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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, 1999 Commission File Number 1-11605
[LOGO OF THE WALT DISNEY COMPANY]
Incorporated in Delaware I.R.S. Employer Identification No.
500 South Buena Vista Street, Burbank, California 91521 95-4545390
(818) 560-1000
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Disney Group Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
go.com Common Stock, $.01 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of November 30, 1999, the aggregate market values of Disney Group and
go.com common stock held by non-affiliates (based on the closing price on such
date as reported on the New York Stock Exchange-Composite Transactions) were
$57.6 billion and $1.2 billion, respectively. All executive officers and
directors of registrant and all persons filing a Schedule 13D with the
Securities and Exchange Commission in respect to registrant's common stock
have been deemed, solely for the purpose of the foregoing calculation, to be
"affiliates" of the registrant.
There were 2,065,943,456 shares of Disney Group common stock outstanding and
35,545,985 shares of go.com common stock outstanding as of December 17, 1999
Documents Incorporated by Reference
Certain information required for Part III of this report is incorporated
herein by reference to the proxy statement for the 2000 annual meeting of the
Company's stockholders.
PART I
ITEM 1. Business
The Walt Disney Company owns 100% of Disney Enterprises, Inc. (DEI) which,
together with its subsidiaries, is a diversified worldwide entertainment
company with operations in five business segments: Media Networks, Studio
Entertainment, Theme Parks and Resorts, Consumer Products and Internet and
Direct Marketing. The term "Company" is used to refer collectively to the
parent company and the subsidiaries through which its various businesses are
actually conducted. Information on revenues, operating income, identifiable
assets and supplemental revenue of the Company's business segments appears in
Note 11 to the Consolidated Financial Statements included in Item 8 hereof.
The Company employs approximately 120,000 people.
MEDIA NETWORKS
Television and Radio Networks
The Company operates the ABC Television Network, which as of September 30,
1999 had 225 primary affiliated stations operating under long-term agreements
reaching 99.9% of all U.S. television households. The ABC Television Network
broadcasts programs in "dayparts" as follows: Monday through Friday Early
Morning, Daytime and Late Night, Monday through Sunday Prime Time and News,
Children's and Sports. The Company operates the ABC Radio Networks, which
reach more than 147 million domestic listeners weekly and consist of over
8,900 program affiliations on more than 4,400 radio stations. The ABC Radio
Networks also produce and distribute a number of radio program series for
radio stations nationwide and can be heard in more than 90 countries
worldwide. In addition, ABC Radio Networks produces and operates Radio Disney,
which targets children ages 6 to 11 and their parents. Radio Disney is carried
on 45 stations that cover nearly 50 percent of the U.S. market.
Generally, the networks pay the cost of producing their own programs or
acquiring broadcast rights from other producers for network programming and
pay varying amounts of compensation to affiliated stations for broadcasting
the programs and commercial announcements included therein. Substantially all
revenues from network operations are derived from the sale to advertisers of
time in network programs for commercial announcements. The ability to sell
time for commercial announcements and the rates received are primarily
dependent on the quantitative and qualitative audience that the network can
deliver to the advertiser as well as overall advertiser demand for time in the
network marketplace.
Television and Radio Stations
The Company owns nine very high frequency (VHF) television stations, five of
which are located in the top ten markets in the United States; one ultra high
frequency (UHF) television station; 26 standard (AM) radio stations; and 16
frequency modulation (FM) radio stations. All of the television stations are
affiliated with the ABC Television Network, and most of the 42 radio stations
are affiliated with the ABC Radio Networks. The Company's television stations
reach 24% of the nation's television households, calculated using the multiple
ownership rules of the Federal Communications Commission (FCC). The Company's
radio stations reach more than 13 million people weekly in the top 20 United
States advertising markets. Markets, frequencies and other station details are
set forth in the following tables:
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Television Stations
Expiration Television
date of FCC market
Station and Market Channel authorization ranking (1)
- ------------------ ------- ------------- -----------
WABC-TV (New York, NY) 7 Jun. 1, 2007 1
KABC-TV (Los Angeles, CA) 7 Dec. 1, 2006 2
WLS-TV (Chicago, IL) 7 Dec. 1, 2005 3
WPVI-TV (Philadelphia, PA) 6 Aug. 1, 2007 4
KGO-TV (San Francisco, CA) 7 (2) 5
KTRK-TV (Houston, TX) 13 Aug. 1, 2006 11
WTVD-TV (Raleigh-Durham, NC) 11 Dec. 1, 2004 29
KFSN-TV (Fresno, CA) 30 Dec. 1, 2006 55
WJRT-TV (Flint, MI) 12 Oct. 1, 2005 64
WTVG-TV (Toledo, OH) 13 Oct. 1, 2005 66
Radio Stations
Frequency Expiration Radio
AM-Kilohertz date of FCC market
Station and Market FM-Megahertz authorization ranking (3)
- ------------------ ------------ ------------- -----------
WABC (New York, NY) 770 K June 1, 2006 1
KABC (Los Angeles, CA) 790 K Dec. 1, 2005 2
KDIS (Los Angeles, CA) 710 K Dec. 1, 2005 2
WLS (Chicago, IL) 890 K Dec. 1, 2004 3
WMVP (Chicago, IL) 1000 K Dec. 1, 2004 3
WRDZ (Chicago, IL) 1300 K Dec. 1, 2004 3
WDDZ (Chicago, IL) 1500 K Dec. 1, 2004 3
KGO (San Francisco, CA) 810 K Dec. 1, 2005 4
KSFO (San Francisco, CA) 560 K Dec. 1, 2005 4
KMKY (San Francisco, CA) 1310 K Dec. 1, 2005 4
WBAP (Dallas-Fort Worth, TX) 820 K Aug. 1, 2005 6
KMKI (Dallas-Fort Worth, TX) 620 K Aug. 1, 2005 6
WJR (Detroit, MI) 760 K Oct. 1, 2004 7
WMAL (Washington, D.C.) 630 K Oct. 1, 2003 8
WDWD (Atlanta, GA) 590 K Apr. 1, 2004 12
KKDZ (Seattle, WA) 1250 K Feb. 1, 2006 14
KDIZ (Minneapolis, MN) 1440 K Apr. 1, 2005 18
WSDZ (St. Louis, MO) 1260 K Dec. 1, 2004 19
WEAE (Pittsburgh, PA) 1250 K Aug. 1, 2006 21
WWMK (Cleveland, OH) 1260 K Oct. 1, 2004 24
KADZ (Denver, CO) 1550 K Oct. 1, 2004 23
KDDZ (Denver, CO) 1690 K (2) 23
KMIK (Phoenix, AZ) 1580 K Feb. 2, 2005 15
KMIC (Houston, TX) 1590 K Aug. 1, 2005 10
WWMI (Tampa, FL) 1380 K Feb. 1, 2004 22
WFBA (Miami, FL) 990 K Feb. 1, 2004 11
WPLJ (FM) (New York, NY) 95.5 M June 6, 2006 1
KLOS (FM) (Los Angeles, CA) 95.5 M (2) 2
WXCD (FM) (Chicago, IL) 94.7 M Dec. 1, 2004 3
KSCS (FM) (Dallas-Fort Worth, TX) 96.3 M Aug. 1, 2005 6
KMEO (FM) (Dallas-Fort Worth, TX) 96.7 M Aug. 1, 2005 6
WPLT (FM) (Detroit, MI) 96.3 M Oct. 1, 2004 7
WDRQ (FM) (Detroit, MI) 93.1 M Oct. 1, 2001 7
WRQX (FM) (Washington, D.C.) 107.3 M Oct. 1, 2003 8
WJZW (FM) (Washington, D.C.) 105.9 M Oct. 1, 2001 8
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Frequency Expiration Radio
AM-Kilohertz date of FCC market
Station and Market FM-Megahertz authorization ranking (3)
- ------------------ ------------ ------------- -----------
WKHX (FM) (Atlanta, GA) 101.5 M Apr. 1, 2004 12
WYAY (FM) (Atlanta, GA) 106.7 M Apr. 1, 2004 12
KQRS (FM) (Minneapolis-St.Paul, MN) 92.5 M Apr. 1, 2005 18
KXXR (FM) (Minneapolis-St.Paul, MN) 93.7 M Apr. 1, 2005 18
KZNR (FM) (Minneapolis-St.Paul, MN) 105.1 M Apr. 1, 2005 18
KZNT (FM) (Minneapolis-St.Paul, MN) 105.3 M Apr. 1, 2005 18
KZNZ (FM) (Minneapolis-St.Paul, MN) 105.7 M Apr. 1, 2005 18
- --------
(1) Based on Nielsen U.S. Television Household Estimates, Nielsen Station
Index, September 1998
(2) See "Renewals"
(3) Based on 1998 Arbitron Radio Market Rank
Cable Networks
The Company's cable networks, which consist of cable and international
broadcast operations, are principally involved in the production and
distribution of cable television programming, the licensing of programming to
domestic and international markets and investing in foreign television
broadcasting, production and distribution entities. The Company owns the
Disney Channel, Toon Disney, SoapNet, which will be launched in January 2000,
80% of ESPN, Inc., 37.5% of the A&E Television Networks, 50% of Lifetime
Entertainment Services, 39.6% of E! Entertainment Television and has various
international investments.
The Disney Channel, which has approximately 59 million domestic subscribers,
is a cable and satellite television service. New shows developed for original
use by the Disney Channel include dramatic, adventure, comedy and educational
series, as well as documentaries and first-run television movies. In addition,
entertainment specials include shows originating from both the Walt Disney
World Resort and Disneyland Park. The balance of the programming consists of
products acquired from third parties and products from the Company's
theatrical film and television programming library.
The Disney Channel International reaches approximately 11 million
subscribers. Programming consists primarily of the Company's theatrical film
and television programming library, as well as products acquired from third
parties and locally produced programming. The Disney Channels in Taiwan and
the U.K. premiered in 1995, followed by the launch of the Disney Channels in
Australia and Malaysia in 1996, France and the Middle East in 1997, Spain in
April 1998, Italy in October 1998 and Germany in October 1999. Further
launches are planned thereafter in Latin America and Scandinavia. The Company
continues to explore the development of the Disney Channel in other countries
around the world.
Toon Disney, a 24-hour cable and satellite channel airing primarily Disney
animation, was launched April 18, 1998. Toon Disney reaches 14 million
subscribers.
SoapNet, a 24-hour, seven-day-a-week soap opera channel, will be launched in
January 2000. SoapNet's prime-time schedule will feature same-day telecasts of
the ABC Daytime soap operas, All My Children, General Hospital, One Life to
Live and Port Charles. The network, targeted to soap opera fans who cannot
tune in during the daytime block on the ABC Television Network, will also
feature an original half-hour daily soap news magazine show, Soap Center, as
well as classic "Flashback" episodes from daytime series. SoapNet will add
third party licensed programming in the near future.
ESPN, Inc. operates ESPN, a cable and satellite sports programming service
reaching 77 million domestic households; ESPN2, which reaches 67 million
homes; ESPN Classic, which reaches nearly 20 million homes; and ESPNEWS, a 24-
hour sports news service that reaches approximately 14 million households
nationwide. ESPN launched two domestic pay sports channels, ESPN Now and ESPN
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Extra, in September 1999. ESPN, Inc. programs, owns or has equity interests in
20 international networks, reaching more than 150 million households outside
the United States in more than 180 countries and territories. ESPN, Inc., owns
33% of Eurosport, a pan-European cable and direct-to-home sports programming
service, and 50% of ESPN Brazil. ESPN, Inc. owns a 50% interest in the ESPN
STAR Sports joint venture, which delivers sports programming throughout most
of Asia, and 32% of NetStar, which owns The Sports Network (TSN) and Le Reseau
des Sports, among other media properties in Canada. ESPN, Inc. also holds a
20% interest in Sports-i ESPN in Japan, the country's only cable and direct-
to-home all-sports network. ESPN also has several other brand extensions,
including ESPN Radio, the largest radio sports network in the United States,
distributed through ABC Radio to more than 620 stations; ESPN The Magazine
published by Disney Publishing, included in the Consumer Products segment; and
ESPN Zones, sports-themed dining and entertainment facilities managed by
Disney Regional Entertainment, included in the Theme Parks and Resorts
segment.
The A&E Television Networks are cable programming services devoted to
cultural and entertainment programming. The A&E cable service reaches 81
million subscribers. The History Channel, which is owned by A&E, reaches 61
million subscribers.
Lifetime Entertainment Services owns Lifetime Television, which reaches 75
million cable subscribers and is devoted to women's lifestyle programming.
During 1998, Lifetime launched the Lifetime Movie Network, a 24-hour digital
channel.
E! Entertainment Television is a cable programming service which reaches 59
million cable subscribers and is devoted to the world of entertainment. E!
Entertainment Television also launched style. in October 1998. style. is a 24-
hour network devoted to style, fashion and design (available to both analog
and digital systems).
The Company's share of the financial results of the cable and international
broadcast services, other than the Disney Channel, ESPN, Inc., and SoapNet,
beginning in 2000, is reported under the heading "Corporate and other
activities" in the Company's Consolidated Statements of Income.
Competitive Position
The ABC Television Network, the Disney Channel, ESPN and other broadcasting
entities primarily compete for viewers with the other television networks,
independent television stations, other video media such as cable television,
satellite television program services and videocassettes. In the sale of
advertising time, the broadcasting operations compete with other television
networks, independent television stations, suppliers of cable television
programs and other advertising media such as newspapers, magazines and
billboards. The ABC Radio Networks likewise compete with other radio networks
and radio programming services, independent radio stations and other
advertising media.
The Company's television and radio stations are in competition with other
television and radio stations, cable television systems, satellite television
program services, videocassettes and other advertising media such as
newspapers, magazines and billboards. Such competition occurs primarily in
individual market areas. A television station in one market does not compete
directly with other stations in other market areas.
There has been a continuing decline in viewership at all major broadcast
networks, including ABC, reflecting, among other things, the growth in the
cable industry's share of viewers, which has resulted in increased competitive
pressures for advertising revenues. In addition, sports and other programming
costs have increased due to increased competition.
Federal Regulation
Television and radio broadcasting are subject to the jurisdiction of the FCC
under the Communications Act of 1934, as amended (the Communications Act). The
Communications Act
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empowers the FCC, among other things, to issue, revoke or modify broadcasting
licenses, determine the location of stations, regulate the equipment used by
stations, adopt such regulations as may be necessary to carry out the
provisions of the Communications Act and impose certain penalties for
violation of its regulations.
FCC regulations also restrict the ownership of stations and cable operations
in certain circumstances, and regulate the practices of network broadcasters,
cable providers and competing services. Such laws and regulations are subject
to change, and the Company generally cannot predict whether new legislation or
regulations, or a change in the extent of application or enforcement of
current laws and regulations, would have an adverse impact on the Company's
operations.
Renewals
Broadcasting licenses are granted for a maximum period of eight years, and
are renewable upon application therefor if the FCC finds that the public
interest would be served thereby. During certain periods when a renewal
application is pending, other parties may file petitions to deny the
application for renewal of a license. A renewal application is now pending for
KGO-TV in San Francisco, KLOS (FM) in Los Angeles and KDDZ (AM) in Denver. All
of the Company's other owned stations have been granted license renewals by
the FCC for maximum terms.
STUDIO ENTERTAINMENT
The Studio Entertainment segment produces live-action and animated motion
pictures, television programs, musical recordings and live stage plays. The
Company is an industry leader in producing and acquiring live-action and
animated motion pictures for distribution to the theatrical, television and
home video markets and produces original television programming for network,
first-run syndication, pay and international syndication markets. In addition,
television programs have been created that contain characters originated in
animated films. Films and characters are also often promoted through the
release of audiocassettes and compact discs. The Company is also engaged
directly in the home video and television distribution of its film and
television library.
Theatrical Films
Walt Disney Pictures and Television, a subsidiary of the Company, produces
and acquires live-action motion pictures that are distributed under the
banners Walt Disney Pictures, Touchstone Pictures and Hollywood Pictures.
Another subsidiary, Miramax Film Corp., acquires and produces motion pictures
that are primarily distributed under the Miramax and Dimension banners. The
Company also produces and distributes animated motion pictures under the
banner Walt Disney Pictures. In addition, the Company distributes films
produced or acquired from certain independent production companies.
During fiscal 2000, the Company expects to distribute approximately 23
feature films under the Walt Disney Pictures, Touchstone Pictures and
Hollywood Pictures banners and approximately 30 films under the Miramax and
Dimension banners, including several live-action family films and five full
length animated films, with the remainder targeted to teenagers and adults. In
addition, the Company periodically reissues previously released animated
films. As of September 30, 1999, the Company had released 569 full length
live-action features (primarily color), 38 full length animated color features
and approximately 483 cartoon shorts.
The Company distributes and markets its filmed products principally through
its own distribution and marketing companies in the United States and major
foreign markets. In 1999, the Company's international distributor, Buena Vista
International, became the first international distribution company to gross
more than $1 billion at the box office for five consecutive years.
-5-
Home Video
The Company directly distributes home video releases from each of its
banners in the domestic market. In the international market, the Company
distributes both directly and through foreign distribution companies. In
addition, the Company develops, acquires and produces original programming for
direct to video release. The Company distributed four of the ten top selling
home videos and three of the ten top rental titles in 1999. As of September
30, 1999, 1,343 produced and acquired titles, including 726 feature films and
539 cartoon shorts and animated features, were available to the domestic
marketplace and 1,524 produced and acquired titles, including 853 feature
films and 671 cartoon shorts and animated features, were available to the
international home entertainment market.
Television Production and Distribution
The Company develops, produces and distributes television programming to
global broadcasters, cable and satellite operators, including the major
television networks, the Disney Channel and other cable broadcasters, under
the Buena Vista Television, Touchstone Television, Walt Disney Television and
Miramax Television labels. Program development is carried out in collaboration
with a number of independent writers, producers and creative teams under
various development arrangements. The Company focuses on the development,
production and distribution of half-hour comedies and one-hour dramas for
network prime-time broadcast. Half-hour comedies Boy Meets World, Sports Night
and The PJ's, and the one-hour drama Felicity, were all renewed for the
1999/2000 television season. New prime-time series that premiered in the fall
of 1999 included the half-hour comedy Thanks and the one-hour dramas Once and
Again and Popular. Midseason orders included the half-hour comedies Brutally
Normal, Talk to Me and Clerks, and the one-hour drama Wonderland.
The Company is also producing nine original television movies for The
Wonderful World of Disney, which was renewed for the 1999/2000 television
season and continues to air on ABC on Sunday evenings.
The 1999/2000 Saturday morning television season returned with a third year
of the two-hour kids' show, Disney's One Saturday Morning on ABC. Disney's One
Saturday Morning is a show comprised of audience participation segments,
cartoons and pre-recorded comedy segments that "wrap-around" the weekly series
Disney's Doug, Disney's Recess, Disney's Pepper Ann, Sabrina and The New
Adventures of Winnie the Pooh. Other television animation series on Disney's
One Saturday Morning include the return of Mouseworks, the first cartoon
series since the 1950's featuring Mickey Mouse and his friends, and the
midseason premier of Weekenders.
The Company also provides a variety of prime-time specials for exhibition on
network television. Additionally, the Company produces first-run animated and
live-action syndicated programming. Disney's One Too is a two-hour block,
airing six days per week, including Disney's Recess, Disney's Doug, Sabrina
and Disney's Hercules. Live-action programming includes Live! with Regis and
Kathie Lee, a daily talk show; Honey, I Shrunk the Kids, a weekly family
action hour; Roger Ebert and the Movies, a weekly motion picture review
program; Your Big Break, a weekly variety show; Disney Presents Bill Nye the
Science Guy, a weekly educational program for children; as well as the daily
game show on cable Win Ben Stein's Money.
The Company licenses its theatrical and television film library to the
domestic television syndication market. Television programs in off-network
syndication or cable include Home Improvement, Ellen, Boy Meets World,
Blossom, Dinosaurs, Golden Girls, Brotherly Love, Empty Nest and Unhappily
Ever After. Major packages of the Company's feature films and television
programming have been licensed for broadcast over several years.
The Company also licenses its theatrical and television properties in a
number of foreign television markets. In addition, certain of the Company's
television programs are syndicated by the Company abroad, including The Disney
Club, a weekly series that the Company produces for foreign markets.
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The Company has licensed to the Encore pay television services, over a
multi-year period, exclusive domestic pay television rights to certain films
released under the Walt Disney Pictures, Touchstone Pictures, Hollywood
Pictures, Miramax and Dimension banners. In addition, the Company has licensed
to the Showtime pay television services over a multi-year period, exclusive
domestic pay television rights to certain films released under the Dimension
banner.
Audio Products and Music Publishing
The Company also produces and distributes compact discs, audiocassettes and
records, consisting primarily of soundtracks for animated films and read-along
products, directed at the children's market in the United States, France and
the United Kingdom, and licenses the creation of similar products throughout
the rest of the world. In addition, the Company commissions new music for its
motion pictures and television programs, and records and licenses the song
copyrights created for the Company to others for printed music, records,
audiovisual devices and public performances.
Domestic retail sales of compact discs, audiocassettes and records are the
largest source of music-related revenues, while direct marketing, which
utilizes catalogs, coupon packages and television, is a secondary means of
music distribution for the Company.
The Company's Hollywood Records subsidiary develops, produces and markets
recordings from new talent across the spectrum of popular music, as well as
soundtracks from certain of the Company's live-action motion pictures. The
Company's Mammoth Records develops, produces and markets a diverse group of
artists in the popular and alternative music fields. The Company also owns the
Nashville-based music label Lyric Street Records.
Walt Disney Theatrical Productions
The Company's award-winning live stage musical division produces musicals
for stages on Broadway and around the world. During 1999, Beauty and the Beast
entered its sixth year on Broadway and a new domestic touring production was
launched. To date, the show has been produced in twelve international markets.
The Lion King continues its standing-room-only Broadway run at the
New Amsterdam Theatre into its second year. The show is running to equal
acclaim in Tokyo and Osaka, Japan, and in London, England. Additional
companies debuted in London in October 1999 and will debut in Toronto and Los
Angeles during 2000. Under a license agreement, The Hunchback of Notre Dame
opened in Berlin in June 1999. Elton John and Tim Rice's Aida opened in
Chicago in December 1999 and is scheduled to open on Broadway in early 2000.
Competitive Position
The success of the Studio Entertainment operations is heavily dependent upon
public taste, which is unpredictable and subject to change. In addition,
Studio Entertainment operating results fluctuate due to the timing and
performance of theatrical and home video releases. Release dates are
determined by several factors, including competition and the timing of
vacation and holiday periods.
The Company's Studio Entertainment businesses compete with all forms of
entertainment. A significant number of companies produce and/or distribute
theatrical and television films, exploit products in the home video market,
provide pay television programming services and sponsor live theater. The
Company also competes to obtain creative talents, story properties, advertiser
support, broadcast rights and market share, which are essential to the success
of all the Company's Studio Entertainment businesses.
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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"), energy,
transportation, imagination, life and health, the land and seas. World
Showcase presents a community of nations focusing on the culture, traditions
and accomplishments of people around the world. World Showcase includes as a
central showpiece the American Adventure, which highlights the history of the
American people. Other nations represented are Canada, China, France, Germany,
Italy, Japan, Mexico, Morocco, Norway and the United Kingdom. Both areas
feature themed rides and attractions, restaurants and merchandise shops.
Beginning October 1, 1999, Epcot began hosting the Company's 15-month
Millennium Celebration, which includes new entertainment spectaculars,
attractions, interactive experiences from around the world and special events.
Disney-MGM Studios - The Disney-MGM Studios, which opened in 1989, consists
of a theme park, an animation studio and a film and television production
facility. The park centers around Hollywood as it was during the 1930's and
1940's and features Disney animators at work and a backstage tour of the film
and television production facilities in addition to themed food service and
merchandise facilities and other attractions. The production facility consists
of three sound stages, merchandise shops and a back lot area and currently
hosts both feature film and television productions. In late 1998, Disney-MGM
Studios began featuring Fantasmic!, a night-time entertainment production
spectacular.
Disney's Animal Kingdom - Disney's Animal Kingdom, which opened in April
1998, consists of a 145-foot Tree of Life as the centerpiece surrounded by
five themed areas: Dinoland U.S.A., Africa, Conservation Station, Asia and
Camp Minnie-Mickey. Each themed area contains adventure attractions,
entertainment shows, restaurants and merchandise shops. The park features more
than 200 species of animals and 4,000 varieties of trees and plants on more
than 500 acres of land.
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Resort Facilities - As of September 30, 1999, the Company owned and operated
13 resort hotels and a complex of villas and suites at the Walt Disney World
Resort, with a total of approximately 20,200 rooms and 318,000 square feet of
conference meeting space. In addition, Disney's Fort Wilderness camping and
recreational area offers approximately 800 campsites and 400 wilderness homes.
The resort also offers professional development and personal enrichment
programs at the Disney Institute.
Recreational amenities and activities available at the resort include five
championship golf courses, miniature golf courses, full-service spas, tennis,
sailing, water skiing, swimming, horseback riding and a number of other
noncompetitive sports and leisure time activities. The resort also operates
three water parks: Blizzard Beach, River Country and Typhoon Lagoon.
The Company has also developed a 120-acre retail, dining and entertainment
complex known as Downtown Disney, which consists of the Downtown Disney
Marketplace, Pleasure Island and Downtown Disney West Side. In addition to
more than 20 specialty retail shops and restaurants, the Downtown Disney
Marketplace is home to the 50,000-square-foot World of Disney, the largest
Disney retail outlet. Pleasure Island, an entertainment center adjacent to the
Downtown Disney Marketplace, includes restaurants, night clubs and shopping
facilities. Downtown Disney West Side is situated on 66 acres on the west side
of Pleasure Island and includes a DisneyQuest facility, Cirque du Soleil and
several participant retail, dining and entertainment operations.
Disney's Wide World of Sports, which opened in 1997, is a 200-acre sports
complex providing professional caliber training and competition, festival and
tournament events and interactive sports activities. The complex's venues
accommodate more than 30 different sporting events, including baseball,
tennis, basketball, softball, track and field, football and soccer. Its 9,000-
seat stadium is the spring training site for the Atlanta Braves. The tennis
venue is the home of the U.S. Men's Clay Court championships. In addition, the
Harlem Globetrotters use the facility for their official training site and
holiday season games. The Amateur Athletic Union hosts more than 30
championship events per year at the facility.
Disney Cruise Line is a cruise vacation line that includes two 85,000-ton
ships, the Disney Magic and its sister ship the Disney Wonder, which sailed
their maiden voyages in July 1998 and August 1999, respectively. Both ships
cater to children, families and adults, with distinctly themed areas for each
group. Each ship features 875 staterooms, 73% of which are outside staterooms
providing guests with ocean views. Each cruise vacation includes a visit to
Disney's Castaway Cay, a 1,000-acre private Bahamian island in the Abacos. The
Company packages cruise vacations with visits to the Walt Disney World Resort
and also offers cruise-only options.
At the Downtown Disney Marketplace Hotel Plaza, seven independently operated
hotels are situated on property leased from the Company. These hotels have a
capacity of approximately 3,700 rooms. Additionally, two hotels--The Walt
Disney World Swan and the Walt Disney World Dolphin, with an aggregate
capacity of approximately 2,300 rooms--are independently operated on property
leased from the Company near Epcot.
The Disney Vacation Club offers ownership interests in several resort
facilities, including the 497-unit Disney Old Key West Resort and 383 units at
Disney's BoardWalk Resort at the Walt Disney World Resort, a 175-unit resort
in Vero Beach, Florida, and a 102-unit resort on Hilton Head Island, South
Carolina. A 34-unit expansion at Disney's Old Key West is scheduled to open in
2000 and a 136-unit expansion adjacent to Disney's Wilderness Lodge is
scheduled for opening in 2001. Available units at each facility are intended
to be sold under a vacation ownership plan and operated partially as rental
property until sold.
In addition, under continued development is Celebration, an innovative new
town that combines architecture, education, health and technology in ways that
promote a strong sense of community. Founded in 1994, Celebration is home to
more than 2,500 residents, an Osceola County public school,
-9-
an 18-hole public golf course, park and recreation areas and a downtown
featuring a variety of shops and restaurants.
Disneyland Resort
The Company owns 393 acres and has under long-term lease an additional 65
acres of land in Anaheim, California. The Company also has the option to
purchase an additional 53 acres of land near Disneyland. This option expires
in May 2001. Disneyland, which opened in 1955, consists of eight principal
areas: Toontown, Fantasyland, Adventureland, Frontierland, Tomorrowland, New
Orleans Square, Main Street and Critter Country. These areas feature themed
rides and attractions, restaurants, refreshment stands and merchandise shops.
A number of the Disneyland attractions are sponsored by corporate
participants. The Company markets Disneyland through international, national
and local advertising and promotional activities. The Company also owns and
operates the 1,000-room Disneyland Hotel and the 500-room Disneyland Pacific
Hotel near Disneyland.
The Company is constructing a new theme park, Disney's California Adventure,
projected to open in 2001. The new theme park is under construction on
property adjacent to Disneyland. Disney's California Adventure will celebrate
the many attributes of the state of California and will feature Downtown
Disney, a themed complex of shopping, dining and entertainment venues; the
Grand Californian, a deluxe 750-room hotel located inside the park; and an
assortment of California-themed areas with associated rides and attractions.
Disney Regional Entertainment
Through the Disney Regional Entertainment group, the Company is developing a
variety of new entertainment concepts to be located in metropolitan and
suburban locations in the United States. These businesses include sports
concepts, interactive entertainment venues and other operations that are based
on Disney brands and creative properties.
The ESPN Zone is a sports-themed dining and entertainment experience
featuring three components: the Studio Grill, offering dining in an ESPN
studio environment; the Screening Room, offering fans any game on the air in
the ultimate sports viewing environment; and the Sports Arena, challenging
fans with a variety of interactive and competitive attractions. In 1998, the
first ESPN Zone site opened in Baltimore's Inner Harbor. Two additional
locations were opened in 1999, in Chicago's River North District and New
York's Times Square. The Company plans to open a further three locations in
Atlanta, Washington, D.C. and Denver in 2000.
DisneyQuest is a multi-story facility where guests of all ages are launched
into a wide range of virtual, interactive adventures. In the summer of 1998,
the first DisneyQuest opened in Downtown Disney at the Walt Disney World
Resort. A second DisneyQuest opened in Chicago in the summer of 1999, and the
Company plans to open a third location in Philadelphia in 2001.
Tokyo Disney Resort
The Company earns royalties on revenues generated by the Tokyo Disneyland
theme park, which is owned and operated by Oriental Land Co., Ltd. (OLC), an
unrelated Japanese corporation. The park, which opened in 1983, is similar in
size and concept to Disneyland and is located approximately six miles from
downtown Tokyo, Japan.
Adjacent to Tokyo Disneyland, OLC is developing a retail, dining and
entertainment complex known as Ikspiari. Ikspiari is scheduled to open in July
2000, together with a 504-room Disney-branded hotel, the Disney Ambassador
hotel. The hotel will be owned and operated by OLC under license from a
Company subsidiary.
Construction has begun on Tokyo DisneySea, the second theme park in Japan
designed by Walt Disney Imagineering. Tokyo DisneySea is scheduled to open in
fall 2001, together with a 502-room Disney-branded hotel and a monorail
system.
-10-
The Company will be entitled to royalties from Tokyo DisneySea and the two
new hotels. All construction costs for the development projects are being
borne by OLC, which is also reimbursing the Company for its design, technical
and operational assistance costs.
Disneyland Paris
Disneyland Paris is located on a 4,800-acre site at Marne-la-Vallee,
approximately 20 miles east of Paris, France. The existing theme park, The
Magic Kingdom, which opened in 1992, features 43 attractions in its five
themed lands. Seven themed hotels, with a total of approximately 5,800 rooms,
are part of the resort complex, together with an entertainment center offering
a variety of retail, dining and show facilities. The project was developed
pursuant to a 1987 master agreement with French governmental authorities by
Euro Disney S.C.A. (Euro Disney), a publicly-held French company in which the
Company currently holds a 39% equity interest and which is managed by a
subsidiary of the Company. The financial results of the Company's investment
in Euro Disney are reported under the heading "Corporate and other activities"
in the Company's Consolidated Statements of Income.
Development of the site continues with the Val d'Europe project near
Disneyland Paris. Construction of an international shopping mall and the
associated road infrastructure is now underway, with an opening date expected
in winter of the year 2000.
In November 1999, Euro Disney stockholders approved an increase in share
capital through an equity rights offering. The offering has been underwritten
to raise $238 million by the end of December 1999. The net proceeds will be
used to partially finance the construction of a second theme park, Disney
Studios, adjacent to the Magic Kingdom. The Company subscribed to
approximately $93 million of the equity rights offering, maintaining its 39%
interest in Euro Disney. Disney Studios is expected to open in spring 2002.
Walt Disney Imagineering
Walt Disney Imagineering provides master planning, real estate development,
attraction and show design, engineering support, production support, project
management and other development services, including research and development
for the Company's operations.
Anaheim Sports, Inc.
Anaheim Sports, Inc., a subsidiary of the Company, owns and operates a
National Hockey League franchise, the Mighty Ducks of Anaheim. In addition, a
Company subsidiary is the managing general partner of Anaheim Angels L.P., the
holder of the Anaheim Angels Major League Baseball franchise. The Company owns
a 100% general partnership interest in Anaheim Angels L.P., as a result of
exercising its option to purchase the 75% of the partnership that it did not
previously own during the second quarter of 1999.
Competitive Position
All of the theme parks and the associated resort facilities are operated on
a year-round basis. Historically, the theme parks and resort business
experiences fluctuations in park attendance and resort occupancy resulting
from the nature of vacation travel. Peak attendance and resort occupancy
generally occur during the summer months when school vacations occur and
during early-winter and spring holiday periods.
The Company's theme parks and resorts compete with all other forms of
entertainment, lodging, tourism and recreational activities. The profitability
of the leisure-time industry is influenced by various factors that are not
directly controllable, such as economic conditions including business cycle
and exchange rate fluctuations, amount of available leisure time, oil and
transportation prices and weather patterns.
-11-
CONSUMER PRODUCTS
The Consumer Products segment licenses the Company's characters and other
intellectual property for use in connection with merchandise and publications
and publishes books and magazines. The Company licenses the name "Walt
Disney," as well as the Company's characters, visual and literary properties,
to various consumer manufacturers, retailers, show promoters and publishers
throughout the world. Character merchandising and publications licensing
promote the Company's films and television programs, as well as the Company's
other operations. Company subsidiaries also engage in direct retail
distribution of products based on the Company's characters and films through
"The Disney Stores" it operates; publish books, magazines and comics
worldwide; and produce children's audio products and computer software for the
entertainment market, as well as film and video products for the educational
marketplace.
Character Merchandise and Publications Licensing
The Company's worldwide licensing activities generate royalties, which are
usually based on a fixed percentage of the wholesale or retail selling price
of the licensee's products. The Company licenses characters based upon both
traditional and newly created film properties. Character merchandise
categories that have been licensed include apparel, toys, gifts, home
furnishings and housewares, stationery and sporting goods. Publication
categories that have been licensed include continuity-series books, book sets,
art and picture books and magazines.
In addition to receiving licensing fees, the Company is actively involved in
the development and approval of licensed merchandise and in the
conceptualization, development, writing and illustration of licensed
publications. The Company continually seeks to create new characters to be
used in licensed products.
The Disney Stores
The Company markets Disney-related products directly through its retail
facilities operated under "The Disney Store" name. These facilities are
generally located in leading shopping malls and similar retail complexes. The
stores carry a wide variety of Disney merchandise and promote other businesses
of the Company. During fiscal 1999, the Company opened 29 new stores in the
United States and Canada, 10 in Europe and 10 in the Asia-Pacific area. The
total number of stores was 728 as of September 30, 1999.
Books and Magazines
The Company has book imprints in the United States offering books for
children and adults as part of the Buena Vista Publishing Group. The Company
also produces several magazines, including FamilyFun, Disney Adventures and
Discover, a general science magazine. In addition, the Company produces ESPN
The Magazine as part of a joint venture with ESPN, Inc. and The Hearst
Company.
Disney Interactive
Disney Interactive is a software business that licenses, develops and
markets entertainment and educational computer software and video game titles
for home and school.
Other Activities
The Company produces audiovisual materials for the educational market,
including videocassettes and film strips. It also licenses the manufacture and
sale of posters and other teaching aids. The Company markets and distributes,
through various channels, animation cel art and other animation-related
artwork and collectibles.
Competitive Position
The Company competes in its character merchandising and other licensing,
publishing and retail activities with other licensors, publishers and
retailers of character, brand and celebrity names.
-12-
Although public information is limited, the Company believes it is the largest
worldwide licensor of character-based merchandise and producer/distributor of
children's audio and film-related products. Operating results for the
licensing and retail distribution business are influenced by seasonal consumer
purchasing behavior and by the timing and performance of animated theatrical
releases.
INTERNET AND DIRECT MARKETING
In 1997, the Buena Vista Internet Group was formed to consolidate and
coordinate the Company's wide-ranging Internet activities. On November 18,
1998, the Company acquired 43% of Infoseek Corporation (Infoseek), a publicly-
held Internet search company. During January 1999, the Company and Infoseek
together launched GO.com, an Internet portal serving as an interactive link
through which people can gain access to the Internet at large, as well as
every form of information, entertainment and consumer products that Disney
offers through the Internet. During the third quarter of 1999, the Company's
Direct Marketing business, consisting mainly of The Walt Disney Catalog, was
combined with the Buena Vista Internet Group to form the Internet and Direct
Marketing business.
The Internet business develops, publishes and distributes content for online
services intended to appeal to broad consumer interest in sports, news, family
and entertainment. Internet websites include Disney.com, Family.com, ESPN.com,
ABCNEWS.com, ABCSports.com and ABC.com. The Internet business also produces
Disney's Club Blast, an entertainment and educational online subscription
service for kids. Internet commerce activities include the DisneyStore.com,
which markets Disney-themed merchandise online; Disney Travel Online, which
offers travel packages to the Walt Disney World Resort and other Disney
destinations; and ESPNStore.com, which offers ESPN-themed and other sports-
related merchandise. The Direct Marketing business operates the Walt Disney
Catalog, which markets Disney-themed merchandise via direct mail.
On July 10, 1999, the Company entered into an Agreement and Plan of
Reorganization with Infoseek to acquire the remaining 58% of Infoseek that it
did not then own. On November 17, 1999, the stockholders of both Infoseek and
the Company approved the transaction. As a result of this approval, the
Company combined its Internet and Direct Marketing operations with Infoseek to
create a single Internet business. A new class of common stock, trading under
the ticker symbol GO, was issued to track the performance of the combined
businesses.
ITEM 2. Properties
The Walt Disney World Resort, Disneyland Park and other properties of the
Company and its subsidiaries are described in Item 1 under the caption Theme
Parks and Resorts. Film library properties are described in Item 1 under the
caption Studio Entertainment. Radio and television stations owned by the
Company are described in Item 1 under the caption Media Networks.
A subsidiary of the Company owns approximately 51 acres of land in Burbank,
California on which the Company's studios and executive offices are located.
The studio facilities are used for the production of both live-action and
animated motion pictures and television products. In addition, Company
subsidiaries lease office and warehouse space for certain studio and corporate
activities. A 397,000 square-foot office building is under construction in
Burbank, California, with an expected completion date during 2000. Other owned
properties include a 400,000 square-foot office building in Burbank,
California, which is used for the Company's operations.
A subsidiary of the Company owns approximately 2.2 million square feet of
office and warehouse buildings on approximately 113 acres in Glendale,
California. The buildings are used for the Company's operations and also
contain space leased to third parties. A 142,000 square-foot broadcast
facility for KABC-TV is under construction with an expected completion date
during 2000.
The Company's Media Networks segment corporate offices are located in a
building owned by a subsidiary of the Company in New York City. A Company
subsidiary also owns the ABC Television Center adjacent to the corporate
offices and ABC Radio Networks' studios, also in New York City.
-13-
Subsidiaries of the Company own the ABC Television Center and lease the ABC
Television Network offices in Los Angeles, the ABC News Bureau facility in
Washington, D.C. and a computer facility in Hackensack, New Jersey, under
leases expiring on various dates through 2034. The Company's 80%-owned
subsidiary, ESPN, Inc., owns ESPN Plaza in Bristol, Connecticut, from which it
conducts its technical operations. The Company owns the majority of its other
broadcast studios and offices and broadcast transmitter sites elsewhere, and
those which it does not own are occupied under leases expiring on various
dates through 2039.
A U.K. subsidiary of the Company owns buildings on a four-acre parcel under
long-term lease in London, England. The mixed-use development consists of
140,000 square feet of office space occupied by subsidiary operations, a
27,000 square-foot building leased to a third party and 65,000 square feet of
retail space. A second phase of this development, completed in 1998, includes
a 142,000 square-foot office building occupied by Company subsidiaries in
1999. Company subsidiaries also lease office space in other parts of Europe
and in Asia and Latin America.
The Disney Stores and Disney Regional Entertainment lease retail space for
their operations.
ITEM 3. Legal Proceedings
The Company, together with, in some instances, certain of its directors and
officers, is a defendant or co-defendant in various legal actions involving
copyright, breach of contract and various other claims incident to the conduct
of its businesses. Management does not expect the Company to suffer any
material liability by reason of such actions.
In re The Walt Disney Company Derivative Litigation. On October 8, 1998, the
Delaware Court of Chancery dismissed an amended and consolidated complaint
filed on May 28, 1997 that named each of the Company's directors as of
December 1996 as defendants. The amended complaint, filed by William and
Geraldine Brehm and thirteen other individuals, had sought, among other
things, a declaratory judgment that the Company's 1995 employment agreement
with its former president, Michael S. Ovitz, was void, or alternatively that
Mr. Ovitz's termination should be deemed a termination "for cause" and any
severance payments to him forfeited. The complaint also sought compensatory or
rescissory damages and injunctive and other equitable relief from the named
defendants, as well as class-action status to pursue a claim for damages and
invalidation of the 1997 election of directors. In its ruling on October 8,
1998, the Delaware court dismissed all counts of the amended complaint.
On November 4, 1998, plaintiffs filed a notice of appeal from the court's
decision.
Similar or identical claims have also been filed by the same plaintiffs
(other than William and Geraldine Brehm) in the Superior Court of the State of
California, Los Angeles County, beginning with a claim filed by Richard and
David Kaplan on January 3, 1997. On May 18, 1998, an additional claim was
filed in the same California court by Dorothy L. Greenfield. All of the
California claims have been consolidated and stayed pending final resolution
of the Delaware proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year covered by this report.
Executive Officers of the Company
The executive officers of the Company are elected each year at the
organizational meeting of the Board of Directors which follows the annual
meeting of the stockholders and at other meetings as appropriate. Each of the
executive officers has been employed by the Company in the position or
positions indicated in the list and pertinent notes below. Messrs. Eisner,
Disney and Litvack have been employed by the Company as executive officers for
more than five years.
-14-
At September 30, 1999, the executive officers were as follows:
Executive
Officer
Name Age Title Since
------------------ --- ----------------------------------------- ---------
Michael D. Eisner 57 Chairman of the Board and Chief Executive 1984
Officer
Roy E. Disney 69 Vice Chairman of the Board 1984
Sanford M. Litvack 63 Vice Chairman of the Board 1991
Louis M. Meisinger 57 Executive Vice President and General 1998
Counsel /1/
John F. Cooke 57 Executive Vice President-Corporate 1995
Affairs /2/
Peter E. Murphy 36 Executive Vice President and Chief 1998
Strategic
Officer /3/
Thomas O. Staggs 38 Executive Vice President and Chief 1998
Financial
Officer /4/
- --------
/1/ Mr. Meisinger was named Executive Vice President and General Counsel of
the Company on July 6, 1998. Prior to joining the Company, he was a senior
partner with the law firm of Troop, Meisinger, Steuber & Pasich in Los
Angeles, California, a firm he co-founded in 1975. Mr. Meisinger specialized
in the litigation of complex entertainment, commercial and securities
matters.
/2/ Mr. Cooke served as President of the Disney Channel from 1985 until
assuming his present position in February 1995.
/3/ Mr. Murphy joined the Company's strategic planning operation in 1988 and
was named Senior Vice President-Strategic Planning and Development of the
Company in July 1995. From August 1997 to May 1998 he served as Chief
Financial Officer of ABC, Inc. He assumed his present position in May 1998.
Effective October 3, 1999, Mr. Murphy was promoted to Senior Executive Vice
President.
/4/ Mr. Staggs joined the Company's strategic planning operation in 1990 and
was named Senior Vice President-Strategic Planning and Development of the
Company in July 1995, serving in that capacity until assuming his present
position in May 1998. Effective October 3, 1999, Mr. Staggs was promoted to
Senior Executive Vice President.
-15-
PART II
ITEM 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's common stock is listed on the New York and Pacific stock
exchanges (NYSE symbol DIS). The following sets forth the high and low
composite closing sale prices for the fiscal periods indicated, adjusted to
reflect the three-for-one split of the Company's stock effective June 1998.
Sales Price
-------------------
High Low
--------- ---------
1999
4th Quarter.......................................... $30 $25 1/2
3rd Quarter.......................................... 35 7/16 28 13/16
2nd Quarter.......................................... 38 29 9/16
1st Quarter.......................................... 33 9/16 23 1/2
1998
4th Quarter.......................................... $39 7/8 $24 7/16
3rd Quarter.......................................... 42 3/8 35 1/64
2nd Quarter.......................................... 38 19/64 31 31/64
1st Quarter.......................................... 33 25 59/64
On September 29, 1998, the Company's Board of Directors decided to begin
paying dividends on an annual, rather than a quarterly basis, to reduce costs
and simplify payments to stockholders. The Company declared a fourth quarter
dividend of $0.21 per share on November 4, 1999 related to fiscal 1999. The
Company declared a first quarter dividend of $0.0442 per share and three
subsequent quarterly dividends of $.0525 per share in 1998.
As of September 30, 1999, the approximate number of record holders of the
Company's common stock was 842,000.
Effective November 17, 1999, shares of the Company's existing common stock
were reclassified as Disney Group common stock and reflect the performance of
the Disney Group. In addition, the Company issued a new class of common stock
to reflect the performance of GO.com. The go.com common stock began trading on
the NYSE under the symbol GO on November 18, 1999 (see Note 15 to the
Consolidated Financial Statements).
-16-
ITEM 6. Selected Financial Data
(In millions, except per share data)
1999(/2/) 1998(/3/) 1997(/4/) 1996(/5/) 1995
--------- --------- --------- --------- -------
Statements of income
Revenues $23,402 $22,976 $22,473 $18,739 $12,151
Operating income 3,444 4,015 4,447 3,033 2,466
Net income 1,300 1,850 1,966 1,214 1,380
Per share(/1/)
Earnings
Diluted $ 0.62 $ 0.89 $ 0.95 $ 0.65 $ 0.87
Basic 0.63 0.91 0.97 0.66 0.88
Dividends(/6/) 0.21 0.20 0.17 0.14 0.12
Balance sheets
Total assets $43,679 $41,378 $38,497 $37,341 $14,995
Borrowings 11,693 11,685 11,068 12,342 2,984
Stockholders' equity 20,975 19,388 17,285 16,086 6,651
Statements of cash flows
Cash provided by operations $ 5,588 $ 5,115 $ 5,099 $ 3,707 $ 3,510
Investing activities (5,310) (5,665) (3,936) (12,546) (2,288)
Financing activities 9 360 (1,124) 8,040 (332)
- --------
(1) The earnings and dividends per share have been adjusted to give effect to
the three-for-one split of the Company's common shares effective June
1998. See Note 8 to the Consolidated Financial Statements.
(2) 1999 results include a gain from the sale of Starwave Corporation of $345
million, Equity in Infoseek loss of $322 million and restructuring charges
of $132 million. See Notes 2 and 15 to the Consolidated Financial
Statements. The diluted earnings per share impact of these activities were
$0.10, ($0.09) and ($0.04), respectively.
(3) 1998 results include a $64 million restructuring charge. The diluted
earnings per share impact of the charge was $0.02.
(4) 1997 results include a $135 million gain from the sale of KCAL-TV. The
diluted earnings per share impact of the gain was $0.04. See Note 2 to the
Consolidated Financial Statements.
(5) 1996 results include a $300 million non-cash charge pertaining to the
implementation of SFAS 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and a $225 million
charge for costs related to the acquisition of ABC. The earnings per share
impacts of these charges were $0.10 and $0.07, respectively. See Note 2 to
the Consolidated Financial Statements.
(6) The 1999 dividend was declared on November 4, 1999, to be paid on December
17, 1999, to holders of record as of November 16, 1999. See Note 8 to the
Consolidated Financial Statements.
-17-
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
In the fourth quarter of 1999, the Company changed the manner in which it
reports its operating segments. In addition, intangible asset amortization has
been excluded from segment results and reported as a separate component of
operating income (see Notes 1 and 11 to the Consolidated Financial
Statements).
Accordingly, the Company now reports five operating segments:
Media Networks, which is broken into two categories, Broadcasting and Cable
Networks. Broadcasting includes the ABC Television Network, the Company's
television stations and radio stations, and the ABC, ESPN and Radio Disney
Radio Networks. Cable Networks consists of the ESPN-branded cable networks,
the Disney Channel and start-up cable operations, including Toon Disney and
the soon-to-be launched SoapNet;
Studio Entertainment, which includes the Company's feature animation and
live-action motion picture, home video, television, live stage play, and
music production and distribution businesses;
Theme Parks and Resorts, reflecting the Company's theme park and resort
activities except Disneyland Paris, which is accounted for under the equity
method and included in Corporate and other activities, its sports team
franchises and its DisneyQuest and ESPN Zone regional entertainment
businesses;
Consumer Products, reflecting primarily merchandise licensing, publishing,
The Disney Store and Disney Interactive software; and
Internet and Direct Marketing, representing the Company's online
activities, except for its investment in Infoseek Corporation, and the
Disney Catalog.
Prior years have been restated to conform to the 1999 presentation.
-18-
Consolidated Results
(in millions, except per share data)
Pro forma (/4/)
As Reported (unaudited)
------------------------- ---------------
1999 1998 1997 1997
------- ------- ------- ---------------
Revenues:
Media Networks $ 7,512 $ 7,142 $ 6,522 $ 6,501
Studio Entertainment 6,548 6,849 6,981 6,981
Theme Parks and Resorts 6,106 5,532 5,014 5,014
Consumer Products 3,030 3,193 3,782 2,943
Internet and Direct Marketing 206 260 174 174
------- ------- ------- -------
Total $23,402 $22,976 $22,473 $21,613
======= ======= ======= =======
Operating income: (/1/)
Media Networks $ 1,611 $ 1,746 $ 1,699 $ 1,695
Studio Entertainment 116 769 1,079 1,079
Theme Parks and Resorts 1,446 1,288 1,136 1,136
Consumer Products 607 801 893 673
Internet and Direct Marketing (93) (94) (56) (56)
Amortization of intangible assets (456) (431) (439) (413)
------- ------- ------- -------
3,231 4,079 4,312 4,114
Restructuring charges (132) (64) -- --
Gain on sale of Starwave 345 -- -- --
Gain on sale of KCAL -- -- 135 --
------- ------- ------- -------
Total 3,444 4,015 4,447 4,114
Corporate and other activities (196) (236) (367) (367)
Equity in Infoseek loss (322) -- -- --
Net interest expense (612) (622) (693) (693)
------- ------- ------- -------
Income before income taxes 2,314 3,157 3,387 3,054
Income taxes (1,014) (1,307) (1,421) (1,282)
------- ------- ------- -------
Net income $ 1,300 $ 1,850 $ 1,966 $ 1,772
======= ======= ======= =======
Earnings per share (EPS): (/2/)
Diluted $ 0.62 $ 0.89 $ 0.95 $ 0.86
======= ======= ======= =======
Basic $ 0.63 $ 0.91 $ 0.97 $ 0.88
======= ======= ======= =======
Net income and earnings per share
excluding restructuring charges
and other items: (/2/) (/3/)
Net income $ 1,368 $ 1,890 $ 1,886 $ 1,772
======= ======= ======= =======
Earnings per share:
Diluted $ 0.66 $ 0.91 $ 0.92 $ 0.86
======= ======= ======= =======
Basic $ 0.67 $ 0.93 $ 0.93 $ 0.88
======= ======= ======= =======
Average number of common and common
equivalent shares outstanding:
(/2/)
Diluted 2,083 2,079 2,060 2,060
======= ======= ======= =======
Basic 2,056 2,037 2,021 2,021
======= ======= ======= =======
- --------
(1) Segment results exclude intangible asset amortization and include
depreciation as follows:
Media Networks................... $ 131 $ 122 $ 104 $ 111
Studio Entertainment............. 64 115 86 86
Theme Parks and Resorts.......... 498 443 408 408
Consumer Products................ 124 85 95 92
Internet and Direct Marketing.... 8 10 6 6
------- ------- ------- -------
$ 825 $ 775 $ 699 $ 703
======= ======= ======= =======
-19-
(2) Earnings per share and average shares outstanding have been adjusted to
give effect to the three-for-one split of the Company's common shares in
June 1998.
(3) The 1999 results exclude a $345 million gain from the sale of Starwave
Corporation, equity in Infoseek loss of $322 million and restructuring
charges of $132 million. The 1998 results exclude restructuring charges of
$64 million and the 1997 results exclude a $135 million gain from the sale
of KCAL (see Notes 2, 14 and 15 to the Consolidated Financial Statements).
(4) During 1997, the Company sold KCAL, a Los Angeles television station,
completed ABC purchase price allocations and disposed of certain ABC
publishing assets. The discussion of 1998 versus 1997 performance below
includes comparisons to pro forma results for 1997, which assume these
events occurred as of the beginning of 1996, the year in which the ABC
acquisition occurred. The Company believes pro forma results represent a
meaningful comparative standard for assessing net income, changes in net
income and earnings trends because the pro forma results include
comparable operations in each year presented. The pro forma results are
not necessarily indicative of the combined results that would have
occurred had these events actually occurred at the beginning of 1996. The
discussions of Studio Entertainment, Theme Parks and Resorts and Internet
and Direct Marketing segments do not include pro forma comparisons, since
the pro forma adjustments did not impact these segments.
Consolidated Results
1999 vs. 1998
Revenues increased 2% to $23.4 billion, driven by growth at Theme Parks and
Resorts and Media Networks, partially offset by decreases in the other
segments. Excluding the impact of Infoseek, which includes the gain on the
sale of Starwave, and fourth quarter restructuring charges, operating income
decreased 21% to $3.2 billion, net income decreased 28% to $1.4 billion and
diluted earnings per share decreased 27% to $0.66. Results for the year were
driven by decreased operating income, increased equity losses from Infoseek,
which include amortization of intangible assets of $229 million and a
$44 million charge for purchased in-process research and development
expenditures, and an increase in restructuring charges recorded in the fourth
quarter, as discussed below. These items were partially offset by the gain on
the sale of Starwave, as discussed below, and lower net expense associated
with Corporate and other activities. Including the restructuring charges and
Infoseek, operating income decreased 14% to $3.4 billion and net income and
diluted earnings per share decreased 30% to $1.3 billion and $0.62,
respectively.
Decreased operating income reflected lower results in Studio Entertainment,
Consumer Products and Media Networks and increased amortization of intangible
assets primarily as a result of the Company's second quarter purchase of the
75% interest in the Anaheim Angels that it did not previously own. These items
were partially offset by improvements from Theme Parks and Resorts. Lower net
expense associated with Corporate and other activities reflected improved
results from the Company's cable equity investments and Euro Disney, partially
offset by increased corporate general and administrative expenses due, in
part, to start-up costs associated with a company-wide strategic sourcing
initiative designed to consolidate its purchasing power. Net interest expense
decreased due to gains from the sale of investments and lower interest rates
in the current year, partially offset by higher debt balances.
In April 1997, the Company purchased a significant equity stake in Starwave
Corporation (Starwave), an Internet technology company. In connection with the
acquisition, the Company was granted an option to purchase substantially all
the remaining shares of Starwave. The Company exercised the option during the
third quarter of 1998. Accordingly, the accounts of Starwave have been
included in the Company's September 30, 1998 consolidated financial
statements. On June 18, 1998, the Company reached an agreement for the
acquisition of Starwave by Infoseek Corporation (Infoseek), a publicly-held
Internet search company, pursuant to a merger. On November 18, 1998, the
Company completed its acquisition of an initial 43% equity interest in
Infoseek (see Notes 2 and 15 to the Consolidated Financial Statements). In
that transaction, Infoseek exchanged shares of its common
-20-
stock for the Company's interest in Starwave and $70 million in cash. As a
result of the exchange of its Starwave investment, the Company recognized a
non-cash gain of $345 million. In connection with its Infoseek investment, the
Company recorded $229 million of amortization related to goodwill and other
identifiable intangible assets and a charge of $44 million for purchased in-
process research and development expenditures, which have been reflected in
"Equity in Infoseek loss" in the Company's Consolidated Statements of Income.
Acquired intangible assets are being amortized over a period of two years.
The impact of such amortization is expected to be $256 million in 2000 and $23
million in 2001. The Company determined the economic useful life of acquired
goodwill by giving consideration to the useful lives of Infoseek's
identifiable intangible assets, consisting of developed technology, trademarks
and in-place workforce. In addition, the Company considered the competitive
environment and the rapid pace of technological change in the Internet
industry.
At special meetings on November 17, 1999, the stockholders of the Company
and Infoseek approved the Company's proposed acquisition of the remaining
interest in Infoseek that it did not already own. Accordingly, Infoseek became
a wholly-owned subsidiary of the Company as of that date. The Company combined
its Internet and Direct Marketing business with Infoseek to establish a new
reporting entity, GO.com, and the Company created and issued a new class of
common stock to reflect the performance of GO.com. The go.com common stock
began trading on the NYSE under the symbol GO on November 18, 1999. Subsequent
to the acquisition, the Company will separately report earnings per share for
GO.com and the Disney Group. The Company's existing class of outstanding
common stock will track Disney Group financial performance, which will reflect
all of the Company's businesses (other than GO.com), as well as the Company's
initial 72% retained interest in GO.com. The remaining 28% interest in GO.com
is publicly traded. As a result of its initial 72% interest in GO.com, the
Company expects this transaction to have a significant negative impact on
fiscal 2000 Disney Group earnings per share, including a substantial increase
in amortization of intangible assets (see Notes 2 and 15 to the Consolidated
Financial Statements).
The Company expects certain trends that affected its 1999 results to
continue in fiscal 2000, especially in the first half of the year, primarily
in the Company's home video and merchandise licensing businesses. In addition,
continued strategic investments in the Company's network television production
and cable network businesses, including Toon Disney and the SoapNet, are
expected to result in higher costs in fiscal 2000. As a result, the Company
believes that fiscal 2000 earnings per share should be approximately in line
with fiscal 1999 results, excluding restructuring charges discussed below and
GO.com, as previously discussed. The Company remains committed to investing in
core markets, pursuing international opportunities, including theme park
expansions, achieving operational improvements and leveraging technologies
such as DVD and the Internet.
1999 Restructuring Charges
In the third quarter, the Company began an across-the-board assessment of
its cost structure. The Company's efforts are directed toward leveraging
marketing and sales efforts, streamlining operations and further developing
distribution channels, including its Internet sites and cable and television
networks (see Note 14 to the Consolidated Financial Statements).
In connection with actions taken to streamline operations, restructuring
charges of $132 million ($0.04 per share) were recorded in the fourth quarter.
The restructuring activities primarily related to the following:
Consolidation of Television Production and Distribution Operations - The
Company decided to consolidate certain of its television production and
distribution operations to improve efficiencies through reduced labor and
overhead costs. Related charges include lease and contract termination
costs, and severance, substantially all of which was paid as of September
30, 1999.
-21-
Club Disney Closure - The Company determined that its Club Disney regional
entertainment centers would not provide an appropriate return on invested
capital, and, accordingly decided to close its five Club Disney locations
and terminate further investment. Related charges primarily include lease
termination costs and write-offs of fixed assets.
ESPN Store Closures and Consolidation of Retail Operations - The Company
determined that the sale of ESPN-branded product could be accomplished more
efficiently via the Internet and through its ESPN Zone regional
entertainment centers, rather than through stand-alone retail stores, and
accordingly decided to close its three ESPN stores. In addition, the
Company will eliminate certain job responsibilities as part of the
consolidation of its retail operations. Related charges for both actions
include severance and asset write-offs.
A summary of the restructuring charges is as follows (in millions):
Description
-----------
Lease and other contract cancellation costs $ 55
Severance 24
Non-cash charges:
Asset write-offs and write-downs 53
----
Total $132
====
The Company's cost-saving initiatives will continue into next year and may
result in additional charges of a similar nature. In addition, the Company is
undertaking a strategic sourcing initiative which is designed to consolidate
its purchasing power. Together these cost-saving measures are expected to
result in total annual savings in excess of $500 million beginning in fiscal
2001.
1998 vs. 1997
Compared to 1997 pro forma results, revenues increased 6% to $23 billion,
driven by growth in all business segments. Net income and diluted earnings per
share increased 4% and 3% to $1.9 billion and $0.89, respectively. These
results were driven by a reduction in net expense associated with Corporate
and other activities and lower net interest expense, partially offset by
decreased operating income. The reduction in net expense associated with
Corporate and other activities was driven by improved results from the
Company's equity investments, including A&E Television and Lifetime
Television, and a gain on the sale of the Company's interest in Scandinavian
Broadcasting System. Decreased net interest expense reflected lower average
debt balances during 1998. Lower operating income was driven by a decline in
Studio Entertainment and Internet and Direct Marketing results, partially
offset by improvements from Theme Parks and Resorts, Consumer Products and
Media Networks.
As reported revenues increased 2% and net income and diluted earnings per
share decreased by 6%. The as reported results reflect the items described
above, as well as the impact of the disposition of certain ABC publishing
assets and the sale of KCAL in 1997.
-22-
Business Segment Results
Media Networks
The following table provides supplemental revenue and operating income
detail for the Media Networks segment (in millions).
Pro forma
As Reported (unaudited)
-------------------- -----------
1999 1998 1997 1997
------ ------ ------ -----------
Revenues:
Broadcasting $4,694 $4,734 $4,526 $4,505
Cable Networks 2,818 2,408 1,996 1,996
------ ------ ------ ------
$7,512 $7,142 $6,522 $6,501
====== ====== ====== ======
Operating Income:
Broadcasting $ 659 $ 977 $1,016 $1,012
Cable Networks 952 769 683 683
------ ------ ------ ------
$1,611 $1,746 $1,699 $1,695
====== ====== ====== ======
1999 vs. 1998
Revenues increased 5% or $370 million to $7.5 billion, driven by increases
of $410 million at the Cable Networks, partially offset by a $40 million
decrease in Broadcasting revenues. Cable Network revenue growth reflected
increased advertising revenues, subscriber growth and contractual rate
increases at ESPN and subscriber growth at the Disney Channel. International
expansion at the Disney Channel also contributed to increased revenues. Lower
Broadcasting revenues were driven by decreases at the television network and
stations, partially offset by growth from radio operations. Television network
revenues were impacted by lower ratings, and lower revenues at owned
television stations reflected ongoing softness in local advertising markets.
Revenue growth at the radio network and stations was driven by strong
advertising markets and higher ratings.
Operating income decreased 8% or $135 million to $1.6 billion, reflecting
higher Broadcasting and Cable Network costs and expenses and lower
Broadcasting revenues. These decreases were partially offset by Cable Network
revenue growth. Costs and expenses, which consist primarily of programming
rights and amortization, production costs, distribution and selling expenses
and labor costs, increased 9% or $505 million, driven by higher sports
programming costs associated with the NFL contract and other programming costs
at the television network and ESPN.
There has been a continuing decline in viewership at all major broadcast
networks, including ABC, reflecting the growth in the cable industry's share
of viewers. In addition, there have been continuing increases in the cost of
sports and other programming.
During the second quarter of 1998, the Company entered into a new agreement
with the National Football League (NFL) for the right to broadcast NFL
football games on the ABC Television Network and ESPN. The contract provides
for total payments of approximately $9 billion over an eight-year period,
commencing with the 1998 season. Under the terms of the contract, the NFL has
the right to cancel the contract after 5 years. The programming rights fees
under the new contract are significantly higher than those required by the
previous contract and the fee increases exceed the estimated revenue increases
over the contract term. The higher fees under the new contract reflect various
factors, including increased competition for sports programming rights and an
increase in the number of games to be broadcast by ESPN. The Company is
pursuing a variety of strategies, including marketing efforts, to reduce the
impact of the higher costs. The contract's impact on the Company's results
over the remaining contract term is dependent upon a number of factors,
including the strength of advertising markets, effectiveness of marketing
efforts and the size of viewer audiences.
-23-
The cost of the NFL contract is charged to expense based on the ratio of
each period's gross revenues to estimated total gross revenues over the non-
cancelable contract period. Estimates of total gross revenues can change
significantly and, accordingly, they are reviewed periodically and
amortization is adjusted if necessary. Such adjustments could have a material
effect on results of operations in future periods.
The Company has investments in cable operations that are accounted for as
unconsolidated equity investments. The table below presents "Operating Income
from Cable Television Activities," which comprise the Cable Networks and the
Company's cable equity investments (unaudited, in millions):
1999 1998 % Change
------ ------ --------
Operating Income:
Cable Networks $ 952 $ 769 24%
Equity Investments:
A&E Television and Lifetime Television 480 393 22%
Other 37 (68) n/m
------ ------
Operating Income from Cable Television Activities 1,469 1,094 34%
Partner Share of Operating Income (462) (333)
------ ------
Disney Share of Operating Income $1,007 $ 761 32%
====== ======
Note: Operating Income from Cable Television Activities presented in this
table represents 100% of both the Company's owned cable businesses and its
cable equity investees. The Disney Share of Operating Income represents the
Company's ownership interest in cable television operating income. Cable
Networks are reported in "Operating income" in the Consolidated Statements
of Income. Equity Investments are accounted for under the equity method and
the Company's proportionate share of the net income of its cable equity
investments is reported in "Corporate and other activities" in the
Consolidated Statements of Income.
The Company believes that Operating Income from Cable Television Activities
provides additional information useful in analyzing the underlying business
results. However, Operating Income from Cable Television Activities is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating income.
The Company's share of Cable Television Operating Income increased 32% or
$246 million to $1.0 billion, driven by increases at the Cable Networks,
subscriber growth at A&E Television and Lifetime Television and lower losses
on start-up investments.
1998 vs. 1997
Revenues increased 10%, or $641 million to $7.1 billion compared with pro
forma 1997 results, reflecting a $412 million increase at the Cable Networks
and $229 million increase in Broadcasting revenues. Cable Network revenues
were driven by a strong advertising market, which resulted in increased
revenues at ESPN, and subscriber growth, which contributed to revenue
increases at ESPN and the Disney Channel. Broadcasting revenue growth was
driven by higher sports advertising revenues, primarily attributable to the
1998 soccer World Cup at the television network, and a strong advertising
market which benefited the television stations.
On an as reported basis, revenues increased $620 million or 10%, reflecting
the items described above, partially offset by the impact of the sale of KCAL
in 1997.
Operating income increased 3%, or $51 million to $1.7 billion compared with
pro forma 1997 results, reflecting growth at the Cable Networks, partially
offset by lower Broadcasting results. Broadcasting results reflected decreases
at the television network driven by lower ratings. Additionally, increased
costs and expenses across the segment and start-up and operating losses from
new cable business initiatives also impacted results. Costs and expenses
increased 12% or $590 million,
-24-
reflecting increased programming and production costs at the Cable Networks,
driven by ESPN, higher Broadcasting program amortization at the television
network, reflecting a reduction in benefits from the ABC acquisition,
increased costs related to the NFL contract (see discussion above) and start-
up and operating costs related to new cable business initiatives.
On an as reported basis, operating income increased $47 million or 3%,
reflecting the items described above, partially offset by the impact of the
sale of KCAL in 1997.
Studio Entertainment
1999 vs. 1998
Revenues decreased 4%, or $301 million to $6.5 billion, driven by declines
of $481 million in domestic home video, partially offset by growth of $152
million in worldwide theatrical motion picture distribution. Domestic home
video revenues reflected fewer unit sales in the current year due to the
greater number of classic animated library titles released in the prior year.
Growth in worldwide theatrical motion picture distribution revenues was
primarily attributable to a stronger film slate in the current year, including
the box office successes: The Sixth Sense, Inspector Gadget, The Waterboy,
Tarzan and A Bug's Life domestically and A Bug's Life and Armageddon
internationally.
Operating income decreased 85%, or $653 million to $116 million, reflecting
declines in worldwide home video and network television production and
distribution, partially offset by increases in worldwide theatrical motion
picture distribution. Costs and expenses, which consist primarily of
production cost amortization, distribution and selling expenses, product
costs, labor and leasehold expenses, increased 6% or $352 million. In
worldwide home video, participation and production cost amortization
increased, reflecting an increase in the current year in the proportion of
recent titles, versus classic animated library titles, whose production costs
are fully amortized. In addition, participation costs increased due to the
release of A Bug's Life and The Sixth Sense. Production cost amortization also
increased in network television production and distribution, reflecting, in
part, increased network television pilot activity and production deficits for
four new prime time series, all of which have been renewed for the 1999/2000
season. Improved results in theatrical motion picture distribution were
partially offset by higher distribution costs and participation cost
amortization.
Increases in production and participation costs are reflective of industry
trends: as competition for creative talent has increased, costs within the
industry have increased at a rate significantly higher than inflation.
1998 vs. 1997
Studio Entertainment revenues decreased 2%, or $132 million to $6.8 billion
compared with 1997 results, driven by declines in worldwide home video and
theatrical motion picture distribution of $330 million, partially offset by
growth of $204 million in television distribution. Lower worldwide home video
revenues reflected difficult comparisons to 1997, which benefited from the
strength of Toy Story, The Hunchback of Notre Dame and 101 Dalmatians,
compared to the 1998 releases of Lady & the Tramp, Hercules and The Little
Mermaid, as well as economic weaknesses in Asian markets. In worldwide
theatrical motion picture distribution, while 1998 revenues reflected
successful box-office performances of Armageddon and Mulan, revenues were
lower overall due to difficult comparisons to 1997, which benefited from the
strong performances of 101 Dalmatians, Ransom and The English Patient. Growth
in television distribution revenue was driven by high volume of television
programming and theatrical releases distributed to the worldwide television
market.
Operating income decreased 29%, or $310 million to $769 million compared
with 1997 results, reflecting declines in worldwide theatrical motion picture
distribution and international home video. These declines were partially
offset by growth in television distribution and improved results in domestic
home video, which was driven by the success of The Little Mermaid, Lady & the
Tramp and Peter Pan. Costs and expenses increased 3% or $178 million. The
increase was driven by increased write-downs related to domestic theatrical
live-action releases and an increase in production costs for
-25-
theatrical and television product, as well as an increase in the number of
shows produced for network television and syndication. Production cost
increases are reflective of industry trends: as competition for creative
talent has increased, costs within the industry have increased at a rate
significantly above inflation. In addition, expenses increased $10 million
related to a restructuring charge in connection with the consolidation of the
Company's Touchstone Pictures and Hollywood Pictures theatrical motion picture
production banners. Increased expenses for 1998 were partially offset by
declines in distribution and selling expenses in the home video and domestic
theatrical motion picture distribution markets, reflecting lower volume, and
declines within television distribution due to the termination of a network
production joint venture.
Theme Parks and Resorts
1999 vs. 1998
Revenues increased 10%, or $574 million to $6.1 billion, driven by growth at
the Walt Disney World Resort, reflecting $153 million from increased guest
spending and record attendance, as well as increases of $202 million from
Disney Cruise Line, $101 million from Anaheim Sports, Inc. and $36 million of
increased guest spending at Disneyland. Increased revenues at Disney Cruise
Line reflected a full period of operations of the Company's first ship, the
Disney Magic, which launched in the fourth quarter of the prior year, and a
partial period of operations of the Company's second ship, the Disney Wonder,
which launched in the fourth quarter of the current year. The increase at
Anaheim Sports, Inc. reflects consolidation of the operations of the Anaheim
Angels, following the Company's second quarter purchase of the 75% of the
Angels that it did not previously own.
Operating income increased 12%, or $158 million to $1.4 billion, resulting
primarily from revenue growth at the Walt Disney World Resort and a full
period of operations at Disney Cruise Line, compared to pre-opening costs for
the majority of the prior year. Costs and expenses, which consist principally
of labor, costs of merchandise, food and beverages sold, depreciation, repairs
and maintenance, entertainment and marketing and sales expenses, increased
$416 million or 10%. Increased operating costs were driven by higher theme
park attendance, a full year of operations of Disney's Animal Kingdom and
Disney Cruise Line, and increased ownership in the Anaheim Angels.
1998 vs. 1997
Revenues increased 10%, or $518 million to $5.5 billion, driven by growth at
the Walt Disney World Resort, reflecting contributions of $256 million from
increased guest spending and record attendance, growth of $106 million from
higher occupied room nights and $76 million from Disney Cruise Line. Higher
guest spending reflected strong per capita spending, due in part to new food,
beverage and merchandise offerings throughout the resort, and higher average
room rates. Increased occupied room nights reflected additional capacity
resulting from the opening of Disney's Coronado Springs Resort in August 1997.
Record theme park attendance resulted from growth in domestic and
international tourist visitation due to the opening of the new theme park,
Disney's Animal Kingdom. Disneyland's revenues for 1998 increased slightly as
higher guest spending was largely offset by reduced attendance driven
primarily by difficult comparisons to 1997's Main Street Electrical Parade
farewell season and construction of New Tomorrowland in the first half of
1998.
Operating income increased 13%, or $152 million to $1.3 billion, resulting
primarily from higher guest spending, increased occupied room nights and
record attendance at the Walt Disney World Resort, partially offset by start-
up and operating costs associated with Disney's Animal Kingdom and Disney
Cruise Line. Costs and expenses increased 9% or $366 million. Increased costs
and expenses were driven by higher theme park attendance and start-up and
operating costs at the new theme park and Disney Cruise Line.
-26-
Consumer Products
1999 vs. 1998
Revenues decreased 5%, or $163 million to $3.0 billion, driven by declines
of $159 million in worldwide merchandise licensing, $98 million in domestic
Disney Stores, partially offset by growth of $49 million at the Disney Stores
internationally, $34 million in publishing operations and $23 million at
Disney Interactive. Lower merchandise licensing revenues were primarily
attributable to declines in domestic activity and in Japan. Lower revenues at
the Disney Stores reflected a decline in comparable store sales domestically.
Publishing revenue increases primarily reflected improvements at ESPN The
Magazine due to increased circulation and a full year of operations. Disney
Interactive revenue increased due to increased licensing activity and strong
results for video game products.
Operating income decreased 24%, or $194 million to $607 million, reflecting
declines in worldwide merchandise licensing and the Disney Stores
domestically, partially offset by increases at Disney Interactive. Declines in
merchandise licensing primarily reflected continuing softness domestically and
in Japan, partially offset by improvements in the rest of Asia and Latin
America. Costs and expenses, which consist primarily of labor, product costs,
including product development costs, distribution and selling expenses and
leasehold expenses increased 1% or $31 million. Higher costs and expenses were
driven by increases at the Disney Stores due, in part, to write-downs of
underutilized assets and inventory, principally domestically, partially offset
by decreased operating expenses at Disney Interactive.
1998 vs. 1997
Consumer Product revenues increased 8%, or $250 million to $3.2 billion
compared with pro forma 1997 results driven by growth of $136 million in the
Disney Stores, $75 million in domestic publishing and $51 million in domestic
character merchandise licensing. Increased revenues at the Disney Stores
reflected an increase in comparable store sales in North America and Europe
and continued worldwide expansion, partially offset by a decrease in
comparable store sales in Asian markets. The increase in domestic publishing
revenues resulted from the success of book titles such as Don't Sweat the
Small Stuff and the launch of ESPN The Magazine. Character merchandise
licensing growth was driven primarily by the continued strength of Winnie the
Pooh in the domestic market, partially offset by declines internationally,
primarily due to softness in Asian markets.
On an as reported basis, revenue decreased 16% or $589 million reflecting
the items described above, as well as the impact of the disposition of certain
ABC publishing assets in 1997.
Operating income increased 19%, or $128 million to $801 million compared
with pro forma 1997 results driven by an increase in domestic merchandise
licensing and Disney Store growth in North America and Europe, partially
offset by declines in international merchandise licensing and increased costs.
Costs and expenses increased 5% or $122 million. Costs and expense increases
were due, in part, to 1998 charges totaling $50 million related to strategic
downsizing, particularly in response to Asian economic difficulties. Increased
costs and expenses for 1998 were partially offset by operating expense
improvements at Disney Interactive.
On an as reported basis, operating income decreased 10% or $92 million,
reflecting the items described above, as well as the impact of the disposition
of certain ABC publishing assets in 1997.
Internet and Direct Marketing
On November 18, 1998, the Company exchanged its ownership interest in
Starwave plus $70 million in cash for a 43% equity interest in Infoseek. This
transaction resulted in a change in the manner of accounting for Starwave and
certain related businesses from the consolidation method, which was applied
prior to the exchange, to the equity method, which was applied after the
exchange.
-27-
The following table provides supplemental revenue and operating income
detail for the Internet and Direct Marketing segment, on an as reported basis
(unaudited, in millions):
1999 1998 1997
---- ---- ----
Revenues:
Direct Marketing $148 $192 $147
Internet 58 68 27
---- ---- ----
Total $206 $260 $174
==== ==== ====
Operating Income (Loss):
Direct Marketing $(23) $(19) $ 10
Internet (70) (75) (66)
---- ---- ----
Total $(93) $(94) $(56)
==== ==== ====
The following discussion of 1999 versus 1998 performance includes
comparisons on a pro forma basis as if Starwave and the related businesses had
been accounted for using the equity method of accounting during 1998. The
Company believes pro forma results represent a meaningful comparative standard
for assessing changes because the pro forma results reflect comparable
accounting methodologies in each year presented. The discussion of Direct
Marketing does not include pro forma comparisons, since the pro forma
adjustments did not impact this business.
1999 vs. 1998
On a pro forma basis, Internet revenues increased $20 million, driven
primarily by increased media and commerce revenues due to growth in
advertising, licensing and subscription businesses as a result of increased
site traffic and related page views and additional advertising and sponsorship
agreements. This increase was offset by a $44 million decline in Direct
Marketing revenues, which resulted in a 10% decrease in total segment revenues
to $206 million compared to pro forma 1998 revenues of $230 million. Internet
operating losses increased 43% or $21 million, to $70 million, on a pro forma
basis, driven primarily by increased development and investment spending. In
addition, as discussed below, increased operating losses of 21% or $4 million
at Direct Marketing resulted in an increase in total segment operating losses
to $93 million compared to pro forma operating losses of $68 million.
On an as reported basis, segment revenues decreased 21% or $54 million to
$206 million, driven by declines of $44 million in Direct Marketing revenues
and $10 million in Internet revenue. Lower Direct Marketing revenues reflected
slower order fill rates due to system and capacity constraints resulting from
the relocation of the Direct Marketing distribution center from Tennessee to
South Carolina and reduced average order size. In addition, management reduced
catalog circulation during the 1998 holiday season to ensure better quality of
customer service during the holiday period. Internet revenues decreased, since
the pro forma increases described above were more than offset by the change in
the manner of accounting for Starwave and related businesses from the
consolidation method to the equity method.
On an as reported basis, operating losses decreased 1% or $1 million to $93
million, reflecting lower losses from Internet operations, partially offset by
increased losses from Direct Marketing operations. Increased expenses in
Internet operations from continued expansion of the business were more than
offset by the effects of the change in the manner of accounting for Starwave
and related businesses, as described above. Increased operating losses from
Direct Marketing operations reflected costs relating to the start-up of the
Direct Marketing distribution center and the implementation of new business
processes, systems and software applications.
Segment costs and expenses, which consist primarily of cost of revenues,
sales and marketing, other operating expenses and depreciation, decreased 16%
or $55 million, driven by the change in the manner of accounting for Starwave
and related businesses and lower Direct Marketing selling
-28-
expenses, driven by reduced catalog mailings and lower outbound shipping
costs, partially offset by increased Internet expenses associated with
continued development of entertainment and family websites and operations of
Toysmart.com and Soccernet.com, two Internet companies acquired during the
fourth quarter of 1999.
1998 vs. 1997
Segment revenues increased 49%, or $86 million to $260 million, driven by
Direct Marketing growth of $45 million and Internet growth of $41 million.
Growth in Direct Marketing reflects increased sales volume driven primarily by
an increase in the number of catalogs. Increased Internet revenues were driven
primarily by increased media and commerce revenue due to growth in
advertising, licensing and subscription businesses. Commerce and subscription
revenue increases also reflected a full year of operations and growth of
Disney's Club Blast and DisneyStore.com.
Operating losses increased 68%, or $38 million to $94 million, due to growth
in Direct Marketing cost of revenues, driven by higher sales volume, increased
inventory liquidation efforts during 1998 and increased spending on
development and growth of the Internet operations, including increased
promotional activities.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations increased 9% or $473 million to $5.6 billion,
driven by a decline in receivables, lower income tax payments and higher
depreciation and amortization of intangible assets, partially offset by
decreased net income.
In 1999, the Company invested $3.0 billion to develop, produce and acquire
rights to film and television properties, including $310 million in connection
with a prior year agreement to acquire a film library. Excluding the payment
in connection with the film library acquisition, film and television
expenditures decreased $625 million, driven by lower live-action production
spending.
During the year, the Company invested $2.1 billion in theme parks, resorts
and other properties. These expenditures reflected continued expansion
activities related to Disney's California Adventure, Disney's Animal Kingdom,
Disney Cruise Line and certain resort facilities at the Walt Disney World
Resort. While several of our recent significant Theme Park and Resort
expansions such as Disney's Animal Kingdom and Disney Cruise Line are
substantially complete, we expect fiscal 2000 spending will be comparable to
1999, reflecting significant increases driven by construction at Disney's
California Adventure.
During 1998, the Company's Board of Directors decided to move to an annual,
rather than quarterly, dividend policy to reduce costs and simplify payments
to the more than 2.7 million stockholders of Company common stock.
Accordingly, there was no dividend payment during the year ended September 30,
1999. On November 4, 1999, the Board of Directors declared an annual cash
dividend of 21 cents per share applicable to 1999. The $433 million dividend
was payable December 17, 1999 to shareholders of Disney common stock at the
close of business November 16, 1999.
During the year, the Company received approximately $2.3 billion from
various financing arrangements. These borrowings have effective interest
rates, including the impact of interest rate swaps, ranging from 4.8% to 5.6%
and maturities in fiscal 2000 through fiscal 2039. Certain of these financing
agreements are denominated in foreign currencies, and the Company has entered
into cross-currency swap agreements effectively converting these obligations
into U.S. dollar denominated LIBOR-based variable rate debt instruments.
Commercial paper borrowings outstanding as of September 30, 1999 totaled $1.7
billion, with maturities of up to one year, supported by bank facilities
totaling $4.8 billion, which expire in one to three years and allow for
borrowings at various interest rates. The Company also has the ability to
borrow under a U.S. shelf registration statement and a euro medium-term note
program, which collectively permit the issuance of up to approximately $3.8
billion of additional debt.
-29-
The Company believes that its financial condition is strong and that its
cash, other liquid assets, operating cash flows, access to equity capital
markets and borrowing capacity, taken together, provide adequate resources to
fund ongoing operating requirements and future capital expenditures related to
the expansion of existing businesses and development of new projects.
OTHER MATTERS
Year 2000
The Y2K Problem. During the year, the Company continued to devote
significant resources throughout its business operations to minimize the risk
of potential disruption from the "year 2000" (Y2K) problem. This problem is a
result of computer programs having been written using two digits (rather than
four) to define the applicable year. Any information technology (IT) systems
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000, which could result in miscalculations and
system failures. The problem also extends to many "non-IT" systems; that is,
operating and control systems that rely on embedded chip systems. In addition,
like every other business enterprise, the Company is at risk from Y2K failures
on the part of its major business counterparties, including suppliers,
distributors, licensees and manufacturers, as well as potential failures in
public and private infrastructure services, including electricity, water, gas,
transportation and communications.
System failures resulting from the Y2K problem could adversely affect
operations and financial results in all of the Company's business segments.
Failures may affect security, payroll operations or employee and guest health
and safety, as well as such routine but important operations as billing and
collection. In addition, the Company's business segments face more specific
risks. For example:
In the Media Networks segment, at-risk operations include satellite
transmission and communication systems. Y2K failures in such systems could
adversely affect the Company's television and radio networks, including cable
services, as well as its owned and operated stations.
In the Studio Entertainment segment, Y2K failures could interfere with
critical systems in such areas as the production, duplication and distribution
of motion picture and home video product.
The Company's Theme Parks and Resorts operations could be significantly
impeded by failures in hotel and cruise line reservation and operating
systems; in theme park operating systems, including those controlling
individual rides, attractions, parades and shows; and in security, health and
safety systems.
In the Consumer Products segment, operations that could be significantly
affected include the ordering, distribution and sale of merchandise at the
Company's retail stores.
In the Internet and Direct Marketing segment, system failures could affect
systems available to Disney guests on the Internet, online security and
internal operations such as web page maintenance.
Addressing the Problem. The Company has developed a six-phase approach to
resolving the Y2K issues that are reasonably within its control. All of these
efforts are being coordinated through a senior-level task force chaired by the
Company's Chief Information Officer (CIO), as well as individual task forces
in each major business unit. As of September 30, 1999, approximately 400
employees were devoting more than half of their time to Y2K efforts, in
addition to approximately 400 expert consultants retained on a full-time basis
to assist with specific potential problems. The CIO reports periodically to
the Audit Review Committee of the Board of Directors with respect to the
Company's Y2K efforts.
The Company's approach to and the anticipated timing of each phase are
described below.
Phase 1 - Inventory. The first phase entailed a worldwide inventory of all
hardware and software (including business and operational applications,
operating systems and third-party products) that
-30-
may be at risk, and identification of key third-party businesses whose Y2K
failures might most significantly impact the Company. The IT system inventory
process, as well as the inventories of key third-party businesses and of
internal non-IT systems have been completed.
Phase 2 - Assessment. Once each at-risk system was identified, the Y2K task
forces assessed how critical the system was to business operations and the
potential impact of failure in order to establish priorities for repair or
replacement. Systems were classified as "critical," "important" or "non-
critical." A "critical" system is one that, if not operational, would cause
the shutdown of all or a portion of a business unit within two weeks, while an
"important" system is one that would cause such a shutdown within two months.
This process has been completed for all IT systems, resulting in the
identification of nearly 600 business systems that are "critical" to continued
functioning and more than 1,000 that are either "important" or are otherwise
being monitored. The assessment process for internal non-IT systems and for
key third-party businesses has also been completed.
Phase 3 - Strategy. This phase involved the development of appropriate
remedial strategies for both IT and non-IT systems. These strategies included
repairing, testing and certifying, replacing or abandoning particular systems
(as discussed under Phases 4 and 5 below). Selection of appropriate strategies
was based upon such factors as the assessments made in Phase 2, the type of
system, the availability of a Y2K-compliant replacement and cost. The strategy
phase has been completed for all IT and non-IT systems.
Phase 4 - Remediation. The remediation phase involves creating detailed
project plans, marshalling necessary resources and executing the strategies
chosen. For IT systems, this phase has been completed. For non-critical
systems, most corrections are expected to be completed by December 31, 1999.
For those systems that are not expected to be reliably functional after
January 1, 2000, detailed manual workaround plans will be developed prior to
the end of 1999.
Phase 5 - Testing and Certification. This phase includes establishing a test
environment, performing systems testing (with third parties if necessary) and
certifying the results. The certification process entails having functional
experts review test results, computer screens and printouts against pre-
established criteria to ensure system compliance. The testing and
certification of all critical and important IT systems has been completed.
Testing for non-IT systems has been completed, and where feasible and
practical, the systems have been tested by either validating that the system
has no date function, is not date-aware, or operates properly when the
millennial date is tested. In other cases, the Company has reviewed vendor or
manufacturer design specifications, drawings, lab results or test data in
order to verify proper date capability. Where the Company has not received
adequate assurance of successful certification efforts by third parties,
contingency plans have been established to minimize potential disruption to
operations.
The Company has initiated written and telephonic communications with key
third-party businesses, as well as public and private providers of
infrastructure services, to ascertain and evaluate their efforts in addressing
Y2K compliance. The Company has tested as many online interfaces between
critical business partners as is practical. In cases where joint testing has
not been possible, the Company has reviewed partners' test scripts and other
indications that ongoing communications and commerce will not be disrupted.
For critical partners' systems interactions with the Company, IT and
functional experts will carefully review the evidence of correct operation at
the earliest possible time in the new year. Manual and semi-automated
workarounds have been developed, where practical. For many hundreds of vendors
and partners for which the Company does not rely upon automated interfaces,
but rather, relies on physical supplies of food, merchandise, fuel and general
supplies, safety stocks of critical items have been, or will be, secured.
Phase 6 - Contingency Planning. This phase involves addressing any remaining
open issues expected in 1999 and early 2000. Contingency planning is now the
primary focus of efforts throughout the Company. Primary emphasis is on guest
and employee safety and comfort, followed by our desire to continue to
generate revenues and minimize any unnecessary costs caused by unexpected
outages.
-31-
Contingency plans have been developed by all business segments. They include,
as appropriate, plans for guest evacuation from rides, theme parks and other
entertainment settings, assuring that guests and employees are safe and warm,
protection of assets and continued operation in the event of loss of power or
communications and the resumption of normal business operations at the
earliest time possible.
Costs. The Company anticipates that expenditures related to the Y2K project
will total $260 million, of which $140 million is expected to be capitalized.
The majority of these costs have been incurred as of September 30, 1999. A
significant portion of these costs has not been incremental, but rather
reflected redeployment of internal resources from other activities. The
Company believes that these redeployments did not have a material adverse
effect on other ongoing business operations. All costs of the Y2K project are
being borne out of the Company's operating cash flow.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and non-IT systems, including all critical and important
systems, will remain up and running after January 1, 2000. Accordingly, the
Company does not currently anticipate that internal systems failures will
result in any material adverse effect to its operations or financial
condition. During 1999, the Company has continued its efforts to ensure that
major third-party businesses and public and private providers of
infrastructure services, such as utilities, communications services and
transportation, will also be prepared for the year 2000, and to develop
contingency plans to address any failures on their part to become Y2K
compliant. At this time, the Company believes that the most likely "worst-
case" scenario involves potential disruptions in areas in which the Company's
operations must rely on such third parties whose systems may not work properly
after January 1, 2000. In addition, the Company's international operations may
be adversely affected by failures of businesses in other parts of the world to
take adequate steps to address the Y2K problem. While such failures could
affect important operations of the Company and its subsidiaries, either
directly or indirectly, in a significant manner, the Company cannot presently
estimate either the likelihood or the potential cost of such failures.
It is important to note that the description of the Company's efforts
necessarily involves estimates and projections with respect to activities
required in the future. These estimates and projections are subject to change
as work continues, and such changes may be substantial.
Conversion to the Euro Currency
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (euro). The transition period for the
introduction of the euro ends June 30, 2002. Issues facing the Company as a
result of the introduction of the euro include converting information
technology systems, reassessing currency risk, negotiating and amending
licensing agreements and contracts, and processing tax and accounting records.
The Company is addressing these issues and does not expect the euro to have a
material effect on the Company's financial condition or results of operations.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Company. The Company and its representatives may from time to time make
written or oral statements that are "forward-looking," including statements
contained in this report and other filings with the Securities and Exchange
Commission and in reports to the Company's stockholders. Management believes
that all statements that express expectations and projections with respect to
future matters, including further restructuring or strategic initiatives and
actions relating to the Company's strategic sourcing initiative, as well as
from developments beyond the Company's control including changes in global
economic conditions that may, among other things, affect the international
performance of the Company's theatrical and home video releases, television
programming and consumer products and, in addition, uncertainties associated
with the Internet; the launching or prospective development of new business
initiatives; "Year 2000" remediation efforts and the introduction of the euro;
are forward-looking statements within the meaning of the Act. These
-32-
statements are made on the basis of management's views and assumptions, as of
the time the statements are made, regarding future events and business
performance. There can be no assurance, however, that management's
expectations will necessarily come to pass.
Factors that may affect forward-looking statements. For an enterprise as
large and complex as the Company, a wide range of factors could materially
affect future developments and performance, including the following:
Changes in Company-wide or business-unit strategies, which may result in
changes in the types or mix of businesses in which the Company is involved
or chooses to invest;
Changes in U.S., global or regional economic conditions, which may affect
attendance and spending at the Company's theme parks and resorts, purchases
of Company-licensed consumer products and the performance of the Company's
broadcasting and motion picture operations;
Changes in U.S. and global financial and equity markets, including
significant interest rate fluctuations, which may impede the Company's
access to, or increase the cost of, external financing for its operations
and investments;
Increased competitive pressures, both domestically and internationally,
which may, among other things, affect the performance of the Company's
theme park, resort and regional entertainment operations and lead to
increased expenses in such areas as television programming acquisition and
motion picture production and marketing;
Legal and regulatory developments that may affect particular business
units, such as regulatory actions affecting environmental activities,
consumer products, broadcasting or Internet activities or the protection of
intellectual properties, the imposition by foreign countries of trade
restrictions or motion picture or television content requirements or
quotas, and changes in international tax laws or currency controls;
Adverse weather conditions or natural disasters, such as hurricanes and
earthquakes, which may, among other things, impair performance at the
Company's theme parks and resorts;
Technological developments that may affect the distribution of the
Company's creative products or create new risks to the Company's ability to
protect its intellectual property;
Labor disputes, which may lead to increased costs or disruption of
operations in any of the Company's business units; and
Changing public and consumer taste, which may affect the Company's
entertainment, broadcasting and consumer products businesses.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
-33-
ITEM 7A. Market Risk
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market values of its investments.
Policies and Procedures
In the normal course of business, the Company employs established policies
and procedures to manage its exposure to changes in interest rates,
fluctuations in the value of foreign currencies and the fair market value of
certain of its investments in debt and equity securities using a variety of
financial instruments.
The Company's objectives in managing its exposure to interest rate changes
are to limit the impact of interest rate changes on earnings and cash flows
and to lower its overall borrowing costs. To achieve its objectives, the
Company primarily uses interest rate swaps and caps to manage net exposure to
interest rate changes related to its portfolio of borrowings. The Company
maintains fixed rate debt as a percentage of its net debt between a minimum
and maximum percentage, which is set by policy.
The Company's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention on
its core business issues and challenges. Accordingly, the Company enters into
various contracts that change in value as foreign exchange rates change to
protect the value of its existing foreign currency assets, liabilities,
commitments and anticipated foreign currency revenues. The Company uses option
strategies that provide for the sale of foreign currencies to hedge probable,
but not firmly committed, revenues. The principal currencies hedged are the
Japanese yen, European euro, Australian dollar, British pound and Canadian
dollar. The Company also uses forward contracts to hedge foreign currency
assets and liabilities in the same principal currencies. By policy, the
Company maintains hedge coverage between minimum and maximum percentages of
its anticipated foreign exchange exposures for periods not to exceed five
years. The gains and losses on these contracts offset changes in the value of
the related exposures.
In addition, the Company uses forward sale contracts to minimize the
exposure to changes in fair market value of certain of its investments in debt
and equity securities.
It is the Company's policy to enter into foreign currency, interest rate
transactions and forward sale contracts only to the extent considered
necessary to meet its objectives as stated above. The Company does not enter
into these transactions for speculative purposes.
Value at Risk
The Company utilizes a "Value-at-Risk" (VAR) model to determine the maximum
potential one-day loss in the fair value of its interest rate and foreign
exchange sensitive financial instruments. The VAR model estimates were made
assuming normal market conditions and a 95% confidence level. There are
various modeling techniques which can be used in the VAR computation. The
Company's computations are based on the interrelationships between movements
in various currencies and interest rates (a "variance/co-variance" technique).
These interrelationships were determined by observing interest rate and
foreign currency market changes over the preceding quarter for the calculation
of VAR amounts at year-end and over each of the four quarters for the
calculation of average VAR amounts during the year. The model includes all of
the Company's debt as well as all interest rate and foreign exchange
derivative contracts. The values of foreign exchange options do not change on
a one-to-one basis with the underlying currencies, as exchange rates vary.
Therefore, the hedge coverage assumed to be obtained from each option has been
adjusted to reflect its respective sensitivity to changes in currency values.
Anticipated transactions, firm commitments and receivables and accounts
payable denominated in foreign currencies, which certain of these instruments
are intended to hedge, were excluded from the model.
-34-
The VAR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by the Company, nor does it
consider the potential effect of favorable changes in market factors. (See
Note 12 to the Consolidated Financial Statements regarding the Company's
financial instruments at September 30, 1999 and 1998.)
The estimated maximum potential one-day loss in fair value, calculated using
the VAR model, follows (unaudited, in millions):
Interest Rate Currency
Sensitive Financial Sensitive Financial Combined
Instruments Instruments Portfolio
- -------------------------------------------------------------------------------
VAR as of September 30, 1999 $15 $22 $27
Average VAR during the year $13 $17 $23
ended September 30, 1999
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), subsequently amended by SFAS No. 137, which the Company is
required to adopt effective October 1, 2000. SFAS 133 will require the Company
to record all derivatives on the balance sheet at fair value. Changes in
derivative fair values will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm
commitments or, for forecasted transactions, deferred and recorded as a
component of other stockholders' equity until the hedged transactions occur
and are recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
The impact of SFAS 133 on the Company's financial statements will depend on a
variety of factors, including future interpretative guidance from the FASB,
the future level of forecasted and actual foreign currency transactions, the
extent of the Company's hedging activities, the types of hedging instruments
used and the effectiveness of such instruments. However, the Company does not
believe the effect of adopting SFAS 133 will be material to its financial
position.
ITEM 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Supplemental Data on page 42.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-35-
PART III
ITEM 10. Directors and Executive Officers of the Company
Directors
Information regarding directors appearing under the caption "Election of
Directors" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders (the 2000 Proxy Statement) is hereby incorporated by reference.
Information regarding executive officers is included in Part I of this Form
10-K as permitted by General Instruction G(3).
ITEM 11. Executive Compensation
Information appearing under the captions "How are directors compensated?"
and "Executive Compensation" in the 2000 Proxy Statement is hereby
incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information setting forth the security ownership of certain beneficial
owners and management appearing under the caption "Stock Ownership" in the
2000 Proxy Statement is hereby incorporated by reference.
ITEM 13. Certain Relationships and Related Transactions
Information regarding certain related transactions appearing under the
caption "Certain Relationships and Related Transactions" in the 2000 Proxy
Statement is hereby incorporated by reference.
-36-
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits and Financial Statements and Schedules
(1) Financial Statements and Schedules
See Index to Financial Statements and Supplemental Data at page 42.
(2) Exhibits
The documents set forth below are filed herewith or incorporated herein
by reference to the location indicated.
Exhibit Location
------- --------
3(a) Amended and Restated Certificate of Annex C to the Joint Proxy
Incorporation of the Company Statement, Prospectus
included in the Registration
Statement on Form S-4 (No.
333-88105) of the Company,
filed Sept. 30, 1999
3(b) Bylaws of the Company Filed herewith
4(a) Form of Registration Rights Agreement Exhibit B to Exhibit 2.1 to
entered into or to be entered into the Form 8-K, dated July 31,
with certain stockholders 1995, of Disney Enterprises,
Inc. ("DEI")
4(b) Five-Year Credit Agreement, dated as Exhibit 4(d) to the 1996 Form
of Oct. 30, 1996 10-K of the Company
4(c) Indenture, dated as of Nov. 30, 1990, Exhibit 2 to the Current
between DEI and Bankers Trust Report on Form 8-K, dated
Company, as Trustee Jan. 14, 1991, of DEI
4(d) Indenture, dated as of Mar. 7, 1996, Exhibit 4.1(a) to the Form 8-
between the Company and Citibank, K, dated Mar. 7, 1996, of the
N.A., as Trustee Company
4(e) Other long-term borrowing instruments
are omitted pursuant to Item 601(b)
(4) (iii) of Regulation S-K. The
Company undertakes to furnish copies
of such instruments to the Commission
upon request.
10(a) (i) Agreement on the Creation and the Exhibits 10(b) and 10(a),
Operation of Euro Disneyland en respectively, to the Form 8-
France, dated Mar. 25, 1987, and (ii) K, dated Apr. 24, 1987, of
Letter relating thereto of the DEI
Chairman of Disney Enterprises, Inc.,
dated Mar. 24, 1987
10(b) Composite Limited Recourse Financing Exhibit 10(b) to the 1997
Facility Agreement, dated as of Apr. Form 10-K of the Company
27, 1988, between DEI and TDL Funding
Company, as amended
10(c) Employment Agreement, dated as of Exhibit 10.2 to the Form 10-Q
Jan. 8, 1997, between the Company and for the period ended Dec. 31,
Michael D. Eisner 1996, of the Company
10(d) (i) Profit Participation Contract, Exhibits 1 and 3,
dated Dec. 14, 1979, with E. Cardon respectively, to the 1980
Walker and (ii) Amendment thereto, Form 10-K of DEI
dated Aug. 8, 1980
-37-
Exhibit Location
------- --------
10(e) Form of Indemnification Agreement for Annex C to the Proxy
certain officers and directors of DEI Statement for the 1988 Annual
Meeting of DEI
10(f) 1995 Stock Option Plan for Non- Exhibit 20 to the Form S-8
Employee Directors Registration Statement (No.
33-57811), dated Feb. 23,
1995, of DEI
10(g) 1990 Stock Incentive Plan and Rules Exhibits 28(a) and 28(b),
respectively, to the Form S-8
Registration Statement
(No. 33-39770), dated Apr. 5,
1991, of DEI
10(h) Amended and Restated 1990 Stock Appendix B-2 to the Joint
Incentive Plan and Rules Proxy Statement/Prospectus
included in the Form S-4
Registration Statement
(No. 33-64141), dated Nov.
13, 1995, of DEI
10(i) Amended and Restated 1995 Stock Annex E to the Joint Proxy
Incentive Plan and Rules Statement/Prospectus included
in the Registration Statement
on Form S-4 (No. 333-88105)
of the Company filed
Sept. 30, 1999
10(j) (i) 1987 Stock Incentive Plan and Exhibits 1(a), 1(b), 2(a),
Rules, (ii) 1984 Stock Incentive Plan 2(b), 3(a), 3(b) and 4,
and Rules, (iii) 1981 Incentive Plan respectively, to the
and Rules and (iv) 1980 Stock Option Prospectus contained in the
Plan Form S-8 Registration
Statement (No. 33-26106),
dated Dec. 20, 1988, of DEI
10(k) Contingent Stock Award Rules under Exhibit 10(t) to the 1986
DEI's 1984 Stock Incentive Plan Form 10-K of DEI
10(l) Bonus Performance Plan for Executive Exhibit 10(1) to the 1998
Officers Form 10-K of the Company
10(m) Performance-Based Compensation Plan Included in the Proxy
for the Company's Chief Executive Statement dated Jan. 9, 1997,
Officer for the 1997 Annual Meeting
of the Company
10(n) Key Employees Deferred Compensation Exhibit 10(p) to the 1997
and Retirement Plan Form 10-K of the Company
10(o) Group Personal Excess Liability Exhibit 10(x) to the 1997
Insurance Plan Form 10-K of the Company
10(p) Family Income Assurance Plan (summary Exhibit 10(y) to the 1997
description) Form 10-K of the Company
10(q) Disney Salaried Savings and Exhibit 10(s) to the 1995
Investment Plan Form 10-K of DEI
10(r) First Amendment to the Disney Exhibit 10(r) to the 1997
Salaried Savings and Investment Plan Form 10-K of the Company
10(s) Second Amendment to the Disney Exhibit 10(s) to the 1997
Salaried Savings and Investment Plan Form 10-K of the Company
10(t) ABC, Inc. Savings and Investment Exhibit 10(t) to the 1998
Plan, as amended Form 10-K of the Company
10(u) Employee Stock Option Plan of Capital Exhibit 10(f) to the 1992
Cities/ABC, Inc., as amended Form 10-K of Capital
Cities/ABC, Inc.
10(v) 1991 Stock Option Plan of Capital Exhibit 6(a)(i) to the Form
Cities/ABC, Inc., as amended 10-Q for the period ended
Mar. 31, 1996, of the Company
21 Subsidiaries of the Company Filed herewith
23 Consent of PricewaterhouseCoopers LLP Included herein at page 43.
27 Financial Data Schedule Filed herewith
28(a) Financial statements of the Disney Included in Form 10-K/A,
Salaried Savings and Investment Plan dated June 29, 1998, of the
for the year ended Dec. 31, 1998 Company
-38-
Exhibit Location
------- --------
28(b) Financial statements of the ABC Included in Form 10-K/A,
Salaried Savings and Investment Plan dated June 29, 1998, of the
for the year ended Dec. 31, 1997 Company
99 Pro forma financial information for Exhibit 99 to the 1997 Form
1997 events. 10-K of the Company
(b) Reports on Form 8-K
(i) Current report on Form 8-K dated July 12, 1999, with respect to the
proposed acquisition of Infoseek Corporation.
-39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE WALT DISNEY COMPANY
-----------------------------------------------------
(Registrant)
Date: December 17, 1999 By: MICHAEL D. EISNER
-----------------------------------------------------
(Michael D. Eisner, Chairman of the Board and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principal Executive Officer
MICHAEL D. EISNER Chairman of the Board and December 17, 1999
____________________________________ Chief Executive Officer
(Michael D. Eisner)
Principal Financial and Accounting
Officers
THOMAS O. STAGGS Executive Vice President and December 17, 1999
____________________________________ Chief Financial Officer
(Thomas O. Staggs)
JOHN J. GARAND Senior Vice President- December 17, 1999
____________________________________ Planning and Control
(John J. Garand)
Directors
REVETA F. BOWERS Director December 17, 1999
____________________________________
(Reveta F. Bowers)
ROY E. DISNEY Director December 17, 1999
____________________________________
(Roy E. Disney)
MICHAEL D. EISNER Director December 17, 1999
____________________________________
(Michael D. Eisner)
JUDITH ESTRIN Director December 17, 1999
____________________________________
(Judith Estrin)
STANLEY P. GOLD Director December 17, 1999
____________________________________
(Stanley P. Gold)
SANFORD M. LITVACK Director December 17, 1999
____________________________________
(Sanford M. Litvack)
IGNACIO E. LOZANO, JR. Director December 17, 1999
____________________________________
(Ignacio E. Lozano, Jr.)
-40-
Signature Title Date
--------- ----- ----
GEORGE J. MITCHELL Director December 17, 1999
____________________________________
(George J. Mitchell)
THOMAS S. MURPHY Director December 17, 1999
____________________________________
(Thomas S. Murphy)
LEE J. O'DONOVAN, S.J. Director December 17, 1999
____________________________________
(Lee J. O'Donovan, S.J.)
SIDNEY POITIER Director December 17, 1999
____________________________________
(Sidney Poitier)
IRWIN E. RUSSELL Director December 17, 1999
____________________________________
(Irwin E. Russell)
ROBERT A.M. STERN Director December 17, 1999
____________________________________
(Robert A.M. Stern)
ANDREA VAN DE KAMP Director December 17, 1999
____________________________________
(Andrea Van de Kamp)
RAYMOND L. WATSON Director December 17, 1999
____________________________________
(Raymond L. Watson)
GARY L. WILSON Director December 17, 1999
____________________________________
(Gary L. Wilson)
-41-
THE WALT DISNEY COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page
----
Report of Independent Accountants and Consent of Independent Accountants.. 43
Consolidated Financial Statements of The Walt Disney Company and
Subsidiaries
Consolidated Statements of Income for the Years Ended September 30,
1999, 1998 and 1997.................................................... 44
Consolidated Balance Sheets as of September 30, 1999 and 1998........... 45
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997.................................................... 46
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997...................................... 47
Notes to Consolidated Financial Statements.............................. 48
Quarterly Financial Summary............................................. 69
Schedules other than those listed above are omitted for the reason that they
are not applicable or the required information is included in the financial
statements or related notes.
-42-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Walt Disney Company
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of The Walt Disney Company and its subsidiaries (the Company) at
September 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1999,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
November 22, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 33-26106,
33-35405 and 33-39770) and Form S-3 (Nos. 33-49891 and 333-52659) of The Walt
Disney Company of our report dated November 22, 1999 which appears above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
December 17, 1999
-43-
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Year Ended September 30 1999 1998 1997
- -----------------------------------------------------------------------------
Revenues $ 23,402 $ 22,976 $ 22,473
Costs and expenses (19,715) (18,466) (17,722)
Amortization of intangible assets (456) (431) (439)
Restructuring charges (132) (64) --
Gain on sale of Starwave 345 -- --
Gain on sale of KCAL -- -- 135
-------- -------- --------
Operating income 3,444 4,015 4,447
Corporate and other activities (196) (236) (367)
Equity in Infoseek loss (322) -- --
Net interest expense (612) (622) (693)
-------- -------- --------
Income before income taxes 2,314 3,157 3,387
Income taxes (1,014) (1,307) (1,421)
-------- -------- --------
Net income $ 1,300 $ 1,850 $ 1,966
======== ======== ========
Earnings per share
Diluted $ 0.62 $ 0.89 $ 0.95
======== ======== ========
Basic $ 0.63 $ 0.91 $ 0.97
======== ======== ========
Average number of common and common equivalent
shares outstanding
Diluted 2,083 2,079 2,060
======== ======== ========
Basic 2,056 2,037 2,021
======== ======== ========
See Notes to Consolidated Financial Statements
-44-
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30 1999 1998
- ----------------------------------------------------------------------------
ASSETS
Current Assets $ 414 $ 127
Cash and cash equivalents
Receivables 3,633 3,999
Inventories 796 899
Film and television costs 4,071 3,223
Deferred income taxes 607 463
Other assets 679 664
------- -------
Total current assets 10,200 9,375
Film and television costs 2,489 2,506
Investments 2,434 1,821
Theme parks, resorts and other property, at cost
Attractions, buildings and equipment 15,869 14,037
Accumulated depreciation (6,220) (5,382)
------- -------
9,649 8,655
Projects in progress 1,272 1,280
Land 425 411
------- -------
11,346 10,346
Intangible assets, net 15,695 15,787
Other assets 1,515 1,543
------- -------
$43,679 $41,378
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 4,588 $ 4,767
Current portion of borrowings 2,415 2,123
Unearned royalties and other advances 704 635
------- -------
Total current liabilities 7,707 7,525
Borrowings 9,278 9,562
Deferred income taxes 2,660 2,488
Other long term liabilities, unearned royalties and other
advances 3,059 2,415
Stockholders' Equity
Preferred stock, $0.01 par value
Authorized--100 million shares
Issued--none
Common stock, $0.01 par value 9,324 8,995
Authorized--3.6 billion shares
Issued--2.1 billion shares
Retained earnings 12,281 10,981
Cumulative translation and other (25) 13
------- -------
21,580 19,989
Treasury stock, at cost, 29 million shares (605) (593)
Shares held by TWDC Stock Compensation Fund, at cost--
0.4 million shares as of September 30, 1998 -- (8)
------- -------
20,975 19,388
------- -------
$43,679 $41,378
======= =======
See Notes to Consolidated Financial Statements
-45-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended September 30 1999 1998 1997
- -------------------------------------------------------------------------------
NET INCOME $ 1,300 $1,850 $1,966
ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 2,472 2,514 1,995
Depreciation 851 809 738
Amortization of intangible assets 456 431 439
Gain on sale of Starwave (345) -- --
Equity in Infoseek loss 322 -- --
Gain on sale of KCAL -- -- (135)
Other 80 31 (15)
CHANGES IN
Receivables 376 (664) (177)
Inventories 103 (46) 8
Other assets (165) 73 (441)
Accounts and taxes payable and other accrued
liabilities 477 218 608
Film and television costs television broadcast rights (319) (447) (179)
Deferred income taxes (20) 346 292
------- ------ ------
4,288 3,265 3,133
------- ------ ------
CASH PROVIDED BY OPERATIONS 5,588 5,115 5,099
------- ------ ------
INVESTING ACTIVITIES
Film and television costs (3,020) (3,335) (3,089)
Investments in theme parks, resorts and other
property (2,134) (2,314) (1,922)
Acquisitions (net of cash acquired) (319) (213) (180)
Proceeds from sale of investments 202 238 31
Purchases of investments (39) (13) (56)
Investment in and loan to E! Entertainment -- (28) (321)
Proceeds from disposal of publishing operations -- -- 1,214
Proceeds from disposal of KCAL -- -- 387
------- ------ ------
(5,310) (5,665) (3,936)
------- ------ ------
FINANCING ACTIVITIES
Change in commercial paper borrowings (451) 308 (2,088)
Other borrowings 2,306 1,522 2,437
Reduction of borrowings (2,031) (1,212) (1,990)
Repurchases of common stock (19) (30) (633)
Exercise of stock options and other 204 184 180
Dividends -- (412) (342)
Proceeds from formation of REITs -- -- 1,312
------- ------ ------
9 360 (1,124)
------- ------ ------
Increase (Decrease) in Cash and Cash Equivalents 287 (190) 39
Cash and Cash Equivalents, Beginning of Year 127 317 278
------- ------ ------
Cash and Cash Equivalents, End of Year $ 414 $ 127 $ 317
======= ====== ======
Supplemental disclosure of cash flow information:
Interest paid $ 575 $ 555 $ 777
======= ====== ======
Income taxes paid $ 721 $1,107 $ 958
======= ====== ======
See Notes to Consolidated Financial Statements
-46-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions, except per share data)
TWDC Stock-
Cumulative Stock holders' Compre-
Common Retained Translation Treasury Compensation Equity hensive
Shares Stock Earnings and Other Stock Fund Total Income
- -----------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1996 2,022 $8,590 $ 7,919 $ 39 $(462) $ -- $16,086 $ --
Exercise of stock
options, net 15 (42) -- -- -- 301 259 --
Common stock
repurchased (24) -- -- -- -- (633) (633) --
Dividends ($0.17 per
share) -- -- (342) -- -- -- (342) --
Cumulative translation
and other (net of tax
benefit of $37
million) -- -- -- (51) -- -- (51) (51)
Net income -- -- 1,966 -- -- -- 1,966 1,966
----- ------ ------- ---- ----- ----- ------- ------
BALANCE AT
SEPTEMBER 30, 1997 2,013 8,548 9,543 (12) (462) (332) 17,285 $1,915
======
Common stock issued 4 160 -- -- -- -- 160 $ --
Exercise of stock
options, net 34 287 -- -- (131) 354 510 --
Common stock
repurchased (1) -- -- -- -- (30) (30) --
Dividends ($0.20 per
share) -- -- (412) -- -- -- (412) --
Cumulative translation
and other (net of tax
expense of
$18 million) -- -- -- 25 -- -- 25 25
Net income -- -- 1,850 -- -- -- 1,850 1,850
----- ------ ------- ---- ----- ----- ------- ------
BALANCE AT
SEPTEMBER 30, 1998 2,050 8,995 10,981 13 (593) (8) 19,388 $1,875
======
Exercise of stock
options, net 14 329 -- -- (12) 17 334 $ --
Common stock reissued 1 -- -- -- -- 10 10 --
Common stock
repurchased (1) -- -- -- -- (19) (19) --
Cumulative translation
and other (net of tax
benefit of $30
million) -- -- -- (38) -- -- (38) (38)
Net income -- -- 1,300 -- -- -- 1,300 1,300
----- ------ ------- ---- ----- ----- ------- ------
BALANCE AT
SEPTEMBER 30, 1999 2,064 $9,324 $12,281 $(25) $(605) $ -- $20,975 $1,262
===== ====== ======= ==== ===== ===== ======= ======
See Notes to Consolidated Financial Statements
-47-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except per share amounts)
1Description of the Business and Summary of Significant Accounting Policies
The Walt Disney Company owns 100% of Disney Enterprises, Inc. (DEI) which,
together with its subsidiaries (the Company), is a diversified worldwide
entertainment company with operations in the following businesses.
MEDIA NETWORKS
The Company operates the ABC Television Network, which has affiliated
stations providing coverage to U.S. television households. The Company also
owns television and radio stations, most of which are affiliated with either
the ABC Television Network or the ABC Radio Networks. The Company's cable and
international broadcast operations are principally involved in the production
and distribution of cable television programming, the licensing of programming
to domestic and international markets and investing in foreign television
broadcasting, production and distribution entities. Primary cable programming
services, which operate through consolidated subsidiary companies, are ESPN-
branded networks, the Disney Channel and Disney Channel International. Other
programming services that operate through joint ventures, and are accounted
for under the equity method, include A&E Television Networks, Lifetime
Entertainment Services and E! Entertainment Television.
STUDIO ENTERTAINMENT
The Company produces and acquires live-action and animated motion pictures
for distribution to the theatrical, home video and television markets. The
Company also produces original television programming for network, first-run
syndication, pay and international syndication markets, stage plays and
musical recordings. The Company distributes these products through its own
distribution and marketing companies in the United States and most foreign
markets.
THEME PARKS AND RESORTS
The Company operates the Walt Disney World Resort in Florida, and Disneyland
Park, the Disneyland Hotel and the Disneyland Pacific Hotel in California. The
Walt Disney World Resort includes the Magic Kingdom, Epcot, Disney-MGM Studios
and Disney's Animal Kingdom, thirteen resort hotels and a complex of villas
and suites, a retail, dining and entertainment complex, a sports complex,
conference centers, campgrounds, golf courses, water parks and other
recreational facilities. In addition, the resort operates Disney Cruise Line
from Port Canaveral, Florida. Disney Regional Entertainment designs, develops
and operates a variety of new entertainment concepts based on Disney brands
and creative properties, operating under the names ESPN Zone and DisneyQuest.
The Company earns royalties on revenues generated by the Tokyo Disneyland
theme park near Tokyo, Japan, which is owned and operated by an unrelated
Japanese corporation. The Company also has an investment in Euro Disney
S.C.A., a publicly-held French entity that operates Disneyland Paris. The
Company's Walt Disney Imagineering unit designs and develops new theme park
concepts and attractions, as well as resort properties. The Company also
manages and markets vacation ownership interests in the Disney Vacation Club.
Included in Theme Parks and Resorts are the Company's National Hockey League
franchise, the Mighty Ducks of Anaheim, and the Anaheim Angels, a Major League
Baseball team.
CONSUMER PRODUCTS
The Company licenses the name "Walt Disney," as well as the Company's
characters, visual and literary properties, to various consumer manufacturers,
retailers, show promoters and publishers throughout the world. The Company
also engages in direct retail distribution principally through the Disney
Stores, and produces books and magazines for the general public in the United
States and
-48-
Europe. In addition, the Company produces audio and computer software products
for the entertainment market, as well as film, video and computer software
products for the educational marketplace.
INTERNET AND DIRECT MARKETING
The Internet business develops, publishes and distributes content for online
services intended to appeal to broad consumer interest in sports, news, family
and entertainment. Internet websites include Disney.com, Family.com, ESPN.com,
ABCNEWS.com, ABCSports.com and ABC.com. The Internet business also produces
Disney's Club Blast, an entertainment and educational online subscription
service for kids. Internet commerce activities include the DisneyStore.com,
which markets Disney-themed merchandise online, Disney Travel Online, which
offers travel packages to the Walt Disney World Resort and other Disney
destinations and ESPNStore.com, which offers ESPN-themed and other sports-
related merchandise. The Direct Marketing business operates the Walt Disney
Catalog, which markets Disney-themed merchandise via direct mail.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
The Walt Disney Company and its subsidiaries after elimination of intercompany
accounts and transactions.
Accounting Changes
Effective September 30, 1999, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131 Disclosure about Segments of an Enterprise
and Related Information (SFAS 131) (see Note 11).
During the first quarter, the Company adopted SFAS No. 130 Reporting
Comprehensive Income, which requires that the Company present comprehensive
income, a measure that reflects all non-owner changes in equity, in addition
to net income. Comprehensive income has been reflected in the accompanying
Consolidated Statements of Stockholders' Equity.
During 1998, the Company adopted SFAS No. 128 Earnings Per Share (SFAS 128),
which specifies the method of computation, presentation and disclosure for
earnings per share (EPS). SFAS 128 requires the presentation of two EPS
amounts, basic and diluted. Basic EPS is calculated by dividing net income by
the weighted average number of common shares outstanding for the period.
Diluted EPS includes the dilution that would occur if outstanding stock
options and other dilutive securities were exercised and is comparable to the
EPS the Company has historically reported. The Company uses the treasury stock
method to calculate the impact of outstanding stock options. Stock options for
which the exercise price exceeds the average market price over the period have
an anti-dilutive effect on EPS and, accordingly, are excluded from the
calculation.
During 1997, the Company adopted SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS 123), which requires disclosure of the fair value and other
characteristics of stock options (see Note 9). The Company has chosen under
the provisions of SFAS 123 to continue using the intrinsic-value method of
accounting for employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB
25).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
-49-
Revenue Recognition
Revenues from the theatrical distribution of motion pictures are recognized
when motion pictures are exhibited. Revenues from video sales are recognized
on the date that video units are made widely available for sale by retailers.
Revenues from the licensing of feature films and television programming are
recorded when the material is available for telecasting by the licensee and
when certain other conditions are met.
Broadcast advertising revenues are recognized when commercials are aired.
Revenues from television subscription services related to the Company's
primary cable programming services are recognized as services are provided.
Internet advertising revenues are recognized on the basis of impression
views in the period the advertising is displayed, provided that no significant
obligations remain and collection is probable. Direct Marketing and Internet-
based merchandise revenues (commerce) are recognized upon shipment to
customers.
Revenues from participants and sponsors at the theme parks are generally
recorded over the period of the applicable agreements commencing with the
opening of the related attraction.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities
with original maturities of three months or less.
Investments
Debt securities that the Company has the positive intent and ability to hold
to maturity are classified as "held-to-maturity" and reported at amortized
cost. Debt securities not classified as held-to-maturity and marketable equity
securities are classified as either "trading" or "available-for-sale," and are
recorded at fair value with unrealized gains and losses included in earnings
or stockholders' equity, respectively. All other equity securities are
accounted for using either the cost method or the equity method. The Company's
share of earnings or losses in its equity investments accounted for under the
equity method, other than Infoseek, is included in "Corporate and other
activities" in the Consolidated Statements of Income.
Inventories
Carrying amounts of merchandise, materials and supplies inventories are
generally determined on a moving average cost basis and are stated at the
lower of cost or market.
Film and Television Costs
Film and television costs are stated at the lower of cost, less accumulated
amortization, or net realizable value. Television broadcast program licenses
and rights and related liabilities are recorded when the license period begins
and the program is available for use.
Film and television production and participation costs are expensed based on
the ratio of the current period's gross revenues to estimated total gross
revenues from all sources on an individual production basis. Television
network and station rights for theatrical movies and other long-form
programming are charged to expense primarily on accelerated bases related to
the usage of the programs. Television network series costs and multi-year
sports rights are charged to expense based on the ratio of the current
period's gross revenues to estimated total gross revenues from such programs.
Estimates of total gross revenues can change significantly due to a variety
of factors, including the level of market acceptance of film and television
products, advertising rates and subscriber fees. Accordingly, revenue
estimates are reviewed periodically and amortization is adjusted if necessary.
-50-
Such adjustments could have a material effect on results of operations in
future periods. The net realizable value of television broadcast program
licenses and rights is performed using a daypart methodology.
Theme Parks, Resorts and Other Property
Theme parks, resorts and other property are carried at cost. Depreciation is
computed on the straight-line method based upon estimated useful lives ranging
from three to fifty years.
Intangible/Other Assets
Intangible assets are amortized over periods ranging from two to forty
years. The Company continually reviews the recoverability of the carrying
value of these assets using the methodology prescribed in SFAS No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. The Company also reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying amounts of such assets may not be recoverable.
Recoverability of these assets is determined by comparing the forecasted
undiscounted net cash flows of the operation to which the assets relate, to
the carrying amount, including associated intangible assets, of such
operation. If the operation is determined to be unable to recover the carrying
amount of its assets, then intangible assets are written down first, followed
by the other long-lived assets of the operation, to fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets.
Risk Management Contracts
In the normal course of business, the Company employs a variety of off-
balance-sheet financial instruments to manage its exposure to fluctuations in
interest, foreign currency exchange rates and investments in equity and debt
securities, including interest rate and cross-currency swap agreements,
forward, option, swaption and spreadlock contracts and interest rate caps.
The Company designates and assigns the financial instruments as hedges of
specific assets, liabilities or anticipated transactions. When hedged assets
or liabilities are sold or extinguished or the anticipated transactions being
hedged are no longer expected to occur, the Company recognizes the gain or
loss on the designated hedging financial instruments.
The Company classifies its derivative financial instruments as held or
issued for purposes other than trading. Option premiums and unrealized losses
on forward contracts and the accrued differential for interest rate and cross-
currency swaps to be received under the agreements are recorded in the balance
sheet as other assets. Unrealized gains on forward contracts and the accrued
differential for interest rate and cross-currency swaps to be paid under the
agreements are included in accounts and taxes payable and other accrued
liabilities. Unrealized gains and losses on forward sale contracts that hedge
investments in equity and debt securities are accounted for off-balance sheet
until the contracts are settled, at which time any gain or loss is recognized
net of the gain or loss on the underlying investment. Costs associated with
forward sale contracts are deferred and included in the basis of the
underlying investment. Realized gains and losses from hedges are classified in
the income statement consistent with the accounting treatment of the items
being hedged. The Company accrues the differential for interest rate and
cross-currency swaps to be paid or received under the agreements as interest
and exchange rates shift as adjustments to net interest expense over the lives
of the swaps. Gains and losses on the termination of swap agreements, prior to
their original maturity, are deferred and amortized to net interest expense
over the remaining term of the underlying hedged transactions.
Cash flows from hedges are classified in the statement of cash flows under
the same category as the cash flows from the related assets, liabilities or
anticipated transactions (see Notes 5 and 12).
-51-
Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares are excluded from the computation in periods in which
they have an anti-dilutive effect. The difference between basic and diluted
earnings per share, for the Company, is solely attributable to stock options.
For the years ended September 30, 1999, 1998 and 1997, options for 28 million,
18 million and 15 million shares, respectively, were excluded from diluted
earnings per share because they were anti-dilutive.
Earnings per share amounts have been adjusted for all years presented, to
reflect the three-for-one split of the Company's common shares effective June
1998 (see Note 8).
Reclassifications
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform to the 1999 presentation, including changes in segment
information as a result of adopting SFAS 131.
2Acquisitions and Dispositions
In April 1997, the Company purchased a significant equity stake in Starwave
Corporation (Starwave), an Internet technology company. In connection with the
acquisition, the Company was granted an option to purchase substantially all
the remaining shares of Starwave, which the Company exercised during the
quarter ended June 30, 1998. Thereafter, the accounts of Starwave were
included in the Company's Consolidated Financial Statements.
On June 18, 1998, the Company reached an agreement for the acquisition of
Starwave by Infoseek Corporation (Infoseek), a publicly held Internet search
company, the purchase of additional shares of Infoseek common stock for $70
million and the purchase of warrants for $139 million, enabling it, under
certain circumstances, to achieve a majority stake in Infoseek. These warrants
vest over a three-year period and expire in five years. On November 18, 1998,
the shareholders of both Infoseek and Starwave approved the acquisition. As a
result of the acquisition and the Company's purchase of additional shares of
Infoseek common stock pursuant to the merger agreement, the Company acquired
approximately 43% of Infoseek's outstanding common stock.
Upon completion of this transaction, the Company recognized a non-cash gain
of $345 million. The gain reflected the market value of the Infoseek shares
received under a partial sale accounting model. As a result of its investment
in Infoseek, the Company recorded intangible assets of $460 million, including
$421 million of goodwill, which are being amortized over an estimated useful
life of two years. The Company determined the economic useful life of the
acquired goodwill by giving consideration to the useful lives of Infoseek's
identifiable intangible assets, consisting of developed technology, trademarks
and in-place workforce. In addition, the Company considered the competitive
environment and the rapid pace of technological change in the Internet
industry.
The Company accounts for its investment in Infoseek under the equity method
of accounting. For the year ended September 30, 1999, the Company recorded
$229 million of amortization related to intangible assets, and a charge of $44
million for purchased in-process research and development expenditures. The
amortization of intangible assets and the charge for research and development
expenditures have been reflected in "Equity in Infoseek loss" in the Company's
Consolidated Statements of Income. As of September 30, 1999, the Company's
recorded investment in Infoseek was $495 million. The quoted market value of
the Company's Infoseek shares at September 30, 1999 was approximately $815
million.
On November 17, 1999, Infoseek became a wholly-owned subsidiary of the
Company (see Note 15).
On February 9, 1996, the Company completed its acquisition of ABC. The
aggregate consideration paid to ABC shareholders consisted of $10.1 billion in
cash and 155 million shares of Company
-52-
common stock valued at $8.8 billion based on the stock price as of the date
the transaction was announced. As a result of the ABC acquisition, the Company
sold its independent Los Angeles television station, KCAL, during the first
quarter of 1997 for $387 million, resulting in a gain of $135 million.
The Company completed its final purchase price allocation and determination
of related goodwill, deferred taxes and other accounts during the second
quarter of 1997.
During the third and fourth quarters of 1997, the Company disposed of most
of the publishing businesses acquired with ABC to various third parties for
consideration approximating their carrying amount. Proceeds consisted of $1.2
billion in cash, $1.0 billion in debt assumption and preferred stock
convertible to common stock with a market value of $660 million.
The unaudited pro forma information below presents results of operations as
if the finalization of purchase price allocation and the disposition of
certain ABC publishing assets in 1997 had occurred at the beginning of that
year. The unaudited pro forma information is not necessarily indicative of the
results of operations of the combined company had these events occurred at the
beginning of the year presented, nor is it necessarily indicative of future
results.
1997
-------
Revenues $21,613
Net income 1,772
Earnings per share
Diluted $ 0.86
Basic $ 0.88
3Investment in Euro Disney
Euro Disney S.C.A. (Euro Disney) operates the Disneyland Paris theme park
and resort complex on a 4,800-acre site near Paris, France. The Company
accounts for its 39% ownership interest in Euro Disney using the equity method
of accounting. As of September 30, 1999, the Company's recorded investment in
Euro Disney was $296 million. The quoted market value of the Company's Euro
Disney shares at September 30, 1999 was approximately $433 million.
In connection with the financial restructuring of Euro Disney in 1994, Euro
Disney Associes S.N.C. (Disney SNC), a wholly-owned affiliate of the Company,
entered into a lease arrangement with a noncancelable term of 12 years (the
Lease) related to substantially all of the Disneyland Paris theme park assets,
and then entered into a 12-year sublease agreement (the Sublease) with Euro
Disney. Remaining lease rentals at September 30, 1999 of FF 7.5 billion ($1.2
billion) receivable from Euro Disney under the Sublease approximate the
amounts payable by Disney SNC under the Lease. At the conclusion of the
Sublease term, Euro Disney will have the option to assume Disney SNC's rights
and obligations under the Lease. If Euro Disney does not exercise its option,
Disney SNC may purchase the assets, continue to lease the assets or elect to
terminate the Lease, in which case Disney SNC would make a termination payment
to the lessor equal to 75% of the lessor's then outstanding debt related to
the theme park assets, estimated to be $1.2 billion; Disney SNC could then
sell or lease the assets on behalf of the lessor to satisfy the remaining
debt, with any excess proceeds payable to Disney SNC.
Also as part of the restructuring, the Company agreed to arrange for the
provision of a 10-year unsecured standby credit facility of approximately $177
million, upon request, bearing interest at PIBOR. As of September 30, 1999,
Euro Disney had not requested that the Company establish this facility. The
Company also agreed, as long as any of the restructured debt is outstanding,
to maintain ownership of at least 34% of the outstanding common stock of Euro
Disney until June 1999, at least 25% for the subsequent five years and at
least 16.67% for an additional term thereafter.
After a five-year waiver resulting from the restructuring, royalties and
management fees from Euro Disney were partially reinstated in fiscal year
1999. As a result, the Company earned approximately
-53-
$33 million in royalties and management fees in fiscal year 1999. Royalties
will be fully reinstated beginning in fiscal year 2004 and management fees
will be progressively reinstated through fiscal year 2018.
In November 1999, Euro Disney stockholders approved an increase in share
capital through an equity rights offering. The offering has been underwritten
to raise $238 million by the end of December 1999. The net proceeds will be
used to partially finance the construction of a second theme park, Disney
Studios, adjacent to the Magic Kingdom. The Company subscribed to
approximately $93 million of the equity rights offering, maintaining its 39%
interest in Euro Disney. Disney Studios is expected to open in spring 2002.
4Film and Television Costs
1999 1998
- -------------------------------------------
Theatrical film costs
Released, less amortization $2,246 $2,035
In-process 1,966 2,041
------ ------
4,212 4,076
------ ------
Television costs
Released, less amortization 582 374
In-process 643 589
------ ------
1,225 963
------ ------
Television broadcast rights 1,123 690
------ ------
6,560 5,729
Less: current portion 4,071 3,223
------ ------
Non-current portion $2,489 $2,506
====== ======
Based on management's total gross revenue estimates as of September 30,
1999, approximately 82% of unamortized film and television costs (except in-
process) are expected to be amortized during the next three years.
5Borrowings
The Company's borrowings at September 30, 1999 and 1998, including interest
rate swaps designated as hedges, are summarized below.
1999
---------------------------------------------------------------
Stated Interest rate and cross- Effective
Interest currency swaps (f) Interest Swap
Balance Rate (e) Pay Float Pay Fixed Rate (g) Maturities
------- -------- ------------ ------------ --------- ----------
Commercial paper due
2000 (a) $ 1,748 5.1% $ -- $ 1,700 5.4% 2001-2002
U.S. dollar notes and
debentures due 2000-
2093 (b) (h) 7,545 6.3% 3,840 500 6.1% 2000-2029
Dual currency and
foreign notes due 2000-
2003 (c) 765 6.4% 765 -- 5.1% 2000-2003
Senior participating
notes due 2000-2001 (d) 1,247 2.7% -- -- n/a n/a
Other due 2000-2027 388 5.5% -- -- n/a n/a
-------
11,693 5.7% -- --
Less current portion 2,415 -- --
------- ------------ ------------
Total long-term
borrowings $ 9,278 $ 4,605 $ 2,200
======= ============ ============
-54-
1998
---------------------------------------------------------------
Stated Interest rate and cross- Effective
Interest currency swaps (f) Interest Swap
Balance Rate (e) Pay Float Pay Fixed Rate (g) Maturities
------- -------- ------------ ------------ --------- ----------
Commercial paper due
1999 (a) $ 2,225 5.5% $ -- $ 2,225 6.2% 1999
U.S. dollar notes and
debentures due 1999-
2093 (b) 6,321 6.6% 2,886 675 6.4% 1999-2012
Dual currency and
foreign notes due 1999-
2003 (c) 1,678 5.8% 1,678 -- 5.4% 1999-2003
Senior participating
notes due 2000-2001 (d) 1,195 2.7% -- -- n/a n/a
Other due 1999-2027 266 5.2% -- -- n/a n/a
-------
11,685 5.8% -- --
Less current portion 2,123 -- --
------- ------------ ------------
Total long-term
borrowings $ 9,562 $ 4,564 $ 2,900
======= ============ ============
- --------
(a) The Company has established bank facilities totaling $4.8 billion, which
expire in one to three years. Under the bank facilities, the Company has
the option to borrow at various interest rates. Commercial paper is
classified as long-term since the Company intends to refinance these
borrowings on a long-term basis through continued commercial paper
borrowings supported by available bank facilities.
(b) Includes $722 million in 1999 and $771 million in 1998 representing
minority interest in a real estate investment trust established by the
Company.
(c) Denominated principally in U.S. dollars, Japanese yen and Italian lira.
(d) Additional interest may be paid based on the performance of designated
portfolios of films. The effective interest rate at September 30, 1999 and
1998 was 6.8%.
(e) The stated interest rate represents the weighted-average coupon rate for
each category of borrowings. For floating rate borrowings, interest rates
are based upon the rates at September 30, 1999 and 1998; these rates are
not necessarily an indication of future interest rates.
(f) Amounts represent notional values of interest rate swaps.
(g) The effective interest rate reflects the effect of interest rate and
cross-currency swaps entered into with respect to certain of these
borrowings as indicated in the "Pay Float" and "Pay Fixed" columns.
(h) Includes $306 million in 1999, representing mandatorily redeemable
preferred stock maturing in 2004.
Borrowings, excluding commercial paper and minority interest, have the
following scheduled maturities:
2000 $2,350
2001 2,184
2002 628
2003 203
2004 1,111
Thereafter 2,747
The Company capitalizes interest on assets constructed for its theme parks,
resorts and other property, and on theatrical and television productions in
process. In 1999, 1998 and 1997, respectively, total interest costs incurred
were $826 million, $824 million and $841 million, of which $109 million, $139
million and $100 million were capitalized.
-55-
6Income Taxes
1999 1998 1997
- -----------------------------------------------------
Income before income taxes
Domestic (including U.S.
exports) $ 2,199 $ 3,114 $3,193
Foreign subsidiaries 115 43 194
------- ------- ------
$ 2,314 $ 3,157 $3,387
======= ======= ======
Income tax provision
Current
Federal $ 715 $ 698 $1,023
State 140 119 203
Foreign (including
withholding) 174 139 190
------- ------- ------
1,029 956 1,416
------- ------- ------
Deferred
Federal (21) 303 21
State 6 48 (16)
------- ------- ------
(15) 351 5
------- ------- ------
$ 1,014 $ 1,307 $1,421
======= ======= ======
Components of Deferred Tax
Assets and Liabilities
Deferred tax assets
Accrued liabilities $(1,112) $(1,051)
Other, net (82) (61)
------- -------
Total deferred tax
assets (1,194) (1,112)
======= =======
Components of Deferred Tax
Assets and Liabilities
Deferred tax liabilities
Depreciable, amortizable
and other property 2,469 2,396
Licensing revenues 232 249
Leveraged leases 327 313
Investment in Euro
Disney 169 129
------- -------
Total deferred tax
liabilities 3,197 3,087
------- -------
Net deferred tax liability
before valuation
allowance 2,003 1,975
Valuation allowance 50 50
------- -------
Net deferred tax liability $ 2,053 $ 2,025
======= =======
Reconciliation of
Effective Income Tax Rate
Federal income tax rate 35.0% 35.0% 35.0%
Nondeductible amortization
of intangible assets 6.0 4.4 4.4
State taxes, net of
federal income tax
benefit 4.1 3.4 3.6
Other, net (1.3) (1.4) (1.0)
------- ------- ------
43.8% 41.4% 42.0%
======= ======= ======
In 1999, 1998 and 1997, income tax benefits attributable to employee stock
option transactions of $96 million, $327 million and $81 million,
respectively, were allocated to stockholders' equity.
-56-
7 Pension and Other Benefit Programs
The Company maintains pension plans and postretirement medical benefit plans
covering most of its domestic employees not covered by union or industry-wide
plans. Employees hired after January 1, 1994 are not eligible for
postretirement medical benefits. With respect to its qualified defined benefit
pension plans, the Company's policy is to fund, at a minimum, the amount
necessary on an actuarial basis to provide for benefits in accordance with the
requirements of the Employee Retirement Income Security Act of 1974. Pension
benefits are generally based on years of service and/or compensation.
The following chart summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated
with the pension and postretirement medical benefit plans.
Postretirement
Pension Plans Benefit Plans
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
Reconciliation of funded status of the
plans and the amounts included in the
Company's consolidated balance sheets:
Projected benefit obligations
Beginning obligations $(1,793) $(1,438) $ (321) $ (293)
Service cost (89) (71) (12) (11)
Interest cost (119) (109) (21) (22)
Amendments (9) 9 -- (3)
Actuarial gains (losses) 160 (247) 52 (2)
Benefits paid 71 63 11 10
------- ------- ------- -------
Ending obligations (1,779) (1,793) (291) (321)
------- ------- ------- -------
Fair value of plans' assets
Beginning fair value 2,014 1,726 185 162
Actual return on plans' assets 249 294 21 26
Employer contributions 36 75 7 7
Participants' contributions 1 1 -- --
Benefits paid (71) (63) (11) (10)
Expenses (18) (19) -- --
------- ------- ------- -------
Ending fair value 2,211 2,014 202 185
------- ------- ------- -------
Funded status of the plans 432 221 (89) (136)
Unrecognized net gain (275) (80) (85) (30)
Unrecognized prior service (benefit) cost (1) (11) 6 1
Fourth quarter contributions -- 33 -- --
------- ------- ------- -------
Net balance sheet asset (liability) $ 156 $ 163 $ (168) $ (165)
======= ======= ======= =======
Rate Assumptions
Discount rate 7.5% 6.8% 7.5% 6.8%
Rate of return on plans' assets 10.5% 10.5% 10.5% 10.5%
Salary increases 5.1% 4.4% n/a n/a
Annual increase in cost of benefits n/a n/a 6.1% 6.4%
-57-
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $110 million, $83 million and $0 for
1999, respectively, and $96 million, $74 million and $0 for 1998,
respectively.
The accumulated postretirement benefit obligations and fair value of plan
assets for postretirement plans with accumulated postretirement benefit
obligations in excess of plan assets were $231 million and $72 million for
1999, respectively, and $254 million and $67 million for 1998, respectively.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement medical benefit plans. A one
percentage point decrease in the assumed health care cost trend rates would
reduce total service and interest costs and postretirement benefit obligations
by $9 million and $44 million, respectively. A one percentage point increase
in the assumed health care cost trend rates would increase total service and
interest costs and postretirement benefit obligations by $13 million and $59
million, respectively. The annual increase in cost of postretirement benefits
is assumed to decrease .3 percentage points per year until reaching 4.9%.
The Company's accumulated pension benefit obligations at September 30, 1999
and 1998 were $1.6 billion, of which 97.6% and 97.7% were vested,
respectively. In addition, the Company contributes to various pension plans
under union and industry-wide agreements.
The income statement expenses of pension plans for 1999, 1998 and 1997
totaled $11 million, $12 million and $45 million, respectively. The discount
rate, rate of return on plan assets and salary increase assumptions for the
pension plans were 7.8%, 10.5% and 5.4%, respectively, in 1997. The income
statement expense (credits) for postretirement benefit plans for 1999, 1998
and 1997 were $10 million, $(13) million and $(18) million, respectively. The
discount rate, rate of return on plan assets and annual increase in cost of
postretirement benefits assumptions were 7.8%, 10.5% and 6.7%, respectively,
in 1997.
The market values of the Company's shares held by the pension plan master
trust as of September 30, 1999 and 1998 were $73 million and $71 million,
respectively.
For eligible employees, the Company has savings and investment plans which
allow eligible employees to allocate up to 10% or 15% of salary through
payroll deductions depending on the plan in which the employee participates.
The Company matches 50% of the employee's pre-tax contributions, up to plan
limits. In 1999, 1998 and 1997, the costs of such plans were $29 million,
$31 million and $32 million, respectively.
8 Stockholders' Equity
During 1998, the Company's Board of Directors decided to move to an annual,
rather than quarterly, dividend policy to reduce costs and simplify payments
to the more than 2.7 million shareholders of Company common stock.
Accordingly, there was no dividend payment during the year ended September 30,
1999. On November 4, 1999, the Board of Directors declared an annual cash
dividend of 21 cents per share applicable to fiscal 1999. The dividend is
payable December 17, 1999 to shareholders of Disney common stock at the close
of business November 16, 1999.
In June 1998, the Company effected a three-for-one split of its common
stock, by means of a special stock dividend. Stockholders' equity has been
restated to give retroactive recognition to the stock split in prior periods
by reclassifying from retained earnings to common stock the par value of
additional shares issued pursuant to the split. In connection with the common
stock split, the Company amended its corporate charter to increase the
Company's authorized common stock from 1.2 billion shares to 3.6 billion
shares. The Board of Directors also approved an increase in the Company's
share repurchase authorization to 133.3 million shares of common stock pre-
split or 400 million post-split. All share and per share data included herein
have been restated to reflect the split.
-58-
In 1996, the Company established the TWDC Stock Compensation Fund (Fund)
pursuant to the repurchase program to acquire shares of the Company for the
purpose of funding certain stock-based compensation. All shares acquired by
the Fund were disposed of and the Fund was dissolved in April 1999. The
Company has established TWDC Stock Compensation Fund II (Fund II) to fund
certain future stock-based compensation. Any shares acquired by Fund II that
are not utilized must be disposed of by December 31, 2002.
9 Stock Incentive Plans
Under various plans, the Company may grant stock options and other awards to
key executive, management and creative personnel at exercise prices equal to
or exceeding the market price at the date of grant. In general, options become
exercisable over a five-year period from the grant date and expire 10 years
after the date of grant. In certain cases for senior executives, options
become exercisable over periods up to 10 years and expire up to 15 years after
date of grant. Shares available for future option grants at September 30,
1999, totaled 108 million.
The following table summarizes information about stock option transactions
(shares in millions):
1999 1998 1997
--------------- --------------- ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year 163 $21.70 183 $17.44 189 $15.84
Awards canceled (9) 27.35 (10) 20.98 (18) 19.32
Awards granted 20 32.97 27 33.07 27 25.64
Awards exercised (15) 13.92 (37) 9.06 (15) 11.14
--- --- ---
Outstanding at September 30 159 $24.29 163 $21.70 183 $17.44
=== === ===
Exercisable at September 30 57 $19.01 51 $16.34 63 $11.77
=== === ===
The following table summarizes information about stock options outstanding
at September 30, 1999 (shares in millions):
Outstanding Exercisable
-------------------------------------- -------------------
Weighted Weighted
Range of Weighted Average Average Average
Exercise Number Remaining Years of Exercise Number Exercise
Prices of Options Contractual Life Price of Options Price
-------- ---------- ------------------ -------- ---------- --------
$ 5-$ 9 3 1.52 $ 8.74 3 $ 8.78
$10-$14 15 4.14 13.51 12 13.44
$15-$19 21 5.73 18.34 17 18.37
$20-$24 55 6.79 21.51 18 21.45
$25-$29 30 8.41 27.13 5 26.59
$30-$34 17 8.65 33.30 1 31.76
$35-$39 15 8.77 37.15 1 37.91
$40-$44 3 7.00 42.21 -- --
--- ---
159 57
=== ===
During 1997, the Company adopted SFAS 123 and, pursuant to its provisions,
elected to continue using the intrinsic-value method of accounting for stock-
based awards granted to employees in accordance with APB 25. Accordingly, the
Company has not recognized compensation expense for its
-59-
stock-based awards to employees. The following table reflects pro forma net
income and earnings per share had the Company elected to adopt the fair value
approach of SFAS 123:
1999 1998 1997
------ ------ ------
Net income:
As reported $1,300 $1,850 $1,966
Pro forma 1,169 1,749 1,870
Diluted earnings per share:
As reported 0.62 0.89 0.95
Pro forma 0.56 0.84 0.91
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years.
The weighted average fair values of options at their grant date during 1999,
1998 and 1997, where the exercise price equaled the market price on the grant
date, were $11.11, $10.82 and $9.09, respectively. The weighted average fair
value of options at their grant date during 1998, where the exercise price
exceeded the market price on the grant date, was $8.55. No such options were
granted during 1999 and 1997. The estimated fair value of each option granted
is calculated using the Black-Scholes option-pricing model. The weighted
average assumptions used in the model were as follows:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.3% 5.4% 6.4%
Expected years until exercise 6.0 6.0 6.1
Expected stock volatility 25% 23% 23%
Dividend yield .69% .71% .71%
10 Detail of Certain Balance Sheet Accounts
1999 1998
- --------------------------------------------------------------
Current receivables
Trade, net of allowances $ 3,160 $ 3,447
Other 473 552
------- -------
$ 3,633 $ 3,999
======= =======
Other current assets
Prepaid expenses $ 515 $ 483
Other 164 181
------- -------
$ 679 $ 664
======= =======
Intangible assets
Cost in excess of ABC's net assets acquired $14,248 $14,248
Trademark 1,100 1,100
FCC licenses 1,100 1,100
Other 856 492
Accumulated amortization (1,609) (1,153)
------- -------
$15,695 $15,787
======= =======
-60-
1999 1998
- ------------------------------------------------------------------------
Accounts and taxes payable and other accrued liabilities
Accounts payable $3,628 $ 3,792
Payroll and employee benefits 802 853
Other 158 122
------ -------
$4,588 $ 4,767
====== =======
Other current liabilities
Unearned royalties and other advances $ 669 $ 566
Other 35 69
------ -------
$ 704 $ 635
====== =======
11 Segments
During the year the Company changed the manner in which it reports operating
segments. The Company is in the leisure business and has operations in five
major segments: Media Networks, Studio Entertainment, Theme Parks and Resorts,
Consumer Products and Internet and Direct Marketing, as described in Note 1.
The operating segments reported below are the segments of the Company for
which separate financial information is available and for which operating
income amounts are evaluated regularly by executive management in deciding how
to allocate resources and in assessing performance. The accounting policies of
the business segments are the same as those described in the summary of
significant accounting policies (see Note 1).
Operating income amounts evaluated include earnings before Corporate and
other activities, net interest expense, income taxes, restructuring charges
and amortization of intangible assets. Corporate and other activities
principally consists of executive management, certain unallocated
administrative support functions, income or loss from equity investments and
minority interest from ESPN.
The following segment results include allocations of certain costs,
including certain information technology costs, pension, legal and other
shared services, which are allocated based on consumption. In addition, while
all significant intersegment transactions have been eliminated, Studio
Entertainment revenues and operating income include an allocation of Consumer
Products revenues, which is meant to reflect a portion of Consumer Products
revenues attributable to certain film properties. These allocations are
agreed-upon amounts between the businesses and may differ from amounts that
would be negotiated in an arms-length transaction.
Business Segments 1999 1998 1997
- ---------------------------------------------------------
Revenues
Media Networks $ 7,512 $ 7,142 $ 6,522
------- ------- -------
Studio Entertainment
Third parties 6,472 6,755 6,840
Intersegment 76 94 141
------- ------- -------
6,548 6,849 6,981
------- ------- -------
Theme Parks and Resorts 6,106 5,532 5,014
------- ------- -------
Consumer Products
Third parties 3,106 3,287 3,923
Intersegment (76) (94) (141)
------- ------- -------
3,030 3,193 3,782
------- ------- -------
Internet and Direct Marketing 206 260 174
------- ------- -------
Total Consolidated Revenues $23,402 $22,976 $22,473
======= ======= =======
-61-
Business Segments 1999 1998 1997
- ---------------------------------------------------------------------
Operating income
Media Networks $ 1,611 $ 1,746 $ 1,699
Studio Entertainment 116 769 1,079
Theme Parks and Resorts 1,446 1,288 1,136
Consumer Products 607 801 893
Internet and Direct Marketing (93) (94) (56)
Amortization of intangible assets (456) (431) (439)
------- ------- -------
3,231 4,079 4,312
Restructuring charges (132) (64) --
Gain on sale of Starwave 345 -- --
Gain on sale of KCAL -- -- 135
------- ------- -------
Total Consolidated Operating Income $ 3,444 $ 4,015 $ 4,447
======= ======= =======
Capital expenditures
Media Networks $ 159 $ 245 $ 152
Studio Entertainment 51 117 171
Theme Parks and Resorts 1,758 1,693 1,266
Consumer Products 106 77 109
Internet and Direct Marketing 17 27 21
Corporate 43 155 203
------- ------- -------
Total Consolidated Capital Expenditures $ 2,134 $ 2,314 $ 1,922
======= ======= =======
Depreciation expense
Media Networks $ 131 $ 122 $ 104
Studio Entertainment 64 115 86
Theme Parks and Resorts 498 443 408
Consumer Products 124 85 95
Internet and Direct Marketing 8 10 6
Corporate 26 34 39
------- ------- -------
Total Consolidated Depreciation Expense $ 851 $ 809 $ 738
======= ======= =======
Amortization expense
Media Networks $ 423 $ 421 $ 405
Studio Entertainment 1 1 --
Theme Parks and Resorts 21 1 --
Consumer Products 6 1 27
Internet and Direct Marketing 5 7 7
------- ------- -------
Total Consolidated Amortization Expense $ 456 $ 431 $ 439
======= ======= =======
Identifiable assets
Media Networks $19,326 $18,749 $18,415
Studio Entertainment 7,865 8,089 6,864
Theme Parks and Resorts 10,272 9,214 8,051
Consumer Products 1,964 1,975 2,065
Internet and Direct Marketing 214 336 168
Corporate* 4,038 3,015 2,934
------- ------- -------
Total Consolidated Assets $43,679 $41,378 $38,497
======= ======= =======
Supplemental revenue data
Media Networks
Advertising $ 5,486 $ 5,287 $ 4,937
Theme Parks and Resorts
Merchandise, food and beverage 1,878 1,780 1,754
Admissions 1,860 1,739 1,603
-62-
Geographic Segments 1999 1998 1997
- -----------------------------------------------------------
Revenues
United States $18,657 $18,106 $17,868
U.S. Exports 1,147 1,036 874
Europe 2,059 2,215 2,073
Asia Pacific 974 996 987
Latin America, Canada and Other 565 623 671
------- ------- -------
$23,402 $22,976 $22,473
======= ======= =======
Operating income
United States $ 3,142 $ 3,468 $ 3,712
Europe 229 369 499
Asia Pacific 228 217 335
Latin America, Canada and Other 115 173 62
Unallocated expenses (270) (212) (161)
------- ------- -------
$ 3,444 $ 4,015 $ 4,447
======= ======= =======
Identifiable assets
United States $41,938 $39,462 $36,706
Europe** 1,238 1,468 1,275
Asia Pacific 319 270 341
Latin America, Canada and Other 184 178 175
------- ------- -------
$43,679 $41,378 $38,497
======= ======= =======
* Primarily investments accounted for under the equity method, deferred tax
assets, other investments, fixed and other assets
** Primarily current assets and investment in Euro Disney
12 Financial Instruments
Investments
As of September 30, 1999 and 1998, the Company held $102 million and $126
million, respectively, of securities classified as available for sale.
Realized gains and losses are determined principally on an average cost basis.
In 1999, the Company recognized $70 million in gains on sales of securities;
in 1998 and 1997, realized gains and losses were not material. In 1999, 1998
and 1997, unrealized gains and losses on available-for-sale securities were
not material.
During the year, the Company hedged certain investment holdings using collar
and forward sale contracts. The collar contracts were terminated during the
year, and the forward contracts, with notional amounts totaling $718 million,
expire in five years.
Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes. The Company's
objective is to manage the impact of interest rate changes on earnings and
cash flows and on the market value of its investments and borrowings. The
Company maintains fixed rate debt as a percentage of its net debt between a
minimum and maximum percentage, which is set by policy.
The Company uses interest rate swaps and other instruments to manage net
exposure to interest rate changes related to its borrowings and investments
and to lower its overall borrowing costs. Significant interest rate risk
management instruments held by the Company during 1999 and 1998 included pay-
floating and pay-fixed swaps and interest rate caps. Pay-floating swaps
effectively convert medium and long-term obligations to LIBOR or commercial
paper rate indexed variable rate instruments. These swap agreements expire in
one to 30 years. Pay-fixed swaps and interest rate caps effectively convert
floating rate obligations to fixed rate instruments. The pay-fixed swaps
expire in two to three years. The interest rate caps either expired or were
terminated during the year.
-63-
The following table reflects incremental changes in the notional or
contractual amounts of the Company's interest rate contracts during 1999 and
1998. Activity representing renewal of existing positions is excluded.
September 30, Maturities/ September 30,
1998 Additions Expirations Terminations 1999
- ----------------------------------------------------------------------------------
Pay-floating swaps $2,886 $ 4,704 $ (925) $(2,825) $3,840
Pay-fixed swaps 2,900 2,200 (2,900) -- 2,200
Interest rate caps 1,100 2,500 (1,100) (2,500) --
------ ------- ------- ------- ------
$6,886 $ 9,404 $(4,925) $(5,325) $6,040
====== ======= ======= ======= ======
September 30, Maturities/ September 30,
1997 Additions Expirations Terminations 1998
- ----------------------------------------------------------------------------------
Pay-floating swaps $2,086 $ 950 $ (50) $ (100) $2,886
Pay-fixed swaps 950 6,000 (4,050) -- 2,900
Interest rate caps -- 3,100 (2,000) -- 1,100
Swaption contracts 300 -- (300) -- --
------ ------- ------- ------- ------
$3,336 $10,050 $(6,400) $ (100) $6,886
====== ======= ======= ======= ======
The impact of interest rate risk management activities on income in 1999,
1998 and 1997, and the amount of deferred gains and losses from interest rate
risk management transactions at September 30, 1999 and 1998 were not material.
Foreign Exchange Risk Management
The Company transacts business in virtually every part of the world and is
subject to risks associated with changing foreign exchange rates. The
Company's objective is to reduce earnings and cash flow volatility associated
with foreign exchange rate changes to allow management to focus its attention
on its core business issues and challenges. Accordingly, the Company enters
into various contracts that change in value as foreign exchange rates change
to protect the value of its existing foreign currency assets and liabilities,
commitments and anticipated foreign currency revenues. By policy, the Company
maintains hedge coverage between minimum and maximum percentages of its
anticipated foreign exchange exposures for periods not to exceed five years.
The gains and losses on these contracts offset changes in the value of the
related exposures.
It is the Company's policy to enter into foreign currency transactions only
to the extent considered necessary to meet its objectives as stated above. The
Company does not enter into foreign currency transactions for speculative
purposes.
The Company uses option strategies that provide for the sale of foreign
currencies to hedge probable, but not firmly committed, revenues. While these
hedging instruments are subject to fluctuations in value, such fluctuations
are offset by changes in the value of the underlying exposures being hedged.
The principal currencies hedged are the European euro, Japanese yen,
Australian dollar, Canadian dollar and British pound. The Company also uses
forward contracts to hedge foreign currency assets and liabilities. Cross-
currency swaps are used to hedge foreign currency-denominated borrowings.
-64-
At September 30, 1999 and 1998, the notional amounts of the Company's
foreign exchange risk management contracts, net of notional amounts of
contracts with counterparties against which the Company has a legal right of
offset, the related exposures hedged and the contract maturities are as
follows:
1999 1998
---------------------------- ----------------------------
Fiscal Fiscal
Notional Exposures Year Notional Exposures Year
Amount Hedged Maturity Amount Hedged Maturity
-------- --------- --------- -------- --------- ---------
Option contracts $1,416 $ 524 2000 $2,966 $1,061 1999-2000
Forward contracts 1,620 1,353 2000 2,053 1,773 1999-2000
Cross-currency swaps 765 765 2000-2003 1,678 1,678 1999-2003
------ ------ ------ ------
$3,801 $2,642 $6,697 $4,512
====== ====== ====== ======
Gains and losses on contracts hedging anticipated foreign currency revenues
and foreign currency commitments are deferred until such revenues are
recognized or such commitments are met, and offset changes in the value of the
foreign currency revenues and commitments. At September 30, 1999 and 1998, the
Company had deferred gains of $38 million and $245 million, respectively, and
deferred losses of $26 million and $118 million, respectively, related to
foreign currency hedge transactions. Deferred amounts to be recognized can
change with market conditions and will be substantially offset by changes in
the value of the related hedged transactions. The impact of foreign exchange
risk management activities on operating income in 1999 and in 1998 was a net
gain of $66 million and $227 million, respectively.
Fair Value of Financial Instruments
At September 30, 1999 and 1998, the Company's financial instruments included
cash, cash equivalents, investments, receivables, accounts payable, borrowings
and interest rate, forward and foreign exchange risk management contracts.
At September 30, 1999 and 1998, the fair values of cash and cash
equivalents, receivables, accounts payable and commercial paper approximated
carrying values because of the short-term nature of these instruments. The
estimated fair values of other financial instruments subject to fair value
disclosures, determined based on broker quotes or quoted market prices or
rates for the same or similar instruments, and the related carrying amounts
are as follows:
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Investments $ 569 $ 832 $ 686 $ 765
Borrowings $(10,971) $(10,962) $(10,914) $(11,271)
Risk management contracts:
Foreign exchange forwards $ (37) $ (27) $ 49 $ 18
Foreign exchange options 58 69 58 178
Interest rate swaps 10 (46) 30 181
Forward sale contracts -- (36) -- --
Cross-currency swaps 13 (65) 25 (89)
-------- -------- -------- --------
$ 44 $ (105) $ 162 $ 288
======== ======== ======== ========
-65-
Credit Concentrations
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its financial
instruments, and does not anticipate nonperformance by the counterparties. The
Company would not realize a material loss as of September 30, 1999 in the
event of nonperformance by any one counterparty. The Company enters into
transactions only with financial institution counterparties that have a credit
rating of A- or better. The Company's current policy regarding agreements with
financial institution counterparties is generally to require collateral in the
event credit ratings fall below A- or in the event aggregate exposures exceed
limits as defined by contract. In addition, the Company limits the amount of
investment credit exposure with any one institution. At September 30, 1999,
financial institution counterparties had not posted any collateral to the
Company, and the Company was required to collateralize $176 million of its
financial instrument obligations.
The Company's trade receivables and investments do not represent a
significant concentration of credit risk at September 30, 1999, due to the
wide variety of customers and markets into which the Company's products are
sold, their dispersion across many geographic areas, and the diversification
of the Company's portfolio among instruments and issuers.
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS
133), as amended by SFAS No. 137, which the Company is required to adopt
effective October 1, 2000. SFAS 133 will require the Company to record all
derivatives on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of other
stockholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair
value will be immediately recognized in earnings. The impact of SFAS 133 on
the Company's financial statements will depend on a variety of factors,
including future interpretative guidance from the FASB, the future level of
forecasted and actual foreign currency transactions, the extent of the
Company's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. However, the Company does not believe the
effect of adopting SFAS 133 will be material to its financial position.
13 Commitments and Contingencies
The Company is committed to the purchase of broadcast rights for various
feature films, sports and other programming aggregating approximately $13.3
billion as of September 30, 1999, including approximately $7.9 billion related
to NFL programming. This amount is substantially payable over the next six
years.
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The Company has various real estate operating leases, including retail
outlets for the distribution of consumer products and office space for general
and administrative purposes. Future minimum lease payments under these non-
cancelable operating leases totaled $2.2 billion at September 30, 1999,
payable as follows:
2000 $ 297
2001 262
2002 239
2003 216
2004 185
Thereafter 1,019
Rental expense for the above operating leases during 1999, 1998 and 1997,
including overages, common-area maintenance and other contingent rentals, was
$385 million, $321 million and $327 million, respectively.
The Company, together with, in some instances, certain of its directors and
officers, is a defendant or co-defendant in various legal actions involving
copyright, breach of contract and various other claims incident to the conduct
of its businesses. Management does not expect the Company to suffer any
material liability by reason of such actions, nor does it expect that such
actions will have a material effect on the Company's liquidity or operating
results.
14 Restructuring Charges
In the third quarter of the current year, the Company began an across-the-
board assessment of its cost structure. The Company's efforts are directed
toward leveraging marketing and sales efforts, streamlining operations,
identifying new markets and further developing distribution channels,
including its Internet sites and cable and television networks.
In connection with actions taken to streamline operations, restructuring
charges were recorded in the fourth quarter and amounted to $132 million
($0.04 per share). The restructuring activities primarily related to severance
and lease and other contract cancellation costs, primarily in connection with
the consolidation of operations in the Company's broadcasting, television
production and regional entertainment businesses.
The charge included cash charges of $24 million for severance and $55
million for lease and other contract cancellation costs, and non-cash charges
for asset write-offs and write-downs of underutilized assets of $53 million.
Accrued balances at September 30, 1999 relate principally to lease and other
contract cancellation costs and will be relieved throughout fiscal 2000, as
leases and contracts expire.
15 Subsequent Event
On November 17, 1999 stockholders of the Company and Infoseek approved the
Company's acquisition of the remaining interest in Infoseek that the Company
did not already own.
The acquisition was effected by the creation and issuance of a new class of
common stock, called go.com common stock, in exchange for outstanding Infoseek
shares, at an exchange rate of 1.15 shares of GO.com for each Infoseek share.
As of the effective date of the Infoseek acquisition, the Company retained
an initial interest of approximately 72% in GO.com. Former Infoseek
stockholders initially owned the remaining 28%. Shares of the Company's
existing common stock were reclassified as Disney Group common stock, and
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track Disney Group financial performance, which reflects the Company's
businesses other than GO.com, plus the Company's retained interest in GO.com.
The Infoseek acquisition will be accounted for as a purchase. Accordingly,
operating results for Infoseek and amortization of its intangible assets,
which is expected to be substantial, will be reflected in the Company's
financial statements from the effective date of the transaction.
The unaudited pro forma information below presents results of operations of
the businesses that are tracked by the Disney Group common stock and the
go.com common stock, as if the Infoseek acquisition and issuance of go.com
common stock had occurred at the beginning of the year. The unaudited pro
forma information is not necessarily indicative of the results of operations
of the combined company had these events occurred at the beginning of the year
presented, nor is it necessarily indicative of future results.
Pro forma 1999
(unaudited)
----------------
Disney
Group GO.com
------- -------
Revenues $23,196 $ 348
======= =======
Net income (loss) 1,364 (1,097)
Disney Group retained interest in GO.com: (790) 790
------- -------
Net income (loss) attributable to shareholders: $ 574 $ (307)
======= =======
Diluted and basic earnings (loss) per share attributable
to shareholders: $ 0.28 $ (7.28)
======= =======
In November 1999, the Company sold the Fairchild Publishing assets acquired
with its acquisition of ABC. The Company is currently finalizing the
accounting for the transaction. The sale is not expected to have a material
effect on the Company's financial position.
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QUARTERLY FINANCIAL SUMMARY
(In millions, except per share data)
(unaudited)
December 31 March 31 June 30 September 30
- -------------------------------------------------------------------
1999 (/1/)(/2/)(/3/)
Revenues $6,589 $5,510 $5,522 $5,781
Operating income 1,375 729 951 389
Net income 622 226 367 85
Earnings per share (/4/)
Diluted 0.30 0.11 0.18 0.04
Basic 0.30 0.11 0.18 0.04
1998 (/3/)
Revenues $6,339 $5,242 $5,248 $6,147
Operating income 1,492 849 923 751
Net income 755 384 415 296
Earnings per share (/4/)
Diluted 0.37 0.18 0.20 0.14
Basic 0.37 0.19 0.20 0.14
- --------
(1) Reflects a $345 million gain on the sale of Starwave in the first quarter
of 1999. The earnings per share impact of the gain was $0.10. See Note 2
to the Consolidated Financial Statements.
(2) Reflects Equity in Infoseek loss of $84 million, $75 million, $87 million
and $76 million for each of the four quarters in 1999, respectively. The
earnings per share impacts of the losses were $0.03, $0.02, $0.02 and
$0.02, respectively. See Notes 2 and 15 to the Consolidated Financial
Statements.
(3) Reflects $132 million and $64 million of restructuring charges in the
fourth quarter of 1999 and 1998, respectively. The earnings per share
impacts of the charges were $0.04 and $0.02, respectively. See Note 14 to
the Consolidated Financial Statements.
(4) Amounts have been adjusted to give effect to the three-for-one split of
the Company's common shares effective June 1998. See Note 8 to the
Consolidated Financial Statements.
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[DISNEY RECYCLING LOGO]