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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2003 Commission File Number 1-11605
Incorporated in Delaware I.R.S. Employer Identification
No. 95-4545390
The Walt Disney Company
500 South Buena Vista Street, Burbank, California 91521
(818) 560-1000
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange
Title of class on Which Registered
Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES X NO
There were 2,043,210,611 shares of common stock outstanding as of April 30, 2003.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- ---------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Revenues $ 6,332 $ 5,856 $ 13,798 $ 12,872
Costs and expenses (5,779) (5,251) (12,569) (11,618)
Amortization of intangible assets (7) (2) (12) (5)
Net interest expense (178) (158) (474) (103)
Equity in the income of investees 51 49 141 119
---------- ----------- ----------- -----------
Income before income taxes and minority interests 419 494 884 1,265
Income taxes (157) (205) (344) (504)
Minority interests (33) (30) (55) (64)
---------- ----------- ----------- -----------
Net income $ 229 $ 259 $ 485 $ 697
========== =========== =========== ===========
Earnings per share (basic and diluted) $ 0.11 $ 0.13 $ 0.24 $ 0.34
========== =========== =========== ===========
Average number of common and common equivalent
shares outstanding:
Diluted 2,043 2,045 2,043 2,043
========== =========== =========== ===========
Basic 2,042 2,039 2,042 2,039
========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
March 31, September 30,
2003 2002
------------------ ------------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,752 $ 1,239
Receivables 4,382 4,049
Inventories 629 697
Television costs 619 661
Deferred income taxes 624 624
Other assets 659 579
------------------ ------------------
Total current assets 8,665 7,849
Film and television costs 6,255 5,959
Investments 1,824 1,810
Parks, resorts and other property, at cost
Attractions, buildings and equipment 19,178 18,917
Accumulated depreciation (8,519) (8,133)
------------------ ------------------
10,659 10,784
Projects in progress 1,312 1,148
Land 764 848
------------------ ------------------
12,735 12,780
Intangible assets, net 2,767 2,776
Goodwill 16,978 17,083
Other assets 1,532 1,788
------------------ ------------------
$ 50,756 $ 50,045
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued liabilities $ 4,952 $ 5,173
Current portion of borrowings 1,781 1,663
Unearned royalties and other advances 1,171 983
------------------ ------------------
Total current liabilities 7,904 7,819
Borrowings 12,932 12,467
Deferred income taxes 2,720 2,597
Other long-term liabilities 3,199 3,283
Minority interests 491 434
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value
Authorized - 100 million shares, Issued - none
Common stock, $.01 par value
Authorized - 3.6 billion shares, Issued - 2.1 billion shares 12,117 12,107
Retained earnings 13,035 12,979
Accumulated other comprehensive income (loss) (115) (85)
------------------ ------------------
25,037 25,001
Treasury stock, at cost, 86.7 million and 81.4 million shares (1,527) (1,395)
Shares held by TWDC Stock Compensation Fund II, at cost
6.6 million shares at September 30, 2002 - (161)
------------------ ------------------
23,510 23,445
------------------ ------------------
$ 50,756 $ 50,045
================== ==================
See Notes to Condensed Consolidated Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
Six Months Ended March 31,
-----------------------------------------
2003 2002
------------------ ------------------
NET INCOME $ 485 $ 697
OPERATING ITEMS NOT REQUIRING CASH
Depreciation 530 506
Equity in the income of investees (141) (119)
Minority interests 55 64
Amortization of intangible assets 12 5
Write-off of aircraft leveraged lease investment 114 -
Gain on sale of Knight-Ridder, Inc. shares - (216)
Other 180 561
CHANGES IN WORKING CAPITAL (306) (818)
------------------ ------------------
Cash provided by operations 929 680
------------------ ------------------
INVESTING ACTIVITIES
Investments in parks, resorts and other property (448) (486)
Acquisitions (net of cash acquired) (28) (2,845)
Dispositions - 16
Proceeds from sale of investments 29 598
Purchase of investments (1) (3)
Other (22) (11)
------------------ ------------------
Cash used by investing activities (470) (2,731)
------------------ ------------------
FINANCING ACTIVITIES
Borrowings 300 2,905
Reduction of borrowings (1,072) (1,147)
Commercial paper borrowings, net 1,226 1,947
Exercise of stock options and other 29 25
Dividends (429) (428)
------------------ ------------------
Cash provided by financing activities 54 3,302
------------------ ------------------
Increase in cash and cash equivalents 513 1,251
Cash and cash equivalents, beginning of period 1,239 618
------------------ ------------------
Cash and cash equivalents, end of period $ 1,752 $ 1,869
================== ==================
See Notes to Condensed Consolidated Financial Statements
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
1. These condensed consolidated financial statements have been prepared in accordance with generally accepted
accounting principles (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been reflected in these condensed consolidated financial statements. Operating results for the
quarter are not necessarily indicative of the results that may be expected for the year ending September 30, 2003.
Certain reclassifications have been made in the fiscal 2002 financial statements to conform to the fiscal 2003
presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended September 30, 2002. In December 1999, DVD Financing, Inc.
(DFI), a subsidiary of Disney Vacation Development, Inc. and an indirect subsidiary of the Company, completed a
receivables sale transaction. In connection with this sale, DFI prepares separate financial statements, although its
separate assets and liabilities are also consolidated in these financial statements.
The terms "Company" and "we" and "our" are used in this report to refer collectively to the parent company and the
subsidiaries through which our various businesses are actually conducted.
2. The operating segments reported below are the segments of the Company for which separate financial information is
available and for which segment operating income amounts are evaluated regularly by executive management in deciding how
to allocate resources and in assessing performance.
Three Months Six Months
Ended March 31, Ended March 31,
------------------------------ ----------------------------
2003 2002 2003 2002
----------- ------------- ---------- -------------
Revenues:
Media Networks $ 2,485 $ 2,196 $ 5,725 $ 5,172
----------- ------------- ---------- -------------
Parks and Resorts 1,485 1,525 3,033 2,958
----------- ------------- ---------- -------------
Studio Entertainment
Third parties 1,844 1,538 3,724 3,298
Intersegment 18 17 29 30
----------- ------------- ---------- -------------
1,862 1,555 3,753 3,328
----------- ------------- ---------- -------------
Consumer Products
Third parties 518 597 1,316 1,444
Intersegment (18) (17) (29) (30)
----------- ------------- ---------- -------------
500 580 1,287 1,414
----------- ------------- ---------- -------------
$ 6,332 $ 5,856 $ 13,798 $ 12,872
=========== ============= ========== =============
Segment operating income:
Media Networks $ 232 $ 309 $ 457 $ 551
Parks and Resorts 155 280 380 467
Studio Entertainment 206 27 344 176
Consumer Products 53 86 243 261
----------- ------------- ---------- -------------
$ 646 $ 702 $ 1,424 $ 1,455
=========== ============= ========== =============
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
The Company evaluates the performance of its operating segments based on segment operating income. A
reconciliation of segment operating income to income before income taxes and minority interests is as follows:
Three Months Six Months
Ended March 31, Ended March 31,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Segment operating income $ 646 $ 702 $ 1,424 $ 1,455
Corporate and unallocated shared expenses (93) (97) (195) (201)
Amortization of intangible assets (7) (2) (12) (5)
Net interest expense (178) (158) (474) (103)
Equity in the income of investees 51 49 141 119
---------- ---------- ---------- ----------
Income before income taxes and minority interests $ 419 $ 494 $ 884 $ 1,265
========== ========== ========== ==========
3. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations
it has undertaken in issuing the guarantee and also requires more detailed disclosures with respect to guarantees. FIN
45 is effective for guarantees issued or modified starting January 1, 2003 and requires additional disclosures for
existing guarantees. The adoption of FIN 45 did not have a material impact on the Company's results of operations or
financial position. The Company has provided additional disclosure with respect to guarantees in Note 12.
In January 2003, consensus was reached on EITF No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21). EITF 00-21 provides guidance on how to determine whether an arrangement involving multiple deliverables requires
that such deliverables be accounted for separately. EITF 00-21 allows for prospective adoption for arrangements entered
into after June 30, 2003 or adoption via a cumulative effect of a change in accounting principal. The Company is
evaluating the impact the adoption of EITF 00-21 will have on its consolidated results of operations and financial
position.
In January 2003, the FASB also issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). FIN 46 requires that the holder of a variable interest evaluate whether or not a variable interest entity should be
consolidated. The consolidation provisions apply immediately for a variable interest entity created after January 31,
2003 and after June 15, 2003 for a variable interest entity created before February 1, 2003. The Company will adopt the
provisions of FIN 46 in the third quarter of fiscal 2003. We do not expect that this adoption will have a material impact
on the Company's results of operations or financial position.
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
4. During the first quarter of fiscal 2003, the Company wrote-off its aircraft leveraged lease investment with United
Airlines, which filed for bankruptcy protection resulting in an pre-tax charge of $114 million, or $0.04 per share. Based
on the bankruptcy filing, we believe it is unlikely that the Company will recover this investment. The pre-tax charge of
$114 million for the write-off is reported in "net interest expense" in the Condensed Consolidated Statements of Income.
As of March 31, 2003, our remaining aircraft leveraged lease investment totaled approximately $175 million, of which $119
million and $56 million, reflected our investment with Delta Air Lines and FedEx, respectively. Given the current status
of the airline industry, we continue to monitor these investments, particularly Delta Air Lines. The inability of Delta
Air Lines to make their lease payments, or the termination of our lease through a bankruptcy proceeding, could result in a
material charge for the write-down of some or all of our investment and could accelerate income tax payments.
During the first quarter of fiscal 2002, the Company sold the remaining shares of Knight-Ridder, Inc. that it had
received in connection with the disposition of certain publishing operations in fiscal 1997. The pre-tax gain of $216
million on the sale is included in "net interest expense" in the Condensed Consolidated Statements of Income.
5. The changes in the carrying amount of goodwill for the six months ended March 31, 2003 are as follows:
Media
Networks Other Total
----------------- ------------- -----------------
Balance as of October 1, 2002 $ 17,008 $ 75 $ 17,083
Goodwill acquired during the period 20 1 21
ABC acquisition adjustment (126) - (126)
----------------- ------------- -----------------
Balance as of March 31, 2003 $ 16,902 $ 76 $ 16,978
================= ============= =================
During the first quarter of fiscal 2003, certain preacquisition tax contingencies related to the Company's 1996
acquisition of Capital Cities/ABC, Inc. were favorably resolved. Reserves recorded for these exposures were reversed
against goodwill.
6. During the six months ended March 31, 2003, the Company increased its commercial paper borrowings by approximately
$1.2 billion and issued global bonds with proceeds of $300 million. The global bonds have an effective interest rate of
5.9%, and mature in fiscal 2018. During the six-month period, the Company repaid approximately $180 million of term debt,
which matured during the six-month period. Additionally, during the six-month period the Company called and repaid
approximately $892 million of debt assumed in the acquisition of ABC Family. As of March 31, 2003, total commercial paper
borrowings were approximately $1.9 billion.
7. Euro Disney S.C.A. operates the Disneyland Resort Paris on a 4,800-acre site near Paris, France. The Company
accounts for its 39% interest using the equity method of accounting.
As of March 31, 2003, the total of the Company's investment and accounts and notes receivable from Euro Disney
totaled $518 million, including $179 million drawn under a line of credit that the Company has provided to Euro Disney,
due in June 2004. As of March 31, 2003, this line of credit was fully drawn.
Due to a current slow-down in tourism and the potential impact of ongoing geopolitical uncertainties, on March 28,
2003, the Company agreed with Euro Disney not to charge royalties and management fees for the period from January 1, 2003
to September 30, 2003, to the extent needed for Euro Disney to comply with a bank covenant regarding its operating
income. As a result of this action, the Company will not recognize additional royalties and management fees for the last
three quarters of fiscal 2003. Additionally, for both fiscal 2003 and fiscal 2004, the Company agreed to allow Euro
Disney to pay its royalties and management fees annually, instead of quarterly.
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
During the last three quarters of fiscal 2002, royalties and management fees from Euro Disney totaled $6 million, $9
million and $12 million, respectively.
In connection with the financial restructuring of Euro Disney in 1994, Euro Disney Associés S.N.C. (Disney SNC), a
wholly-owned affiliate of the Company, entered into a lease arrangement with a financing company with a noncancelable term
of 12 years related to substantially all of the Disneyland Park assets, and then entered into a 12 year sublease agreement
with Euro Disney. Remaining lease rentals at March 31, 2003 of approximately $695 million receivable from Euro Disney
under the sublease approximate the amounts payable by Disney SNC under the lease. At the conclusion of the sublease term,
Euro Disney will have the option of assuming 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 Disneyland Park assets, which payment would be approximately $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.
As of March 31, 2003, Euro Disney had, on a US GAAP basis, total assets of $3.2 billion and total liabilities of
$3.2 billion, including borrowings totaling $2.5 billion.
8. Diluted earnings per share amounts are calculated using the treasury stock method and are based upon the weighted
average number of common and common equivalent shares outstanding during the period. For the quarters ended March 31, 2003
and 2002, options for 223 million and 126 million shares, respectively, were excluded from the diluted earnings per share
calculation as they were anti-dilutive. For the six months ended March 31, 2003 and 2002, options for 211 million and 145
million shares, respectively, were excluded.
9. Comprehensive income is as follows:
Three Months Six Months
Ended March 31, Ended March 31,
------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- --------- ------------
Net income $ 229 $ 259 $ 485 $ 697
Market value adjustments for investments and hedges,
net of tax (15) (11) (33) 16
Foreign currency translation, net of tax (9) (2) 3 38
---------- ---------- --------- ------------
Comprehensive income $ 205 $ 246 $ 455 $ 751
========== ========== ========= ============
10. The following table reflects pro forma net income and earnings per share had the Company elected to record
employee stock option expense based on the fair value methodology:
Three Months Ended March Six Months
31, Ended March 31,
-------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ---------- ------------
Net income:
As reported $ 229 $ 259 $ 485 $ 697
Less stock option expense (112) (121) (223) (230)
Tax effect 42 46 83 86
------------ ------------ ---------- ------------
Pro forma after stock option expense $ 159 $ 184 $ 345 $ 553
============ ============ ========== ============
Diluted earnings per share:
As reported $ 0.11 $ 0.13 $ 0.24 $ 0.34
Pro forma after option expense $ 0.08 $ 0.09 $ 0.17 $ 0.27
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
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 pro
forma amounts assume that the Company had been following the fair value approach since the beginning of fiscal 1996.
The Company grants restricted stock units to certain executives. Certain restricted stock units vest upon the
achievement of defined performance conditions while, the remaining restricted stock units generally vest equally in two
and four years from the grant date. Restricted stock units are forfeited if the grantee terminates employment prior to
vesting. During the six months ended March 31, 2003, the Company granted 2,756,000 restricted stock units and recorded
compensation expense of approximately $7.5 million. As of March 31, 2003, 3,978,000 restricted stock units are
outstanding and unearned stock compensation expense totaled approximately $64 million.
11. In December 1999, the Company established the TWDC Stock Compensation Fund II pursuant to the Company's repurchase
program to acquire shares of Disney common stock for the purpose of funding certain future stock-based compensation. The
fund was terminated on December 12, 2002. On that date, the 5,359,485 shares of Disney common stock still owned by the
fund were transferred back to the Company and were classified as treasury stock.
12. The Company has exposure to various legal and other contingencies arising from the conduct of its business.
Litigation
Stephen Slesinger, Inc. v. The Walt Disney Company. In this lawsuit, filed on February 27, 1991, the plaintiff
claims that a Company subsidiary defrauded it and breached a 1983 licensing agreement with respect to certain Winnie the
Pooh properties, by failing to account for and pay royalties on revenues earned from the sale of Winnie the Pooh movies on
videocassette and from the exploitation of Winnie the Pooh merchandising rights. The plaintiff seeks damages for the
licensee's alleged breaches as well as confirmation of the plaintiff's interpretation of the licensing agreement with
respect to future activities. The plaintiff also seeks the right to terminate the agreement on the basis of the alleged
breaches. The Company disputes that the plaintiff is entitled to any damages or other relief of any kind, including
termination of the licensing agreement. If each of the plaintiff's claims were to be confirmed in a final judgment,
damages as argued by the plaintiff could total as much as several hundred million dollars and adversely impact the value
to the Company of any future exploitation of the licensed rights. However, given the number of outstanding issues and the
uncertainty of their ultimate disposition, management is unable to predict the magnitude of any potential determination of
the plaintiff's claims. On April 24, 2003, the Company removed the case from Los Angeles County Superior Court to the
United States District Court for the Central District of California, where no trial date has been set.
Milne and Disney Enterprises, Inc. v. Stephen Slesinger, Inc. On November 5, 2002, Clare Milne, the granddaughter of
A. A. Milne, author of the Winnie the Pooh books, and the Company's subsidiary Disney Enterprises, Inc., filed a complaint
against Stephen Slesinger, Inc. ("SSI") in the United States District Court for the Central District of California. On
November 4, 2002, Ms. Milne served notices to SSI and the Company's subsidiary terminating A. A. Milne's prior grant of
rights to Winnie the Pooh, effective November 5, 2004, and granted all of those rights to the Company's subsidiary. In
their lawsuit, Ms. Milne and the Company's subsidiary seek a declaratory judgment, under United States copyright law, that
Ms. Milne's termination notices were valid; that SSI's rights to Winnie the Pooh in the United States will terminate
effective November 5, 2004; that upon termination of SSI's rights in the United States, the 1983 licensing agreement that
is the subject of the Stephen Slesinger, Inc. lawsuit described above will terminate by operation of law; and that, as of
November 5, 2004, SSI will be entitled to no further royalties for uses of Winnie the Pooh.
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
In January 2003, SSI filed (a) an answer denying the material allegations of the complaint and (b) counterclaims seeking a
declaration (i) that Ms. Milne's grant of rights to Disney Enterprises, Inc. is void and unenforceable and (ii) that
Disney Enterprises, Inc. remains obligated to pay SSI royalties under the 1983 licensing agreement. SSI also filed a
motion to dismiss the complaint or, in the alternative, for summary judgment. On May 8, 2003, the Court ruled that
Milne's termination notices are invalid and dismissed SSI's counterclaim as moot.
Kohn v. The Walt Disney Company et al. On August 15, 2002, Aaron Kohn filed a class action lawsuit against the
Company, its Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Central
District of California on behalf of a putative class consisting of purchasers of the Company's common stock between August
15, 1997 and May 15, 2002. Subsequently, at least nine substantially identical lawsuits were also filed in the same court,
each alleging that the defendants violated federal securities laws by not disclosing the pendency and potential
implications of the Stephen Slesinger, Inc. lawsuit described above prior to the Company's filing of its quarterly report
on Form 10-Q in May 2002. The plaintiffs claim that this alleged nondisclosure constituted a fraud on the market that
artificially inflated the Company's stock price, and contend that a decline in the stock price resulted from the May 2002
disclosure. The plaintiffs seek compensatory damages and/or rescission for themselves and all members of their defined
class. On December 10, 2002, plaintiffs' motion to consolidate the related actions into a single case was granted, and
their motion for appointment of lead plaintiffs and counsel was granted on February 21, 2003.
Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution
of these legal matters will have on the Company's results of operations, financial position or cash flows.
The Company, together with, in some instances, certain of its directors and officers, is a defendant or co-defendant
in various other legal actions involving copyright, breach of contract and various other claims incident to the conduct of
its businesses. Management does not expect a material impact to its results of operations, financial position or cash
flows by reason of these actions.
Contractual Guarantees
Commencing in 1994, the Company guaranteed certain special assessment and water/sewer revenue bond series issued by
the Celebration Community Development District and the Enterprise Community Development District (collectively, the
Districts). The bond proceeds were used by the Districts to finance the construction of infrastructure improvements and
the water and sewer system in the mixed-use, residential community of Celebration, Florida (Celebration). As of March 31,
2003, the remaining debt service obligation guaranteed by the Company was $115 million, of which $67 million was
principal.
In 1997, the Company guaranteed certain bond issuances by the Anaheim Public Authority for a total of $111 million.
The guarantee also extends to interest that will total $298 million over the 40-year life of the bond. The bond proceeds
were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the
Disneyland Resort. Revenues from sales, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are
used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible
to fund the shortfall. To the extent that subsequent tax revenues exceed the debt service payments in subsequent periods,
the Company would be reimbursed for any previously funded shortfalls.
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
To date, tax revenues have exceeded the debt service payments for both the Celebration and Anaheim bonds.
13. As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time
to time, these audits result in proposed assessments. The Internal Revenue Service (IRS) has recently completed its
examination of the Company's federal income tax returns for 1993 through 1995. In connection with this examination, the
IRS has proposed assessments that challenge certain of the Company's tax positions. The Company has negotiated the
settlement of a number of proposed assessments, and is pursuing an administrative appeal before the IRS with regard to the
remainder. If the remaining proposed assessments are upheld through the administrative and legal process, they could have
a material impact on the Company's earnings and cash flow. However, the Company believes that its tax positions comply
with applicable tax law and intends to defend its positions vigorously. The Company believes it has adequately provided
for any reasonably foreseeable outcome related to these matters. Although their ultimate resolution will likely require
additional cash tax payments, the Company does not anticipate any material earnings impact from these matters.
14. In April 2003, the Company issued $1.3 billion of convertible senior notes due on April 15, 2023. The notes bear
interest at an annual rate of 2.125% and are redeemable at the Company's option any time after April 15, 2008 at a price
of 100% of the principal amount of the notes. The notes are redeemable at the investor's option at a price of 100% of
principal amount on April 15, 2008, April 15, 2013 and April 15, 2018, and upon the occurrence of certain fundamental
changes, such as a change in control. The notes are convertible into Disney common stock, under certain circumstances, at
an initial conversion rate of 33.9443 shares of common stock per $1,000 principal amount of notes. This is equivalent to
an initial conversion price of $29.46. The conversion rate is subject to adjustment if certain events occur.
15. On April 14, 2003, the Company signed an agreement with Arturo Moreno for the sale of the Anaheim Angels baseball
team. The sale is expected to close in May 2003. The Company does not expect a material gain from the transaction.
THE WALT DISNEY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEASONALITY
The Company's businesses are subject to the effects of seasonality. Consequently, the operating results for the six
months ended March 31, 2003 for each business segment, and for the Company as a whole, are not necessarily indicative of
results to be expected for the full year.
Media Networks revenues are influenced by advertiser demand and the seasonal nature of programming, and generally
peak in the spring and fall.
Studio Entertainment revenues fluctuate based upon the timing of theatrical motion picture, home video (VHS and DVD)
and television releases. Release dates for theatrical, home video and television products are determined by several
factors, including timing of vacation and holiday periods and competition in the market.
Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the
seasonal 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.
Consumer Products revenues are influenced by seasonal consumer purchasing behavior and the timing of animated
theatrical releases.
RESULTS OF OPERATIONS
Net income for the quarter decreased 12%, or $30 million, to $229 million, and earnings per share decreased 15%, or
$0.02, to $0.11 compared to the prior-year quarter. Results for the current quarter reflected lower segment operating
income and higher net interest expense. Decreased segment operating income reflected lower Parks and Resorts, Media
Networks and Consumer Products results, partially offset by improvements at Studio Entertainment. Corporate and
unallocated shared expenses were relatively flat from the prior-year quarter as additional costs for new finance and human
resource information technology systems were offset by lower costs from brand promotion initiatives. Income from equity
investees was also comparable to the prior-year quarter as increases at the cable equity investments were offset by higher
losses at Euro Disney.
Net interest expense is as follows:
Three Months Six Months
Ended March 31, Ended March 31,
------------------------------ -----------------------------------
(unaudited, in millions) 2003 2002 2003 2002
------------- ------------- --------------- ----------------
Interest expense $ (172) $ (182) $ (359) $ (351)
Interest and investment income (loss) (6) 24 (115) 248
------------- ------------ -------------- ----------------
Net interest expense $ (178) $ (158) $ (474) $ (103)
============= ============ ============== ================
Interest expense for the three months ended March 31, 2003 was lower primarily due to lower average debt balances
and lower interest rates. Interest and investment income (loss) for the three months reflected investment losses in the
current period compared to investment gains in the prior-year quarter.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
For the six months, net income decreased 30% or $212 million, to $485 million, and earnings per share decreased 29%,
or $0.10, to $0.24 compared to the prior-year period. Results for the current period included the write-off of our
aircraft leveraged lease investment with United Airlines ($114 million or $0.04 per share). Results for the prior-year
period include a gain on the sale of the Company's remaining shares of Knight-Ridder, Inc. ($216 million or $0.06 per
share). Excluding the year-over-year impact of the United Airlines charge and Knight-Ridder gain, results for the current
period reflected lower segment operating income, partially offset by higher equity in the income of investees and lower
corporate and unallocated shared expenses. Decreased segment operating income reflected lower Media Networks, Parks and
Resorts and Consumer Products results, partially offset by stronger performance at Studio Entertainment. The increase in
equity in the income of investees improvements reflected higher advertising revenues at the cable channel investments,
partially offset by higher Euro Disney losses. The decrease in corporate and unallocated shared expenses was primarily
due to lower brand promotion initiatives, partially offset by additional costs for finance and human resource information
technology systems.
Pension and post-retirement medical benefit plan costs have increased significantly in fiscal 2003 due primarily to
changes in actuarial assumptions and higher healthcare costs. The majority of these costs are borne by the Parks and
Resorts segment. We expect that these costs will significantly increase in fiscal 2004, as well. The projected fiscal
2004 increase is due primarily to a decrease in the discount rate used to measure the present value of plan obligations,
as well as the actual performance of plan assets, which has been below the long-term expected performance, reflecting
generally decreasing returns of the financial markets overall. The decrease in the discount rate assumption reflects
declining interest rates.
Business Segment Results
(unaudited, in millions) Three Months Ended March 31, Six Months Ended March 31,
------------------------------------------- -----------------------------------------
Revenues: 2003 2002 % Change 2003 2002 % Change
----------- ------------- ------------- ----------- ---------- --------------
Media Networks $ 2,485 $ 2,196 13 % $ 5,725 $ 5,172 $ 11 %
Parks and Resorts 1,485 1,525 (3)% 3,033 2,958 3 %
Studio Entertainment 1,862 1,555 20 % 3,753 3,328 13 %
Consumer Products 500 580 (14)% 1,287 1,414 (9)%
----------- ------------- ----------- ----------
$ 6,332 $ 5,856 8 % $ 13,798 $ 12,872 $ 7 %
=========== ============ =========== ==========
Segment operating income:
Media Networks $ 232 309 (25)% $ 457 $ 551 $ (17)%
Parks and Resorts 155 280 (45)% 380 467 (19)%
Studio Entertainment 206 27 n/m 344 176 95 %
Consumer Products 53 $ 86 (38)% 243 261 (7)%
----------- ------------ ----------- ----------
$ 646 $ 702 (8)% $ 1,424 $ 1,455 $ (2)%
=========== ============ =========== ==========
The Company evaluates the performance of its operating segments based on segment operating income. The following
table reconciles segment operating income to income before income taxes and minority interests.
Three Months Ended March 31, Six Months Ended March 31,
------------------------------------- ----------------------------------------
(unaudited, in millions) 2003 2002 % Change 2003 2002 % Change
---------- --------- ------------ ----------- ---------- -------------
Segment operating income $ 646 $ 702 (8)% $ 1,424 $ 1,455 (2)%
Corporate and unallocated shared
expenses (93) (97) 4 % (195) (201) 3 %
Amortization of intangible assets (7) (2) n/m (12) (5) n/m
Net interest expense (178) (158) (13)% (474) (103) n/m
Equity in the income of investees 51 49 4 % 141 119 18 %
---------- --------- ----------- ----------
Income before income taxes and
minority interests $ 419 $ 494 (15)% $ 884 $ 1,265 (30)%
========== ========= =========== ==========
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
Depreciation expense is as follows:
(unaudited, in millions) Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------- -----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ------------------
Media Networks $ 43 $ 45 $ 85 $ 91
Parks and Resorts 170 161 340 322
Studio Entertainment 10 10 19 21
Consumer Products 18 16 33 29
------------- ------------- -------------- --------------
Segment depreciation expense 241 232 477 463
Corporate 28 24 53 43
------------- ------------- -------------- --------------
Total depreciation expense $ 269 $ 256 $ 530 $ 506
============= ============= ============== ==============
Segment depreciation expense is included in segment operating income and corporate depreciation expense is included in
corporate and unallocated shared expenses.
Business Segment Results - Three Months
Media Networks
The following table provides supplemental revenue and operating income detail for the Media Networks segment:
(unaudited, in millions)
Three Months Ended March 31, 2003 2002 % Change
----------- ----------- -------------------
Revenues:
Broadcasting $ 1,407 $ 1,240 13%
Cable Networks 1,078 956 13%
----------- -----------
$ 2,485 $ 2,196 13%
=========== ===========
Segment operating income:
Broadcasting $ (105) $ (13) n/m
Cable Networks 337 322 5%
----------- -----------
$ 232 $ 309 (25)%
=========== ===========
Media Networks revenues increased 13%, or $289 million, to $2.5 billion, driven by increases of $167 million at
Broadcasting and $122 million at the Cable Networks. Increased Broadcasting revenue was driven primarily by an increase
of $153 million at the ABC television network and $17 million at the Company's owned and operated stations. The increases
at the television network and stations were primarily driven by higher advertising revenues, reflecting higher rates due
to an active scatter market, and in part to the Super Bowl, partially offset by decreases because of regular programming
preemptions due to war coverage. Revenues at the Cable Networks increased primarily due to increases at ESPN due to
higher affiliate and advertising revenue. Higher affiliate revenues reflected contractual rate increases and subscriber
growth. These increases were partially offset by the impact of the bankruptcy filing of a cable affiliate in Latin
America as discussed below.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
Segment operating income decreased 25%, or $77 million, to $232 million, driven by decreases of $92 million at
Broadcasting, due to higher programming and production costs, partially offset by an increase of $15 million at the Cable
Networks due to higher revenues, partially offset by higher programming costs. Costs and expenses, which consist
primarily of programming rights costs and amortization, production costs, distribution and selling expenses and labor
costs, increased 19%, or $366 million, due to higher programming costs at the television network due to the Super Bowl and
higher primetime series costs and at ESPN due to National Football League (NFL) and National Basketball Association (NBA)
programming. Cost increases also reflected higher marketing costs at ABC Family related to branding initiatives.
The Company has various contractual commitments for the purchase of broadcast rights for sports and other
programming, including NFL, NBA, MLB, NHL and various college football conference and bowl games. The costs of these
contracts have increased significantly in recent years. We have implemented a variety of strategies, including marketing
efforts, to reduce the impact of the higher costs. The impact of these contracts on the Company's results over the
remaining term of the contracts is dependent upon a number of factors, including the strength of advertising markets,
effectiveness of marketing efforts and the size of viewer audiences.
The costs of these contracts are charged to expense based on the ratio of each period's gross revenues to estimated
total gross revenues over the remaining contract period. Estimates of total gross revenues can change significantly and,
accordingly, they are reviewed periodically and amortization and carrying amounts are adjusted, if necessary. Such
adjustments could have a material effect on the Company's results of operations in future periods. The initial five-year
period of the Company's contract to broadcast the NFL was non-cancelable and ended with the telecast of the 2003 Pro
Bowl. In February 2003, the NFL exercised its option to extend the contract for an additional three years ending with the
telecast of the 2006 Pro Bowl. Programming rights for the initial five-year period have been charged to expense based on
estimates of total revenues for that period of time.
Consolidation in the cable and satellite distribution industry may affect the Company's ability to obtain and
maintain terms of the distribution of its Cable Network services that are as favorable as those currently in place.
The Company has a significant cable affiliate in Latin America that filed for bankruptcy protection in March 2003.
This resulted in a reduction of revenues for the Latin American Disney Channel and ESPN services.
Parks and Resorts
Revenues decreased 3%, or $40 million, to $1.5 billion, driven primarily by decreases of $29 million at the Walt
Disney World Resort and $13 million from Euro Disney, partially offset by an increase of $5 million at the Disneyland
Resort. The revenue decrease at Walt Disney World reflected decreased theme park attendance and hotel occupancy,
partially offset by higher guest spending. Decreased attendance and hotel occupancy at Walt Disney World Resort reflected
disruption in travel and tourism generally due to concerns about world events and softness in the economy as a whole, and
the timing of the Easter holiday, which occurred during the third quarter of the current year versus the second quarter of the
prior year. Increased guest spending at Walt Disney World reflected ticket and other price increases in the fourth quarter of
the prior year, as well as a reduction in certain promotional programs. The decrease in revenues from Euro Disney included lower
royalties and management fees due to the cessation of billing and recognition of revenues commencing with the current quarter
(see Note 7). At Disneyland, the revenue increase was primarily due to higher hotel occupancy and theme park attendance.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
Segment operating income decreased 45%, or $125 million, to $155 million, reflecting higher costs at both the Walt
Disney World and Disneyland resorts, and lower revenues. Costs and expenses, which consist principally of labor, costs of
merchandise, food and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sales
expense, increased by 7%, or $85 million, for the quarter. Costs and expenses at both resorts reflected higher spending
on information systems and increased costs for refurbishments, employee benefits, insurance, depreciation and marketing
costs, partially offset by the impact of ongoing cost management efforts.
Studio Entertainment
Revenues increased 20%, or $307 million, to $1.9 billion, driven by an increase of $257 million in worldwide home
video, $55 million in worldwide theatrical motion picture distribution and $25 million in television distribution.
Increases at worldwide home video reflected strong DVD and VHS sales of Sweet Home Alabama, Signs and Spy Kids 2: The
Island of Lost Dreams, compared to the prior-year quarter. In worldwide theatrical motion picture distribution, revenue
increases reflected the strong performances of Bringing Down the House, Chicago and Shanghai Knights compared to the
prior-year quarter. Increases in television distribution revenues reflected higher network and syndication revenues in the
current quarter.
Segment operating income increased from $27 million to $206 million due to revenue growth in worldwide home video
and television distribution. Cost and expenses, which consist primarily of production cost amortization, distribution and
selling expenses, product costs and participation costs, increased 8% or $128 million, driven by increases in worldwide
home video and worldwide theatrical motion picture distribution, partially offset by decreases in television
distribution. Higher costs in worldwide home video were due primarily to higher distribution expenses for Signs, Sweet
Home Alabama, and 101 Dalmatians II: Patch's London Adventure. Cost increases in worldwide theatrical motion picture
distribution reflected higher distribution expenses for current-quarter titles including Chicago, Bringing Down the House,
Shanghai Knights and The Recruit. Declines at television distribution reflected lower amortization costs of live-action
titles.
Consumer Products
Revenues decreased 14%, or $80 million, to $500 million, reflecting decreases of $64 million at the Disney Store and
$15 million at Buena Vista Games (previously Disney Interactive). The declines at the Disney Store were due to lower
comparative store sales and fewer stores, as a result of store closures and the sale of the Disney Store business in Japan
in the third quarter of the prior year. The decrease at Buena Vista Games was due to weaker performances by titles in the
current quarter compared to the prior-year quarter, which included Monsters, Inc. titles.
Segment operating income decreased 38%, or $33 million, to $53 million, reflecting decreased sales at the Disney
Store. Costs and expenses, which primarily consist of labor, product costs, including product development costs,
distribution and selling expenses and leasehold expenses, decreased 10%, or $47 million, primarily driven by lower sales
volume at the Disney Store and decreased product development and marketing costs at Buena Vista Games.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
Business Segment Results - Six Months
Media Networks
The following table provides supplemental revenue and operating income detail for the Media Networks segment:
(unaudited, in millions)
Six Months Ended March 31, 2003 2002 % Change
--------------- ---------------- ---------------
Revenues:
Broadcasting $ 2,971 $ 2,704 10%
Cable Networks 2,754 2,468 12%
--------------- ----------------
$ 5,725 $ 5,172 11%
=============== ================
Segment operating income:
Broadcasting $ (67) $ (90) 26%
Cable Networks 524 641 (18)%
--------------- ----------------
$ 457 $ 551 (17)%
=============== ================
Media Networks revenues increased 11%, or $553 million, to $5.7 billion, driven by increases of $267 million at
Broadcasting and $286 million at the Cable Networks. Increased Broadcasting revenue was primarily driven by an increase
of $171 million at the ABC television network and $45 million at the owned and operated television stations. The
increases at the television network and the owned and operated television stations were driven primarily by higher
advertising revenues reflecting higher rates due to an active scatter market and in part to the Super Bowl, partially
offset by decreases because of regular programming preemptions due to war coverage. Increases at the Cable Networks were
driven by higher affiliate and advertising revenues primarily at ESPN. Higher affiliate revenues reflected subscriber
growth and contractual rate increases. These increases were partially offset by the impact of the bankruptcy filing of a
cable affiliate in Latin America.
Segment operating income decreased 17%, or $94 million, to $457 million, driven by decreases of $117 million at the
Cable Networks, due to higher programming costs, partially offset by an increase of $23 million at Broadcasting due to
higher revenues. Costs and expenses increased 14%, or $647 million, driven by higher sports programming costs principally
due to NFL and NBA broadcasts.
Parks and Resorts
Revenues increased 3%, or $75 million, to $3.0 billion, driven primarily by increases of $57 million at the Walt
Disney World Resort and $43 million at the Disneyland Resort, partially offset by a decrease of $21 from Euro Disney. The
revenue increases at the Walt Disney World and Disneyland resorts were driven by higher guest spending at both resorts, as
well as higher theme park attendance and hotel occupancy at Disneyland, partially offset by lower theme park attendance
and hotel occupancy at Walt Disney World. Higher guest spending at Walt Disney World reflected ticket and other price
increases in the fourth quarter of the prior year and a reduction in certain promotional programs. At Disneyland, higher
guest spending was driven by ticket price increases in the second quarter of the prior year. Increased attendance at the
Disneyland Resort reflected the continued success of the Annual Passport program. The decrease in revenues from Euro
Disney included lower royalties and management fees due to the cessation of billing and recognition of revenues commencing
with the second quarter of the current year (see Note 7).
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
Segment operating income decreased 19%, or $87 million, to $380 million, reflecting higher costs, partially offset
by revenue increases. Costs and expenses increased by 7%, or $162 million. Higher costs and expenses at both resorts
were driven by higher spending on information systems and increased costs for employee benefits, insurance, depreciation
and marketing costs, as well as increased guest volume, partially offset by the impact of ongoing cost management
efforts.
Studio Entertainment
Revenues increased 13% or $425 million, to $3.8 billion, driven by an increase of $307 million in worldwide home
video, $83 million in worldwide theatrical motion picture distribution and $30 million in television distribution.
Worldwide home video results reflected stronger DVD and VHS sales of Lilo & Stitch, Beauty & the Beast and Sweet Home
Alabama compared to the prior-year period, which included Pearl Harbor, Snow White and the Seven Dwarfs and Atlantis. In
worldwide theatrical motion picture distribution, revenue increases reflected strong performances of The Santa Clause 2,
Chicago and Sweet Home Alabama. Increases in television distribution revenues reflected higher network and syndication
revenues in the current period.
Segment operating income increased from $176 million to $344 million, due to revenue growth in worldwide home video
and television distribution, partially offset by increased costs of worldwide theatrical motion picture distribution.
Cost and expenses increased 8%, or $257 million, driven by increases in worldwide home video and worldwide theatrical
motion picture distribution, partially offset by decreases in television distribution. Higher costs in worldwide home
video reflected higher distribution and selling expenses for current-period titles, including Lilo & Stitch and Beauty &
the Beast. Increases in worldwide theatrical motion picture distribution reflected higher distribution costs for
current-period titles, which included Treasure Planet, Chicago and The Santa Clause 2 and higher amortization costs for
Treasure Planet and Santa Clause 2, partially offset by lower participation costs. In television distribution activities,
declines reflected lower amortization costs of live-action titles for the current period.
Consumer Products
Revenues decreased 9%, or $127 million, to $1.3 billion, reflecting declines of $142 million at the Disney Store
and $15 million at Buena Vista Games, partially offset by increases of $32 million in merchandise licensing. The decline
at the Disney Store is due to the sale of the Disney Store business in Japan as well as lower comparative store sales and
fewer stores in North America. The decrease at Buena Vista Games is due to higher sales in the prior-year period,
reflecting the strong performance of Monsters, Inc. titles. The increase in merchandise licensing reflects primarily
higher revenues from toy licensees, due in part to higher contractually guaranteed minimum royalties during the first
quarter.
Operating income decreased 7%, or $18 million, to $243 million, reflecting declines at the Disney Store, partially
offset by increases in merchandise licensing due to increased sales and lower costs at Buena Vista Games. Costs and
expenses decreased 9%, or $109 million, primarily driven by lower costs at the Disney Store reflecting lower sales volume
and reduced product development and marketing expenses at Buena Vista Games.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
STOCK OPTION ACCOUNTING
The following table reflects pro forma net income and earnings per share had the Company elected to record stock
option expense based on the fair value methodology:
Three Months Ended Six Months
March 31, Ended March 31,
------------------------ ----------------------------
(unaudited, in million, except per share data) 2003 2002 2003 2002
---------- ---------- ------------ -----------
Net income:
As reported $ 229 $ 259 $ 485 $ 697
Less stock option expense (112) (121) (223) (230)
Tax effect 42 46 83 86
---------- ---------- ----------- -----------
Pro forma after stock option expense $ 159 $ 184 $ 345 $ 553
========== ========== =========== ===========
Diluted earnings per share:
As reported $ 0.11 $ 0.13 $ 0.24 $ 0.34
Pro forma after option expense $ 0.08 $ 0.09 $ 0.17 $ 0.27
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 pro
forma amounts assume that the Company had been following the fair value approach since the beginning of fiscal 1996.
Fully diluted shares outstanding and diluted earnings per share include the effect of in-the-money stock options
calculated based on the average share price for the period. The dilution from employee options increases as the Company's
share price increases, as shown below:
Total Incremental Percentage of Hypothetical Q2
Disney In-the-Money Diluted Shares Average Shares 2003
Share Price Options (1) Outstanding EPS Impact (3)
------------------ ------------------- ------------------ ------------------ -------------------
-----------------------------------------------------------------------------------------------------------------
$ 17.00 10 million --(2) -- $ 0.00
-----------------------------------------------------------------------------------------------------------------
25.00 123 million 15 million 0.74% (0.00)
30.00 152 million 27 million 1.32% (0.00)
40.00 222 million 53 million 2.59% (0.00)
50.00 230 million 71 million 3.48% (0.00)
(1) Represents the incremental impact on fully diluted shares outstanding assuming the average share prices indicated,
using the treasury stock method. Under the treasury stock method, the tax effected proceeds that would be
received from the exercise of all in-the-money options are assumed to be used to repurchase shares.
(2) Fully diluted shares outstanding for the quarter ended March 31, 2003 total 2,043 million and include the dilutive
impact of in-the-money options at the average share price for the period of $17.00. At the average share price
of $17.00, the dilutive impact of in-the-money options was 1 million shares for the quarter.
(3) Based upon Q2 2003 earnings of $229 million, or $0.11 per share.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
FINANCIAL CONDITION
For the six months ended March 31, 2003, cash provided by operations improved by $249 million to $929 million from
$680 million in the prior-year quarter, reflecting the timing of the collection of accounts receivable and payment of
accounts payable.
During the six months ended March 31, 2003, the Company invested $448 million in parks, resorts and other
properties. Investments in parks, resorts and other properties by segment are as follows:
Six Months Ended March 31,
-----------------------------
(unaudited, in millions) 2003 2002
------------ ------------
Media Networks $ 60 $ 59
Parks and Resorts 255 291
Studio Entertainment 24 24
Consumer Products 15 22
Corporate and unallocated shared expenditures 94 90
------------ ------------
$ 448 $ 486
============ ============
During the six months ended March 31, 2003, the Company's borrowing activity was as follows:
(unaudited, in millions) Additions Payments Total
------------- ------------- -------------
Commercial paper borrowings (net change
for the six months) $ 1,226 $ - $ 1,226
US medium term notes and other USD
denominated debt 300 (41) 259
European medium term notes - (127) (127)
Other - (12) (12)
Debt repaid in connection with the ABC
Family acquisition - (892) (892)
------------- ------------- -------------
$ 1,526 $ (1,072) $ 454
============= ============= =============
During the six months ended March 31, 2003, the Company increased its commercial paper borrowings by approximately
$1.2 billion and issued global bonds with proceeds of $300 million. The global bonds have an effective interest rate of
5.9%, and mature in fiscal 2018. During the six-month period, the Company repaid approximately $180 million of term debt,
which matured during the period. Additionally, during the six-month period the Company called and repaid approximately
$892 million of debt assumed in the acquisition of ABC Family.
Commercial paper borrowings outstanding as of March 31, 2003 totaled approximately $1.9 billion, with maturities of
up to one year, supported by a $2.25 billion bank facility that expires in 2004 and another $2.25 billion bank facility
that expires in 2005. Net commercial paper borrowings (total commercial paper less money market securities held by the
Company) at March 31, 2003 totaled approximately $1.3 billion. These bank facilities allow for borrowings at LIBOR-based
rates plus a spread, depending upon the Company's public debt rating. As of March 31, 2003, the Company had not borrowed
any amounts under these bank facilities. The Company also has the ability to have up to $350 million of letters of credit
issued under the $2.25 billion facility expiring in 2004 which if utilized reduces available borrowing under this
facility. As of March 31, 2003, $56 million of letters of credit had been issued under this facility, thus $2.19 billion
was available for borrowing.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
The Company has a 39% interest in Euro Disney S.C.A., which operates the Disneyland Resort Paris. As of March 31,
2003, Euro Disney has drawn $179 million under a line of credit with the Company, due in June 2004. As of March 31, 2003,
the line of credit was fully drawn down. Euro Disney had, on a US GAAP basis, total assets of $3.2 billion and total
liabilities of $3.2 billion, including borrowings totaling $2.5 billion as of March 31, 2003.
In connection with the financial restructuring of Euro Disney in 1994, Euro Disney Associés S.N.C. (Disney SNC), a
wholly-owned affiliate of the Company, entered into a lease arrangement with a financing company with a noncancelable term
of 12 years related to substantially all of the Disneyland Park assets, and then entered into a 12 year sublease agreement
with Euro Disney. Remaining lease rentals at March 31, 2003 of approximately $695 million receivable from Euro Disney
under the sublease approximate the amounts payable by Disney SNC under the lease. At the conclusion of the sublease term,
Euro Disney will have the option of assuming 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 Disneyland Park assets, which payment would be approximately $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.
The Company believes that it is unlikely that Disney SNC would be required to pay the 75% lease termination penalty, as we
currently expect that Euro Disney will assume the finance lease by exercising the assumption option in accordance with the
sublease terms in order for Euro Disney to continue its business.
At March 31, 2003, contractual commitments to purchase broadcast programming rights totaled $12.4 billion, including
$954 million for available programming and $9.8 billion for sports programming rights, primarily NFL, NBA, college
football, MLB and NHL.
Contractual commitments relating to broadcast programming rights are payable as follows (unaudited, in millions):
2003 $ 1,756
2004 3,168
2005 2,910
2006 2,289
2007 1,068
Thereafter 1,177
---------
$ 12,368
=========
We expect that the ABC television network, ESPN, ABC Family, The Disney Channels and the Company's television and
radio stations will continue to enter into programming commitments to purchase broadcast rights for various feature films,
sports and other programming.
As disclosed in Note 4 to the Condensed Consolidated Financial Statements, based on United Airline's bankruptcy
filling, the Company believes it is unlikely that it will recover this investment. The pre-tax charge of $114 million for
the write-off is reported in "net interest expense" in the Condensed Consolidated Statements of Income. As of March 31,
2003, the aircraft leveraged lease investment totaled approximately $175 million, of which $119 million and $56 million,
reflected our investment with Delta Air Lines, and FedEx, respectively. Given the current status of the airline industry,
we continue to monitor our other investments in commercial aircraft leasing transactions, particularly Delta Air Lines.
The inability of Delta Air Lines to make their lease payments, or the termination of our leases through a bankruptcy
proceeding, could result in a material charge for the write-down of some or all our investment and could accelerate income
tax payments.
WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
As disclosed in the Notes to the Condensed Consolidated Financial Statements (see Notes 12 and 13), the Company has
exposure for certain legal and tax matters. Management believes that it is currently not possible to estimate the impact,
if any, that the ultimate resolution of these matters will have on the Company's financial position or cash flows.
The Company declared a $429 million dividend ($0.21 per share) on December 3, 2002 related to fiscal 2002, which was
paid on January 9, 2003 to shareholders of record on December 13, 2002. The Company paid a $428 million dividend ($0.21
per share) during the first quarter of fiscal 2002 applicable to fiscal 2001.
We believe that the Company's financial condition is strong and that its cash, other liquid assets, operating cash
flows, access to debt and 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. However, the Company's operating cash flow and access to the capital markets can be impacted
by macroeconomic factors outside of its control. In addition to macroeconomic factors, the Company's borrowing costs can
be impacted by short and long-term debt ratings assigned by independent rating agencies, which are based, in significant
part, on the Company's performance as measured by certain credit measures such as interest coverage and leverage ratios.
On October 4, 2002, Standard & Poor's Ratings Services lowered its long-term ratings on the Company to BBB+. Subsequently,
on March 20, 2003, Standard & Poor's placed the BBB+ long-term corporate credit rating of the Company on Credit Watch with
negative implications. At the same time, Standard & Poors affirmed its A-2 short-term corporate credit rating on the
Company. On October 18, 2002, Moody's Investors Service downgraded the Company's long-term debt rating to Baa1 from A3,
affirmed the P2 short-term rating and indicated that our outlook was stable.
OTHER MATTERS
Accounting Policies and Estimates
We believe that the application of the following accounting policies, which are important to our financial position
and results of operations, requires significant judgments and estimates on the part of management. For a summary of all
of our accounting policies, including the accounting policies discussed below, see Note 2 of the Consolidated Financial
Statements in the 2002 Annual Report.
Film and Television Revenues and Costs
We expense the cost of film and television production and participations as well as multi-year sports rights over
the applicable product life cycle based upon the ratio of the current period's gross revenues to the estimated remaining
total gross revenues. These estimates are calculated on an individual production basis for film and television and on an
individual contract basis for sports rights. Estimates of total gross revenues can change due to a variety of factors,
including the level of market acceptance, advertising rates and subscriber fees.
For film and television productions, estimated remaining gross revenue from all sources includes revenue that will
be earned within ten years of the date of the initial theatrical release for film productions. For television series, we
include revenues that will be earned within 10 years of the delivery of the first episode, or if still in production, five
years from the date of delivery of the most recent episode. For acquired film libraries, remaining revenues include
amounts to be earned for up to 20 years from the date of acquisition.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
Television network and station rights for theatrical movies, series and other programs are charged to expense based
on the number of times the program is expected to be shown. Estimates of usage of television network and station
programming can change based on competition and audience acceptance. Accordingly, revenue estimates and planned usage are
reviewed periodically and are revised if necessary. A change in revenue projections or planned usage could have an impact
on our results of operations.
Costs of film and television productions and programming costs for our television and cable networks are subject to
valuation adjustments pursuant to the applicable accounting rules. The values of the television program licenses and
rights are reviewed using a daypart methodology. The Company's dayparts are early morning, daytime, late night, prime
time, news, children's and sports. A daypart is defined as an aggregation of programs broadcast during a particular time
of day or programs of a similar type. Estimated values are based upon assumptions about future demand and market
conditions. If actual demand or market conditions are less favorable than our projections, film, television and
programming cost write-downs may be required.
Revenue Recognition
The Company has revenue recognition policies for its various operating segments, which are appropriate to the
circumstances of each business. See Note 2 of the Consolidated Financial Statements in the 2002 Annual Report for a
summary of these revenue recognition policies.
We record reductions to revenues for estimated future returns of merchandise, primarily home video, DVD and software
products, and for customer programs and sales incentives. These estimates are based upon historical return experience,
current economic trends and projections of customer demand for and acceptance of our products. Differences may result in
the amount and timing of our revenue for any period if actual performance varies from our estimates.
Goodwill, Intangible Assets, Long-lived Assets and Investments
Goodwill and other intangible assets must be tested for impairment on an annual basis. We completed our impairment
testing as of September 30, 2002 and determined that there were no impairment losses related to goodwill and other
intangible assets. In assessing the recoverability of goodwill and other intangible assets, projections regarding
estimated future cash flows and other factors are made to determine the fair value of the respective assets. If these
estimates or related projections change in the future, we may be required to record impairment charges for these assets.
For purposes of performing the impairment test for goodwill and other intangible assets as required by SFAS 142, we
established the following reporting units: Cable Networks, Television Broadcasting, Radio, Studio Entertainment, Consumer
Products and Parks and Resorts.
For purposes of performing our impairment test, we used a present value technique (discounted cash flow) to
determine fair value for all of the reporting units except for the Television Broadcasting Group. The Television
Broadcasting reporting unit includes the ABC television network and owned and operated television stations. These
businesses have been grouped together because their respective cash flows are dependant on one another. For purposes of
our impairment test, we used an operating income multiple to value the owned and operated television stations and a
revenue multiple to value the television network. We did not use a present value technique or a market multiple approach
to value the television network as a present value technique would not capture the full fair value of the television
network and there have been no recent comparable sale transactions for a television network.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
We applied what we believe to be the most appropriate valuation methodologies for each of the reporting units. If
we had established different reporting units or utilized different valuation methodologies the impairment test could have
resulted in different results.
Long-lived assets include certain long-term investments. The fair value of the long-term investments is dependent on
the performance of the companies we invest in, as well as volatility inherent in the external markets for these
investments. In assessing potential impairment for these investments, we will consider these factors as well as
forecasted financial performance of our investees. If these forecasts are not met, impairment charges may be required.
Contingencies and Litigation
We are currently involved in certain legal proceedings and, as required, have accrued our estimate of the probable
costs for the resolution of these claims. This estimate has been developed in consultation with outside counsel and is
based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is
possible, however, that future results of operations for any particular quarterly or annual period could be materially
affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings.
Income Tax Audits
As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to
time, these audits result in proposed assessments. The Internal Revenue Service (IRS) has recently completed its
examination of the Company's federal income tax returns for 1993 through 1995. In connection with this examination, the
IRS has proposed assessments that challenge certain of the Company's tax positions. The Company has negotiated the
settlement of a number of proposed assessments, and is pursuing an administrative appeal before the IRS with regard to the
remainder. If the remaining proposed assessments are upheld through the administrative and legal process, they could have
a material impact on the Company's earnings and cash flow. The Company believes that its tax positions comply with
applicable tax law and intends to defend its positions vigorously. The Company believes it has adequately provided for
any reasonably foreseeable outcome related to these matters. Although their ultimate resolution will likely require
additional cash tax payments the Company does not anticipate any material earnings impact from these matters.
Accounting Changes
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations
it has undertaken in issuing the guarantee and also requires more detailed disclosures with respect to guarantees. FIN
45 is effective for guarantees issued or modified starting January 1, 2003 and requires additional disclosures for
existing guarantees. The adoption of FIN 45 did not have a material impact on the Company's results of operations or
financial position. The Company has provided additional disclosure with respect to guarantees in Note 12 to the Condensed
Consolidated Financial Statements.
In January 2003, consensus was reached on EITF No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21). EITF 00-21 provides guidance on how to determine whether an arrangement involving multiple deliverables requires
that such deliverable be accounted for separately. EITF 00-21 allows for prospective adoption for arrangements entered
into after June 30, 2003 or adoption via a cumulative effect of a change in accounting principal as of June 30, 2003. The
Company is evaluating the impact the adoption of EITF 00-21 will have on its consolidated results of operations and
financial position.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
In January 2003, the FASB also issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). FIN 46 requires that the holder of a variable interest evaluate whether or not a variable interest entity should be
consolidated. The consolidation provisions apply immediately for a variable interest entity created after January 31,
2003 and after June 15, 2003 for a variable interest entity created before February 1, 2003. The Company will adopt the
provisions of FIN 46 in the third quarter of fiscal 2003. We do not expect that this adoption will have a material impact
on the Company's results of operations or financial position.
MARKET RISK
Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes. Our objective is to manage the impact of interest
rate changes on earnings and cash flows and on the market value of the Company's investments and borrowings. We maintain
fixed-rate debt as a percentage of our net debt between a minimum and maximum percentage, which is set by policy.
We use interest rate swaps and other instruments to manage net exposure to interest rate changes related to our
borrowings and investments and to lower the Company's overall borrowing costs. We do not enter into interest rate swaps
for speculative purposes. Significant interest rate risk management instruments held by the Company during the quarter
included receive-fixed and pay-fixed swaps. Receive-fixed swaps, which expire in one to 19 years, effectively convert
medium- and long-term obligations to LIBOR-indexed variable rate instruments. Pay-fixed swaps, which expire in one to two
years, effectively convert floating-rate obligations to fixed-rate instruments.
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. Our objective is to reduce earnings and cash flow volatility associated with foreign exchange
rate changes to allow management to focus its attention on our 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, we
maintain hedge coverage between minimum and maximum percentages of anticipated foreign exchange exposures for periods of
up to five years. The gains and losses on these contracts offset changes in the value of the related exposures. It is
our policy to enter into foreign currency transactions only to the extent considered necessary to meet these objectives.
The Company does not enter into foreign currency transactions for speculative purposes.
We use forward and option strategies that provide for the sale of foreign currencies to hedge probable, but not
firmly committed, revenues. We also use forward contracts to hedge foreign currency assets and liabilities. These forward
and option contracts generally mature within five years. While these hedging instruments are subject to fluctuations in
value, such fluctuations should offset changes in the value of the underlying exposures being hedged. The principal
currencies hedged are the European euro, Japanese yen, British pound and Canadian dollar. Cross-currency swaps are used
to hedge foreign currency-denominated borrowings.
Other Derivatives
The Company holds warrants in both public and private companies. These warrants, although not designated as hedging
instruments, are deemed derivatives if they contain a net-share settlement clause or satisfy other relevant criteria.
During the quarter, the Company recorded the change in fair value of certain of these instruments to current earnings.
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(continued)
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. We 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 our shareholders. All statements that express expectations and projections with respect to
future matters may be affected by changes in the Company's strategic direction, as well as by developments beyond the
Company's control. These developments may include international, political, health concern and military developments that
may affect travel and leisure businesses generally; changes in domestic and 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; regulatory and other uncertainties associated with the Internet and other technological
developments; and the launching or prospective development of new business initiatives. All forward-looking 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 our 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. A list of such factors is set forth in the
Company's Annual Report on Form 10-K for the year ended September 30, 2002 under the heading "Factors that may affect
forward-looking statements."
PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk. See Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. We have established disclosure controls and procedures to
ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the
officers who verify the Company's financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of May 7, 2003, the principal executive officer and principal financial officer of the
Company have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms.
(b) Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of their most recent evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Stephen Slesinger, Inc. v. The Walt Disney Company. In this lawsuit, filed on February 27, 1991, the plaintiff
claims that a Company subsidiary defrauded it and breached a 1983 licensing agreement with respect to certain Winnie the
Pooh properties, by failing to account for and pay royalties on revenues earned from the sale of Winnie the Pooh movies on
videocassette and from the exploitation of Winnie the Pooh merchandising rights. The plaintiff seeks damages for the
licensee's alleged breaches as well as confirmation of the plaintiff's interpretation of the licensing agreement with
respect to future activities. The plaintiff also seeks the right to terminate the agreement on the basis of the alleged
breaches. The Company disputes that the plaintiff is entitled to any damages or other relief of any kind, including
termination of the licensing agreement. If each of the plaintiff's claims were to be confirmed in a final judgment,
damages as argued by the plaintiff could total as much as several hundred million dollars and adversely impact the value
to the Company of any future exploitation of the licensed rights. However, given the number of outstanding issues and the
uncertainty of their ultimate disposition, management is unable to predict the magnitude of any potential determination of
the plaintiff's claims. On April 24, 2003, the Company removed the case from Los Angeles County Superior Court to the
United States District Court for the Central District of California, where no trial date has been set.
Milne and Disney Enterprises, Inc. v. Stephen Slesinger, Inc. On November 5, 2002, Clare Milne, the granddaughter
of A. A. Milne, author of the Winnie the Pooh books, and the Company's subsidiary Disney Enterprises, Inc., filed a
complaint against Stephen Slesinger, Inc. ("SSI") in the United States District Court for the Central District of
California. On November 4, 2002, Ms. Milne served notices to SSI and the Company's subsidiary terminating A. A. Milne's
prior grant of rights to Winnie the Pooh, effective November 5, 2004, and granted all of those rights to the Company's
subsidiary. In their lawsuit, Ms. Milne and the Company's subsidiary seek a declaratory judgment, under United States
copyright law, that Ms. Milne's termination notices were valid; that SSI's rights to Winnie the Pooh in the United States
will terminate effective November 5, 2004; that upon termination of SSI's rights in the United States, the 1983 licensing
agreement that is the subject of the Stephen Slesinger, Inc. lawsuit described above will terminate by operation of law;
and that, as of November 5, 2004, SSI will be entitled to no further royalties for uses of Winnie the Pooh. In January
2003, SSI filed (a) an answer denying the material allegations of the complaint and (b) counterclaims seeking a
declaration (i) that Ms. Milne's grant of rights to Disney Enterprises, Inc. is void and unenforceable and (ii) that
Disney Enterprises, Inc. remains obligated to pay SSI royalties under the 1983 licensing agreement. SSI also filed a
motion to dismiss the complaint or, in the alternative, for summary judgment. On May 8, 2003, the Court ruled that
Milne's termination notices are invalid and dismissed SSI's counterclaims as moot.
Kohn v. The Walt Disney Company et al. On August 15, 2002, Aaron Kohn filed a class action lawsuit against the
Company, its Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Central
District of California on behalf of a putative class consisting of purchasers of the Company's common stock between August
15, 1997 and May 15, 2002. Subsequently, at least nine substantially identical lawsuits were also filed in the same court,
each alleging that the defendants violated federal securities laws by not disclosing the pendency and potential
implications of the Stephen Slesinger, Inc. lawsuit described above prior to the Company's filing of its quarterly report
on Form 10-Q in May 2002. The plaintiffs claim that this alleged nondisclosure constituted a fraud on the market that
artificially inflated the Company's stock price, and contend that a decline in the stock price resulted from the May 2002
disclosure. The plaintiffs seek compensatory damages and/or rescission for themselves and all members of their defined
class. On December 10, 2002, plaintiffs' motion to consolidate the related actions into a single case was granted, and
their motion for appointment of lead plaintiffs and counsel was granted on February 21, 2003.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - (continued)
In re The Walt Disney Company Derivative Litigation. William and Geraldine Brehm and 13 other individuals filed
an amended and consolidated complaint on May 28, 1997 in the Delaware Court of Chancery seeking, among other things, a
declaratory judgment against each of the Company's directors as of December 1996 that the Company's 1995 employment
agreement with its former president, Michael S. Ovitz, was void, or alternatively that Mr. Ovitz's termination should be
deemed a termination "for cause" and any severance payments to him forfeited. On October 8, 1998, the Delaware Court of
Chancery dismissed all counts of the amended complaint. Plaintiffs appealed, and on February 9, 2000, the Supreme Court
of Delaware affirmed the dismissal but ruled also that plaintiffs should be permitted to file an amended complaint in
accordance with the Court's opinion. The plaintiffs filed their amended complaint on January 3, 2002. On February 6,
2003, the Company's directors' motion to dismiss the amended complaint was converted by the Court to a motion for summary
judgment and the plaintiffs were permitted to take discovery. The Company and its directors answered the amended
complaint on April 1, 2003.
Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution
of these legal matters will have on the Company's results of operations, financial position or cash flows.
The Company, together with, in some instances, certain of its directors and officers, is a defendant or co-defendant
in various other legal actions involving copyright, breach of contract and various other claims incident to the conduct of
its businesses. Management does not expect a material impact to its results of operations, financial position or cash
flows by reason of these actions.
PART II. OTHER INFORMATION (continued)
ITEM 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders during the Company's annual
meeting of shareholders held on March 19, 2003.
Description of Matter
1. Election of Directors Votes Authority
Cast For Withheld
-------------------------------
John E. Bryson 1,599,361,911 162,810,545
Roy E. Disney 1,684,194,532 77,977,924
Michael D. Eisner 1,639,472,917 122,699,539
Judith L. Estrin 1,607,060,491 155,111,965
Stanley P. Gold 1,676,423,240 85,749,216
Robert A. Iger 1,647,809,544 114,362,912
Monica C. Lozano 1,602,335,405 159,837,051
Robert W. Matschullat 1,637,628,008 124,544,448
George J. Mitchell 1,657,781,812 104,390,644
Thomas S. Murphy 1,684,004,718 78,167,738
Leo J. O'Donovan, S.J. 1,605,848,370 156,324,086
Raymond L. Watson 1,593,769,776 168,402,680
Gary L. Wilson 1,680,075,422 82,097,034
Broker
For Against Abstentions Non-Votes
-----------------------------------------------------------------
2. Ratification of PricewaterhouseCoopers 1,620,128,988 121,463,417 20,580,051 -
LLP as independent accountants
3. Approval of the amended and restated
1997 non-employee director's stock
and deferred compensation plan 1,664,588,520 68,253,272 29,330,664 -
4. Stockholder proposal relating to labor
standards for China 117,001,380 1,130,981,366 107,497,934 406,691,776
5. Stockholder proposal relating to theme
park safety reporting 108,388,032 1,156,121,198 91,017,785 406,645,441
6. Stockholder proposal relating to
executive compensation 187,804,646 1,105,006,684 62,715,049 406,646,077
7. Stockholder proposal relating to stock
options 188,005,322 1,107,027,062 60,504,412 406,635,660
PART II. OTHER INFORMATION (continued)
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(a) Consulting Agreement, dated as of February 22, 2003, between the Company and Louis M. Meisinger.
99(a) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Michael D. Eisner.
99(b) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Thomas O. Staggs.
(b) Reports on Form 8-K
The following current report on Form 8-K was filed by the Company during the Company's second fiscal quarter:
(1) Current report on Form 8-K dated January 30, 2003, including (a) the Company's earnings release for the fiscal
quarter ended December 31, 2002 and (b) the text of the conference call concerning the earnings release.
(2) Current report on Form 8-K dated February 19, 2003, setting forth the amended Form T-1 Statement of Eligibility
under the Trust Indenture Act of 1939 of Wells Fargo Bank, N.A. under the Company's senior debt securities indenture.
(3) Current Report on Form 8-K dated March 19, 2003, set forth (a) the Company's press release in connection with the
annual shareholders meeting and (b) the prepared text of presentations made at the meeting.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
THE WALT DISNEY COMPANY
(Registrant)
By:
/s/ THOMAS O. STAGGS
(Thomas O. Staggs, Senior Executive Vice President
and Chief Financial Officer)
May 15, 2003
Burbank, California
CERTIFICATIONS
I, Michael D. Eisner, Chairman of the Board and Chief Executive Officer of The Walt Disney Company (the "Company"),
certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ MICHAEL D. EISNER
-------------------------------------
Michael D. Eisner
Chairman of the Board
and Chief Executive Officer
CERTIFICATIONS
I, Thomas O. Staggs, Senior Executive Vice President and Chief Financial Officer of The Walt Disney Company (the
"Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ THOMAS O. STAGGS
-------------------------------------
Thomas O. Staggs
Senior Executive Vice President
and Chief Financial
Officer