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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, 1998 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
on Which Registered
Title of Each Class
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, 1998, 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 $66.0
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 2,050,798,550 shares of common stock outstanding as of December
17, 1998 (including 507,300 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 117,000 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. Unless the context otherwise
requires, the term "Company" is 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 and 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 produces 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; produce popular music,
children's audio products and computer software for the entertainment market,
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 and Hollywood Pictures.
Another subsidiary, Miramax Film Corp., acquires and produces motion pictures
that are primarily distributed under the Miramax and Dimension banners. The
Company also produces and distributes animated motion pictures under the
banner Walt Disney Pictures. In addition, the Company distributes films
produced or acquired by certain independent production companies.
During fiscal 1999, the Company expects to distribute approximately 21
feature films under the Walt Disney Pictures, Touchtone Pictures and Hollywood
Pictures banners and approximately 36 films under the Miramax and Dimension
banners, including several live-action family films and one to two full length
animated films, with the remainder targeted to teenagers and adults. In
addition, the
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Company periodically reissues previously released animated films. As of
September 30, 1998, the Company had released 547 full length live-action
features (primarily color), 36 full length animated color features and
approximately 478 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 1998, 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 four 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. For two years in a row, the Company has distributed
seven of the ten top selling home videos. In addition, the Company distributed
three of the five top rental titles in 1998. As of September 30, 1998, 1,247
produced and acquired titles, including 661 feature films and 527 cartoon
shorts and animated features, were available to the domestic marketplace and
1,349 produced and acquired titles, including 715 feature films and 634
cartoon shorts and animated features, were available to the international home
entertainment market.
TELEVISION PRODUCTION AND DISTRIBUTION
The Company develops, produces and distributes television programming to
global broadcasters, cable and satellite operators, including the major
television networks, the Disney Channel and other cable broadcasters, under
the Buena Vista Television, Touchstone Television 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. Half-hour comedies Home Improvement, Boy Meets World, Smart Guy and
Unhappily Ever After were all renewed for the 1998/99 television season. New
prime-time series premiering in the fall of 1998 included the half-hour comedy
Sports Night and the one-hour drama Felicity. Midseason orders include the
half-hour comedies The PJ's and Zoe Bean.
The Company is also producing six original television movies for The
Wonderful World of Disney, which was renewed for the 1998/99 television season
and continues to air on ABC on Sunday evenings.
The 1998/99 Saturday morning television season returned with a second year
of the two-hour kids' show, Disney's One Saturday Morning on ABC. Disney's One
Saturday Morning is a show comprised of audience participation segments,
cartoons and pre-recorded comedy segments that "wrap-around" the weekly series
Disney's Doug, Recess and Pepper Ann. Other television animation series on ABC
include the premiere of Disney's Hercules, and the return of Disney's 101
Dalmatians: The Series and The New Adventures of Winnie the Pooh. Midseason on
Saturday morning will feature the premiere of Mouseworks, the first cartoon
series since the 1950's featuring Mickey Mouse and his friends.
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 one-and-a-half
hour block, airing five days per week, including Disney's Hercules, Disney's
Doug and Ducktales. Live-action programming includes Live! With Regis and
Kathie Lee, a daily 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 Make Me Laugh and Win Ben Stein's Money.
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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, Ellen, Boy Meets World,
Blossom, Dinosaurs, Golden Girls, Brotherly Love and Empty Nest. Major
packages of the Company's feature films and television programming have been
licensed for broadcast over several years.
The Company also licenses its theatrical and television properties in a
number of foreign television markets. In addition, certain of the Company's
television programs are syndicated by the Company abroad, including The Disney
Club, a weekly series that the Company produces for foreign markets.
The Company has licensed to the Encore pay television services, over a
multi-year period, exclusive domestic pay television rights to certain films
released under the Miramax, Touchstone, Hollywood, Dimension and Walt Disney
Pictures banners. In addition, the Company has licensed to the Showtime pay
television services over a multi-year period, exclusive domestic pay
television rights to certain films released under the Dimension banner.
AUDIO PRODUCTS AND MUSIC PUBLISHING
The Company also produces and distributes compact discs, audiocassettes and
records, consisting primarily of soundtracks for animated films and read-along
products, directed at the children's market in the United States, France and
the United Kingdom, and licenses the creation of similar products throughout
the rest of the world. In addition, the Company commissions new music for its
motion pictures and television programs and records and licenses the song
copyrights created for the Company to others for printed music, records,
audiovisual devices and public performances.
Domestic retail sales of compact discs, audiocassettes and records are the
largest source of music-related revenues, while direct marketing, which
utilizes catalogs, coupon packages and television, is a secondary means of
music distribution for the Company.
The Company's Hollywood Records subsidiary develops, produces and markets
recordings from new talent across the spectrum of popular music, as well as
soundtracks from certain of the Company's live-action motion pictures. The
Company's Mammoth Records develops, produces and markets a diverse group of
artists in the popular and alternative music fields. The Company also owns the
Nashville-based music label Lyric Street Records.
WALT DISNEY THEATRICAL PRODUCTIONS
In November 1997, the Broadway production of The Lion King opened at the
newly renovated New Amsterdam Theater. In 1998, The Lion King won six Tony
Awards, including Best Musical. 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 seven
countries around the world.
CHARACTER MERCHANDISE AND PUBLICATIONS LICENSING
The Company's worldwide licensing activities generate royalties, which are
usually based on a fixed percentage of the wholesale or retail selling price
of the licensee's products. The Company licenses characters based upon both
traditional and newly created film properties. Character merchandise
categories that have been licensed include apparel, toys, gifts, home
furnishings and housewares, stationery and sporting goods. Publication
categories that have been licensed include continuity-series books, book sets,
art and picture books and magazines.
In addition to receiving licensing fees, the Company is actively involved in
the development and approval of licensed merchandise and in the
conceptualization, development, writing and illustration
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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 1998, the Company opened 18 new stores in the
United States and Canada, 8 in Europe and 21 in the Asia-Pacific area. The
Company also closed 2 stores in Europe as part of cost reduction efforts,
bringing the total number of stores to 681 as of September 30, 1998. The
Company expects to open additional stores in the future in selected markets
throughout the United States, as well as in Asian and European countries.
BOOKS AND MAGAZINES
The Company has book imprints in the United States offering books for
children and adults as part of the Buena Vista Publishing Group. The Company
also produces several magazines including Family Fun, Disney Adventures as
well as Discover, a general science magazine. In addition, the Company
produces ESPN The Magazine as part of a joint venture with ESPN, Inc. and The
Hearst Company.
MULTIMEDIA
BUENA VISTA INTERNET GROUP - During the first quarter of 1998, Buena Vista
Internet Group ("BVIG") was formed to coordinate the Company's internet
initiatives. BVIG develops, publishes and distributes content for narrow-band
on-line services, the interactive software market, interactive television
platforms, internet web sites, including Disney.com, Disney's Daily Blast,
ESPN.com, ABCNews.com and the Disney Store Online which offers Disneythemed
merchandise over the internet.
Effective November 18, 1998, the Company acquired 43% of Infoseek
Corporation, an internet search company. In connection with its investment in
Infoseek, BVIG and Infoseek announced the creation of the Go NetworkSYMBOL 212
\f "Symbol" \s 10. The Go Network will be an internet portal serving as an
interactive link through which people can gain access to the internet at
large, as well as every form of information and entertainment that Disney
offers.
DISNEY INTERACTIVE - Disney Interactive is a software business that
licenses, develops and markets entertainment and educational computer software
and video game titles for home and school.
OTHER ACTIVITIES
The Company produces audiovisual materials for the educational market,
including videocassettes and film strips. It also licenses the manufacture and
sale of posters and other teaching aids. The Company markets and distributes,
through various channels, animation cel art and other animation-related
artwork and collectibles. In addition, the Company directly sells merchandise
through The Disney Catalog.
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
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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 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 NETWORK
The Company operates the ABC Television Network, which as of September 30,
1998 had 224 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 144 million domestic listeners weekly and consist of
over 8,900 program affiliations on more than 4,400 radio stations. The ABC
Radio Networks also produce and distribute a number of radio program series
for radio stations nationwide and can be heard in more than 90 countries
worldwide.
Generally, the networks pay the cost of producing their own programs or
acquiring broadcast rights from other producers for network programming and
pay varying amounts of compensation to affiliated stations for broadcasting
the programs and commercial announcements included therein. Substantially all
revenues from network operations are derived from the sale to advertisers of
time in network programs for commercial announcements. The ability to sell
time for commercial announcements and the rates received are primarily
dependent on the quantitative and qualitative audience that the network can
deliver to the advertiser as well as overall advertiser demand for time in the
network marketplace.
TELEVISION AND RADIO STATIONS
The Company owns nine very high frequency (VHF) television stations, five of
which are located in the top ten markets in the United States; one ultra high
frequency (UHF) television station; fifteen standard (AM) radio stations; and
fifteen frequency modulation (FM) radio stations. All of the television
stations are affiliated with the ABC Television Network, and most of the 30
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 Dec. 2, 2005 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, 2006 11
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EXPIRATION TELEVISION
DATE OF FCC MARKET
STATION AND MARKET CHANNEL AUTHORIZATION RANKING (1)
- ------------------ ------- ------------- -----------
WTVD (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 (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 (2)
- ------------------ ------------ ------------- -----------
WABC (New York, NY) 770 K June 1, 2006 1
KABC (Los Angeles, CA) 790 K Dec. 1, 2005 2
KDIS (Los Angeles, CA) 710 K Dec. 1, 2005 2
WLS (Chicago, IL) 890 K Dec. 1, 2004 3
KGO (San Francisco, CA) 810 K Dec. 1, 2005 4
KSFO (San Francisco, CA) 560 K Dec. 1, 2005 4
KMKY (San Francisco, CA) 1310 K Dec. 1, 2005 4
WBAP (Dallas-Fort Worth, TX) 820 K Aug. 1, 2005 6
WJR (Detroit-MI) 760 K Oct. 1, 2004 7
WMAL (Washington, DC) 630 K Oct. 1, 2003 8
WDWD (Atlanta, GA) 590 K Apr. 1, 2004 12
KKDZ (Seattle, WA) 1250 K Feb. 1, 2006 13
KDIZ (Minneapolis, MN) 1440 K Apr. 1, 2005 14
WIBV (St. Louis, MO) 1260 K Dec. 1, 2004 18
WMIH (Cleveland, OH) 1260 K Oct. 1, 2004 23
WPLJ (FM) (New York, NY) 95.5 M June 6, 2006 1
KLOS (FM) (Los Angeles, CA) 95.5 M (3)
WXCD (FM) (Chicago, IL) 94.7 M Dec. 1, 2004 3
KSCS (FM) (Dallas-Fort Worth, TX) 96.3 M Aug. 1, 2005 6
WPLT (FM) (Detroit, MI) 96.3 M Oct. 1, 2004 7
WDRQ (FM) (Detroit, MI) 93.1 M Oct. 1, 2001 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 14
KXXR (FM) (Minneapolis-St.Paul, MN) 93.7 M Apr. 1, 2005 14
KZNR (FM) (Minneapolis-St.Paul, MN)) 105.1 M Apr. 1, 2005 14
KZNT (FM) (Minneapolis-St.Paul, MN) 105.3 M Apr. 1, 2005 14
KZNZ (FM) (Minneapolis-St.Paul, MN) 105.7 M Apr. 1, 2005 14
- --------
(1) Based on Nielsen U.S. Television Household Estimates, September 1998
(2) Based on 1998 Arbitron Radio Market Rank
(3) Renewal application pending
CABLE AND INTERNATIONAL BROADCAST OPERATIONS
The Company's cable and international broadcast operations are principally
involved in the production and distribution of cable television programming,
the licensing of programming to domestic and international markets and
investing in foreign television broadcasting, production and distribution
entities. The Company owns the Disney Channel, Toon Disney, 80% of ESPN, Inc.,
37.5% of the A&E Television Networks, 50% of Lifetime Entertainment Services,
39.6% of E! Entertainment Television and has various other international
investments. During the first quarter of 1998, the Company acquired the
Classic Sports Network.
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The Disney Channel, which has approximately 43 million domestic subscribers,
is a cable and satellite television service. New shows developed for original
use by the Disney Channel include dramatic, adventure, comedy and educational
series, as well as documentaries and first-run television movies. In addition,
entertainment specials include shows originating from both the Walt Disney
World Resort(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.
Toon Disney, a 24-hour cable and satellite channel airing Disney animation,
was launched April 18, 1998, the fifteenth anniversary of the Disney Channel.
Toon Disney reaches 6 million subscribers.
The Disney Channel International reaches approximately 9 million
subscribers. Programming consists primarily of the Company's theatrical film
and television programming library, as well as products acquired from third
parties and locally produced programming. The Disney Channels in Taiwan and
the U.K. premiered in 1995, followed by the launch of the Disney Channels in
Australia and Malaysia in 1996, the Disney Channels France and Middle East in
1997, the Disney Channel Spain in April 1998, and the Disney Channel Italy in
October 1998. Planned launches include Disney Channels in Germany and Brazil
in October 1999 and the Disney Channel Latin America in January 2000. 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 75 million households, ESPN2, which reaches 61 million domestic
subscribers, Classic Sports Network, which reaches more than 15 million homes
and ESPNEWS, a 24-hour sports news service that reaches approximately 10
million subscribers nationwide. ESPN, Inc., owns or has equity interests in
20 international networks, reaching more than 152 million households outside
the U.S. in more than 180 countries and territories. ESPN, Inc., owns 33% of
Eurosport, a pan-European cable and direct-to-home sports programming service,
and 50% of ESPN Brazil. ESPN, Inc. owns a 50% interest in the ESPN STAR joint
venture, which delivers sports programming throughout most of Asia, and 32% of
the NetStar, which owns The Sports Network (TSN) and Les Reseau des Sports,
among other media properties in Canada. ESPN, Inc. also holds a 20% interest
in Sports-i ESPN in Japan, the country's only cable and direct-to-home all-
sports network.
The A&E Television Networks are cable programming services devoted to
cultural and entertainment programming. The A&E cable service reaches 78
million subscribers. The History Channel, which is owned by A&E, reaches 51
million subscribers.
Lifetime Entertainment Services owns Lifetime Television, which reaches 73
million cable subscribers and is devoted to women's lifestyle programming.
During 1998, Lifetime launched the Lifetime Movie Network, a 24-hour digital
channel.
E! Entertainment Television is a cable programming service which reaches 51
million cable subscribers and is devoted to the world of entertainment. E!
Entertainment Television also launched Style in October 1998. Style is a 24-
hour network devoted to style, fashion and design (available to both analog
and digital systems).
The Company's share of the financial results of the cable and international
broadcast services, other than the Disney Channel and ESPN, Inc., is 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,
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independent television stations, suppliers of cable television programs and
other advertising media such as newspapers, magazines and billboards. The ABC
Radio Networks likewise compete with other radio networks and radio
programming services, independent radio stations and other advertising media.
The Company's television and radio stations are in competition with other
television and radio stations, cable television systems, satellite television
program services, videocassettes and other advertising media such as
newspapers, magazines and billboards. Such competition occurs primarily in
individual market areas. A television station in one market does not compete
directly with other stations in other market areas.
There has been a continuing decline in viewership at all major broadcast
networks, including ABC, reflecting the growth in the cable industry's share
of viewers, which has resulted in increased competitive pressures for
advertising revenues. In addition, sports and other programming costs have
increased due to increased competition.
FEDERAL REGULATION
Television and radio broadcasting are subject to the jurisdiction of the
Federal Communications Commission ("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. A renewal application is now pending for
KLOS (FM), in Los Angeles. 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 theme park and has an ownership
interest in Disneyland Paris.
WALT DISNEY WORLD RESORT
The Walt Disney World Resort is located on approximately 30,500 acres of
land owned by Company subsidiaries 15 miles southwest of Orlando, Florida. The
resort includes four theme parks (the Magic Kingdom, Epcot, Disney-MGM
Studios, and Disney's Animal Kingdom), hotels and villas, a retail, dining and
entertainment complex, a sports complex, conference centers, campgrounds, golf
courses, water parks and other recreational facilities designed to attract
visitors for an extended stay. In addition, the resort operates Disney Cruise
Line from Port Canaveral, Florida.
The Company markets the entire Walt Disney World destination resort through
a variety of national, international and local advertising and promotional
activities. A number of attractions in each of the theme parks are sponsored
by corporate participants through long-term participation agreements.
MAGIC KINGDOM - The Magic Kingdom, which opened in 1971, consists of seven
principal areas: Main Street U.S.A., Liberty Square, Frontierland,
Tomorrowland, Fantasyland, Adventureland and Mickey's Toontown Fair. These
areas feature themed rides and attractions, restaurants, refreshment areas and
merchandise shops.
EPCOT - Epcot, which opened in 1982, consists of two major themed areas:
Future World and World Showcase. Future World dramatizes certain historical
developments and addresses the challenges facing the world today through major
pavilions devoted to high-tech products of the future ("Innoventions"),
communication and technological exhibitions ("Spaceship Earth"), 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, 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. In late 1998, Disney-MGM
Studios began featuring Fantasmic!, a night-time entertainment production
spectacular.
DISNEY'S ANIMAL KINGDOM - Disney's Animal Kingdom, which opened in April
1998, consists of a 145-foot Tree of Life as the centerpiece surrounded by
four themed areas: Dinoland U.S.A., Africa, Conservation Station and Camp
Minnie-Mickey. Each themed area contains adventure attractions, entertainment
shows, restaurants and merchandise shops. The park features more than 200
species of animals and 4,000 varieties of trees and plants on more than 500
acres of land. An additional themed area, Asia, is scheduled to open during
1999. Among its attractions will be a river raft thrill ride and viewings of
tigers and various other animals.
RESORT FACILITIES - As of September 30, 1998, 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
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16,700 rooms and 318,000 square feet of conference meeting space. Currently
under development is phase three of Disney's All-Star Resorts, Disney's All-
Star Movies Resort. This resort will provide an additional 1,920 rooms and is
expected to be completed in early 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.
Recreational amenities and activities available at the resort 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 retail, dining and entertainment
complex known as Downtown Disney, which consists of the Downtown Disney
Marketplace, Pleasure Island and Downtown Disney West Side. In addition to
more than 20 specialty retail shops and restaurants, the Downtown Disney
Marketplace is home to the 50,000-square-foot World of Disney, the largest
Disney retail outlet. Pleasure Island, an entertainment center adjacent to the
Downtown Disney Marketplace, includes restaurants, night clubs and shopping
facilities. Downtown Disney West Side is situated on 66 acres on the west side
of Pleasure Island and includes a DisneyQuest facility and several third-party
retail, dining and entertainment operations.
Disney's Wide World of Sports, which opened in 1997, is a 200-acre sports
complex providing professional caliber training and competition, festival and
tournament events and interactive sports activities. The complex's venues
accommodate more than 30 different sporting events, including baseball,
tennis, basketball, softball, track and field, football and soccer. Its 9,000-
seat stadium is the spring training site for the Atlanta Braves. The tennis
venue is the home of the U.S. Men's Clay Court championships and the sports
fields are home of the NFL Quarterback Challenge. In addition, the Harlem
Globetrotters use the facility for their official training site and holiday
season games. The Amateur Athletic Union hosts more than 30 championship
events per year at the facility.
Under continued phased-in development are Celebration, a 4,900-acre town,
and Disney Cruise Line, a cruise vacation line that includes an 85,000 ton-
ship, the Disney Magic, which sailed its maiden voyage in July 1998. A second
ship, the Disney Wonder, is expected to launch in the second half of 1999.
Both ships cater to children, families and adults with distinctly themed areas
for each group. Additionally, each ship features 875 staterooms, 73% of which
are outside staterooms providing guests with ocean views. The staterooms
generally offer 25% more living space than the current cruise line industry
average. Each cruise vacation includes a visit to Disney's Castaway Cay, a
1,000-acre private Bahamian island in the Abacos. The Company packages cruise
vacations with visits to the Walt Disney World Resort and also offers cruise-
only options.
At the Downtown Disney Marketplace Hotel Plaza, seven independently operated
hotels are situated on property leased from the Company. These hotels have a
capacity of approximately 3,700 rooms. Additionally, two hotels--The Walt
Disney World Swan and the Walt Disney World Dolphin, with an aggregate
capacity of approximately 2,300 rooms--are independently operated on property
leased from the Company near Epcot.
The Disney Vacation Club offers ownership interests in several resort
facilities, including the 497-unit Disney Old Key West Resort and 383 villas
at Disney's BoardWalk Resort at the Walt Disney World Resort, a 175-unit
resort in Vero Beach, Florida, and a 102-unit resort on Hilton Head Island,
South Carolina. A 34-unit expansion at Disney's Old Key West is scheduled to
open in 2000 and a 134-unit expansion adjacent to Disney's Wilderness Lodge is
scheduled for opening in 2001. Available units at each facility are intended
to be sold under a vacation ownership plan and operated partially as rental
property until sold.
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DISNEYLAND RESORT
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.
The Company completed a substantial renovation of Tomorrowland, including
new rides and attractions, in the third quarter of 1998.
The Company has begun construction on a new theme park, Disney's California
Adventure, projected to open in 2001. The new theme park will be constructed
on property adjacent to Disneyland. 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 REGIONAL ENTERTAINMENT
Through the Disney Regional Entertainment group, the Company is developing a
variety of new entertainment concepts to be located in metropolitan and
suburban locations in the United States and around the world. These businesses
include sports concepts, interactive entertainment venues, family play centers
and other operations that are based on Disney brands and creative properties.
In January 1998, Disney Regional Entertainment opened its second Club Disney
in California. Club Disney is a community play center designed to entertain
and enrich young families with imaginative play. Club Disney offers a variety
of unique activities, as well as a cafe, exclusive retail merchandise, themed
birthday parties and educational field trips. Club Disney is now operating in
Thousand Oaks and West Covina, California and will open this winter in
Chandler and Glendale, Arizona, both outside Phoenix, and in Lone Tree,
Colorado, outside Denver. Additional Club Disney openings are planned in
various suburban markets.
In 1998 the Company launched its first ESPN Zone in Baltimore's Inner
Harbor. The ESPN Zone is a 35,000 square-foot sports-themed dining and
entertainment experience featuring three integrated components: The Studio
Grill, offering dining in an ESPN studio environment; the Screening Room,
offering fans any game on the air in the ultimate sports viewing environment;
and the Sports Arena, challenging fans with a variety of interactive and
competitive attractions. ESPN Zone is scheduled to open in Chicago's River
North District and New York's Times Square in the summer of 1999.
In the summer of 1998, the first DisneyQuest opened in Downtown Disney at
the Walt Disney World Resort. DisneyQuest is a five story, 100,000 square-foot
facility, where guests of all ages are launched into a wide range of virtual,
interactive adventures. DisneyQuest is scheduled to open in the summer of 1999
in Chicago and in Philadelphia in 2000.
TOKYO DISNEY RESORT
The Company earns royalties on revenues generated by the Tokyo Disneyland
theme park, which is owned and operated by Oriental Land Co., Ltd. ("OLC"), an
unrelated Japanese corporation. The park, which opened in 1983, is similar in
size and concept to Disneyland and is located approximately six miles from
downtown Tokyo, Japan.
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In the fourth quarter of 1998, OLC commenced construction of a second theme
park designed by Walt Disney Imagineering, which will be called Tokyo
DisneySea. Tokyo DisneySea is scheduled to open in fall 2001, together with a
500-room Disney-branded hotel and monorail system.
OLC is also developing a retail, dining and entertainment complex adjacent
to Tokyo Disneyland in what is known as the Maihama Station Area, which will
include a second 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.
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
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 was 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 currently holds a 39% equity interest and
which is managed by a subsidiary of the Company. The financial results of the
Company's investment in Euro Disney are reported under the heading "Corporate
activities and other" in the Company's Consolidated Statements of Income.
Development of the site continues with the Val d'Europe project at the gates
of Disneyland Paris. Construction of an international shopping mall and the
associated road infrastructure is now underway, with an opening date expected
in the second half of the year 2000.
WALT DISNEY IMAGINEERING
Walt Disney Imagineering provides master planning, real estate development,
attraction and show design, engineering support, production support, project
management and other development services, including research and development
for the Company's operations.
ANAHEIM SPORTS, INC.
Anaheim Sports, Inc. a subsidiary of the Company, owns and operates a
National Hockey League franchise, the Mighty Ducks of Anaheim. In addition, a
Company subsidiary is the managing general partner of Anaheim Angels, L.P.,
the holder of the Anaheim Angels Major League Baseball franchise. The Company
owns a 25% general partnership interest in Anaheim Angels L.P., with an option
to purchase the entire partnership interest on or before March 31, 1999.
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 resort
business experiences fluctuations in park attendance and resort occupancy
resulting from the nature of vacation travel. Peak attendance and resort
occupancy generally occur during the summer months when school vacations occur
and during early-winter and spring holiday periods.
The Company's theme parks and resorts compete with all other forms of
entertainment, lodging, tourism and recreational activities. The profitability
of the leisure-time industry is influenced by various factors that are not
directly controllable, such as economic conditions including business cycle
and exchange rate fluctuations, amount of available leisure time, oil and
transportation prices and weather patterns.
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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 owned properties include a 400,000 square-foot office
building in Burbank, California, which is used for the Company's operations.
A subsidiary of the Company owns approximately 1.8 million square feet of
office and warehouse 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
building owned by a subsidiary of the Company in New York City. A Company
subsidiary also owns the ABC Television Center adjacent to the corporate
offices and ABC Radio Networks' studios, also in New York City.
Subsidiaries of the Company own the ABC Television Center and lease the ABC
Television Network offices in Los Angeles, the ABC News Bureau facility in
Washington, DC and a computer facility in Hackensack, New Jersey, under leases
expiring on various dates through 2034. The Company's 80%-owned subsidiary,
ESPN, Inc., owns ESPN Plaza in Bristol, Connecticut, from which it conducts
its technical operations. The Company owns the majority of its other broadcast
studios and offices and broadcast transmitter sites elsewhere, and those which
it does not own are occupied under leases expiring on various dates through
2039.
A U.K. subsidiary of the Company owns buildings on a four-acre parcel under
long-term lease in London, England. The mixed-use development consists of
140,000 square feet of office space occupied by subsidiary operations, a
27,000 square-foot building leased to a third party and 65,000 square feet of
retail space. A second phase of this development, completed in 1998, includes
a 142,000 square-foot office building occupied by Company subsidiaries in
1999. Company subsidiaries also lease office space in other parts of Europe
and in Asia and Latin America.
The Disney Stores and Disney Regional Entertainment lease retail space for
their operations.
ITEM 3. LEGAL PROCEEDINGS
The Company, together with, in some instances, certain of its directors and
officers, is a defendant or co-defendant in various legal actions involving
copyright, breach of contract and various other claims incident to the conduct
of its businesses. Management does not expect the Company to suffer any
material liability by reason of such actions.
In re The Walt Disney Company Derivative Litigation. On October 8, 1998, the
Delaware Court of Chancery dismissed an amended and consolidated complaint
filed on May 28, 1997 that named each of the Company's directors as of
December 1996 as defendants. The amended complaint, filed by William and
Geraldine Brehm and thirteen other individuals, had sought, among other
things, a declaratory judgment that the Company's 1995 employment agreement
with its former president, Michael S. Ovitz, was void, or alternatively that
Mr. Ovitz's termination should be deemed a termination "for cause" and any
severance payments to him forfeited. The complaint also sought compensatory or
rescissory damages and injunctive and other equitable relief from the named
defendants, as well as class-action status to pursue a claim for damages and
invalidation of the 1997 election of directors. In its ruling on October 8,
1998, the Delaware court dismissed all counts of the amended complaint.
-13-
On November 4, 1998, plaintiffs filed a notice of appeal from the court's
decision.
Similar or identical claims have also been filed by the same plaintiffs
(other than William and Geraldine Brehm) in the Superior Court of the State of
California, Los Angeles County, beginning with a claim filed by Richard and
David Kaplan on January 3, 1997. On May 18, 1998, an additional claim was
filed in the same California court by Dorothy L. Greenfield. All of the
California claims have been consolidated and stayed pending final resolution
of the Delaware proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are elected each year at the
organizational meeting of the Board of Directors which follows the annual
meeting of the stockholders and at other meetings as appropriate. Each of the
executive officers has been employed by the Company in the position or
positions indicated in the list and pertinent notes below. Messrs. Eisner,
Disney and Litvack have been employed by the Company as executive officers for
more than five years.
At September 30, 1998, the executive officers were as follows:
Executive
Officer
Name Age Title Since
------------------ --- ------------------------------------------ ---------
Michael D. Eisner 56 Chairman of the Board and Chief Executive 1984
Officer
Roy E. Disney 68 Vice Chairman of the Board 1984
Sanford M. Litvack 62 Senior Executive Vice President and Chief 1991
of Corporate Operations
Louis M. Meisinger 56 Executive Vice President and General 1998
Counsel /1/
Peter E. Murphy 35 Executive Vice President and Chief 1998
Strategic
Officer /2/
John F. Cooke 56 Executive Vice President-Corporate Affairs 1995
/3/
Thomas O. Staggs 37 Executive Vice President and Chief 1998
Financial
Officer /4/
- --------
/1/ Mr. Meisinger, was named Executive Vice President and General Counsel of
the Company on July 6, 1998. Prior to joining the Company, he was a senior
partner with the law firm of Troop, Meisinger, Steuber & Pasich in Los
Angeles, California, a firm he co-founded in 1975. Mr. Meisinger specialized
in the litigation of complex entertainment, commercial and securities
matters.
/2/ Mr. Murphy joined the Company's strategic planning operation in 1988 and
was named Senior Vice President-Strategic Planning and Development of the
Company in July 1995. From August 1997 to May 1998 he served as Chief
Financial Officer of ABC, Inc. He assumed his present position in May 1998.
/3/ Mr. Cooke served as President of the Disney Channel from 1985 until
assuming his present position in February 1995.
/4/ Mr. Staggs joined the Company's strategic planning operation in 1990 and
was named Senior Vice President-Strategic Planning and Development of the
Company in July 1995, serving in that capacity until assuming his present
position in May 1998.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York and Pacific stock
exchanges (NYSE symbol DIS). The following sets forth the high and low
composite closing sale prices for the fiscal periods indicated, adjusted to
reflect the three-for-one split of the Company's common shares effective June
1998.
Sales Price
-------------------
High Low
--------- ---------
1998
4th Quarter.......................................... $39 7/8 $24 7/16
3rd Quarter.......................................... 42 3/8 35 1/64
2nd Quarter.......................................... 38 19/64 31 31/64
1st Quarter.......................................... 33 25 59/64
1997
4th Quarter.......................................... $26 63/64 $25 1/16
3rd Quarter.......................................... 28 11/64 23 45/64
2nd Quarter.......................................... 26 3/64 22 29/64
1st Quarter.......................................... 25 21/64 20 53/64
The Company declared a first quarter dividend of $0.0442 per share and three
subsequent quarterly dividends of $.0525 per share in 1998, and in 1997,
declared a first quarter dividend of $.0367 per share and three subsequent
quarterly dividends of $0.0442 per share.
As of September 30, 1998, the approximate number of record holders of the
Company's common stock was 658,000.
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ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
1998 1997(2) 1996(3) 1995 1994
------- ------- ------- ------- -------
Statements of income
Revenues $22,976 $22,473 $18,739 $12,151 $10,090
Operating income 4,015 4,447 3,033 2,466 1,972
Net income 1,850 1,966 1,214 1,380 1,110
Per share (1)
Earnings
Diluted 0.89 0.95 0.65 0.87 0.68
Basic 0.91 0.97 0.66 0.88 0.69
Dividends 0.20 0.17 0.14 0.12 0.10
Balance sheets
Total assets $41,378 $38,497 $37,341 $14,995 $13,110
Borrowings 11,685 11,068 12,342 2,984 2,937
Stockholders' equity 19,388 17,285 16,086 6,651 5,508
Statements of cash flows
Cash provided by operations $ 5,115 $ 5,099 $ 3,707 $ 3,510 $ 2,808
Investing activities (5,665) (3,936) (12,546) (2,288) (2,887)
Financing activities 360 (1,124) 8,040 (332) (97)
- --------
(1) The earnings and dividends per share have been adjusted to give effect to
the three-for-one split of the Company's common shares effective June
1998. See Note 8 to the Consolidated Financial Statements.
(2) 1997 results include a $135 million gain from the sale of KCAL-TV. The
diluted earnings per share impact of the gain was $0.04. See Note 2 to the
Consolidated Financial Statements.
(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 $0.10 and $0.07, respectively. See Notes 2
and 11 to the Consolidated Financial Statements.
-16-
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. During 1997, the Company sold KCAL, a Los Angeles television station,
completed its final ABC purchase price allocation and determination of the
related intangible assets and disposed of certain ABC publishing assets. To
enhance comparability, certain information for 1997 and 1996 is presented on a
"pro forma" basis, which assumes that these events occurred at the beginning
of 1996. The pro forma results are not necessarily indicative of the combined
results that would have occurred had these events actually occurred at the
beginning of 1996.
CONSOLIDATED RESULTS
(in millions, except per share data)
PRO FORMA
AS REPORTED (unaudited)
------------------------- ----------------
1998 1997 1996 1997 1996
------- ------- ------- ------- -------
Revenues:
Creative Content $10,302 $10,937 $10,159 $10,098 $ 9,564
Broadcasting 7,142 6,522 4,078 6,501 6,009
Theme Parks and Resorts 5,532 5,014 4,502 5,014 4,502
------- ------- ------- ------- -------
Total $22,976 $22,473 $18,739 $21,613 $20,075
======= ======= ======= ======= =======
Operating income: (1)
Creative Content $ 1,403 $ 1,882 $ 1,561 $ 1,693 $ 1,435
Broadcasting 1,325 1,294 782 1,285 1,084
Theme Parks and Resorts 1,287 1,136 990 1,136 990
Gain on sale of KCAL -- 135 -- -- --
Accounting change -- -- (300) -- (300)
------- ------- ------- ------- -------
Total 4,015 4,447 3,033 4,114 3,209
Corporate activities and other (236) (367) (309) (367) (249)
Net interest expense (622) (693) (438) (693) (698)
Acquisition-related costs -- -- (225) -- --
------- ------- ------- ------- -------
Income before income taxes 3,157 3,387 2,061 3,054 2,262
Income taxes (1,307) (1,421) (847) (1,282) (988)
------- ------- ------- ------- -------
Net income $ 1,850 $ 1,966 $ 1,214 $ 1,772 $ 1,274
======= ======= ======= ======= =======
Earnings per share: (3)
Diluted $ 0.89 $ 0.95 $ 0.65 $ 0.86 $ 0.62
======= ======= ======= ======= =======
Basic $ 0.91 $ 0.97 $ 0.66 $ 0.88 $ 0.63
======= ======= ======= ======= =======
Net income excluding non-
recurring items (2) $ 1,850 $ 1,886 $ 1,534 $ 1,772 $ 1,457
======= ======= ======= ======= =======
Earnings per share excluding non-
recurring items: (2) (3)
Diluted $ 0.89 $ 0.92 $ 0.83 $ 0.86 $ 0.70
======= ======= ======= ======= =======
Basic $ 0.91 $ 0.93 $ 0.84 $ 0.88 $ 0.72
======= ======= ======= ======= =======
Amortization of intangible assets
included in operating income $ 431 $ 439 $ 301 $ 413 $ 413
======= ======= ======= ======= =======
Average number of common and
common equivalent shares
outstanding: (3)
Diluted 2,079 2,060 1,857 2,060 2,067
======= ======= ======= ======= =======
Basic 2,037 2,021 1,827 2,021 2,037
======= ======= ======= ======= =======
- --------
(1) Includes depreciation and amortization (excluding film costs) of:
Creative Content............... $ 219 $ 222 $ 186 $ 187 $ 145
Broadcasting................... 543 508 382 521 521
Theme Parks and Resorts........ 444 408 358 408 358
------- ------- ------- ------- -------
$ 1,206 $ 1,138 $ 926 $ 1,116 $ 1,024
======= ======= ======= ======= =======
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(2) The 1997 results include a $135 million gain from the sale of KCAL. 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.
(3) Earnings per share and average shares outstanding have been adjusted to
give effect to the three-for-one split of the Company's common shares in
June 1998.
The following discussion of 1998 versus 1997 and 1997 versus 1996
performance includes comparisons to pro forma results for 1997 and 1996. The
Company believes pro forma results represent a meaningful comparative standard
for assessing net income, changes in net income and earnings trends because
the pro forma results include comparable operations in each year presented.
The discussion of the Theme Parks and Resorts segment does not include pro
forma comparisons, since the pro forma adjustments did not impact this
segment.
CONSOLIDATED RESULTS
1998 VS. 1997
Compared to 1997 pro forma results, revenues increased 6% to $23 billion,
driven by growth in all business segments. Net income and diluted earnings per
share increased 4% and 3% to $1.9 billion and $.89, respectively. These
results were driven by a reduction in net expense associated with corporate
activities and other and lower net interest expense, partially offset by
decreased operating income. The reduction in net expense associated with
corporate activities and other was driven by improved results from the
Company's equity investments, including A&E Television and Lifetime
Television, and a gain on the sale of the Company's interest in Scandinavian
Broadcasting System. Decreased net interest expense reflected lower average
debt balances during the year. Lower operating income was driven by a decline
in Creative Content results, partially offset by improvements from Theme Parks
and Resorts and Broadcasting.
As reported revenues increased 2% and net income and diluted earnings per
share decreased by 6%. The as reported results reflect the items described
above as well as the impact of the disposition of certain ABC publishing
assets and the sale of KCAL in 1997.
In April 1997, the Company purchased a significant equity stake in Starwave
Corporation ("Starwave"), an internet technology company. In connection with
the acquisition, the Company was granted an option to purchase substantially
all the remaining shares of Starwave. The Company exercised the option during
the third quarter of 1998. Accordingly, the accounts of Starwave have been
included in the Company's September 30, 1998 consolidated financial
statements. On June 18, 1998, the Company reached an agreement for the
acquisition of Starwave by Infoseek Corporation ("Infoseek"), a publicly-held
internet search company, pursuant to a merger. On November 18, 1998, the
shareholders of both Infoseek and Starwave approved the merger. As a result of
the merger and the Company's purchase of additional shares of Infoseek common
stock pursuant to the merger agreement, the Company owns approximately 43% of
Infoseek's outstanding common stock. In addition, pursuant to the merger
agreement, the Company purchased warrants enabling it, under certain
circumstances, to achieve a majority stake in Infoseek. These warrants vest
over a three-year period and expire in five years. Effective as of the
November 18, 1998 closing date of the transaction, the Company will record a
significant non-cash gain, a write-off for purchased in-process research and
development costs and an increase in investments, reflecting the Company's
share of the fair value of Infoseek's intangible assets. The Company is
currently performing the necessary valuations to determine the gain, the
research and development write-off and the amount of and amortization period
for the intangible assets. Thereafter, the Company will account for its
investment in Infoseek under the equity method. The merger is not expected to
have a material effect on the Company's financial position.
-18-
1997 VS. 1996
Compared to 1996 pro forma results, pro forma revenues increased 8% to $21.6
billion, reflecting growth in all business segments. Pro forma net income and
diluted earnings per share, excluding non-recurring items, increased 22% and
23% to $1.8 billion and $.86, 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 years. 1997 reflects settlements with former senior executives
and 1996 reflects certain gains at ABC, primarily related to the sale of an
investment in a cellular communications company.
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 discussed above, increased 23%, driven by increased
operating income for each business segment. Diluted earnings per share,
excluding the 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.
BUSINESS SEGMENT RESULTS
CREATIVE CONTENT
1998 VS. 1997
Revenues increased 2% or $204 million to $10.3 billion compared with pro
forma 1997, driven by growth of $204 million in television distribution, $136
million in the Disney Stores, $54 million in domestic publishing and $51
million in domestic character merchandise licensing. These increases were
partially offset by declines in worldwide home video and theatrical motion
picture distribution of $330 million. Growth in television distribution
revenue was driven by higher volume of television programming and theatrical
releases distributed to the worldwide television market. Increased revenues at
the Disney Stores reflected an increase in comparable store sales in North
America and Europe and continued worldwide expansion, partially offset by a
decrease in comparable store sales in Asian markets. The increase in domestic
publishing revenues resulted from the success of book titles such as Don't
Sweat the Small Stuff and the launch of ESPN The Magazine. Character
merchandise licensing growth was driven primarily by the continued strength of
Winnie the Pooh in the domestic market, partially offset by declines
internationally, primarily due to softness in Asian markets. Lower worldwide
home video revenues reflected difficult comparisons to the prior year, which
benefited from the strength of Toy Story, The Hunchback of Notre Dame and 101
Dalmatians, compared to the current year release of Lady & the Tramp, Hercules
and The Little Mermaid, as well as economic weaknesses in Asian markets. In
worldwide theatrical motion picture distribution, while current year revenues
reflected successful box-office performances of Armageddon, Disney's highest-
grossing live-action film, and Mulan, its most recent animated release,
revenues were lower overall due to difficult comparisons to the prior year,
which benefited from the strong performances of 101 Dalmatians, Ransom and The
English Patient.
On an as reported basis, revenues decreased $635 million or 6%, reflecting
the items described above, as well as the impact of the disposition of certain
ABC publishing assets in the prior year.
Operating income decreased 17% or $290 million to $1.4 billion compared with
pro forma 1997 results, reflecting declines in worldwide theatrical motion
picture distribution and international home video. These declines were
partially offset by growth in television distribution, increases in domestic
merchandise licensing, Disney Store growth in North America and Europe and
improved results in domestic home video, driven by the success of The Little
Mermaid, Lady & the Tramp and Peter Pan. Costs and expenses, which consist
primarily of production cost amortization, distribution and selling expenses,
product costs, labor and leasehold expenses, increased 6% or $494 million. The
increase was driven by increased write-downs related to domestic theatrical
live-action releases and an increase in production costs for theatrical and
television product, as well as an increase in the number of shows produced for
network television and syndication. Production cost increases are reflective
of industry
-19-
trends: as competition for creative talent has increased, costs within the
industry have increased at a rate significantly above inflation. Cost and
expense increases were also due to increased activity related to internet
start-up businesses. In addition, current year costs and expenses reflected
charges totaling $64 million related to strategic downsizing in the Company's
consumer product business, particularly in response to Asian economic
difficulties, and consolidation of certain studio operations in its filmed
entertainment business. Increased expenses for the year were partially offset
by declines in distribution and selling expenses in the home video and
domestic theatrical motion picture distribution markets reflecting lower
volume, declines within television distribution due to the termination of a
network production joint venture and a decrease in development and other
operating expenses at Disney Interactive.
On an as reported basis, operating income decreased $479 million or 25%,
reflecting the items described above, as well as the impact of the disposition
of certain ABC publishing assets in the prior year.
1997 VS. 1996
Pro forma revenues increased 6% or $534 million to $10.1 billion compared
with pro forma 1996, 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. Growth at the Disney Stores
reflected continued worldwide expansion with 106 new stores opening in 1997.
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.
On an as reported basis, revenues increased $778 million or 8%, reflecting
the items described above, as well as increased revenues from ABC's publishing
assets up to the date of disposition. Additionally, 1997 included a full
period of revenues from certain ABC Television production operations.
Pro forma operating income increased 18% or $258 million to $1.7 billion
compared with pro forma 1996, reflecting improved results for theatrical
distribution, character merchandise licensing and television distribution,
partially offset by a reduction in home video results. Costs and expenses,
increased 3% or $276 million, 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 and the
write-off of certain theatrical development projects in the prior year.
On an as reported basis, operating income increased $321 million or 21%,
reflecting the items described above as well as higher operating income from
ABC's publishing assets up to the date of disposition.
BROADCASTING
1998 VS. 1997
Revenues increased 10% or $641 million to $7.1 billion compared with pro
forma 1997 results, reflecting a $427 million increase at ESPN and the Disney
Channel, a $110 million increase at the television network and an $81 million
increase at the television stations. A strong advertising market resulted in
increased revenues at ESPN and the television stations and subscriber growth
contributed to revenue increases at ESPN and the Disney Channel. Television
network growth was driven by higher sports advertising revenues, primarily
attributable to the 1998 soccer World Cup.
On an as reported basis, revenues increased $620 million or 10%, reflecting
the items described above, partially offset by the impact of the sale of KCAL
in the prior year.
-20-
Operating income increased 3% or $40 million to $1.3 billion compared with
pro forma 1997 results reflecting increased revenues at ESPN, the Disney
Channel and the television stations, partially offset by lower results at the
television network and start-up and operating losses from new business
initiatives. Results at the television network reflected the impact of lower
ratings and increased costs and expenses. Costs and expenses, which consist
primarily of programming rights and amortization, production costs,
distribution and selling expenses and labor costs, increased 12% or $601
million, reflecting increased programming and production costs at ESPN, higher
program amortization at the television network, reflecting a reduction in
benefits from the ABC acquisition, increased costs related to the NFL contract
(see discussion below) and start-up and operating costs related to new
business initiatives.
On an as reported basis, operating income increased $31 million or 2%,
reflecting the items described above, partially offset by the impact of the
sale of KCAL in the prior year.
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 1998, the
Company acquired the Classic Sports Network, a cable network devoted to
memorable sporting events, invested in a number of international cable
ventures and continued its international expansion of the Disney Channel.
The Company's cable operations continue to provide strong earnings growth.
The Company's results for 1998 reflect an increase in pretax income of $148
million or 18% for mature cable properties compared with 1997 results,
including 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 domestic and international ESPN and Disney Channel start-up
cable ventures. The Company's pretax income reflected an increase of 20% from
all cable properties.
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.
There has been a continuing decline in viewership at all major broadcast
networks, including ABC, reflecting the growth in the cable industry's share
of viewers. In addition, there have been continuing increases in the cost of
sports and other programming.
During the second quarter of 1998, the Company entered into a new agreement
with the National Football League (the "NFL") for the right to broadcast NFL
football games on the ABC Television Network and ESPN. The contract provides
for total payments of approximately $9 billion over an eight-year period,
commencing with the 1998 season. The programming rights fees under the new
contract are significantly higher than those required by the previous contract
and the fee increases exceed the estimated revenue increases over the contract
term. The higher fees under the new contract reflect various factors,
including increased competition for sports programming rights and an increase
in the number of games to be broadcast by ESPN. The Company is pursuing a
variety of strategies, including marketing efforts, to reduce the impact of
the higher costs. The contract's impact on the Company's results over the
remaining contract term is dependent upon a number of factors, including the
strength of advertising markets, effectiveness of marketing efforts and the
size of viewer audiences.
The cost of the NFL contract is charged to expense based on the ratio of
each period's gross revenues to estimated total gross revenues. Estimates of
total gross revenues can change significantly and accordingly, they are
reviewed periodically and amortization is adjusted if necessary. Such
adjustments could have a material effect on results of operations in future
periods.
-21-
1997 VS. 1996
Pro forma revenues increased 8% or $492 million to $6.5 billion compared
with pro forma 1996, 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
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 primetime ratings.
On an as reported basis, revenues increased $2.4 billion or 60%, reflecting
a full period of ABC's broadcasting operations in 1997.
Pro forma operating income increased 19% or $201 million to $1.3 billion
compared with pro forma 1996, 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 the period's sporting events, improvements in children's
programming, continued strength in the advertising market and decreased
program amortization. Costs and expenses increased 6% or $291 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.
On an as reported basis, operating income increased $512 million or 65%,
reflecting a full period of ABC's broadcasting operations in 1997.
The Company's results for 1997 reflect an increase in pretax income of $182
million or 28% for mature cable properties compared with 1996 results. These
increases were partially offset by the Company's recognition of its
proportionate share of losses associated with start-up cable ventures.
Overall, the Company's pretax income increased 29% in 1997 from all cable
properties.
THEME PARKS AND RESORTS
1998 VS. 1997
Revenues increased 10% or $518 million to $5.5 billion, driven by growth at
the Walt Disney World Resort, reflecting contributions of $256 million, from
increased guest spending and record attendance, growth of $106 million from
higher occupied room nights and $76 million from Disney Cruise Line. Higher
guest spending reflected strong per capita spending, due in part to new food,
beverage and merchandise offerings throughout the resort, and higher average
room rates. Increased occupied room nights reflected additional capacity
resulting from the opening of Disney's Coronado Springs Resort in August 1997.
Record theme park attendance resulted from growth in domestic and
international tourist visitation due to the opening of the new theme park,
Disney's Animal Kingdom. Disneyland's revenues for the year increased slightly
as higher guest spending was largely offset by reduced attendance driven
primarily by difficult comparisons to the prior year's Main Street Electrical
Parade farewell season and construction of New Tomorrowland in the first half
of 1998.
Operating income increased 13% or $151 million to $1.3 billion, resulting
primarily from higher guest spending, increased occupied room nights and
record attendance at the Walt Disney World Resort, partially offset by start-
up and operating costs associated with Disney's Animal Kingdom and Disney
Cruise Line. Costs and expenses, which consist principally of labor, costs of
merchandise, food, and beverages sold, depreciation, repairs and maintenance,
entertainment and marketing and sales expenses, increased 9% or $367 million.
Increased costs and expenses were driven by higher theme park attendance,
start-up and operating costs at the new theme park and Disney Cruise Line.
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
-22-
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
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 both began operations in 1998.
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 was comparable to the prior year, at
$5.1 billion.
In 1998, the Company invested $3.3 billion to develop and produce film and
television properties and $2.3 billion to design and develop new theme park
attractions, resort properties, real estate developments and other properties.
1997 investments totaled $3.1 billion and $1.9 billion, respectively.
The $246 million increase in investment in film and television properties
was primarily driven by higher live-action and animation spending. Live-action
production spending was driven by increases at Miramax and higher animation
spending reflected an increase in the number of films in production.
The $392 million increase in investment in theme parks, resorts and other
properties resulted primarily from initiatives including Disney's California
Adventure and Disney Cruise Line. Capital spending is expected to increase in
1999, driven by increased spending for Disney's California Adventure.
The Company acquires shares of its stock on an ongoing basis and is
authorized as of September 30, 1998 to purchase up to an additional 400
million shares. This amount reflects an increase in the repurchase
authorization and the three-for-one split of the Company's common shares, both
effected in June 1998. During 1998, a subsidiary of the Company acquired
approximately 1.1 million shares of the Company's common stock for
approximately $30 million. The Company also used $412 million to fund dividend
payments during the year.
During 1998, total borrowings increased to $11.7 billion. The Company
borrowed approximately $1.8 billion in 1998, with effective interest rates,
including the impact of interest rate swaps, ranging from 5.2% to 6.8% and
maturities in fiscal 1999 through fiscal 2008. Certain of these financing
agreements are denominated in foreign currencies, and the Company has entered
into cross-currency swap agreements effectively converting these obligations
into U.S. dollar denominated LIBOR-based variable rate debt instruments. In
August 1998, the Company filed a new U.S. registration statement, which
replaced the existing U.S. shelf registration statement, and provides for
issuance of up to $5.0 billion of debt. As of September 30, 1998, the Company
had the ability to borrow under the U.S. shelf registration statement and a
euro medium-term note program, which collectively permitted the issuance of up
to approximately $5.8 billion of additional debt. In addition, the Company has
$5.2 billion available under bank facilities to support its commercial paper
activities.
-23-
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.
OTHER MATTERS
YEAR 2000
The Y2K Problem. The Company is devoting significant resources throughout
its business operations to minimize the risk of potential disruption from the
"year 2000 ("Y2K') problem." This problem is a result of computer programs
having been written using two digits (rather than four) to define the
applicable year. Any information technology ("IT") systems that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations and system failures.
The problem also extends to many "non-IT" systems; that is, operating and
control systems that rely on embedded chip systems. In addition, like every
other business enterprise, the Company is at risk from Y2K failures on the
part of its major business counterparts, including suppliers, distributors,
licensees and manufacturers, as well as potential failures in public and
private infrastructure services, including electricity, water, gas,
transportation and communications.
System failures resulting from the Y2K problem could adversely affect
operations and financial results in all of the Company's business segments.
Failures may affect security, payroll operations or employee and guest health
and safety, as well as such routine but important operations as billing and
collection. In addition, the Company's business segments face more specific
risks. For example:
The Company's Theme Parks and Resorts operations could be significantly
impeded by failures in hotel and cruise line reservation and operating
systems; in theme park operating systems, including those controlling
individual rides, attractions, parades and shows; and in security, health and
safety systems.
In the Creative Content segment, Y2K failures could interfere with critical
systems in such areas as the production, duplication and distribution of
motion picture and home video product and the ordering, distribution and sale
of merchandise at the Company's retail stores and catalog operations.
In the Broadcasting segment, at-risk operations include satellite
transmission and communication systems. Y2K failures in such systems could
adversely affect the Company's television and radio networks, including cable
services, as well as its owned and operated stations.
Addressing the Problem. The Company has developed a six-phase approach to
resolving the Y2K issues that are reasonably within its control. All of these
efforts are being coordinated through a senior-level task force chaired by the
Company's Chief Information Officer ("CIO"), as well as individual task forces
in each major business unit. As of September 30, 1998, approximately 400
employees were devoting more than half of their time to Y2K efforts, in
addition to approximately 400 expert consultants retained on a full-time basis
to assist with specific potential problems. The CIO reports periodically to
the Audit Review Committee of the Board of Directors with respect to the
Company's Y2K efforts.
The Company's approach to and the anticipated timing of each phase are
described below.
Phase 1 - Inventory. The first phase entails a worldwide inventory of all
hardware and software (including business and operational applications,
operating systems and third-party products) that may be at risk, and
identification of key third-party businesses whose Y2K failures might most
significantly impact the Company. The IT system inventory process has been
completed, and the inventories of key third-party businesses and of internal
non-IT systems are expected to be completed by December 31, 1998.
-24-
Phase 2 - Assessment. Once each at-risk system has been identified, the Y2K
task forces assess how critical the system is to business operations and the
potential impact of failure, in order to establish priorities for repair or
replacement. Systems are classified as "critical," "important" or "non-
critical." A "critical" system is one that, if not operational, would cause
the shutdown of all or a portion of a business unit within two weeks, while an
"important" system is one that would cause such a shutdown within two months.
This process has been completed for all IT systems, resulting in the
identification of nearly 600 business systems that are "critical" to continued
functioning and more than 1,000 that are either "important" or are otherwise
being monitored. The assessment process for internal non-IT systems and for
key third-party businesses is expected to be completed by mid-1999. Systems
that are known to be critical or important are receiving top priority in
assessment and remediation.
Phase 3 - Strategy. This phase involves the development of appropriate
remedial strategies for both IT and non-IT systems. These strategies may
include repairing, testing and certifying, replacing or abandoning particular
systems (as discussed under Phases 4 and 5 below). Selection of appropriate
strategies is based upon such factors as the assessments made in Phase 2, the
type of system, the availability of a Y2K-compliant replacement and cost. The
strategy phase has been completed for all IT systems. For some non-IT embedded
systems, strategy development is continuing. At the Company's theme parks, the
majority of ride and show control systems have been tested and certified. A
strategy for addressing embedded systems in office buildings is being
developed in concert with building managers and systems vendors and should be
completed by spring 1999. The process of analysis, certification or
replacement or "workaround" for embedded systems in office buildings is
expected to consume the first half of 1999. Strategies for other embedded
systems, such as satellite communications systems, are being developed and are
also expected to be complete by mid-1999.
Phase 4 - Remediation. The remediation phase involves creating detailed
project plans, marshalling necessary resources and executing the strategies
chosen. For IT systems, this phase is approximately 75% complete for critical
and important systems, and is expected to be completed (including
certification) by July 31, 1999. For non-critical systems, most corrections
are expected to be completed by December 31, 1999. For those systems that are
not expected to be reliably functional after January 1, 2000, detailed manual
workaround plans will be developed prior to the end of 1999.
Phase 5 - Testing and Certification. This phase includes establishing a test
environment, performing systems testing (with third parties if necessary), and
certifying the results. The certification process entails having functional
experts review test results, computer screens and printouts against pre-
established criteria to ensure system compliance. The Company expects all
critical and important IT systems to be certified by July 31, 1999. Testing
for non-IT systems has been initiated; however, due to the Company's reliance
on many third-party vendors for these systems, the Company cannot estimate
precisely when this phase will be completed. The majority of embedded systems
at the Company's theme parks are expected to be certified by December 31,
1998. The Company's target for all critical and important non-IT systems is
July 1999.
The Company has initiated written and telephonic communications with key
third-party businesses, as well as public and private providers of
infrastructure services, to ascertain and evaluate their efforts in addressing
Y2K compliance. It is anticipated that the majority of testing and
certification with these entities will occur in 1999.
Phase 6 - Contingency Planning. This phase involves addressing any remaining
open issues expected in 1999 and early 2000. As a precautionary measure, the
Company is currently developing contingency plans for all systems that are not
expected to be Y2K compliant by March 1999. A variety of automated as well as
manual fallback plans are under consideration, including the use of electronic
spreadsheets, resetting system dates to 1972, a year in which the calendar
coincides with that of 2000, and manual workarounds. The Company estimates
that all of these plans will be completed by December 1999.
-25-
Costs. As of September 30, 1998, the Company had incurred costs of
approximately $136 million related to its Y2K project, of which $82 million
has been capitalized. The estimated additional costs to complete the project
are currently expected to be approximately $125 million, of which $60 million
is expected to be capitalized. A significant portion of these costs have not
been incremental, but rather reflect redeployment of internal resources from
other activities. The Company does not expect these redeployments to have a
material adverse effect on other ongoing business operations of the Company
and its subsidiaries, although it is possible that certain maintenance and
upgrading processes will be delayed as the result of the priority being given
to Y2K remediation. All of the costs of the Y2K project are being borne out of
the Company's operating cash flow.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems, including all critical and important
systems, will remain up and running after January 1, 2000. Accordingly, the
Company does not currently anticipate that internal systems failures will
result in any material adverse effect to its operations or financial
condition. During 1999, the Company will also continue and expand its efforts
to ensure that major third-party businesses and public and private providers
of infrastructure services, such as utilities, communications services and
transportation, will also be prepared for the year 2000, and to develop
contingency plans to address any failures on their part to become Y2K
compliant. At this time, the Company believes that the most likely "worst-
case" scenario involves potential disruptions in areas in which the Company's
operations must rely on such third parties whose systems may not work properly
after January 1, 2000. In addition, the Company's international operations may
be adversely affected by failures of businesses in other parts of the world to
take adequate steps to address the Y2K problem. While such failures could
affect important operations of the Company and its subsidiaries, either
directly or indirectly, in a significant manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures.
The nature and focus of the Company's efforts to address the Year 2000
problem may be revised periodically as interim goals are achieved or new
issues are identified. In addition, it is important to note that the
description of the Company's efforts necessarily involves estimates and
projections with respect to activities required in the future. These estimates
and projections are subject to change as work continues, and such changes may
be substantial.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain member countries of the European Union are
scheduled to establish fixed conversion rates between their existing
currencies and the European Union's common currency (euro). The Company
conducts business in member countries. The transition period for the
introduction of the euro will be between January 1, 1999 and June 30, 2002.
The Company is addressing the issues involved with the introduction of the
euro. The more important issues facing the Company include: converting
information technology systems; reassessing currency risk; negotiating and
amending licensing agreements and contracts; and processing tax and accounting
records.
Based upon progress to date the Company believes that use of the euro will
not have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the euro is not expected to have a material effect on the
Company's financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the
Company. The Company and its representatives may from time to time make
written or oral statements that are "forward-looking," including statements
contained in this report and other filings with the Securities and Exchange
Commission and in reports to the Company's stockholders. All statements that
express expectations and projections with respect to future matters, including
the launching or prospective development of
-26-
new business initiatives; anticipated motion picture or television releases;
internet or theme park and resort projects; "Year 2000" remediation efforts;
and preparations for the introduction of the euro, are forward-looking
statements within the meaning of the Act. These statements are made on the
basis of management's views and assumptions, as of the time the statements are
made, regarding future events and business performance. There can be no
assurance, however, that management's expectations will necessarily come to
pass.
Factors that may affect forward-looking statements. For an enterprise as
large and complex as the Company, a wide range of factors could materially
affect future developments and performance, including the following:
Changes in Company-wide or business-unit strategies, which may result in
changes in the types or mix of businesses in which the Company is involved
or chooses to invest;
Changes in U.S., global or regional economic conditions, which may affect
attendance and spending at the Company's theme parks and resorts, purchases
of Company-licensed consumer products and the performance of the Company's
broadcasting and motion picture operations;
Changes in U.S. and global financial and equity markets, including
significant interest rate fluctuations, which may impede the Company's
access to, or increase the cost of, external financing for its operations
and investments;
Increased competitive pressures, both domestically and internationally,
which may, among other things, affect the performance of the Company's
theme park, resort and regional entertainment operations and lead to
increased expenses in such areas as television programming acquisition and
motion picture production and marketing;
Legal and regulatory developments that may affect particular business
units, such as regulatory actions affecting environmental activities,
consumer products, broadcasting or internet activities or the protection of
intellectual properties, the imposition by foreign countries of trade
restrictions or motion picture or television content requirements or
quotas, and changes in international tax laws or currency controls;
Adverse weather conditions or natural disasters, such as hurricanes and
earthquakes, which may, among other things, impair performance at the
Company's theme parks and resorts;
Technological developments that may affect the distribution of the
Company's creative products or create new risks to the Company's ability to
protect its intellectual property;
Labor disputes, which may lead to increased costs or disruption of
operations in any of the Company's business units; and
Changing public and consumer taste, which may affect the Company's
entertainment, broadcasting and consumer products businesses.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
-27-
ITEM 7A. MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market values of its investments.
POLICIES AND PROCEDURES
In the normal course of business, the Company employs established policies
and procedures to manage its exposure to changes in interest rates 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 to focus its attention on
its core business issues and challenges. Accordingly, the Company enters into
various contracts that change in value as foreign exchange rates change to
protect the value of its existing foreign currency assets, liabilities,
commitments and anticipated foreign currency revenues. The Company uses option
strategies that provide for the sale of foreign currencies to hedge probable,
but not firmly committed, revenues. The principal currencies hedged are the
Japanese yen, French franc, German mark, British pound, Canadian dollar and
Italian lira. By policy, the Company maintains hedge coverage between minimum
and maximum percentages of its anticipated foreign exchange exposures for
periods not to exceed five years. The gains and losses on these contracts
offset changes in the value of the related exposures.
It is the Company's policy to enter into foreign currency 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 year-end and over each of the four quarters for the
calculation of average VAR amounts during the year. The model includes all of
the Company's debt as well as all interest rate and foreign exchange
derivative contracts. The values of foreign exchange options do not change on
a one-to-one basis with the underlying currencies, as exchange rates vary.
Therefore, the hedge coverage assumed to be obtained from each option has been
adjusted to reflect its respective sensitivity to changes in currency values.
Anticipated transactions, firm commitments and receivables and accounts
payable denominated in foreign currencies, which certain of these instruments
are intended to hedge, were excluded from the model.
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, 1998 and 1997.)
-28-
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, 1998 $32 $29 $56
Average VAR during the year 21 26 32
ended September 30, 1998
The higher VAR combined portfolio exposure at September 30, 1998 is
primarily due to the volatile financial market environment existing at year
end. Since the Company utilizes currency sensitive derivative instruments to
hedge 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.
NEW ACCOUNTING GUIDANCE
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which the Company is required to adopt effective
October 1, 1999. SFAS 133 will require the Company to record all derivatives
on the balance sheet at fair value. Changes in derivative fair values will
either be recognized in earnings as offsets to the changes in fair value of
related hedged assets, liabilities and firm commitments or, for forecasted
transactions, deferred and recorded as a component of other stockholders'
equity until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
immediately recognized in earnings. The impact of SFAS 133 on the Company's
financial statements will depend on a variety of factors, including future
interpretative guidance from the FASB, the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of
such instruments. However, the Company does not believe the effect of adopting
SFAS 133 will be material to its financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Supplemental Data on page 36.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-29-
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 1999 Annual Meeting of
Stockholders (the "1999 Proxy Statement") is hereby incorporated by reference.
Information regarding executive officers is included in Part I of this Form
10-K as permitted by General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the captions "How are directors compensated?"
and "Executive Compensation" in the 1999 Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information setting forth the security ownership of certain beneficial
owners and management appearing under the caption "Stock Ownership" in the
1999 Proxy Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain related transactions appearing under the
caption "Certain Relationships and Related Transactions" in the 1999 Proxy
Statement is hereby incorporated by reference.
-30-
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 36.
(2) Exhibits
The documents set forth below are filed herewith or incorporated herein
by reference to the location indicated.
EXHIBIT LOCATION
------- --------
3(a) Restated Certificate of Incorporation Exhibit 3(a) to the Form 8-
of the Company B/A Registration Statement,
dated Jan. 23, 1996, of the
Company
3(b) Bylaws of the Company Exhibit 4.2 to Amendment No.
1 to the Form S-3
Registration Statement, dated
Aug. 3, 1998, of the Company
4(a) Form of Registration Rights Agreement Exhibit B to Exhibit 2.1 to
entered into or to be entered into the Form 8-K, dated July 31,
with certain stockholders 1995, of Disney Enterprises,
Inc. ("DEI")
4(b) Rights Agreement, dated as of Nov. 8, Exhibit 4.2 to the Form S-4
1995 Registration Statement, dated
Nov. 13, 1995 (No. 33-64141)
of the Company
4(c) Five-Year Credit Agreement, dated as Exhibit 4(d) to the 1996 Form
of Oct. 30, 1996 10-K of the Company
4(d) Indenture, dated as of Nov. 30, 1990, Exhibit 2 to the Current
between DEI and Bankers Trust Report on Form 8-K, dated
Company, as Trustee Jan. 14, 1991, of DEI
4(e) Indenture, dated as of Mar. 7, 1996, Exhibit 4.1(a) to the Form 8-
between the Company and Citibank, K, dated Mar. 7, 1996, of the
N.A., as Trustee Company
4(f) Other long-term borrowing instruments
are omitted pursuant to Item 601(b)
(4) (iii) of Regulation S-K. The
Company undertakes to furnish copies
of such instruments to the Commission
upon request.
10(a) (i) Agreement on the Creation and the Exhibits 10(b) and 10(a),
Operation of Euro Disneyland en respectively, to the Form 8-
France, dated Mar. 25, 1987, and (ii) K, dated Apr. 24, 1987, of
Letter relating thereto of the DEI
Chairman of Disney Enterprises, Inc.,
dated Mar. 24, 1987
10(b) Composite Limited Recourse Financing Exhibit 10(b) to the 1997
Facility Agreement, dated as of Apr. Form 10-K of the Company
27, 1988, between DEI and TDL Funding
Company, as amended
10(c) Employment Agreement, dated as of Exhibit 10.2 to the Form 10-Q
Jan. 8, 1997, between the Company and for the period ended Dec. 31,
Michael D. Eisner 1996, of the Company
-31-
EXHIBIT LOCATION
------- --------
10(d) (i) Profit Participation Contract, Exhibits 1 and 3,
dated Dec. 14, 1979, with E. Cardon respectively, to the 1980
Walker and (ii) Amendment thereto, Form 10-K of DEI
dated Aug. 8, 1980
10(e) Form of Indemnification Agreement for Annex C to the Proxy
certain officers and directors of DEI Statement for the 1988 Annual
Meeting of DEI
10(f) 1995 Stock Option Plan for Non- Exhibit 20 to the Form S-8
Employee Directors Registration Statement (No.
33-57811), dated Feb. 23,
1995, of DEI
10(g) 1990 Stock Incentive Plan and Rules Exhibits 28(a) and 28(b),
respectively, to the Form S-8
Registration Statement
(No. 33-39770), dated Apr. 5,
1991, of DEI
10(h) Amended and Restated 1990 Stock Appendix B-2 to the Joint
Incentive Plan and Rules Proxy Statement/Prospectus
included in the Form S-4
Registration Statement
(No. 33-64141), dated Nov.
13, 1995, of DEI
10(i) 1995 Stock Incentive Plan and Rules Appendix B-1 to the Joint
Proxy Statement/Prospectus
included in the Form S-4
Registration Statement
(No. 33-64141), dated Nov.
13, 1995, of DEI
10(j) (i) 1987 Stock Incentive Plan and Exhibits 1(a), 1(b), 2(a),
Rules, (ii) 1984 Stock Incentive Plan 2(b), 3(a), 3(b) and 4,
and Rules, (iii) 1981 Incentive Plan respectively, to the
and Rules and (iv) 1980 Stock Option Prospectus contained in the
Plan Form S-8 Registration
Statement (No. 33-26106),
dated Dec. 20, 1988, of DEI
10(k) Contingent Stock Award Rules under Exhibit 10(t) to the 1986
DEI's 1984 Stock Incentive Plan Form 10-K of DEI
10(l) Bonus Performance Plan for Executive Filed herewith
Officers
10(m) Performance-Based Compensation Plan Included in the Proxy
for the Company's Chief Executive Statement dated Jan. 9, 1997,
Officer for the 1997 Annual Meeting
of the Company
10(n) Key Employees Deferred Compensation Exhibit 10(p) to the 1997
and Retirement Plan Form 10-K of the Company
10(o) Group Personal Excess Liability Exhibit 10(x) to the 1997
Insurance Plan Form 10-K of the Company
10(p) Family Income Assurance Plan (summary Exhibit 10(y) to the 1997
description) Form 10-K of the Company
10(q) Disney Salaried Savings and Exhibit 10(s) to the 1995
Investment Plan Form 10-K of DEI
10(r) First Amendment to the Disney Exhibit 10(r) to the 1997
Salaried Savings and Investment Plan Form 10-K of the Company
10(s) Second Amendment to the Disney Exhibit 10(s) to the 1997
Salaried Savings and Investment Plan Form 10-K of the Company
10(t) ABC, Inc. Savings and Investment File herewith
Plan, as amended
10(u) Employee Stock Option Plan of Capital Exhibit 10(f) to the 1992
Cities/ABC, Inc., as amended Form 10-K of Capital
Cities/ABC, Inc.
10(v) 1991 Stock Option Plan of Capital Exhibit 6(a)(i) to the Form
Cities/ABC, Inc., as amended 10-Q for the period ended
Mar. 31, 1996, of the Company
-32-
EXHIBIT LOCATION
------- --------
21 Subsidiaries of the Company Filed herewith.
23 Consent of PricewaterhouseCoopers LLP Included herein at page 37.
27 Financial Data Schedule Filed herewith.
28(a) Financial statements of the Disney Included in Form 10-K/A,
Salaried Savings and Investment Plan dated June 29, 1998, of the
for the year ended Dec. 31, 1998 Company
28(b) Financial statements of the ABC Included in Form 10-K/A,
Salaried Savings and Investment Plan dated June 29, 1998, of the
for the year ended Dec. 31, 1997 Company
99 Pro forma financial information for Exhibit 99 to the 1997 Form
1997 events. 10-K of the Company
(b) Reports on Form 8-K
(i) The Company filed a Current Report on Form 8-K on August 6, 1998 in
connection with the effectiveness of its registration statement on Form
S-3 with respect to the issuance of up to an aggregate of
$5,000,000,000 of debt securities, preferred stock, common stock and
warrants.
-33-
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 18, 1998 By: MICHAEL D. EISNER
-----------------------------------------------------
(Michael D. Eisner, Chairman of the Board and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principal Executive Officer
MICHAEL D. EISNER Chairman of the Board and December 18, 1998
- -------------------------------- Chief Executive Officer
(Michael D. Eisner)
Principal Financial and Accounting
Officers
THOMAS O. STAGGS Executive Vice President and December 18, 1998
- -------------------------------- Chief Financial Officer
(Thomas O. Staggs)
JOHN J. GARAND Senior Vice President- December 18, 1998
- -------------------------------- Planning and Control
(John J. Garand)
Directors
REVETA F. BOWERS Director December 18, 1998
- --------------------------------
(Reveta F. Bowers)
ROY E. DISNEY Director December 18, 1998
- --------------------------------
(Roy E. Disney)
MICHAEL D. EISNER Director December 18, 1998
- --------------------------------
(Michael D. Eisner)
JUDITH ESTRIN Director December 18, 1998
- --------------------------------
(Judith Estrin)
STANLEY P. GOLD Director December 18, 1998
- --------------------------------
(Stanley P. Gold)
SANFORD M. LITVACK Director December 18, 1998
- --------------------------------
(Sanford M. Litvack)
IGNACIO E. LOZANO, JR. Director December 18, 1998
- --------------------------------
(Ignacio E. Lozano, Jr.)
GEORGE J. MITCHELL Director December 18, 1998
- --------------------------------
(George J. Mitchell)
-34-
Signature Title Date
--------- ----- ----
THOMAS S. MURPHY Director December 18, 1998
- -----------------------------
(Thomas S. Murphy)
RICHARD A. NUNIS Director December 18, 1998
- -----------------------------
(Richard A. Nunis)
LEO J. O'DONOVAN, S.J. Director December 18, 1998
- -----------------------------
(Leo J. O'Donovan, S.J.)
SIDNEY POITIER Director December 18, 1998
- -----------------------------
(Sidney Poitier)
IRWIN E. RUSSELL Director December 18, 1998
- -----------------------------
(Irwin E. Russell)
ROBERT A.M. STERN Director December 18, 1998
- -----------------------------
(Robert A.M. Stern)
ANDREA VAN DE KAMP Director December 18, 1998
- -----------------------------
(Andrea Van de Kamp)
E. CARDON WALKER Director December 18, 1998
- -----------------------------
(E. Cardon Walker)
RAYMOND L. WATSON Director December 18, 1998
- -----------------------------
(Raymond L. Watson)
GARY L. WILSON Director December 18, 1998
- -----------------------------
(Gary L. Wilson)
-35-
THE WALT DISNEY COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page
----
Report of Independent Accountants and Consent of Independent Accountants.. 37
Consolidated Financial Statements of The Walt Disney Company and
Subsidiaries
Consolidated Statements of Income for the Years Ended September 30,
1998, 1997 and 1996.................................................... 38
Consolidated Balance Sheets as of September 30, 1998 and 1997........... 39
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996.................................................... 40
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996...................................... 41
Notes to Consolidated Financial Statements.............................. 42
Quarterly Financial Summary............................................. 60
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.
-36-
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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1998,
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.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
November 19, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 33-26106,
33-35405 and 33-39770) and Form S-3 (Nos. 33-49891 and 333-52659) of The Walt
Disney Company of our report dated November 19, 1998 which appears above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
December 18, 1998
-37-
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Year Ended September 30 1998 1997 1996
- -----------------------------------------------------------------------------
Revenues $ 22,976 $ 22,473 $ 18,739
Costs and expenses (18,961) (18,161) (15,406)
Gain on sale of KCAL -- 135 --
Accounting change -- -- (300)
-------- -------- --------
Operating income 4,015 4,447 3,033
Corporate activities and other (236) (367) (309)
Net interest expense (622) (693) (438)
Acquisition-related costs -- -- (225)
-------- -------- --------
Income before income taxes 3,157 3,387 2,061
Income taxes (1,307) (1,421) (847)
-------- -------- --------
Net income $ 1,850 $ 1,966 $ 1,214
======== ======== ========
Earnings per share
Diluted $ 0.89 $ 0.95 $ 0.65
======== ======== ========
Basic $ 0.91 $ 0.97 $ 0.66
======== ======== ========
Average number of common and common equivalent
shares outstanding
Diluted 2,079 2,060 1,857
======== ======== ========
Basic 2,037 2,021 1,827
======== ======== ========
See Notes to Consolidated Financial Statements
-38-
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30 1998 1997
- ----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 127 $ 317
Receivables 3,999 3,329
Inventories 899 853
Film and television costs 3,223 2,186
Deferred income taxes 463 482
Other assets 664 486
------- -------
Total current assets 9,375 7,653
Film and television costs 2,506 2,215
Investments 1,814 1,914
Theme parks, resorts and other property, at cost
Attractions, buildings and equipment 14,037 11,787
Accumulated depreciation (5,382) (4,857)
------- -------
8,655 6,930
Projects in progress 1,280 1,928
Land 411 93
------- -------
10,346 8,951
Intangible assets, net 15,769 16,011
Other assets 1,568 1,753
------- -------
$41,378 $38,497
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 4,767 $ 4,748
Current portion of borrowings 2,123 897
Unearned royalties and other advances 635 631
------- -------
Total current liabilities 7,525 6,276
Borrowings 9,562 10,171
Deferred income taxes 2,488 2,161
Other long term liabilities, unearned royalties and other
advances 2,415 2,604
Stockholders' Equity
Preferred stock, $.01 par value
Authorized--100 million shares
Issued--none
Common stock, $.01 par value
Authorized--3.6 billion shares
Issued--2.1 billion shares and 2.0 billion shares 8,995 8,548
Retained earnings 10,981 9,543
Cumulative translation and other 13 (12)
------- -------
19,989 18,079
Treasury stock, at cost, 29 million shares and 24 million
shares (593) (462)
Shares held by TWDC Stock Compensation Fund, at cost--
0.4 million shares and 13 million shares (8) (332)
------- -------
19,388 17,285
------- -------
$41,378 $38,497
======= =======
See Notes to Consolidated Financial Statements
-39-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended September 30 1998 1997 1996
- ------------------------------------------------------------------------------
NET INCOME $ 1,850 $ 1,966 $ 1,214
ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 2,514 1,995 1,786
Depreciation 809 738 672
Amortization of intangible assets 431 439 301
Gain on sale of KCAL -- (135) --
Accounting change -- -- 300
Other (75) (15) 22
CHANGES IN
Receivables (664) (177) (297)
Inventories (46) 8 (13)
Other assets 179 (441) (399)
Accounts and taxes payable and accrued
liabilities 218 608 56
Film and television costs television broadcast
rights (447) (179) 58
Deferred income taxes 346 292 (78)
Investments in trading securities -- -- 85
------- ------- --------
3,265 3,133 2,493
------- ------- --------
CASH PROVIDED BY OPERATIONS 5,115 5,099 3,707
------- ------- --------
INVESTING ACTIVITIES
Film and television costs (3,335) (3,089) (2,760)
Investments in theme parks, resorts and other
property (2,314) (1,922) (1,745)
Acquisitions (213) (180) --
Proceeds from sale of marketable securities and
other investments 238 31 409
Purchases of marketable securities (13) (56) (18)
Investment in and loan to E! Entertainment (28) (321) --
Proceeds from disposal of publishing operations -- 1,214 --
Acquisition of ABC, net of cash acquired -- -- (8,432)
Proceeds from disposal of KCAL -- 387 --
------- ------- --------
(5,665) (3,936) (12,546)
------- ------- --------
FINANCING ACTIVITIES
Borrowings 1,830 2,437 13,560
Reduction of borrowings (1,212) (4,078) (4,872)
Repurchases of common stock (30) (633) (462)
Dividends (412) (342) (271)
Exercise of stock options and other 184 180 85
Proceeds from formation of REITs -- 1,312 --
------- ------- --------
360 (1,124) 8,040
------- ------- --------
(Decrease) Increase in Cash and Cash Equivalents (190) 39 (799)
Cash and Cash Equivalents, Beginning of Year 317 278 1,077
------- ------- --------
Cash and Cash Equivalents, End of Year $ 127 $ 317 $ 278
======= ======= ========
Supplemental disclosure of cash flow information:
Interest paid $ 555 $ 777 $ 379
======= ======= ========
Income taxes paid $ 1,107 $ 958 $ 689
======= ======= ========
See Notes to Consolidated Financial Statements
-40-
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, 1995 1,573 $1,240 $ 6,976 $ 38 $(1,603) $ -- $ 6,651
Impact of ABC
acquisition 464 7,206 -- -- 1,603 -- 8,809
Exercise of stock
options, net 9 144 -- -- -- -- 144
Common stock
repurchased (24) -- -- -- (462) -- (462)
Dividends ($.14 per
share) -- -- (271) -- -- -- (271)
Cumulative translation
and other -- -- -- 1 -- -- 1
Net income -- -- 1,214 -- -- -- 1,214
----- ------ ------- ---- ------- ----- -------
BALANCE AT
SEPTEMBER 30, 1996 2,022 8,590 7,919 39 (462) -- 16,086
Exercise of stock
options, net 15 (42) -- -- -- 301 259
Common stock
repurchased (24) -- -- -- -- (633) (633)
Dividends ($.17 per
share) -- -- (342) -- -- -- (342)
Cumulative translation
and other -- -- -- (51) -- -- (51)
Net income -- -- 1,966 -- -- -- 1,966
----- ------ ------- ---- ------- ----- -------
BALANCE AT
SEPTEMBER 30, 1997 2,013 8,548 9,543 (12) (462) (332) 17,285
Common stock issued 4 160 -- -- -- -- 160
Exercise of stock
options, net 34 287 -- -- (131) 354 510
Common stock
repurchased (1) -- -- -- -- (30) (30)
Dividends ($.20 per
share) -- -- (412) -- -- -- (412)
Cumulative translation
and other -- -- -- 25 -- -- 25
Net income -- -- 1,850 -- -- -- 1,850
----- ------ ------- ---- ------- ----- -------
BALANCE AT
SEPTEMBER 30, 1998 2,050 $8,995 $10,981 $ 13 $ (593) $ (8) $19,388
===== ====== ======= ==== ======= ===== =======
See Notes to Consolidated Financial Statements
-41-
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 and computer software products for the entertainment market, as well as
film, video and computer software products for the educational marketplace.
Buena Vista Internet Group ("BVIG") coordinates the Company's internet
initiatives. BVIG develops, publishes and distributes content for narrow-band
on-line services, the interactive software market, interactive television
platforms, internet web sites, including Disney.com, Disney's Daily Blast,
ESPN.com, ABCNews.com and the Disney Store Online, which offers Disneythemed
merchandise over the internet.
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 either
the ABC Television Network or the ABC Radio Networks. The Company's cable and
international broadcast operations are principally involved in the production
and distribution of cable television programming, the licensing of programming
to domestic and international markets and investing in foreign television
broadcasting, production and distribution entities. Primary domestic cable
programming services, which operate through subsidiary companies and joint
ventures, are ESPN, the A&E Television Networks, Lifetime Entertainment
Services and E! Entertainment Television. The Company provides programming for
and operates cable and satellite television programming services, including
the Disney Channel and Disney Channel International.
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,
Disney-MGM Studios and Disney's Animal Kingdom, thirteen resort hotels and a
complex of villas and suites, a retail, dining and entertainment complex, a
sports complex, conference centers, campgrounds, golf courses, water parks and
other recreational facilities. In addition, the resort operates Disney Cruise
Line from Port Canaveral, Florida. Disney Regional Entertainment designs,
develops and operates a variety of new entertainment concepts based on Disney
brands and creative properties, operating under the names Club Disney, ESPN
Zone and DisneyQuest. 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
-42-
Company also has an investment in Euro Disney S.C.A., a publicly-held French
entity that operates Disneyland Paris. The Company's Walt Disney Imagineering
unit designs and develops new theme park concepts and attractions, as well as
resort properties. The Company also manages and markets vacation ownership
interests in the Disney Vacation Club. Included in Theme Parks and Resorts are
the Company's National Hockey League franchise, the Mighty Ducks of Anaheim,
and its ownership interest in the Anaheim Angels, a Major League Baseball
team.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
The Walt Disney Company and its subsidiaries after elimination of intercompany
accounts and transactions.
Accounting Changes
During the first quarter, the Company adopted Statement of Financial
Accounting Standards No. 128 Earnings Per Share ("SFAS 128"), which specifies
the method of computation, presentation and disclosure for earnings per share
("EPS"). SFAS 128 requires the presentation of two EPS amounts, basic and
diluted. Basic EPS is calculated by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted EPS
includes the dilution that would occur if outstanding stock options and other
dilutive securities were exercised and is comparable to the EPS the Company
has historically reported. The diluted EPS calculation excludes the effect of
stock options when their exercise prices exceed the average market price over
the period.
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.
-43-
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 costs are stated at the lower of cost, less accumulated
amortization, or net realizable value. Television broadcast program licenses
and rights and related liabilities are recorded when the license period begins
and the program is available for use.
Film and television production and participation costs are expensed based on
the ratio of the current period's gross revenues to estimated total gross
revenues from all sources on an individual production basis. Television
network and station rights for theatrical movies and other long-form
programming are charged to expense primarily on accelerated bases related to
the usage of the programs. Television network series costs and multi-year
sports rights are charged to expense based on the ratio of the current
period's gross revenues to estimated total gross revenues from such programs.
Estimates of total gross revenues can change significantly due to a variety
of factors, including the level of market acceptance of film and television
products, advertising rates and subscriber fees. Accordingly, revenue
estimates are reviewed periodically and amortization is adjusted if necessary.
Such adjustments could have a material effect on results of operations in
future periods.
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
amounts of such assets may not be recoverable. Recoverability of these assets
is determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate, to the carrying amount, including
associated intangible assets, of such operation. If the operation is
determined to be unable to recover the carrying amount of its assets, then
intangible assets are written down first, followed by the other long-lived
assets of the operation, to fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the nature of the
assets.
Risk Management Contracts
In the normal course of business, the Company employs a variety of off-
balance-sheet financial instruments to manage its exposure to fluctuations in
interest and foreign currency exchange rates, including interest rate and
cross-currency swap agreements, forward, option, swaption and spreadlock
contracts and interest rate caps.
-44-
The Company designates and assigns the financial instruments as hedges of
specific assets, liabilities or anticipated transactions. When hedged assets
or liabilities are sold or extinguished or the anticipated transactions being
hedged are no longer expected to occur, the Company recognizes the gain or
loss on the designated hedging financial instruments.
The Company classifies its derivative financial instruments as held or
issued for purposes other than trading. Option premiums and unrealized losses
on forward contracts and the accrued differential for interest rate and cross-
currency swaps to be received under the agreements are recorded in the balance
sheet as other assets. Unrealized gains on forward contracts and the accrued
differential for interest rate and cross-currency swaps to be paid under the
agreements are included in accounts and taxes payable and other accrued
liabilities. Realized gains and losses from hedges are classified in the
income statement consistent with the accounting treatment of the items being
hedged. The Company accrues the differential for interest rate and cross-
currency swaps to be paid or received under the agreements as interest and
exchange rates shift as adjustments to net interest expense over the lives of
the swaps. Gains and losses on the termination of swap agreements, prior to
their original maturity, are deferred and amortized to net interest expense
over the remaining term of the underlying hedged transactions.
Cash flows from hedges are classified in the statement of cash flows under
the same category as the cash flows from the related assets, liabilities or
anticipated transactions (see Notes 5 and 12).
Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares are excluded from the computation in periods in which
they have an anti-dilutive effect. The difference between basic and diluted
earnings per share, for the Company, is solely attributable to stock options.
For the years ended September 30, 1998, 1997 and 1996, options for 18 million,
15 million and 39 million shares, respectively, were excluded from diluted
earnings per share.
Earnings per share amounts have been adjusted, for all years presented, to
reflect the three-for-one split of the Company's common shares effective June
1998 (see Note 8).
Reclassifications
Certain reclassifications have been made in the 1997 and 1996 financial
statements to conform to the 1998 presentation, including the change in format
from an unclassified balance sheet to a classified balance sheet, which
separately presents the current and non-current portions of assets and
liabilities. Consistent with the classification of television broadcast rights
as current assets, payments for such rights are now reclassified as operating
cash flows.
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.
As a result of the ABC acquisition, the Company sold its independent Los
Angeles television station, KCAL, during the first quarter of 1997 for $387
million, resulting in a gain of $135 million.
The Company completed its final purchase price allocation and determination
of related goodwill, deferred taxes and other accounts during the second
quarter of 1997.
During the third and fourth quarters of 1997, the Company disposed of most
of the publishing businesses acquired with ABC to various third parties for
consideration approximating their carrying
-45-
amount. Proceeds consisted of $1.2 billion in cash, $1.0 billion in debt
assumption and preferred stock convertible to common stock with a market value
of $660 million.
The unaudited pro forma information below presents results of operations as
if the acquisition of ABC in 1996 and the sale of KCAL, the finalization of
purchase price allocation and the disposition of certain ABC publishing assets
in 1997 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 these events occurred at the
beginning of the years presented, nor is it necessarily indicative of future
results.
Year Ended
September 30,
----------------
1997 1996 (a)
------- --------
Revenues $21,613 $20,075
Net income 1,772 1,274
Earnings per share
Diluted $ 0.86 $ 0.62
Basic $ 0.88 $ 0.63
- --------
(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 diluted earnings per share by $.09 for the year.
3Investment in Euro Disney
Euro Disney S.C.A. ("Euro Disney") operates the Disneyland Paris theme park
and resort complex on a 4,800-acre site near Paris, France. The Company
accounts for its 39% ownership interest in Euro Disney using the equity method
of accounting. As of September 30, 1998, the Company's recorded investment in
Euro Disney was $340 million. The quoted market value of the Company's Euro
Disney shares at September 30, 1998 was approximately $452 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, 1998 of
FF 8.3 billion ($1.5 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 $1.1
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 $201
million, upon request, bearing interest at PIBOR. As of September 30, 1998,
Euro Disney had not requested that the Company establish this facility. The
Company also agreed, as long as any of the restructured debt is outstanding,
to maintain ownership of at least 34% of the outstanding common stock of Euro
Disney until June 1999, at least 25% for the subsequent five years and at
least 16.67% for an additional term thereafter.
-46-
4Film and Television Costs
1998 1997
- -------------------------------------------
Theatrical film costs
Released, less amortization $2,035 $1,691
In-process 2,041 1,855
------ ------
4,076 3,546
------ ------
Television costs
Released, less amortization 374 276
In-process 589 279
------ ------
963 555
------ ------
Television broadcast rights 690 300
------ ------
5,729 4,401
Less: current portion 3,223 2,186
------ ------
Non-current portion $2,506 $2,215
====== ======
Based on management's total gross revenue estimates as of September 30,
1998, approximately 82% of unamortized film and television costs (except in-
process) are expected to be amortized during the next three years.
5Borrowings
The Company's borrowings at September 30, 1998 and 1997, including interest
rate swaps designated as hedges, are summarized below.
1998
---------------------------------------------------------------
STATED INTEREST RATE AND CROSS- EFFECTIVE
INTEREST CURRENCY SWAPS (F) INTEREST SWAP
BALANCE RATE (E) PAY FLOAT PAY FIXED RATE (G) MATURITIES
------- -------- ------------ ------------ --------- ----------
Commercial paper due
1999 (a) $2,225 5.5% $ -- $ 2,225 6.2% 1999
U.S. dollar notes and
debentures due
1999-2093 (b) 6,321 6.6% 2,886 675 6.4% 1999-2012
Dual currency and
foreign notes due
1999-2003 (c) 1,678 5.8% 1,678 -- 5.4% 1999-2003
Senior participating
notes due 2000-2001 (d) 1,195 2.7% -- -- N/A N/A
Other due 1999-2027 266 5.2% -- -- N/A N/A
------
11,685 5.8% -- -- 6.2%
Less current portion 2,123
------ ------------ ------------
TOTAL LONG-TERM
BORROWINGS $9,562 $ 4,564 $ 2,900
====== ============ ============
-47-
1997
----------------------------------------------------------------
Stated Interest rate and cross- Effective
Interest currency swaps (f) Interest Swap
Balance Rate (e) Pay Float Pay Fixed Rate (g) Maturities
------- -------- ------------- ------------ --------- ----------
Commercial paper due
1998 (a) $ 2,019 5.8% $ -- $ 950 6.2% 1999
U.S. dollar notes and
debentures due
1998-2093 (b) 5,796 6.7% 2,086 -- 6.5% 1998-2012
Dual currency and
foreign notes due
1998-2001 (c) 1,854 5.2% 1,812 -- 5.4% 1998-2001
Senior participating
notes due 2000-2001 (d) 1,145 2.7% -- -- n/a n/a
Other due 1998-2027 254 8.2% -- -- n/a n/a
-------
11,068 5.9% -- -- 6.3%
Less current portion 897
------- ------------- -----------
Total long-term
borrowings $10,171 $ 3,898 $ 950
======= ============= ===========
- --------
(a) The Company has established bank facilities totaling $5.2 billion which
expire in one to four years. Under the bank facilities, the Company has
the option to borrow at various interest rates. Commercial paper is
classified as long-term since the Company intends to refinance these
borrowings on a long-term basis through continued commercial paper
borrowings supported by available bank facilities.
(b) Includes $771 million in 1998 and $821 million in 1997 representing
minority interest in a real estate investment trust established by the
Company.
(c) Denominated principally in U.S. dollars, Japanese yen, Australian dollars
and Italian lira.
(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. The effective interest rates at September 30, 1998
and 1997 were 6.8% and 6.3%, respectively.
(e) The stated interest rate represents the weighted average coupon rate for
each category of borrowings. For floating rate borrowings, interest rates
are based upon the rates at September 30, 1998 and 1997; these rates are
not necessarily an indication of future interest rates.
(f) Amounts represent notional values of interest rate swaps.
(g) The effective interest rate reflects the effect of interest rate and
cross-currency swaps entered into with respect to certain of these
borrowings as indicated in the "Pay Float" and "Pay Fixed" columns.
Borrowings, excluding commercial paper and minority interest, have the
following scheduled maturities:
1999 $2,123
2000 2,074
2001 2,054
2002 --
2003 92
Thereafter 2,346
The Company capitalizes interest on assets constructed for its theme parks,
resorts and other property, and on theatrical and television productions in
process. In 1998, 1997 and 1996, respectively, total interest costs incurred
were $824 million, $841 million and $545 million, of which $139 million, $100
million and $66 million were capitalized.
-48-
6Income Taxes
1998 1997 1996
- -----------------------------------------------------
Income before income taxes
Domestic (including U.S.
exports) $ 3,114 $ 3,193 $1,822
Foreign subsidiaries 43 194 239
------- ------- ------
$ 3,157 $ 3,387 $2,061
======= ======= ======
Income tax provision
Current Federal $ 698 $ 1,023 $ 389
State 119 203 101
Foreign (including
withholding) 139 190 235
------- ------- ------
956 1,416 725
------- ------- ------
Deferred
Federal 303 21 106
State 48 (16) 16
------- ------- ------
351 5 122
------- ------- ------
$ 1,307 $ 1,421 $ 847
======= ======= ======
Components of Deferred Tax
Assets and Liabilities 1998 1997
- -----------------------------------------------------
Deferred tax assets
Accrued liabilities $(1,051) $(1,257)
Other, net (61) (89)
------- -------
Total deferred tax
assets (1,112) (1,346)
======= =======
Deferred tax liabilities
Depreciable, amortizable
and other property 2,396 2,413
Licensing revenues 249 193
Leveraged leases 313 279
Investment in Euro
Disney 129 90
------- -------
Total deferred tax
liabilities 3,087 2,975
------- -------
Net deferred tax liability
before valuation
allowance 1,975 1,629
Valuation allowance 50 50
------- -------
Net deferred tax liability $ 2,025 $ 1,679
======= =======
Reconciliation of
Effective Income Tax Rate 1998 1997 1996
- -----------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Nondeductible amortization
of intangible assets 4.4 4.4 5.1
State taxes, net of
federal income tax
benefit 3.4 3.6 3.7
Other, net (1.4) (1.0) (2.7)
------- ------- ------
41.4% 42.0% 41.1%
======= ======= ======
In 1998, 1997 and 1996, income tax benefits attributable to employee stock
option transactions of $327 million, $81 million and $44 million,
respectively, were allocated to stockholders' equity.
-49-
7Pension 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
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
Reconciliation of funded status of the
plans and the amounts included in the
Company's consolidated balance sheets:
Projected benefit obligations
Beginning obligations $(1,438) $(1,402) $ (293) $ (271)
Service cost (71) (73) (11) (10)
Interest cost (109) (106) (22) (21)
Actuarial gains (losses) (247) 9 (2) 5
Benefits paid 63 62 10 9
Other 9 72 (3) (5)
------- ------- ------- -------
Ending obligations (1,793) (1,438) (321) (293)
------- ------- ------- -------
Fair value of plans' assets
Beginning fair value 1,726 1,442 162 138
Actual return on plans' assets 294 304 26 22
Employer contributions 75 110 7
Participants' contributions 1 1 - 11
Benefits paid (63) (62) (10) (9)
Expenses (15) (9) -- --
Other (4) (60) -- --
------- ------- ------- -------
Ending fair value 2,014 1,726 185 162
------- ------- ------- -------
Funded status of the plans 221 288 (136) (131)
Unrecognized net gain (loss) (80) (219) (30) (20)
Unrecognized prior service benefit (cost) (11) (2) 1 (34)
Other 33 28 -- --
------- ------- ------- -------
Net balance sheet asset (liability) $ 163 $ 95 $ (165) $ (185)
======= ======= ======= =======
Rate Assumptions
Discount rate 6.8% 7.8% 6.8% 7.8%
Rate of return on plans' assets 10.5% 10.5% 10.5% 10.5%
Salary increases 4.4% 5.4% N/A n/a
Annual increase in cost of benefits N/A n/a 6.4% 6.7%
The projected benefit obligations and the accumulated benefit obligations
for the pension plans with accumulated benefit obligations in excess of plan
assets were $96 million and $74 million for 1998, and $79 million and $50
million for 1997.
The annual increase in cost of postretirement benefits is assumed to
decrease .3 percentage points per year until reaching 4.9%.
-50-
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement medical benefit plans. The effects of
a one percentage point decrease in the assumed health care cost trend rates on
total service and interest cost components and on postretirement benefit
obligations are $9 million and $70 million, respectively. The effects of a one
percentage point increase in the assumed health care cost trend rates on total
service and interest cost components and on postretirement benefit obligations
are ($7) million and ($53) million, respectively.
The Company's accumulated pension benefit obligations at September 30, 1998
and 1997 were $1.6 billion and $1.3 billion, of which 97.7% and 97.8% were
vested, respectively.
The income statement costs of the pension plans for 1998, 1997 and 1996
totaled $12 million, $45 million and $58 million, respectively. The discount
rate, rate of return on plan assets and salary increase assumptions for the
pension plans were 7.8%, 10.0% and 5.6%, respectively, in 1996. The income
statement credits for the postretirement benefit plans for 1998, 1997 and 1996
were $13 million, $18 million and $16 million, respectively. The discount
rate, rate of return on plan assets and annual increase in cost of
postretirement benefits assumptions were 7.8%, 10.0% and 7.0%, respectively,
in 1996.
The market values of the Company's shares held by the pension plan master
trust as of September 30, 1998 and 1997 were $71 million and $75 million,
respectively.
8Stockholders' Equity
In June 1998, the Company effected a three-for-one split of its common
stock, by means of a special stock dividend. Stockholders' equity has been
restated to give retroactive recognition to the stock split in prior periods
by reclassifying from retained earnings to common stock the par value of
additional shares issued pursuant to the split. In connection with the common
stock split, the Company amended its corporate charter to increase the
Company's authorized common stock from 1.2 billion shares to 3.6 billion
shares. The Board of Directors also approved an increase in the Company's
share repurchase authorization to 133.3 million shares of common stock pre-
split or 400 million post-split. All share and per share data included herein
have been restated to reflect the split.
In 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.
The Company has a stockholder rights plan, expiring June 30, 1999, which
becomes operative upon 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.
9Stock 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,
1998, totaled 119 million.
-51-
The following table summarizes information about stock option transactions
(shares in millions):
1998 1997 1996
--------------- --------------- ---------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year 183 $17.44 189 $15.84 105 $11.20
Awards canceled (10) 20.98 (18) 19.32 (6) 17.10
Awards granted 27 33.07 27 25.64 96 19.63
Awards exercised (37) 9.06 (15) 11.14 (9) 10.53
Awards transferred (ABC) -- -- 3 11.05
--- --- --- ------
Outstanding at September 30 163 $21.70 183 $17.44 189 $15.84
=== === ===
Exercisable at September 30 51 $16.34 63 $11.77 51 $ 9.40
=== === ===
The following table summarizes information about stock options outstanding
at September 30, 1998 (shares in millions):
Outstanding Exercisable
-------------------------------------- -------------------
Weighted Weighted
Range of Weighted Average Average Average
Exercise Number Remaining Years of Exercise Number Exercise
Prices of Options Contractual Life Price of Options Price
-------- ---------- ------------------ -------- ---------- --------
$ 2-$ 5 2 0.28 $ 5.71 2 $ 5.71
$ 5-$10 7 2.19 8.55 6 8.58
$10-$15 20 5.01 13.41 14 13.27
$15-$20 24 6.72 18.33 16 18.44
$20-$25 60 7.79 21.54 11 21.33
$25-$30 26 9.10 26.48 2 26.64
$30-$35 9 8.82 31.76 --
$35-$40 12 9.56 38.02 --
$40-$45 3 8.01 42.21 --
--- ---
163 51
=== ===
During 1997, the Company adopted SFAS 123 and pursuant to its provisions,
elected to continue using the intrinsic-value method of accounting for stock-
based awards granted to employees in accordance with APB 25. Accordingly, the
Company has not recognized compensation expense for its 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:
1998 1997 1996
------ ------ ------
Net income:
As reported $1,850 $1,966 $1,214
Pro forma 1,749 1,870 1,185
Diluted earnings per share:
As reported 0.89 0.95 0.65
Pro forma 0.84 0.91 0.64
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.
-52-
The weighted average fair values of options at their grant date during 1998,
1997 and 1996, where the exercise price equaled the market price on the grant
date, were $10.82 and $9.09, and $7.67, respectively. The weighted average
fair values of options at their grant date during 1998 and 1996, where the
exercise price exceeded the market price on the grant date, were $8.55 and
$6.20, respectively. 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 weighted average assumptions used in the model were
as follows:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.4% 6.4% 6.2%
Expected years until exercise 6.0 6.1 7.1
Expected stock volatility 23% 23% 23%
Dividend yield .71% .71% .69%
10Detail of Certain Balance Sheet Accounts
1998 1997
- ---------------------------------------------------------------------------
Current Receivables
Trade, net of allowances $ 3,447 $ 3,002
Other 552 327
------- -------
$ 3,999 $ 3,329
======= =======
Accounts and taxes payable and other accrued liabilities
Accounts payable $ 3,792 $ 3,560
Income taxes payable -- 383
Payroll and employee benefits 853 684
Other 122 121
------- -------
$ 4,767 $ 4,748
======= =======
Intangible assets
Cost in excess of ABC's net assets acquired $14,248 $14,307
Trademark 1,100 1,100
FCC licenses 1,100 1,100
Other 474 211
Accumulated amortization (1,153) (707)
------- -------
$15,769 $16,011
======= =======
-53-
11 Segments
Business Segments 1998 1997 1996
- ---------------------------------------------------------
Revenues
Creative Content $10,302 $10,937 $10,159
Broadcasting 7,142 6,522 4,078
Theme Parks and Resorts 5,532 5,014 4,502
------- ------- -------
$22,976 $22,473 $18,739
======= ======= =======
Operating income
Creative Content $ 1,403 $ 1,882 $ 1,561
Broadcasting 1,325 1,294 782
Theme Parks and Resorts 1,287 1,136 990
KCAL gain -- 135 --
Accounting change -- -- (300)
------- ------- -------
$ 4,015 $ 4,447 $ 3,033
======= ======= =======
Capital expenditures
Creative Content $ 221 $ 301 $ 359
Broadcasting 245 152 113
Theme Parks and Resorts 1,693 1,266 1,196
Corporate 155 203 77
------- ------- -------
$ 2,314 $ 1,922 $ 1,745
======= ======= =======
Depreciation expense
Creative Content $ 209 $ 187 $ 163
Broadcasting 122 104 104
Theme Parks and Resorts 444 408 358
Corporate 34 39 47
------- ------- -------
$ 809 $ 738 $ 672
======= ======= =======
Identifiable assets
Creative Content $ 9,509 $ 8,832 $ 8,837
Broadcasting 20,099 19,036 19,576
Theme Parks and Resorts 9,214 8,051 7,066
Corporate 2,556 2,578 1,862
------- ------- -------
$41,378 $38,497 $37,341
======= ======= =======
Supplemental revenue data
Creative Content
Theatrical product $ 5,085 $ 5,595 $ 5,472
Consumer products 3,452 3,076 2,518
Broadcasting
Advertising 5,287 4,937 3,092
Theme Parks and Resorts
Merchandise, food and beverage 1,780 1,754 1,555
Admissions 1,739 1,603 1,493
-54-
Geographic Segments 1998 1997 1996
- ------------------------------------------------
Revenues
United States $18,106 $17,868 $14,422
United States export 1,036 874 746
Europe 2,215 2,073 2,086
Rest of world 1,619 1,658 1,485
------- ------- -------
$22,976 $22,473 $18,739
======= ======= =======
Operating income
United States $ 3,468 $ 3,712 $ 2,229
Europe 369 499 633
Rest of world 390 397 382
Unallocated expenses (212) (161) (211)
------- ------- -------
$ 4,015 $ 4,447 $ 3,033
======= ======= =======
Identifiable assets
United States $39,462 $36,706 $35,477
Europe 1,468 1,275 1,495
Rest of world 448 516 369
------- ------- -------
$41,378 $38,497 $37,341
======= ======= =======
During the second quarter of 1996, the Company implemented SFAS 121. This
accounting standard changed 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, 1998 and 1997, the Company held $126 million and $137
million, respectively, of securities classified as available for sale. In
1998, 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, 1998 and 1997 included pay-floating and
pay-fixed swaps, interest rate caps and swaption contracts. Pay-floating swaps
effectively converted medium-term obligations to LIBOR-based or commercial
paper variable rate instruments. These swap agreements expire in one to 14
years. Pay-fixed swaps and interest rate caps effectively converted floating
rate obligations to fixed rate instruments. These instruments expire within
one year. Swaption contracts were designated as hedges of floating rate debt
and expired in 1998.
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The following table reflects incremental changes in the notional or
contractual amounts of the Company's interest rate contracts during 1998 and
1997. Activity representing renewal of existing positions is excluded.
September 30, Maturities/ SEPTEMBER 30,
1997 Additions Expirations Terminations 1998
- ------------------------------------------------------------------------------------
Pay-floating swaps $ 2,086 $ 950 $ (50) $ (100) $ 2,886
Pay-fixed swaps 950 6,000 (4,050) -- 2,900
Interest rate caps -- 3,100 (2,000) -- 1,100
Swaption contracts 300 -- (300) -- --
------- -------- -------- ------- -------
$ 3,336 $ 10,050 $ (6,400) $ (100) $ 6,886
======= ======== ======== ======= =======
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
======= ======== ======== ======= =======
The impact of interest rate risk management activities on income in 1998,
1997 and 1996, and the amount of deferred gains and losses from interest rate
risk management transactions at September 30, 1998 and 1997 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 exiting foreign currency assets and liabilities,
commitments and anticipated foreign currency revenues. By policy, the Company
maintains hedge coverage between minimum and maximum percentages of its
anticipated foreign exchange exposures for periods not to exceed five years.
The gains and losses on these contracts offset changes in the value of the
related exposures.
It is the Company's policy to enter into foreign currency transactions only
to the extent considered necessary to meet its objectives as stated above. The
Company does not enter into foreign currency transactions for speculative
purposes.
The Company uses option strategies 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 and Italian lira. 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 a cruise ship (see Note 13). Cross-currency swaps are used to
hedge foreign currency-denominated borrowings.
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At September 30, 1998 and 1997, 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:
1998 1997
---------------------------- ----------------------------
FISCAL Fiscal
NOTIONAL EXPOSURES YEAR Notional Exposures Year
AMOUNT HEDGED MATURITY Amount Hedged Maturity
-------- --------- --------- -------- --------- ---------
Option contracts $2,966 $1,061 1999-2000 $3,460 $1,633 1998-1999
Forward contracts 2,053 1,773 1999-2000 2,284 1,725 1998-1999
Cross-currency swaps 1,678 1,678 1999-2003 1,812 1,812 1998-2001
------ ------ ------ ------
$6,697 $4,512 $7,556 $5,170
====== ====== ====== ======
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, 1998 and 1997, the
Company had deferred gains of $245 million and $486 million respectively, and
deferred losses of $118 million and $220 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 1998 and in 1997 was a net
gain of $227 million and $166 million, respectively.
Fair Value of Financial Instruments
At September 30, 1998 and 1997, 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, 1998 and 1997, 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:
1998 1997
------------------ ------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------- -------- -------- --------
Investments $ 686 $ 765 $ 769 $ 1,174
Borrowings $(10,914) $(11,271) $(10,313) $(10,290)
Risk management contracts:
Foreign exchange forwards $ 49 $ 18 $ 43 $ 93
Foreign exchange options 58 178 177 367
Interest rate swaps 30 181 20 54
Cross-currency swaps 25 (89) 17 (77)
-------- -------- -------- --------
$ 162 $ 288 $ 257 $ 437
======== ======== ======== ========
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, 1998 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.
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The Company's current policy regarding agreements with financial institution
counterparties is generally to require collateral in the event credit ratings
fall below A- or in the event aggregate exposures exceed limits as defined by
contract. In addition, the Company limits the amount of credit exposure with
any one institution. At September 30, 1998, financial institution
counterparties posted collateral of $83 million to the Company, and the
Company was not required to collateralize its financial instrument
obligations.
The Company's trade receivables and investments do not represent significant
concentration of credit risk at September 30, 1998, due to the wide variety of
customers and markets into which the Company's products are sold, their
dispersion across many geographic areas, and the diversification of the
Company's portfolio among instruments and issuers.
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which the Company is required to adopt effective
October 1, 1999. SFAS 133 will require the Company to record all derivatives
on the balance sheet at fair value. Changes in derivative fair values will
either be recognized in earnings as offsets to the changes in fair value of
related hedged assets, liabilities and firm commitments or, for forecasted
transactions, deferred and recorded as a component of other stockholders'
equity until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
immediately recognized in earnings. The impact of SFAS 133 on the Company's
financial statements will depend on a variety of factors, including future
interpretative guidance from the FASB, the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of
such instruments. However, the Company does not believe the effect of adopting
SFAS 133 will be material to its financial position.
13 Commitments and Contingencies
Pursuant to an agreement with a shipyard for the construction of a cruise
ship for its Disney Cruise Line, the Company is committed to make payments
totaling approximately $290 million in 1999.
The Company is committed to the purchase of broadcast rights for various
feature films, sports and other programming aggregating approximately $14.7
billion as of September 30, 1998. This amount is substantially payable over
the next six years.
The Company has various real estate operating leases, including retail
outlets for the distribution of consumer products and office space for general
and administrative purposes. Future minimum lease payments under these non-
cancelable operating leases totaled $2 billion at September 30, 1998, payable
as follows:
1999 $272
2000 259
2001 236
2002 214
2003 183
Thereafter 819
Rental expense for the above operating leases during 1998, 1997 and 1996,
including overages, common-area maintenance and other contingent rentals, was
$321 million, $327 million and $233 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
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claims incident to the conduct of its businesses. Management does not expect
the Company to suffer any material liability by reason of such actions, nor
does it expect that such actions will have a material effect on the Company's
liquidity or operating results.
14 Subsequent Event
In April 1997, the Company purchased a significant equity stake in Starwave
Corporation ("Starwave"), an internet technology company. In connection with
the acquisition, the Company was granted an option to purchase substantially
all the remaining shares of Starwave, which the Company exercised during the
third quarter of 1998. Accordingly, the accounts of Starwave have been
included in the Company's September 30, 1998 consolidated financial
statements. On June 18, 1998, the Company reached an agreement for the
acquisition of Starwave by Infoseek Corporation ("Infoseek"), a publicly-held
internet search company, pursuant to a merger. On November 18, 1998, the
shareholders of both Infoseek and Starwave approved the merger. As a result of
the merger and the Company's purchase of additional shares of Infoseek common
stock pursuant to the merger agreement, the Company owns approximately 43% of
Infoseek's outstanding common stock. In addition, pursuant to the merger
agreement, the Company purchased warrants enabling it, under certain
circumstances, to achieve a majority stake in Infoseek. These warrants vest
over a three-year period and expire in five years. Effective as of the
November 18, 1998 closing date of the transaction, the Company will record a
significant non-cash gain, a write-off for purchased in-process research and
development costs and an increase in investments, reflecting the Company's
share of the fair value of Infoseek's intangible assets. The Company is
currently performing the necessary valuations to determine the gain, the
research and development write-off and the amount of and amortization period
for the intangible assets. Thereafter, the Company will account for its
investment in Infoseek under the equity method. The merger is not expected to
have a material effect on the Company's financial position.
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QUARTERLY FINANCIAL SUMMARY
(In millions, except per share data)
(Unaudited)
December 31 March 31 June 30 September 30
- ------------------------------------------------------------------------
1998
Revenues $6,339 $5,242 $5,248 $6,147
Operating income 1,492 849 923 751
Net income 755 384 415 296
Earnings per share (/1/)
Diluted 0.37 0.18 0.20 0.14
Basic 0.37 0.19 0.20 0.14
1997
Revenues $6,278 $5,481 $5,194 $5,520
Operating income (/2/) 1,562 864 1,060 961
Net income (/2/) 749 333 473 411
Earnings per share (/1/)(/2/)
Diluted 0.36 0.16 0.23 0.20
Basic 0.37 0.16 0.23 0.20
- --------
(1) Amounts have been adjusted to give effect to the three-for-one split of
the Company's common shares effective June 1998. See Note 8 to the
Consolidated Financial Statements.
(2) Reflects a $135 million gain on the sale of KCAL in the first quarter. The
earnings per share impact of this gain was $0.04. See Note 2 to the
Consolidated Financial Statements.
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[DISNEY RECYCLING LOGO]