payable, borrowings
and interest rate and foreign exchange risk management contracts.
At September 30, 1997 and 1996, the fair values of cash and cash
equivalents, receivables, accounts payable and commercial paper approximated
carrying values because of the short-term nature of these instruments. The
estimated fair values of other financial instruments subject to fair value
disclosures, determined based on broker quotes or quoted market prices or
rates for the same or similar instruments, and the related carrying amounts
are as follows:
1997 1996
------------------ ------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------- -------- -------- --------
Investments $ 769 $ 1,174 $ 148 $ 148
Borrowings (10,313) (10,290) (12,342) (12,270)
Risk management contracts 257 437 466 460
-------- -------- -------- --------
$ (9,287) $ (8,679) $(11,728) $(11,662)
======== ======== ======== ========
Credit Concentrations
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its financial
instruments and does not anticipate nonperformance by the counterparties. The
Company would not realize a material loss as of September 30, 1997 in the
event of nonperformance by any one counterparty. The Company enters into
transactions only with financial institution counterparties which have a
credit rating of A- or better. The Company's current policy in 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
credit exposure with any one institution. At September 30, 1997, financial
institution counterparties posted collateral of $210 million to the Company,
and the Company was not required to collateralize its financial instrument
obligations.
-50-
The Company's trade receivables and investments do not represent significant
concentrations of credit risk at September 30, 1997, 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.
13 Commitments and Contingencies
During 1995, the Company entered into agreements with a shipyard to build
two cruise ships for its Disney Cruise Line. Under the agreements, the Company
is committed to make payments totaling approximately $625 million through
1999.
At September 30, 1997, the Company is committed to the purchase of broadcast
rights for various feature films, sports and other programming aggregating
approximately $5.2 billion. 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 $1.8 billion at September 30, 1997,
payable as follows:
1998 $229
1999 222
2000 209
2001 195
2002 179
Thereafter 741
Rental expense for the above operating leases, including overages, common-
area maintenance and other contingent rentals, during 1997, 1996 and 1995 was
$327 million, $233 million and $135 million, respectively.
The Company, together with, in some instances, certain of its directors and
officers, is a defendant or co-defendant in various legal actions involving
copyright, breach of contract and various other claims incident to the conduct
of its businesses. Management does not expect the Company to suffer any
material liability by reason of such actions, nor does it expect that such
actions will have a material effect on the Company's liquidity or operating
results.
-51-
QUARTERLY FINANCIAL SUMMARY
(In millions, except per share data)
(Unaudited)
December 31 March 31 June 30 September 30
- --------------------------------------------------------------------------
1997
Revenues $6,278 $5,481 $5,194 $5,520
Operating income (/1/) 1,562 864 1,060 961
Net income (/1/) 749 333 473 411
Earnings per share (/1/) 1.09 .49 .69 .60
1996 (/2/)
Revenues $3,837 $4,543 $5,087 $5,272
Operating income (/3/) 863 356 956 858
Net income (loss) (/3/) 497 (25) 406 336
Earnings (loss) per share (/3/) .93 (.04) .59 .49
- --------
(1) Reflects a $135 million gain on the sale of KCAL in the first quarter. The
earnings per share impact of this gain was $.11. See Note 2 to the
Consolidated Financial Statements.
(2) Results after February 9, 1996 reflect the impact of the acquisition of
ABC. See Note 2 to the Consolidated Financial Statements.
(3) Operating and net income (loss) reflect a $300 million non-cash charge in
the second quarter pertaining to the implementation of SFAS 121. Net
income (loss) was also affected in the second quarter by a $225 million
charge for costs related to the acquisition of ABC. The earnings per share
impacts of these charges were $.30 and $.22, respectively. See Notes 2 and
11 to the Consolidated Financial Statements.
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