-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tg1N3ah06XARFbbEmSPXaEEzDrt0zrbYcgXCHlsKxDU4DlbzuWnjCZToMDCU6kMP mFkgdOlp3peG/zAVqe6X0A== /in/edgar/work/20000815/0000898430-00-002406/0000898430-00-002406.txt : 20000922 0000898430-00-002406.hdr.sgml : 20000921 ACCESSION NUMBER: 0000898430-00-002406 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALT DISNEY CO/ CENTRAL INDEX KEY: 0001001039 STANDARD INDUSTRIAL CLASSIFICATION: [7990 ] IRS NUMBER: 954545390 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11605 FILM NUMBER: 701812 BUSINESS ADDRESS: STREET 1: 500 SOUTH BUENA VISTA ST CITY: BURBANK STATE: CA ZIP: 91521 BUSINESS PHONE: 8185601000 MAIL ADDRESS: STREET 1: 500 SOUTH BUENA VISTA ST CITY: BURBANK STATE: CA ZIP: 91521 FORMER COMPANY: FORMER CONFORMED NAME: DC HOLDCO INC DATE OF NAME CHANGE: 19950918 10-Q 1 0001.txt FORM 10-Q 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 June 30, 2000 Commission File Number 1-11605 [LOGO OF THE WALT DISNEY COMPANY] [CAPTION] Incorporated in Delaware I.R.S. Employer Identification No. 500 South Buena Vista Street, Burbank, California 91521 95-4545390 (818) 560-1000
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 _____ ___ There were 2,084,607,043 shares of Disney common stock outstanding and 45,241,022 shares of Walt Disney Internet Group common stock outstanding as of August 10, 2000. TABLE OF CONTENTS
Page Reference --------- Part I--Financial Information Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1 Part II--Other Information Item 6. Exhibits 2 Signature 3 ANNEX I DISNEY ------- Condensed Combined Financial Information Condensed Combined Statements of Income I-1 Condensed Combined Balance Sheets I-2 Condensed Combined Statements of Cash Flows I-3 Notes to Condensed Combined Financial Statements I-4 Management's Discussion and Analysis of Financial Condition and Results of Operations I-8 ANNEX II WALT DISNEY INTERNET GROUP -------------------------- Condensed Combined Financial Information Condensed Combined Statements of Operations II-1 Condensed Combined Balance Sheets II-2 Condensed Combined Statements of Cash Flows II-3 Notes to Condensed Combined Financial Statements II-4 Management's Discussion and Analysis of Financial Condition and Results of Operations II-7 ANNEX III THE WALT DISNEY COMPANY ------------------------ Condensed Consolidated Financial Information Condensed Consolidated Statements of Income III-1 Condensed Consolidated Balance Sheets III-2 Condensed Consolidated Statements of Cash Flows III-3 Notes to Condensed Consolidated Financial Statements III-4 Management's Discussion and Analysis of Financial Condition and Results of Operations III-8 Exhibits
PART I. FINANCIAL INFORMATION As more fully discussed herein, on November 17, 1999 The Walt Disney Company (the Company) completed its acquisition of the remaining interest in Infoseek Corporation (Infoseek) that it did not already own via the creation and issuance of a new class of common stock called GO.com common stock. GO.com common stock is intended to reflect the performance of the Company's Internet and direct marketing businesses including Infoseek (collectively, GO.com). Upon issuance of GO.com common stock, the Company's existing common stock was reclassified as Disney common stock, which is intended to reflect the performance of the Company's businesses other than GO.com, plus a retained interest in GO.com (collectively, Disney). As a result of the Infoseek transaction and issuance of GO.com common stock, the Company now reports consolidated financial information and separate financial information for Disney and for GO.com. Prior to the Infoseek acquisition, the Company's Internet and direct marketing businesses were referred to as "Disney's existing Internet business" or "Internet and Direct Marketing." Effective August 2, 2000, GO.com adopted a new name, Walt Disney Internet Group (Internet Group). The Internet Group's common stock continues to trade on the New York Stock Exchange under the new name, with a new ticker symbol, "DIG." ITEM 1. Financial Statements For information required by Item 1, refer to: "Disney Condensed Combined Financial Information" filed as part of this document in Annex I and "Walt Disney Internet Group Condensed Combined Financial Information" filed as part of this document in Annex II and "The Walt Disney Company Condensed Consolidated Financial Information" filed as part of this document in Annex III. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For information required by Item 2, refer to: "Disney Management's Discussion and Analysis of Financial Condition and Results of Operations" filed as part of this document in Annex I and "Walt Disney Internet Group Management's Discussion and Analysis of Financial Condition and Results of Operations" filed as part of this document in Annex II and "The Walt Disney Company Management's Discussion and Analysis of Financial Condition and Results of Operations" filed as part of this document in Annex III. -1- PART II. OTHER INFORMATION ITEM 6. Exhibits 10(a). Amended and Restated Employment Agreement dated June 29, 2000, between Registrant and Michael D. Eisner 10(b). Amendment, dated June 26, 2000 to Registrant's Stock Incentive Plans. 27. Financial Data Schedule, filed electronically. -2- 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: THOMAS O. STAGGS ----------------------------------- (Thomas O. Staggs, Senior Executive Vice President and Chief Financial Officer) August 14, 2000 Burbank, California -3- ANNEX I [LOGO OF THE WALT DISNEY COMPANY] DISNEY CONDENSED COMBINED FINANCIAL INFORMATION DISNEY CONDENSED COMBINED STATEMENTS OF INCOME In millions, except per share data (unaudited)
Three Months Ended Nine Months Ended June 30, June 30, --------------------------------------- ----------------------------------- 2000 1999 2000 1999 ---------------- ---------------- ---------------- ------------ Revenues $5,964 $5,489 $19,000 $17,485 Costs and expenses 4,681 4,391 15,526 14,377 Amortization of intangible assets 109 117 331 332 Gain on sale of Fairchild -- -- 243 -- ------ ------ ------- ------- Operating income 1,174 981 3,386 2,776 Corporate and other activities 1 (27) (30) (112) Gain on sale of Eurosport 93 -- 93 -- Net interest expense (124) (164) (441) (499) ------ ------ ------- ------- Income before income taxes, minority interests and retained interest in the Internet Group 1,144 790 3,008 2,165 Income taxes (468) (333) (1,383) (905) Minority interests (43) (26) (105) (69) ------ ------ ------- ------- Income before retained interest in the Internet Group 633 431 1,520 1,191 Net (loss) income related to retained interest in the Internet Group (193) (63) (563) 24 ------ ------ ------- ------- Net income $ 440 $ 368 $ 957 $ 1,215 ====== ====== ======= ======= Earnings per share: Diluted $ 0.21 $ 0.18 $ 0.46 $ 0.58 ====== ====== ======= ======= Basic $ 0.21 $ 0.18 $ 0.46 $ 0.59 ====== ====== ======= ======= Average number of common and common equivalent shares outstanding: Diluted 2,115 2,086 2,100 2,084 ====== ====== ======= ======= Basic 2,078 2,059 2,070 2,054 ====== ====== ======= =======
See Notes to Condensed Combined Financial Statements I-1 DISNEY CONDENSED COMBINED BALANCE SHEETS In millions (unaudited) June 30, September 30, 2000 1999 -------------------- -------------------- ASSETS Current Assets Cash and cash equivalents $ 685 $ 408 Receivables 3,748 3,615 Inventories 635 752 Film and television costs 3,794 4,071 Deferred income taxes 581 598 Other assets 676 666 ------- ------- Total current assets 10,119 10,110 Loan receivable from the Internet Group 51 19 Film and television costs 2,612 2,489 Investments 2,021 1,929 Retained interest in the Internet Group 1,286 371 Parks, resorts and other property, at cost Attractions, buildings and equipment 16,059 15,815 Accumulated depreciation (6,732) (6,201) ------- ------- 9,327 9,614 Projects in progress 2,043 1,266 Land 487 425 ------- ------- 11,857 11,305 Intangible assets, net 14,885 15,631 Other assets 1,288 1,509 ------- ------- $44,119 $43,363 ======= ======= LIABILITIES AND GROUP EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 4,494 $ 4,497 Current portion of borrowings 2,481 2,387 Unearned royalties and other advances 765 698 ------- ------- Total current liabilities 7,740 7,582 Borrowings 7,249 9,187 Deferred income taxes 2,872 2,602 Other long term liabilities, unearned royalties and other advances 2,623 2,711 Minority interests 334 306 Group equity 23,301 20,975 ------- ------- $44,119 $43,363 ======= =======
See Notes to Condensed Combined Financial Statements I-2 DISNEY CONDENSED COMBINED STATEMENTS OF CASH FLOWS In millions (unaudited)
Nine Months Ended June 30, ------------------------------------------- 2000 1999 ------------------ ------------------ NET INCOME $ 957 $ 1,215 OPERATING ITEMS NOT REQUIRING CASH OUTLAYS Amortization of film and television costs 2,061 1,819 Depreciation 696 633 Amortization of intangible assets 331 332 Gain on sale of Fairchild (243) - Gain on sale of Eurosport (93) - Minority interests 105 69 Retained interest in the Internet Group 563 (24) Other (34) 18 CHANGES IN ASSETS AND LIABILITIES 552 390 ------- ------- 3,938 3,237 ------- ------- CASH PROVIDED BY OPERATIONS 4,895 4,452 ------- ------- INVESTING ACTIVITIES Dispositions 842 - Film and television costs (1,989) (2,277) Investments in parks, resorts and other property (1,340) (1,515) Investment in Euro Disney (91) - Acquisitions (net of cash acquired) - (218) Other 134 41 ------- ------- (2,444) (3,969) ------- ------- FINANCING ACTIVITIES Commercial paper borrowings, net (538) 294 Other borrowings 1,084 1,625 Reduction of borrowings (2,398) (1,661) Capital contributions to the Internet Group (22) (147) Loans to the Internet Group (79) - Dividends (434) - Repurchases of Disney common stock (115) (19) Exercise of stock options and other 328 157 ------- ------- (2,174) 249 ------- ------- Increase in cash and cash equivalents 277 732 Cash and cash equivalents, beginning of period 408 119 ------- ------- Cash and cash equivalents, end of period $ 685 $ 851 ======= =======
See Notes to Condensed Combined Financial Statements I-3 DISNEY NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS 1. These condensed combined 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 combined financial statements. Operating results for the quarter and nine months are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. Certain reclassifications have been made in the fiscal 1999 financial statements to conform to the fiscal 2000 presentation. For further information, refer to the consolidated financial statements and footnotes thereto for the Company included in its Annual Report on Form 10-K for the year ended September 30, 1999, as well as the combined financial statements and footnotes thereto for Disney for the year ended September 30, 1998, included in the joint proxy statement/prospectus of The Walt Disney Company and Infoseek Corporation, filed on Form S-4 dated September 30, 1999. 2. In November 1998, the Company acquired a 43% interest in Infoseek Corporation (Infoseek) in a transaction that, among other things, provided for the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by Infoseek. The Company recognized a $345 million non-cash pre-tax gain on that transaction. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. The acquisition was effected by the creation and issuance of a new class of common stock, called GO.com common stock, in exchange for outstanding Infoseek shares, at an exchange rate of 1.15 shares of GO.com common stock for each Infoseek share. Upon consummation of the acquisition, the Company combined its Internet and direct marketing businesses with Infoseek to create a single Internet and direct marketing business called GO.com. On August 2, 2000, the Internet and direct marketing business was renamed Walt Disney Internet Group (hereinafter referred to as the Internet Group). The acquisition has been accounted for as a purchase, and the acquisition cost of $2.1 billion has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. Assets acquired totaled $130 million and liabilities assumed were $46 million. A total of approximately $2.0 billion, representing the excess of acquisition cost over the fair value of Infoseek's net assets, has been allocated to intangible assets, including goodwill of $1.9 billion, and is being amortized over two to nine years. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. Disney's interest in Infoseek intangible assets is included in the retained interest in the Internet Group in the condensed combined balance sheets. Disney retains an interest of approximately 71% in the Internet Group at June 30, 2000. Effective November 18, 1999, shares of the Company's existing common stock were reclassified as Disney common stock, to track the financial performance of the Company's businesses other than the Internet Group, plus Disney's retained interest in the Internet Group. In November 1999, the Company sold Fairchild Publications, which it had acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain of $243 million. In June 2000, the Company sold its 33% interest in Eurosport, a European sports cable service, for $155 million. The sale resulted in a pre-tax gain of $93 million. I-4 DISNEY NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued) Disney's combined results of operations have incorporated Infoseek's activity from November 18, 1999 and the activity of Fairchild Publications through the date of its disposal. The unaudited pro forma information below presents combined results of operations as if the Infoseek acquisition and the disposition of Fairchild Publications had occurred at the beginning of fiscal 1999. The unaudited pro forma information is not necessarily indicative of results of operations had the Infoseek acquisition and the disposition of Fairchild Publications occurred at the beginning of fiscal 1999, nor is it necessarily indicative of future results.
Nine Months Ended June 30, ---------------------------------------------- 2000 1999 -------------------- -------------------- (unaudited; in millions, except per share data) Revenues $ 18,986 $ 17,359 Net income 914 657 Diluted earnings per share $ 0.44 $ 0.32
Pro forma amounts for the nine-month periods exclude the impact of purchased in-process research and development expenditures of $23 million and $117 million in 2000 and 1999, respectively, the gain on the sale of Fairchild Publications in fiscal 2000 and the Starwave gain in fiscal 1999. 3. During the nine months, Disney repaid $2.4 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $538 million. These repayments were partially funded by proceeds of $1.1 billion from various financing arrangements having effective interest rates ranging from 5.50% to 6.81% and maturities in fiscal 2002 through 2015. 4. During 1998, the Company's Board of Directors decided to move to an annual, rather than quarterly, dividend policy to reduce costs and simplify payments to stockholders. During the first quarter of fiscal 2000, the Company paid a dividend of $434 million ($0.21 per share) applicable to fiscal 1999. 5. 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. Common equivalent shares are excluded from the computation in periods in which they would have an anti- dilutive effect. The difference between basic and diluted earnings per share is solely attributable to stock options, which are considered anti-dilutive when the option exercise prices exceed the weighted average market price per share of common stock during the period. For the three months ended June 30, 2000 and 1999, options for 3 million and 36 million shares, respectively, were excluded from the diluted earnings per share calculation. For the nine-month periods, options for 22 million and 26 million shares, respectively, were excluded. 6. During the nine months, a subsidiary of the Company repurchased 3.8 million shares of Disney common stock for approximately $115 million. Under its share repurchase program, the Company is authorized to purchase up to an additional 395 million shares. The Company evaluates share repurchase decisions on an ongoing basis, taking into account borrowing capacity, management's target capital structure, and other investment opportunities. I-5 DISNEY NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued) 7. Comprehensive income is as follows:
Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------- --------------------------------- 2000 1999 2000 1999 ---------------- --------------- -------------- ------------- (unaudited, in millions) Net income $ 440 $ 368 $ 957 $1,215 Cumulative translation and other adjustments, net of tax 11 (5) 19 (16) ----- ----- ----- ------ Comprehensive income $ 451 $ 363 $ 976 $1,199 ===== ===== ===== ======
8. The operating segments reported below are the segments of Disney for which separate financial information is available and for which operating income or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. During the first quarter of the current year, Disney completed the merger of television production activities of the Walt Disney Studios with those of the ABC Television Network. Accordingly, television production activities formerly reported in Studio Entertainment are now reported in the Media Networks segment. All prior-year amounts have been restated to reflect the current presentation.
Three Months Ended Nine Months Ended June 30, June 30, -------------------------------------- -------------------------------- (unaudited, in millions) 2000 1999 2000 1999 ---------------- --------------- -------------- ----------- Revenues: Media Networks $2,270 $1,886 $ 7,420 $ 6,041 ------ ------ ------- ------ Studio Entertainment Third parties 1,228 1,258 4,434 4,590 Intersegment 15 11 64 47 ------ ------ ------- ------- 1,243 1,269 4,498 4,637 ------ ------ ------- ------- Parks & Resorts 1,940 1,720 5,088 4,576 ------ ------ ------- ------- Consumer Products Third parties 526 625 2,058 2,278 Intersegment (15) (11) (64) (47) ------ ------ ------- ------- 511 614 1,994 2,231 ------ ------ ------- ------- $5,964 $5,489 $19,000 $17,485 ====== ====== ======= ======= Operating income: Media Networks $ 662 $ 485 $ 1,838 $ 1,216 Studio Entertainment (3) (1) 23 238 Parks & Resorts 565 497 1,258 1,151 Consumer Products 59 117 355 503 Amortization of intangible assets (109) (117) (331) (332) ------ ------ ------- ------- 1,174 981 3,143 2,776 Gain on sale of Fairchild -- -- 243 -- ------ ------ ------- ------- $1,174 $ 981 $ 3,386 $ 2,776 ====== ====== ======= =======
I-6 DISNEY NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued) 9. In July 2000, the Internet Group sold Ultraseek Corp., a subsidiary that provides intranet search software, which it had acquired as part of its acquisitions of Infoseek. Proceeds from the sale consisted of shares of common stock of the purchaser, Inktomi Corp., a publicly held company, and approximately $4 million in cash. The transaction will be recorded in the fourth quarter. 10. On August 11, 2000, a jury returned a verdict against the Company in the amount of $240 million in a civil lawsuit in a Florida trial court in Orlando. The lawsuit asserted that the company misappropriated the concept for its Wide World of Sports complex at the Walt Disney World Resort. Based on the jury's findings, the court has discretion, upon a motion by the Plaintiff, to add to the verdict an amount up to double the amount thereof. The Company intends to challenge the verdict in the trial court and, if necessary, on appeal and believes that there are substantial grounds for complete reversal or reduction of the verdict. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on the Company's results of operations, financial position or cash flow. I-7 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEASONALITY Disney's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and nine months ended June 30, 2000 for each business segment, and for Disney 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 and home video releases. Release dates for theatrical and home video products are determined by several factors, including timing of vacation and holiday periods and competition in the market. Parks & 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 On November 4, 1999, the Company sold Fairchild Publications, which was acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. As more fully discussed in Note 2 to the Condensed Combined Financial Statements, the acquisition resulted in the creation of the Internet Group, which comprises all of Disney's Internet businesses and Infoseek, as well as Disney's direct marketing operations. The Company now separately reports operating results for the Internet Group and Disney, which comprises the Company's businesses other than the Internet Group, plus Disney's retained interest of approximately 71%, as of June 30, 2000, in the Internet Group. To enhance comparability, certain information for the current nine months and prior-year periods is presented on a pro forma basis, which assumes that these events had occurred at the beginning of fiscal 1999. The pro forma results are not necessarily indicative of the combined results that would have occurred had these events actually occurred at the beginning of fiscal 1999, nor are they necessarily indicative of future results. Pro forma net loss related to Disney's retained interest in the Internet Group excludes the impact of the Internet Group purchased in-process research and development expenditures of $23 million and $117 million for the nine months ended June 30, 2000 and 1999, respectively. I-8 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Combined Results - Quarter
Three Months Ended June 30, ------------------------------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 ------------- ---------------- ------------- ----------------- (unaudited; in millions, except per share data) Revenues $5,964 $5,452 9 % $5,489 Costs and expenses 4,681 4,357 (7)% 4,391 Amortization of intangible assets 109 116 6 % 117 ------ ------ ------ Operating income 1,174 979 20 % 981 Corporate and other activities 1 (27) n/m (27) Gain on sale of Eurosport 93 - n/m - Net interest expense (124) (162) 23 % (164) ------ ------ ------ Income before income taxes, minority interests and retained interest in the Internet Group 1,144 790 45 % 790 Income taxes (468) (337) (39)% (333) Minority interests (43) (26) (65)% (26) ------ ------ ------ Income before retained interest in the Internet Group 633 427 48 % 431 Net loss related to retained interest in the Internet Group /(1)/ (193) (181) (7)% (63) ------ ------ ------ Net income $ 440 $ 246 79 % $ 368 ====== ====== ====== Earnings per share: Diluted $ 0.21 $ 0.12 75 % $ 0.18 ====== ====== ====== Basic $ 0.21 $ 0.12 75 % $ 0.18 ====== ====== ====== Earnings per share excluding retained interest in the Internet Group: Diluted $ 0.30 $ 0.20 50 % $ 0.21 ====== ====== ====== Basic $ 0.30 $ 0.21 43 % $ 0.21 ====== ====== ====== Average number of common and common equivalent shares outstanding: Diluted 2,115 2,086 2,086 ====== ====== ====== Basic 2,078 2,059 2,059 ====== ====== ====== (1) Amounts include non-cash amortization of intangible assets as follows: $ 164 $ 164 $ 62 ====== ====== ======
Net income for the quarter increased 79%, or $194 million, to $440 million, and diluted earnings per share increased 75% to $0.21, compared to prior-year pro forma amounts, driven by increased operating income, the gain on the sale of Eurosport, lower net interest expense and improved Corporate and other activities, partially offset by increased minority interests and increased net loss related to the retained interest in the Internet Group. Excluding the retained interest in the Internet Group, net income and diluted earnings per share increased 48% and 50% to $633 million and $0.30, respectively. Increased operating income reflected higher Media Networks and Parks & Resorts results, partially offset by lower Consumer Products results. Lower net interest expense reflected lower average debt balances, partially offset by higher interest rates. Lower average debt balances were driven by reductions of debt, which were funded by increased cash flow. Corporate and other activities improved due to increased income from equity investments. Higher minority interests reflected the minority share of the Eurosport gain. The increase in net loss related to the retained interest in the Internet Group reflects higher costs and expenses at the Internet Group, driven by continued investment in Internet operations and infrastructure, new Web site technology, development of new product initiatives and growth of existing Web site product offerings, partially offset by Internet revenue growth. I-9 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) As previously noted, the Company completed its acquisition of Infoseek during the quarter ended December 31, 1999 (see Note 2 to the Condensed Combined Financial Statements). The acquisition resulted in a significant increase in intangible assets at the Internet Group. Disney's retained interest in the Internet Group reflects the impact of amortization of these assets. Acquired intangible assets are being amortized over periods ranging from two to nine years. The impact of amortization related to the November 1998 and November 1999 Infoseek acquisitions, after the impact of the Ultraseek sale (see Note 9 to the Condensed Combined Financial Statements) is expected to be $212 million for the remaining three months of fiscal 2000, $641 million in 2001, $595 million in 2002, $84 million in 2003 and $13 million over the remainder of the amortization period. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. On an as-reported basis, net income increased 20% or $72 million, reflecting the items described above, as well as the consolidation of Infoseek operations beginning November 18, 1999. Combined Results - Nine Months
Nine Months Ended June 30, -------------------------------------------------------------------------------------- Pro Forma As Reported ------------------------------------------------ ---------------------------------- 2000 1999 % Change 2000 1999 ------------- ------------ -------------- ------------- ----------------- (unaudited; in millions, except per share data) Revenues $18,986 $17,359 9 % $19,000 $17,485 Costs and expenses 15,513 14,267 (9)% 15,526 14,377 Amortization of intangible assets 331 329 (1)% 331 332 Gain on sale of Fairchild -- -- n/m 243 -- ------- ------- ------- ------- Operating income 3,142 2,763 14 % 3,386 2,776 Corporate and other activities (28) (112) 75 % (30) (112) Gain on sale of Eurosport 93 n/m 93 -- Net interest expense (439) (496) 11 % (441) (499) ------- ------- ------- ------- Income before income taxes, minority interests and retained interest in the Internet Group 2,768 2,155 28 % 3,008 2,165 Income taxes (1,146) (896) (28)% (1,383) (905) Minority interests (105) (69) (52)% (105) (69) ------- ------- ------- ------- Income before retained interest in the Internet Group 1,517 1,190 27 % 1,520 1,191 Net (loss) income related to retained interest in the Internet Group /(1)/ (603) (533) (13)% (563) 24 ------- ------- ------- ------- Net income $ 914 $ 657 39 % $ 957 $ 1,215 ======= ======= ======= ======= Earnings per share: Diluted $ 0.44 $ 0.32 38 % $ 0.46 $ 0.58 ======= ======= ======= ======= Basic $ 0.44 $ 0.32 38 % $ 0.46 $ 0.59 ======= ======= ======= ======= Earnings per share excluding retained interest in the Internet Group: Diluted $ 0.72 $ 0.57 26 % $ 0.72 $ 0.57 ======= ======= ======= ======= Basic $ 0.73 $ 0.58 26 % $ 0.73 $ 0.58 ======= ======= ======= ======= Average number of common and common equivalent shares outstanding: Diluted 2,100 2,084 2,100 2,084 ======= ======= ======= ======= Basic 2,070 2,054 2,070 2,054 ======= ======= ======= ======= /(1)/ Amounts include non-cash amortization of intangible assets as follow: $ 497 $ 492 $ 436 $ 165 ======= ======= ======= =======
I-10 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On a pro forma basis, net income for the nine months increased 39%, or $257 million, to $914 million, and diluted earnings per share increased 38% to $0.44, driven by increased operating income, the gain on the sale of Eurosport, improved Corporate and other activities and decreased net interest expense, partially offset by increased net loss related to the retained interest in the Internet Group and increased minority interests. Excluding the retained interest in the Internet Group, net income and diluted earnings per share increased 27% and 26% to $1.5 billion and $0.72, respectively. Increased operating income reflected higher Media Networks and Parks & Resorts results, partially offset by lower Studio Entertainment and Consumer Products results. Corporate and other activities improved due to increased income from equity investments. Lower net interest expense reflected gains from the sale of investments and lower average debt balances, partially offset by higher interest rates and charges related to certain financial instruments. Lower average debt balances were driven by reductions of debt, which were funded by increased cash flow. The increase in net loss related to the retained interest in the Internet Group reflects higher costs and expenses at the Internet Group, driven by continued investment in Internet operations and infrastructure, new Web site technology, development of new product initiatives and growth of existing Web site product offerings, a non-cash charge of $31 million to reflect the impairment of certain intangible assets and one-time employee retention bonus payments of $17 million, partially offset by Internet revenue growth. As noted above, the Company completed the sale of Fairchild Publications during the nine months. The sale resulted in a pre-tax gain of $243 million. Income taxes on the transaction largely offset the pre-tax gain. On an as-reported basis, net income decreased 21% or $258 million and operating income increased 22% or $610 million. As-reported results reflect the items discussed above, as well as the impact of the Infoseek acquisition on the retained interest in the Internet Group and the sale of Fairchild Publications. The retained interest in the Internet Group reflects a gain on the sale of Starwave of $345 million in the prior-year period and Infoseek losses and incremental amortization of acquired intangible assets in the current period. The higher effective tax rate for the current nine months reflects the income tax impact of the sale of Fairchild Publications. I-11 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Quarter
Three Months Ended June 30, --------------------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 ------------ ---------- ---------- ------------ (unaudited, in millions) Revenues: Media Networks $2,270 $1,886 20 % $1,886 Studio Entertainment 1,243 1,269 (2)% 1,269 Parks & Resorts 1,940 1,720 13 % 1,720 Consumer Products 511 577 (11)% 614 ------ ------ ------ $5,964 $5,452 9 % $5,489 ====== ====== ====== Operating income /(1)/: Media Networks $ 662 $ 485 36 % $ 485 Studio Entertainment (3) (1) n/m (1) Parks & Resorts 565 497 14 % 497 Consumer Products 59 114 (48)% 117 Amortization of intangible assets (109) (116) 6 % (117) ------ ------ ------ $1,174 $ 979 20 % $ 981 ====== ====== ======
(1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization (EBITDA) are as follows:
Media Networks $ 697 $ 521 $ 521 Studio Entertainment 9 14 14 Parks & Resorts 731 631 631 Consumer Products 89 152 156 ------ ------ ------ $1,526 $1,318 $1,322 ====== ====== ======
Management believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non- GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Three Months Ended June 30, ------------------------------------------------ 2000 1999 % Change ---- ---- ------ (unaudited, in millions) Revenues: Broadcasting $1,509 $1,215 24 % Cable Networks 761 671 13 % ------ ------ ------ $2,270 $1,886 20 % ====== ====== Operating income: Broadcasting $ 421 $ 209 101 % Cable Networks 241 276 (13)% ------ ------ $ 662 $ 485 36 % ====== ======
Revenues increased 20%, or $384 million, to $2.3 billion, driven by increases of $294 million from Broadcasting and $90 million at the Cable Networks. Broadcasting revenues were driven by growth at the ABC television network and the Company's owned television stations. Increases at the television network and owned television stations were driven by the continued success of Who Wants to Be a Millionaire, a strong advertising market and higher overall ratings on network programming. The television stations also benefited from higher spot advertising rates driven by ABC placing first in the May and February sweeps. The strong advertising market also drove improvements at the radio stations. Cable Networks revenue growth was driven by increased advertising and affiliate revenues due to a strong advertising market and subscriber growth. Operating income increased 36%, or $177 million, to $662 million, reflecting increased Broadcasting and Cable Networks revenues, partially offset by higher costs. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 15% or $207 million, driven by higher sports programming costs, at the Cable Networks, principally related to National Hockey League (NHL) and Major League Baseball broadcasts. In addition, higher costs and expenses reflected start-up costs associated with the January launch of SoapNet and various international Disney Channels. I-12 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating income from cable television activities," which comprise the Cable Networks and the Company's cable equity investments:
Three Months Ended June 30, ---------------------------------------- 2000 1999 % Change ----------- --------- --------- (unaudited, in millions) Operating income: Cable Networks $ 241 $ 276 (13)% Equity investments: A&E, Lifetime and E! Entertainment Television 183 147 24 % Other /(1)/ 124 26 n/m ----- ----- Operating income from cable television activities 548 449 22 % Partner share of operating income (169) (154) (10)% ----- ----- Disney share of operating income $ 379 $ 295 28 % ===== =====
/(1)/ Includes a gain of $93 million from the sale of Eurosport during the current quarter Note: Operating income from cable television activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Disney share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Combined Statements of Income. Equity Investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Combined Statements of Income. Management believes that operating income from cable television activities provides additional information useful in analyzing the underlying business results. However, operating income from cable television activities is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. Disney's share of cable television operating Income increased 28%, or $84 million to $379 million, driven by the gain on the sale of Eurosport and increased advertising revenues at Lifetime Television, The History Channel, A&E Television and E! Entertainment Television, partially offset by decreases at the Cable Networks. Studio Entertainment Revenues decreased 2%, or $26 million, to $1.2 billion, driven by declines of $82 million in worldwide home video and $82 million in network television production and distribution, partially offset by growth of $67 million in domestic theatrical motion picture distribution and $34 million in stage plays and music. In worldwide home video, the successful performance of Tarzan and other Gold Collection titles on VHS and DVD and The Sixth Sense on DVD faced difficult comparisons to the prior-year quarter, which included A Bug's Life and Lion King II: Simba's Pride. The decline in network television production and distribution revenue reflected the production of Home Improvement in the prior- year quarter, partially offset by strong performances of 101 Dalmatians and Air Force One in international markets. Growth in domestic theatrical motion picture distribution reflected the performances of Dinosaur, Gone in 60 Seconds and Shanghai Noon in the current quarter compared to Tarzan in the prior-year quarter. Growth in stage play revenues was driven by the performance of The Lion King, Beauty and the Beast and Aida in the current quarter and music revenues reflected sales of the Mission: Impossible 2 soundtrack. I-13 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Operating losses increased to $3 million, due to declines in domestic theatrical motion picture distribution, where cost increases exceeded revenue gains, partially offset by growth in network television production and distribution and worldwide home video, where cost decreases exceeded revenue declines, and stage plays. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, participations expense, product costs, labor and leasehold expenses, decreased 2% or $24 million. Lower costs and expenses reflected decreases at network television production and distribution and domestic home video, partially offset by increases at domestic theatrical motion picture distribution. Production cost amortization decreased at network television production and distribution due to the production of Home Improvement and pilot programs in the prior-year quarter and the distribution of more classic animated titles in the current year, which have a lower amortization cost relative to recent titles. Domestic home video distribution, selling and participation costs decreased due to a reduction in videotape unit sales and significant participation payments made to Pixar on A Bug's Life in the prior-year quarter. Cost increases in domestic theatrical motion picture distribution reflected increased distribution expenses for Dinosaur, Gone in 60 Seconds and Shanghai Noon and higher production cost amortization in the current quarter. Parks & Resorts Revenues increased 13%, or $220 million, to $1.9 billion, driven by growth of $133 million at the Walt Disney World Resort, reflecting increased guest spending and record theme park attendance; $21 million at Disney Cruise Line, reflecting a full quarter of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior-year quarter; and $11 million at Disneyland, reflecting increased attendance. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration. Higher attendance at Disneyland was driven by the 45th Anniversary Celebration and the strength of the Annual Pass program. Operating income increased 14%, or $68 million, to $565 million, driven by revenue growth at the Walt Disney World Resort and Disneyland, partially offset by higher costs and expenses. Costs and expenses, which consist principally of labor, costs of merchandise, food and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sales expense, increased 12% or $152 million. Increased operating costs were driven by higher theme park attendance, the ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise Line operations. Consumer Products Revenues decreased 11%, or $66 million, to $511 million, compared to prior- year pro forma amounts, driven by a decline of $56 million in worldwide merchandise licensing and publishing and $8 million at the Disney Stores, partially offset by growth of $8 million at Disney Interactive. Merchandise licensing revenues reflected continued worldwide softness. Publishing revenues reflected declines primarily in North America and Europe. Disney Store revenues decreased due to lower comparative store sales, principally domestically, partially offset by improved comparative store sales in certain European markets. Disney Interactive revenues increased due to the success of the Who Wants to Be a Millionaire video games and Pooh learning titles. On an as-reported basis, revenues decreased 17% or $103 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Operating income decreased 48%, or $55 million, to $59 million, compared to prior-year pro forma amounts, reflecting declines in worldwide merchandise licensing, partially offset by improvements at the Disney Store, driven by improvements in North America, due to cost reductions, and in certain European markets, and also at Disney Interactive. Costs and expenses, which consist primarily of labor; product costs, including product development costs; distribution and selling expenses; and leasehold expenses, decreased 2% or $11 million, driven by the Disney Stores domestically due to better product mix and labor cost savings, partially offset by higher advertising and international infrastructure costs. I-14 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On an as-reported basis, operating income decreased 50% or $58 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Business Segment Results - Nine Months
Nine Months Ended June 30, --------------------------------------------------------- Pro Forma As Reported -------------------------------- ------------------ 2000 1999 % Change 2000 1999 ------- ------- -------- ------- ------- (unaudited, in millions) Revenues: Media Networks $ 7,420 $ 6,041 23 % $ 7,420 $ 6,041 Studio Entertainment 4,498 4,637 (3)% 4,498 4,637 Parks & Resorts 5,088 4,576 11 % 5,088 4,576 Consumer Products 1,980 2,105 (6)% 1,994 2,231 ------- ------- ------- ------- $18,986 $17,359 9 % $19,000 $17,485 ======= ======= ======= ======= Operating income /(1)/: Media Networks $ 1,838 $ 1,216 51 % $ 1,838 $ 1,216 Studio Entertainment 23 238 (90)% 23 238 Parks & Resorts 1,258 1,151 9 % 1,258 1,151 Consumer Products 354 487 (27)% 355 503 Amortization of intangible assets (331) (329) (1)% (331) (332) ------- ------- ------- ------- 3,142 2,763 14 % 3,143 2,776 Gain on sale of Fairchild -- -- n/m 243 -- ------- ------- ------- ------- $ 3,142 $ 2,763 14 % $ 3,386 $ 2,776 ======= ======= ======= =======
(1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows: Media Networks $ 1,942 $ 1,313 $ 1,942 $ 1,313 Studio Entertainment 63 283 63 283 Parks & Resorts 1,696 1,518 1,696 1,518 Consumer Products 434 587 435 604 ------- ------- ------- ------- $ 4,135 $ 3,701 $ 4,136 $ 3,718 ======= ======= ======= =======
I-15 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Nine Months Ended June 30, --------------------------------------------------------- 2000 1999 % Change --------------- -------------- ---------------- (unaudited, in millions) Revenues: Broadcasting $4,876 $3,955 23% Cable Networks 2,544 2,086 22% ------ ------ $7,420 $6,041 23% ====== ====== Operating income: Broadcasting $1,008 $ 495 104% Cable Networks 830 721 15% ------ ------ $1,838 $1,216 51% ====== ======
Revenues increased 23%, or $1.4 billion, to $7.4 billion, driven by increases of $921 million from Broadcasting and $458 million at the Cable Networks. Increased Broadcasting revenues were driven by growth at the ABC television network and the Company's owned television stations. Increases at the television network and owned television stations were driven by a strong advertising market, the continued success of Who Wants to Be a Millionaire and higher overall ratings on network programming, including Good Morning America. The television stations also benefited from higher spot advertising rates driven by ABC placing first in the May and February sweeps. Cable Networks revenue growth was driven by increased advertising revenues due to a strong advertising market, as well as higher affiliate fees due to contractual rate adjustments and subscriber growth. Operating income increased 51%, or $622 million, to $1.8 billion, reflecting increased Broadcasting and Cable Network revenues, partially offset by higher costs. Costs and expenses increased 16% or $757 million, driven by higher sports programming costs, principally related to National Football League (NFL) and NHL broadcasts. In addition, start-up costs associated with the January launch of SoapNet and various international Disney Channels contributed to increased costs and expenses. During the second quarter of 1998, the Company entered into a new agreement with the NFL for the right to broadcast NFL football games on the ABC Television Network and ESPN. The contract provides for total payments of approximately $9 billion over an eight-year period, and commenced with the 1998 season. Under the terms of the contract, the NFL has the right to cancel the contract after five years. The programming rights fees under the new contract are significantly higher than those required by the previous contract and the fee increases exceed the estimated revenue increases over the contract term. The higher fees under the new contract reflect various factors, including increased competition for sports programming rights and an increase in the number of games to be broadcast by ESPN. Disney continues to pursue a variety of strategies, including marketing efforts, to reduce the impact of the higher costs. The contract's impact on Disney's results over the remaining contract term is dependent upon a number of factors, including the strength of advertising markets, effectiveness of marketing efforts and the size of viewer audiences. I-16 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The cost of the NFL contract is charged to expense based on the ratio of each period's gross revenues to estimated total gross revenues over the non- cancelable contract period. Estimates of total gross revenues can change significantly and, accordingly, they are reviewed periodically and amortization is adjusted if necessary. Such adjustments could have a material effect on results of operations in future periods. The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating income from cable television activities," which comprise the Cable Networks and the Company's cable equity investments:
Nine Months Ended June 30, ---------------------------- 2000 1999 % Change ------ ------ -------- (unaudited, in millions) Operating income: Cable Networks $ 830 $ 721 15 % Equity investments: A&E, Lifetime and E! Entertainment Television 501 382 31 % Other /(1)/ 175 33 n/m ------ ------ Operating income from cable television activities 1,506 1,136 33 % Partner share of operating income (487) (363) (34)% ------ ------ Disney share of operating income $1,019 $ 773 32 % ====== ======
/(1)/ Includes a gain of $93 million from the sale of Eurosport during the current quarter Note: Operating income from cable television activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Disney share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Combined Statements of Income. Equity investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Combined Statements of Income. Disney's share of cable television operating income increased 32%, or $246 million, to $1.0 billion, driven by increased advertising revenues at Lifetime Television, The History Channel, E! Entertainment Television and A&E Television; growth at the Cable Networks; and the gain on the sale of Eurosport. Studio Entertainment Revenues decreased 3%, or $139 million, to $4.5 billion, driven by declines of $269 million in worldwide home video and $133 million in network television production and distribution, partially offset by growth of $191 million in worldwide theatrical motion picture distribution and $57 million in stage plays. Worldwide home video revenues reflected fewer unit sales in the current year, as the prior year included the successful releases of Lion King II: Simba's Pride, Mulan, Armageddon and A Bug's Life. The decline in network television production and distribution reflects the production of Home Improvement in the prior year. Growth in worldwide theatrical motion picture distribution reflected the performance of Toy Story 2, Tarzan, The Sixth Sense and Dinosaur. Growth in stage play revenues was driven by the performances of The Lion King, Beauty and the Beast and Aida. I-17 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Operating income decreased 90%, or $215 million to $23 million, due to revenue declines in worldwide home video and declines in domestic theatrical motion picture distribution, where cost increases exceeded revenue gains. These declines were partially offset by improvements in international theatrical motion picture distribution. Costs and expenses increased 2% or $76 million. Cost increases in worldwide theatrical motion picture distribution reflected higher production cost amortization and increased participation costs due to The Sixth Sense and Toy Story 2. Stage play operating and production cost amortization expenses increased due to The Lion King and Aida. Production cost amortization decreased in network television production and distribution, reflecting the production of Home Improvement in the prior year and the distribution of more classic animated titles in the current year. Worldwide home video distribution and selling costs and production cost amortization decreased due to a reduction in videotape unit sales compared to the prior year. Increases in production and participation costs are also reflective of industry trends: as competition for creative talent has increased, costs within the industry have increased at a rate significantly higher than inflation. Parks & Resorts Revenues increased 11%, or $512 million, to $5.1 billion, driven by growth of $293 million at the Walt Disney World Resort, reflecting increased guest spending, record theme park attendance and record occupied room nights; $89 million at Disney Cruise Line, reflecting a full nine months of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior year; and $13 million at Disneyland, reflecting increased guest spending. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration and higher occupied room nights reflecting the opening of the All Star Movies Resort, which opened in the second quarter of the prior year. At Disneyland, increased attendance and guest spending were driven by the 45th Anniversary Celebration, enhanced merchandise and food and beverage offerings throughout the park and the strength of the Annual Pass program. Operating income increased 9%, or $107 million, to $1.3 billion, driven by revenue growth at the Walt Disney World Resort, improved results at Disney Cruise Line and higher guest spending at Disneyland. Costs and expenses increased 12% or $405 million, driven by higher theme park attendance and the ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise Line operations. Consumer Products Pro forma revenues decreased 6%, or $125 million, to $2.0 billion, driven by declines of $140 million in worldwide merchandise licensing and publishing, partially offset by an increase of $25 million at Disney Interactive. Lower merchandise licensing and publishing revenues were primarily attributable to declines domestically and in Europe. Disney Interactive revenues increased due to the success of the Who Wants to Be a Millionaire video games, Pooh learning titles and the Toy Story 2 action game. On an as-reported basis, revenues decreased 11% or $237 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Pro forma operating income decreased 27%, or $133 million, to $354 million, driven by declines in worldwide merchandise licensing and softer publishing results domestically and in Europe, partially offset by an increase at Disney Interactive. Costs and expenses were comparable to the prior year. On an as-reported basis, operating income decreased 29% or $148 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. I-18 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) FINANCIAL CONDITION For the nine months ended June 30, 2000, cash provided by operations increased $443 million to $4.9 billion, driven by increased income excluding the Internet Group, higher amortization of television broadcast rights relative to cash payments and increased amortization of film and television costs, partially offset by higher income tax payments due to certain payments attributable to the prior fiscal year. During the nine months, Disney invested $2.0 billion to develop, produce and acquire rights to film and television properties, a decrease of $288 million. The decrease was primarily due to a $310 million payment related to the acquisition of a film library in the prior year. During the nine months, Disney invested $1.3 billion in parks, resorts and other properties. These expenditures reflected continued expansion activities related to Disney's California Adventure and certain resort facilities at the Walt Disney World Resort. The decrease of $175 million from the prior year reflects the final payment for the second cruise ship, the Disney Wonder, in the prior year, partially offset by increased spending on Disney's California Adventure in the current year. During the nine months, Disney invested $91 million in Euro Disney S.C.A. to maintain its 39% ownership interest after a Euro Disney equity rights offering, the proceeds of which will be used to fund construction of a new theme park. Total commitments to purchase broadcast programming approximated $13.5 billion at June 30, 2000, including approximately $11.0 billion related to sports programming rights, primarily NFL, College Football, Major League Baseball and NHL. Substantially all of this amount is payable over the next six years. Disney expects the ABC Television Network, ESPN and the Company's television and radio stations to continue to enter into programming commitments to purchase the broadcast rights for various feature films, sports and other programming. During the nine months, Disney repaid $2.4 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $538 million. These repayments were partially funded by proceeds of $1.1 billion from various financing arrangements. Commercial paper borrowings outstanding as of June 30, 2000 totaled $1.4 billion, with maturities of up to one year, supported by bank facilities totaling $4.8 billion, which expire in one to five years and allow for borrowings at various interest rates. Disney also has the ability to borrow under a U.S. shelf registration statement and a euro medium-term note program, which collectively permit the issuance of up to approximately $4.8 billion of additional debt. Disney is authorized as of June 30, 2000 to purchase up to 395 million shares of Disney common stock. During the nine months, a subsidiary of Disney acquired approximately 3.8 million shares of Disney common stock for approximately $115 million. Disney also used $434 million to fund dividend payments during the first quarter. Disney believes that its financial condition is strong and that its cash, other liquid assets, operating cash flows, access to equity capital markets and borrowing capacity, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses, including the Internet Group, and development of new projects. I-19 DISNEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) OTHER MATTERS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Disney is evaluating the effect that adoption may have on its combined results of operations and financial position and will reflect such effect, if any, during fiscal 2001. In June 2000, the American Institute of Certified Public Accountants issued Statement of Position 00-2 Accounting by Producers or Distributors of Films (SOP 00-2). SOP 00-2 changes the accounting standards for costs to produce and distribute film and television properties. Disney expects to adopt the new standard effective October 1, 2000, and is evaluating the effect that such adoption may have on its combined results of operations and financial position. On August 11, 2000, a jury returned a verdict against the Company in the amount of $240 million in a civil lawsuit in a Florida trial court in Orlando. The lawsuit asserted that the company misappropriated the concept for its Wide World of Sports complex at the Walt Disney World Resort. Based on the Jury's findings, the court has discretion, upon a motion by the Plaintiff, to add to the verdict an amount up to double the amount thereof. The Company intends to challenge the verdict in the trial court and, if necessary, on appeal and believes that there are substantial grounds for complete reversal or reduction of the verdict. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on the Company's results of operations, financial position or cash flow. I-20 ANNEX II [LOGO OF THE WALT DISNEY COMPANY] WALT DISNEY INTERNET GROUP CONDENSED COMBINED FINANCIAL INFORMATION WALT DISNEY INTERNET GROUP CONDENSED COMBINED STATEMENTS OF OPERATIONS In thousands, except per share data (unaudited)
Three Months Ended Nine Months Ended June 30, June 30, ------------------------ ------------------------- 2000 1999 2000 1999 --------- -------- --------- --------- Revenues $ 86,346 $ 41,645 $ 286,065 $ 159,798 Costs and expenses: Cost of revenues 81,050 34,423 249,189 111,437 Sales and marketing 51,529 17,307 169,591 58,681 Other operating expenses 27,862 8,931 142,861 26,924 Depreciation 9,131 1,914 23,232 5,486 Amortization of intangible assets 230,710 -- 578,394 -- Gain on sale of Starwave -- -- -- 345,048 --------- -------- --------- --------- Operating (loss) income (313,936) (20,930) (877,202) 302,318 Corporate and other activities (1,875) (3,325) (6,396) (13,443) Equity in Infoseek loss -- (73,512) (40,575) (245,590) Net interest expense (217) (2,139) (6,446) (5,371) --------- -------- --------- --------- (Loss) income before income taxes and minority interests (316,028) (99,906) (930,619) 37,914 Income tax benefit (expense) 42,752 36,472 144,246 (13,933) Minority interests 1,108 -- 19,536 252 --------- -------- --------- --------- Net (loss) income $(272,168) $(63,434) $(766,837) $ 24,233 ========= ======== ========= ========= Net (loss) income attributed to: Disney common stock/(1)/ $(193,228) $(63,434) $(563,252) $ 24,233 ========= ======== ========= ========= Internet Group common stock $ (78,940) $ n/a $(203,585) $ n/a ========= ======== ========= ========= Loss per share attributed to the Internet Group: Diluted and Basic $ (1.75) $ n/a $(4.58) $ n/a ========= ======== ========= ========= Average number of common and common equivalent shares outstanding: Diluted and Basic 45,160 n/a 44,469 n/a ========= ======== ========= =========
(1) Net (loss) income attributed to Disney common stock includes 100% of the Internet Group's losses through November 17, 1999, and approximately 71% thereafter. See Notes to Condensed Combined Financial Statements II-1 WALT DISNEY INTERNET GROUP CONDENSED COMBINED BALANCE SHEETS In thousands (unaudited)
June 30, September 30, 2000 1999 ---------- ------------- ASSETS Current Assets Cash and cash equivalents $ 4,589 $ 5,530 Receivables (net of allowance for doubtful accounts of $17,166 and $4,791) 51,962 17,763 Inventories 19,198 43,521 Deferred income taxes 27,762 8,993 Other assets 10,649 13,905 ---------- -------- Total current assets 114,160 89,712 Investments 59,472 505,210 Property and equipment, at cost 166,350 53,509 Accumulated depreciation (81,184) (18,928) ---------- -------- 85,166 34,581 Projects in progress -- 6,112 ---------- -------- 85,166 40,693 Intangible assets, net 1,730,959 64,389 Deferred income taxes 18,135 -- Other assets 4,543 6,420 ---------- -------- $2,012,435 $706,424 ========== ======== LIABILITIES AND GROUP EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 123,567 $ 90,997 Current portion of borrowings -- 28,313 Unearned royalties and other advances 21,388 6,312 ---------- -------- Total current liabilities 144,955 125,622 Loan payable to Disney 50,900 19,000 Borrowings -- 90,350 Deferred income taxes -- 58,396 Other long term liabilities, unearned royalties and other advances 5,574 -- Minority interests -- 42,041 Group equity 1,811,006 371,015 ---------- -------- $2,012,435 $706,424 ========== ========
See Notes to Condensed Combined Financial Statements II-2 WALT DISNEY INTERNET GROUP CONDENSED COMBINED STATEMENTS OF CASH FLOWS In thousands (unaudited)
Nine Months Ended June 30, ------------------------- 2000 1999 --------- --------- NET (LOSS) INCOME $(766,837) $ 24,233 OPERATING ITEMS NOT REQUIRING CASH OUTLAYS Depreciation 23,232 5,486 Amortization of intangibles 578,394 -- Charge for in-process research and development 23,322 -- Impairment charges 35,849 -- Gain on sale of Starwave -- (345,048) Equity in Infoseek loss 40,575 245,590 Minority interests (19,536) (252) Other 1,606 8,015 CHANGES IN ASSETS AND LIABILITIES 61,249 2,971 --------- --------- 744,691 (83,238) --------- --------- CASH USED IN OPERATIONS (22,146) (59,005) --------- --------- INVESTING ACTIVITIES Investments in property and equipment (29,094) (11,655) Acquisitions (net of cash acquired) 2,362 (70,013) Purchases of investments (73,301) -- --------- --------- (100,033) (81,668) --------- --------- FINANCING ACTIVITIES Capital contributions from Disney, net 21,514 146,892 Borrowings 7,214 -- Reduction of borrowings (2,594) (13,900) Stock options exercised 16,366 -- Borrowings from Disney, net 78,738 -- --------- --------- 121,238 132,992 --------- --------- Decrease in cash and cash equivalents (941) (7,681) Cash and cash equivalents, beginning of period 5,530 7,684 --------- --------- Cash and cash equivalents, end of period $ 4,589 $ 3 ========= =========
See Notes to Condensed Combined Financial Statements II-3 WALT DISNEY INTERNET GROUP NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS 1. These condensed combined 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 combined financial statements. Operating results for the quarter and nine months are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. For further information, refer to the consolidated financial statements and footnotes thereto for the Company included in its Annual Report on Form 10-K for the year ended September 30, 1999 as well as the combined financial statements and footnotes thereto for Disney's existing Internet and direct marketing businesses (known as GO.com) for the year ended September 30, 1998, included in the joint proxy statement/prospectus of The Walt Disney Company and Infoseek Corporation, filed on Form S-4 dated September 30, 1999 and the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999. 2. In November 1998, the Company acquired a 43% interest in Infoseek Corporation (Infoseek) in a transaction that, among other things, provided for the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by Infoseek. The Company recognized a $345 million non-cash pre-tax gain on that transaction. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. The acquisition was effected by the creation and issuance of a new class of common stock, called GO.com common stock, in exchange for outstanding Infoseek shares, at an exchange rate of 1.15 shares of GO.com common stock for each Infoseek share. Upon consummation of the acquisition, the Company combined its Internet and direct marketing businesses with Infoseek to create a single Internet and direct marketing business called GO.com. On August 2, 2000, the Internet and direct marketing business was renamed Walt Disney Internet Group (hereinafter referred to as the Internet Group). The acquisition has been accounted for as a purchase, and the acquisition cost of $2.1 billion has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. Assets acquired totaled $130 million and liabilities assumed were $46 million. A total of approximately $2.0 billion, representing the excess of acquisition cost over the fair value of Infoseek's net assets, has been allocated to intangible assets, including goodwill of $1.9 billion, and is being amortized over two to nine years. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. During the quarter ended December 31, 1999, the Internet Group recorded charges for purchased in-process research and development expenditures totaling $23.3 million, which are reported in other operating expenses in the condensed combined statements of operations. Disney retains an interest of approximately 71% in the Internet Group at June 30, 2000. Effective November 18, 1999, shares of the Company's existing common stock were reclassified as Disney common stock, to track the financial performance of the Company's businesses other than the Internet Group, plus Disney's retained interest in the Internet Group. II-4 WALT DISNEY INTERNET GROUP NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS The Internet Group's combined results of operations have incorporated Infoseek's activity on a consolidated basis since November 18, 1999. The unaudited pro forma information below presents combined results of operations as if the Infoseek acquisition had occurred at the beginning of fiscal 1999. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined group had the Infoseek acquisition occurred at the beginning of fiscal 1999, nor is it necessarily indicative of future results.
Nine Months Ended June 30, ------------------------- 2000 1999 ------------------------- (unaudited; in thousands, except per share data) Revenues $ 309,534 $ 260,576 Net loss (844,942) (740,099) Net loss attributed to Internet Group common stock (242,388) (206,687) Diluted and basic loss per share attributed to Internet Group common stock $ (5.45) $ (4.83)
Pro forma amounts for the nine-month periods exclude purchased in-process research and development expenditures of $23.3 million and $116.2 million, in 2000 and 1999, respectively, and the Starwave gain in fiscal 1999. 3. Diluted and basic loss per share amounts for the nine months reflect the results of operations after November 17, 1999, the date the Company acquired the remaining interest in Infoseek that it did not already own and first issued the Internet Group common stock, through June 30, 2000. Diluted loss 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. Common equivalent shares are excluded from the computation in periods in which they would have an anti-dilutive effect. The difference between basic and diluted earnings per share is solely attributable to stock options, which are considered anti-dilutive when option exercise prices exceed the weighted average market price per share of common stock during the period. For the quarter and nine months ended June 30, 2000, all Internet Group stock options were anti-dilutive and, accordingly, options for 25.8 million and 16.9 million shares, respectively, were excluded from the loss per share calculation. 4. As a result of toysmart.com's bankruptcy filing, the Internet Group has changed its method of accounting for toysmart.com from the consolidation method to the cost method, effective June 9, 2000. The Internet Group's investment in toysmart.com as of June 30, 2000 was not significant. 5. On June 30, 2000, the Internet Group acquired the remaining 40% interest in Soccernet.com that it did not already own. The acquisition has been accounted for as a purchase. The excess of the purchase price over the fair value of the net assets acquired was $15.2 million and has been recorded as goodwill, which is being amortized over its estimated useful life. 6. During the quarter ended March 31, 2000, the Internet Group recorded a $30.8 million non-cash impairment charge, which is reported in Other operating expenses, related to goodwill and other intangible assets for an Internet business. Based upon a significant decrease in revenues relative to budget, the Internet Group performed an impairment assessment in accordance with Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long- lived Assets to Be Disposed Of, and accordingly, wrote the assets down to their fair value, which was determined based upon projected discounted future cash flows. 7. In April 2000, the Company's Board of Directors approved a share repurchase program for up to five million shares of Internet Group common stock in the open market. No shares have been repurchased under this program. II-5 WALT DISNEY INTERNET GROUP NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS 8. Comprehensive (loss) income is as follows:
Three Months Ended Nine Months Ended June 30, June 30, --------------------- -------------------- (unaudited, in thousands) 2000 1999 2000 1999 --------- -------- --------- ------- Net (loss) income $(272,168) $(63,434) $(766,837) $24,233 Unrealized holding loss, net (10,885) -- (12,329) -- --------- -------- --------- ------- Comprehensive (loss) income $(283,053) $(63,434) $(779,166) $24,233 ========= ======== ========= =======
9. The Internet and Direct Marketing segments reported below are the operating segments of the Internet Group for which separate financial information is available and for which operating income or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.
Three Months Ended Nine Months Ended June 30, June 30, --------------------- --------------------- (unaudited, in thousands) 2000 1999 2000 1999 --------- -------- --------- -------- Revenues: Internet Media $ 51,606 $ 7,848 $ 137,874 $ 26,614 Commerce 17,855 5,656 54,571 16,550 --------- -------- --------- -------- 69,461 13,504 192,445 43,164 Direct Marketing 16,885 28,141 93,620 116,634 --------- -------- --------- -------- $ 86,346 $ 41,645 $ 286,065 $159,798 ========= ======== ========= ======== Operating (loss) income: Internet $ (76,801) $(15,086) $(277,946) $(35,701) Direct Marketing (6,425) (5,844) (20,862) (7,029) --------- -------- --------- -------- (83,226) (20,930) (298,808) (42,730) Amortization of intangible assets 230,710 -- 578,394 -- --------- -------- --------- -------- (313,936) (20,930) (877,202) (42,730) Gain on sale of Starwave -- -- -- 345,048 --------- -------- --------- -------- $(313,936) $(20,930) $(877,202) $302,318 ========= ======== ========= ========
10. In July 2000, the Internet Group sold Ultraseek Corp., a subsidiary that provides intranet search software, which it had acquired as part of its acquisitions of Infoseek. Proceeds from the sale consisted of shares of common stock of the purchaser, Inktomi Corp., a publicly held company, and approximately $4 million in cash. The transaction will be recorded in the fourth quarter. II-6 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEASONALITY The Internet Group's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and nine months ended June 30, 2000 for each business segment, and for the Internet Group as a whole, are not necessarily indicative of results to be expected for the full year. Internet commerce and Direct Marketing revenues fluctuate with seasonal consumer purchasing behavior, with a significant portion of annual revenues generated in the first quarter. Internet media revenues are influenced by advertiser demand and visitor traffic. RESULTS OF OPERATIONS On November 17, 1999, the stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. As more fully discussed in Note 2 to the Condensed Combined Financial Statements, the acquisition resulted in the creation of the Internet Group, which comprises all of Disney's Internet businesses and Infoseek, as well as Disney's direct marketing operations. The Company now separately reports operating results for the Internet Group and Disney, which comprises the Company's businesses other than the Internet Group, plus Disney's retained interest of approximately 71% as of June 30, 2000, in the Internet Group. The Internet Group's results of operations have incorporated Infoseek's activity since the date of the acquisition. To enhance comparability, operating results for the current nine months and prior-year periods have been presented on a pro forma basis, which assumes that the acquisition of the remaining interest in Infoseek and subsequent creation of the Internet Group had occurred at the beginning of fiscal 1999. The pro forma results are not necessarily indicative of the combined results that would have occurred had the acquisition actually occurred at the beginning of fiscal 1999, nor are they necessarily indicative of future results. Pro forma operating loss for the nine months excludes purchased in-process research and development expenditures of $23.3 million and $72.6 million in 2000 and 1999, respectively, and the Starwave gain in fiscal 1999. II-7 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Combined Results - Quarter
Three Months Ended June 30, ------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 --------- --------- -------- ----------- (unaudited; in thousands, except per share data) Revenues $ 86,346 $ 78,186 10 % $ 41,645 Cost of revenues 81,050 56,303 (44)% 34,423 Sales and marketing 51,529 47,722 (8)% 17,307 Other operating expenses 27,862 15,714 (77)% 8,931 Depreciation 9,131 6,606 (38)% 1,914 --------- --------- -------- (83,226) (48,159) (20,930) Amortization of intangible assets 230,710 227,419 (1)% -- --------- --------- -------- Operating loss (313,936) (275,578) (14)% (20,930) Corporate and other activities (1,875) (1,787) (5)% (3,325) Equity in Infoseek loss -- -- -- (73,512) Net interest (expense) income (217) 1,472 (115)% (2,139) --------- --------- -------- Loss before income taxes and minority interests (316,028) (275,893) (15)% (99,906) Income tax benefit 42,752 24,279 76 % 36,472 Minority interests 1,108 75 n/m -- --------- --------- -------- Net loss $(272,168) $(251,539) (8)% $(63,434) ========= ========= ======== Net loss attributed to: Disney common stock $(193,228) $(181,292) (7)% $(63,434) ========= ========= ======== Internet Group common stock $ (78,940) $ (70,247) (12)% $ n/a ========= ========= ======== Loss per share attributed to Internet Group common stock: Diluted and Basic $ (1.75) $ (1.64) (7)% $ n/a ========= ========= ======== Loss per share attributed to Internet Group common stock excluding amortization of intangibles /(1)/: Diluted and Basic $ (0.34) $ (0.20) (70)% $ n/a ========= ========= ======== Average number of common and common equivalent shares outstanding /(2)/: Diluted and Basic 45,160 42,834 n/a ========= ========= ========
(1) Management believes that loss per share excluding amortization of intangible assets provides additional information useful in analyzing business results. Loss per share excluding amortization of intangible assets is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported loss per share. (2) Total shares amount to 155,704 and 153,378 shares for 2000 and 1999, respectively, including 110,544 shares attributable to Disney's retained interest in the Internet Group. II-8 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Net loss, net loss attributable to Internet Group common stock and diluted loss per share for the quarter increased 8% to $272.2 million, 12% to $78.9 million and 7% to $1.75, respectively, compared to prior-year pro forma amounts. These increases were driven by increased operating losses in both the Internet and Direct Marketing segments, including increased amortization of intangible assets. Higher amortization of intangible assets reflected incremental intangible assets associated with the acquisition of an interest in Soccernet.com in the third quarter of fiscal 1999. These increases were partially offset by a higher effective tax benefit rate reflecting tax benefits provided by losses from operations, which were larger relative to losses attributable to goodwill amortization which generate no tax benefits. As previously discussed, the Company completed its acquisition of Infoseek during the quarter ended December 31, 1999 (see Note 2 to the Condensed Combined Financial Statements). The acquisition resulted in a significant increase in intangible assets. Intangible assets are being amortized over periods ranging from two to nine years. The impact of amortization related to the November 1998 and November 1999 Infoseek acquisitions, after the impact of the Ultraseek sale (see Note 10 to the Condensed Combined Financial Statements), is expected to be $212.1 million for the remaining three months of fiscal 2000, $641.4 million in 2001, $594.9 million in 2002, $83.5 million in 2003 and $13.4 million over the remainder of the amortization period. The Internet Group determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Internet Group considered the competitive environment and the rapid pace of technological change in the Internet industry. On an as-reported basis, net loss increased by $208.7 million. The as-reported comparison reflects the items described above, as well as the consolidation of Infoseek operations beginning November 18, 1999, the incremental amortization of intangible assets in the current quarter related to the Infoseek acquisition, and equity in Infoseek losses in the prior-year quarter. II-9 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Combined Results - Nine Months
Nine Months Ended June 30, --------------------------------------------------------------------------- Pro Forma As Reported ------------------------------------------ -------------------------- 2000 1999 % Change 2000 1999 ------------------------------------------ -------------------------- (unaudited; in thousands, except per share data) Revenues $ 309,534 $ 260,576 19 % $ 286,065 $ 159,798 Cost of revenues 265,738 168,569 (58)% 249,189 111,437 Sales and marketing 179,859 149,597 (20)% 169,591 58,681 Other operating expenses 131,319 54,365 (142)% 142,861 26,924 Depreciation 25,113 16,904 (49)% 23,232 5,486 ----------- --------- --------- --------- (292,495) (128,859) (127)% (298,808) (42,730) Amortization of intangible assets 697,047 682,257 (2)% 578,394 -- Gain on sale of Starwave -- -- -- -- 345,048 ----------- --------- --------- --------- Operating (loss) income (989,542) (811,116) (22)% (877,202) 302,318 Corporate and other activities (6,005) (5,235) (15)% (6,396) (13,443) Equity in Infoseek loss -- -- -- (40,575) (245,590) Net interest (expense) income (5,018) 4,206 (219)% (6,446) (5,371) ----------- --------- --------- --------- (Loss) income before income taxes and minority interests (1,000,565) (812,145) (23)% (930,619) 37,914 Income tax benefit (expense) 136,076 71,469 90 % 144,246 (13,933) Minority interests 19,547 577 n/m 19,536 252 ----------- --------- --------- --------- Net (loss) income $ (844,942) $(740,099) (14)% $(766,837) $ 24,233 =========== ========= ========= ========= Net (loss) income attributed to: Disney common stock $ (602,554) $(533,412) (13)% $(563,252) $ 24,233 =========== ========= ========= ========= Internet Group common stock/(1)/ $ (242,388) $(206,687) (17)% $(203,585) $ n/a =========== ========= ========= ========= Loss per share attributed to Internet Group common stock /(1)/: Diluted and Basic $(5.45) $(4.83) (13)% $(4.58) $ n/a =========== ========= ========= ========= Loss per share attributed to Internet Group common stock excluding amortization of intangibles /(1)(2)/: Diluted and Basic $(1.11) $(0.53) (109)% $(1.05) $ n/a =========== ========= ========= ========= Average number of common and common equivalent shares outstanding/(3)/: Diluted and Basic 44,469 42,834 44,469 n/a =========== ========= ========= =========
(1) As-reported amounts reflect the period from November 18, 1999 (date of issuance of Internet Group common stock) through June 30, 2000. (2) The Internet Group believes that loss per share excluding amortization of intangible assets provides additional information useful in analyzing business results. Loss per share excluding amortization of intangible assets is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported loss per share. (3) Total shares amount to 155,013 and 153,378 shares for 2000 and 1999, respectively, including 110,544 shares attributable to Disney's retained interest in the Internet Group. II-10 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On a pro forma basis, net loss, net loss attributed to Internet Group common stock and diluted loss per share increased 14% to $844.9 million, 17% to $242.4 million and 13% to $5.45, respectively. These increases were driven by higher operating losses in both the Internet and Direct Marketing segments, including increased amortization of intangible assets. Higher amortization of intangible assets reflects incremental intangible assets associated with the acquisitions of interests in Soccernet.com and toysmart.com in the third and fourth quarters of fiscal 1999, respectively. These increases were partially offset by minority interest adjustments and a higher effective tax benefit rate reflecting tax benefits provided by losses from operations, which were larger relative to losses attributable to goodwill amortization which generate no tax benefits. On an as-reported basis, net loss, net loss attributed to Internet Group common stock and diluted loss per share were $766.8 million, $203.6 million and $4.58, respectively. As-reported results reflect the items described above, as well as the incremental amortization of intangible assets related to the Infoseek acquisition, the consolidation of Infoseek's operations beginning November 18, 1999, the gain on the sale of Starwave in the first quarter of fiscal 1999 and decreased corporate and other activities due to a change in the manner of accounting for Starwave and related businesses. Costs and expenses for the remainder of the year are expected to reflect continued investment in Web site technology and infrastructure, new product initiatives and incremental marketing and sales expenditures. The Internet Group has begun participating in the traditional television network up-front marketplace and has sold approximately $30 million in Internet advertising which it expects to fulfill and recognize as revenue during fiscal 2001. Business Segment Results - Quarter
Three Months Ended June 30, -------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 --------- --------- -------- ----------- (unaudited, in thousands) Revenues: Internet Media $ 51,606 $ 40,901 26 % $ 7,848 Commerce and other 17,855 9,144 95 % 5,656 --------- --------- -------- 69,461 50,045 39 % 13,504 Direct Marketing 16,885 28,141 (40)% 28,141 --------- --------- -------- $ 86,346 $ 78,186 10 % $ 41,645 ========= ========= ======== Operating loss: /(1)/ Internet $ (76,801) $ (42,315) (81)% $(15,086) Direct Marketing (6,425) (5,844) (10)% (5,844) --------- --------- -------- (83,226) (48,159) (73)% (20,930) Amortization of intangible assets 230,710 227,419 (1)% -- --------- --------- -------- $(313,936) $(275,578) (14)% $(20,930) ========= ========= ========
(1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization (EBITDA) is as follows: Internet $ (68,512) $ (36,594) $(14,057) Direct Marketing (5,583) (4,959) (4,959) --------- --------- -------- $ (74,095) $ (41,553) $(19,016) ========= ========= ========
Management believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non- GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating loss. II-11 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Internet Revenues increased 39%, or $19.4 million, to $69.5 million compared to prior- year pro forma amounts, driven by growth in media and commerce revenues. Media revenues, which consist primarily of advertising and sponsorship agreements, licensing of site content and subscriptions from member-only sites that provide subscribers with exclusive content and games, increased 26%, or $10.7 million, to $51.6 million, reflecting higher advertising and sponsorship revenues driven by increased advertiser demand and higher online site traffic at the ABC-branded Web sites (ABC.com and ABCNEWS.com), Family.com, Disney.com and ESPN.com. Commerce revenues increased 95%, or $8.7 million, to $17.9 million, driven by growth in Ultraseek's intranet search software sales and increased sales at DisneyStore.com and DisneyTravel.com. Commerce revenue growth reflected an 89% increase over the prior-year quarter in the total number of orders per month, as well as an increase in average order size across the Internet Group's commerce sites. On an as-reported basis, revenues increased 414% or $56.0 million, reflecting the items described above, as well as the operations of Infoseek, which were consolidated into the Internet Group beginning November 18, 1999. Operating loss increased 81%, or $34.5 million, to $76.8 million compared to prior-year pro forma amounts, reflecting higher costs and expenses, partially offset by increased revenues. Costs and expenses, which consist primarily of cost of revenues, sales and marketing, other operating expenses and depreciation, increased 58% or $53.9 million. Cost of revenues, which consist primarily of employee compensation, third-party development and engineering costs, hosting and delivery costs associated with the Internet Group's Web sites, and the cost of commerce merchandise, increased primarily due to continued investment in Web site technology and infrastructure, new product initiatives, enhancements to existing Web sites and the ongoing redesign of the GO.com Web site. Sales and marketing expenses increased due to expanded promotion of commerce businesses, partially offset by decreases at the GO.com Web site. Sales and marketing related to the GO.com Web site were reduced as the Internet Group reevaluated the positioning of the GO.com Web site. Increased other operating expenses were driven by continued infrastructure investment primarily related to the redesign and enhancement of the GO.com Web site. On an as-reported basis, operating loss increased $61.7 million to $76.8 million, reflecting the items described above, as well as losses at Infoseek, which was consolidated into the Internet Group beginning November 18, 1999. Direct Marketing Revenues decreased 40%, or $11.3 million, to $16.9 million due principally to planned reductions in catalog circulation, fewer product offerings and lower catalog response rates due to changes in the Company's merchandising strategy and customer migration to the Internet Group's online business. Operating loss increased 10%, or $0.6 million to $6.4 million, reflecting a 40% decline in revenues, partially offset by a decrease in costs and expenses. Costs and expenses, which consist primarily of costs of goods sold reported as cost of revenues, selling and marketing, other operating expenses and depreciation, decreased 31% or $10.7 million, principally due to lower cost of revenues as a result of lower sales volumes. II-12 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Nine Months
Nine Months Ended June 30, ---------------------------------------------------------- Pro Forma As Reported --------------------------------- --------------------- 2000 1999 % Change 2000 1999 --------- --------- -------- --------- -------- (unaudited, in thousands) Revenues: Internet Media $ 159,632 $ 117,226 36 % $ 137,874 $ 26,614 Commerce and other 56,282 26,716 111 % 54,571 16,550 --------- --------- --------- -------- 215,914 143,942 50 % 192,445 43,164 Direct Marketing 93,620 116,634 (20)% 93,620 116,634 --------- --------- --------- -------- $ 309,534 $ 260,576 19 % $ 286,065 $159,798 ========= ========= ========= ======== Operating (loss) income: /(1)/ Internet $(271,633) $(121,830) (123)% $(277,946) $(35,701) Direct Marketing (20,862) (7,029) (197)% (20,862) (7,029) --------- --------- --------- -------- (292,495) (128,859) (127)% (298,808) (42,730) Amortization of intangible assets 697,047 682,257 (2)% 578,394 -- --------- --------- --------- -------- (989,542) (811,116) (22)% (877,202) (42,730) Gain on sale of Starwave -- -- -- -- 345,048 --------- --------- --------- -------- $(989,542) $(811,116) (22)% $(877,202) $302,318 ========= ========= ========= ========
/(1)/ Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows: Internet $(249,184) $(106,801) $(257,378) $(32,090) Direct Marketing (18,198) (5,154) (18,198) (5,154) --------- --------- --------- -------- $(267,382) $(111,955) $(275,576) $(37,244) ========= ========= ========= ========
Internet Pro forma revenues increased 50%, or $72.0 million to $215.9 million, reflecting growth in both media and commerce revenues. Media revenues increased 36%, or $42.4 million to $159.6 million, reflecting higher advertising and sponsorship revenues driven by increased advertiser demand and higher online site traffic at the ABC-branded Web sites, ESPN.com, GO.com, Disney.com and Family.com. Commerce revenues increased 111%, or $29.6 million, to $56.3 million, driven by strong sales at the DisneyStore.com, operations at toysmart.com, which was acquired during the fourth quarter of 1999, and growth in Ultraseek's intranet search software sales. Commerce revenue growth reflected a 148% increase over the prior-year period in the total number of orders per month, as well as an increase in average order size across the Internet Group's commerce sites. On an as-reported basis, revenues increased 346%, or $149.3 million to $192.4 million, reflecting the items described above, as well as the operations of Infoseek, which were consolidated into the Internet Group beginning November 18, 1999. II-13 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Pro forma operating loss increased 123%, or $149.8 million, to $271.6 million, reflecting higher costs and expenses which increased 83%, or $221.8 million, partially offset by increased revenues. Cost of revenues increased primarily due to continued investment in Web site technology and infrastructure, new product initiatives, enhancements to existing Web sites, ongoing redesign of the GO.com Web site, operations at toysmart.com and a one-time employee retention payment of $7.9 million required by the 1999 Infoseek acquisition agreement. Sales and marketing expenses increased primarily due to operations at toysmart.com, expanded promotion of commerce businesses and one-time employee retention payments of $5.2 million, partially offset by reduced marketing at the GO.com Web site. Increased other operating expenses were driven by a non-cash charge of $30.8 million to reflect the impairment of goodwill and certain intangible assets, continued infrastructure investment, operations at toysmart.com and one- time employee retention payments of $4.2 million. On an as-reported basis, operating loss increased $242.2 million to $277.9 million, reflecting the items described above, as well as losses at Infoseek, which was consolidated into the Internet Group beginning November 18, 1999. Direct Marketing Revenues decreased 20%, or $23.0 million, to $93.6 million, due principally to planned reductions in catalog circulation, fewer product offerings and lower catalog response rates. Lower response rates reflected a higher proportion of mailings targeting new customers during the nine months. Lower revenues also reflected inventory liquidation initiatives. Operating loss increased $13.8 million to $20.9 million, compared to $7.0 million in the prior year, reflecting a 20% decline in revenues. Cost of revenues declined due to the lower sales volumes. FINANCIAL CONDITION The Internet Group's cash needs are funded by Disney and such funding is accounted for as either a capital contribution from Disney (i.e., as an increase in the Internet Group's group equity and Disney's retained interest in the Internet Group), or as a loan. Disney may account for all cash transfers from Disney or the Internet Group to or for the account of the other as inter-group loans, other than transfers in return for assets or services rendered or transfers in respect of Disney's retained interest that correspond to dividends paid on Internet Group common stock. These loans bear interest at the rate at which Disney could borrow such funds. The Company's board of directors has discretion to determine, in the exercise of its business judgment, that a given transfer or type of transfer should be accounted for as a long-term loan, a capital contribution increasing Disney's retained interest in the Internet Group or a return of capital reducing Disney's retained interest in the Internet Group. The Company has agreed, however, that advances from Disney to the Internet Group up to $250.0 million on a cumulative basis will be accounted for as short-term or long-term loans at interest rates at which Disney could borrow such funds and will not be accounted for as capital contributions. For the nine months ended June 30, 2000, cash used by operations of $22.1 million was driven by higher pre-tax losses before non-cash items, partially offset by tax benefits attributed to the Internet Group's operations, an increase in accounts payable outstanding and a reduction in inventory levels. The Internet Group has strategically invested in Internet-related companies. Total investment purchases were $73.3 million for the nine months ended June 30, 2000. From October 1, 1999 through the November 17, 1999 Infoseek acquisition, the Internet Group received $21.5 million in capital contribution funding from Disney. II-14 WALT DISNEY INTERNET GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The Internet Group's net borrowings from Disney during the nine months ended June 30, 2000, totaled $78.7 million and represent advances from Disney to be accounted for as a loan. OTHER MATTERS In April 2000, the Financial Accounting Standards Board Emerging Issues Task Force issued EITF Issue No. 00-2 Accounting for Web Site Development Costs. The Internet Group will adopt the consensus in the Issue in the fourth quarter of fiscal 2000, and is evaluating the effect that such adoption may have on its combined results of operations and financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Disney is evaluating the effect that adoption may have on its combined results of operations and financial position and will reflect such effect, if any, during fiscal 2001. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of the Internet Group. The Internet Group and its representatives may from time to time make written or oral statements that the Internet Group believes are "forward- looking," including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to the Internet Group stockholders. The Internet Group believes that all statements that express expectations and projections with respect to future matters, including the launching or prospective development of new business initiatives and Internet projects, are forward-looking statements within the meaning of the Act. These statements are made on the basis of management's views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management's expectations will necessarily come to pass. Factors that may affect forward-looking statements. A wide range of factors could materially affect future developments and performance. A list of such factors is set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 1999 under the heading "Factors that may affect forward- looking statements." II-15 Annex III [LOGO OF WALT DISNEY] THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED FINANCIAL INFORMATION THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME In millions, except per share data (unaudited)
Three Months Ended Nine Months Ended June 30, June 30, ----------------------------------- ------------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues $6,051 $5,531 $19,286 $17,644 Costs and expenses 4,851 4,454 16,111 14,579 Amortization of intangible assets 340 117 910 332 Gain on sale of Fairchild -- -- 243 -- Gain on sale of Starwave -- -- -- 345 ------ ------ ------- ------- Operating income 860 960 2,508 3,078 Corporate and other activities (1) (17) (36) (125) Gain on sale of Eurosport 93 -- 93 -- Equity in Infoseek loss -- (87) (41) (246) Net interest expense (124) (166) (447) (504) ------ ------ ------- ------- Income before income taxes and minority interests 828 690 2,077 2,203 Income taxes (425) (296) (1,238) (919) Minority interests (42) (26) (86) (69) ------ ------ ------- ------- Net income $ 361 $ 368 $ 753 $ 1,215 ====== ====== ======= ======= Earnings (loss) attributed to: Disney common stock/(1)/ $ 440 $ 368 $ 957 $ 1,215 Internet Group common stock (79) -- (204) -- ------ ------ ------- ------- $ 361 $ 368 $ 753 $ 1,215 ====== ====== ======= ======= Earnings (loss) per share attributed to: Disney/(1)/ Diluted $0.21 $0.18 $0.46 $0.58 ====== ====== ======= ======= Basic $0.21 $0.18 $0.46 $0.59 ====== ====== ======= ======= Internet Group (basic and diluted) $(1.75) n/a $(4.58) n/a ====== ====== ======= ======= Average number of common and common equivalent shares outstanding: Disney Diluted 2,115 2,086 2,100 2,084 ====== ====== ======= ======= Basic 2,078 2,059 2,070 2,054 ====== ====== ======= ======= Internet Group (basic and diluted) 45 n/a 44 n/a ====== ====== ======= =======
- ------------- (1) Including Disney's retained interest in the Internet Group. Disney's retained interest in the Internet Group reflects 100% of Internet Group losses through November 17, 1999, and approximately 71% thereafter. See Notes to Condensed Consolidated Financial Statements III-1 THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS In millions, except share data
June 30, September 30, 2000 1999 -------------- ------------- (unaudited) ASSETS Current Assets Cash and cash equivalents $ 690 $ 414 Receivables 3,800 3,633 Inventories 654 796 Film and television costs 3,794 4,071 Deferred income taxes 609 607 Other assets 687 679 ------- ------- Total current assets 10,234 10,200 Film and television costs 2,612 2,489 Investments 2,080 2,434 Parks, resorts and other property, at cost Attractions, buildings and equipment 16,225 15,869 Accumulated depreciation (6,813) (6,220) ------- ------- 9,412 9,649 Projects in progress 2,043 1,272 Land 487 425 ------- ------- 11,942 11,346 Intangible assets, net 16,616 15,695 Other assets 1,293 1,515 ------- ------- $44,777 $43,679 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 4,618 $ 4,588 Current portion of borrowings 2,481 2,415 Unearned royalties and other advances 786 704 ------- ------- Total current liabilities 7,885 7,707 Borrowings 7,249 9,278 Deferred income taxes 2,854 2,660 Other long term liabilities, unearned royalties and other advances 2,629 2,711 Minority interests 334 348 Stockholders' Equity Preferred stock, $.01 par value Authorized--100 million shares, Issued--None Common Stock Common stock--Disney, $.01 par value Authorized--3.6 billion, Issued--2.1 billion 9,672 9,324 Common stock--Internet Group, $.01 par value Authorized--1.0 billion, Issued--45.2 million 2,181 -- Retained earnings 12,600 12,281 Cumulative translation and other (19) (25) ------- ------- 24,434 21,580 Treasury stock, at cost, 29 million shares (605) (605) Shares held by TWDC Stock Compensation Fund II, at cost--0.1 million shares (3) -- ------- ------- 23,826 20,975 ------- ------- $44,777 $43,679 ======= =======
See Notes to Condensed Consolidated Financial Statements III-2 THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS In millions (unaudited)
Nine Months Ended June 30, ------------------------------------- 2000 1999 --------------- --------------- NET INCOME $ 753 $ 1,215 OPERATING ITEMS NOT REQUIRING CASH OUTLAYS Amortization of film and television costs 2,061 1,819 Depreciation 719 638 Amortization of intangibles 910 332 Gain on sale of Fairchild (243) -- Gain on sale of Eurosport (93) -- Gain on sale of Starwave -- (345) Minority interests 86 69 Equity in Infoseek loss 41 246 Other 26 26 CHANGES IN ASSETS AND LIABILITIES 613 393 ------- ------- 4,120 3,178 ------- ------- CASH PROVIDED BY OPERATIONS 4,873 4,393 ------- ------- INVESTING ACTIVITIES Dispositions 909 -- Film and television costs (1,989) (2,277) Investments in parks, resorts and other property (1,369) (1,526) Investment in Euro Disney (91) -- Acquisitions (net of cash acquired) 2 (288) Other (6) 40 ------- ------- (2,544) (4,051) ------- ------- FINANCING ACTIVITIES Commercial paper borrowings, net (538) 294 Other borrowings 1,091 1,625 Reduction of borrowings (2,401) (1,675) Dividends (434) -- Repurchases of Disney common stock (115) (19) Exercise of stock options and other 344 157 ------- ------- (2,053) 382 ------- ------- Increase in cash and cash equivalents 276 724 Cash and cash equivalents, beginning of period 414 127 ------- ------- Cash and cash equivalents, end of period $ 690 $ 851 ======= =======
See Notes to Condensed Consolidated Financial Statements III-3 THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Operating results for the quarter and nine months are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. Certain reclassifications have been made in the fiscal 1999 financial statements to conform to the fiscal 2000 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, 1999. 2. In November 1998, the Company acquired a 43% interest in Infoseek Corporation (Infoseek) in a transaction that, among other things, provided for the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by Infoseek. The Company recognized a $345 million non-cash pre-tax gain on that transaction. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. The acquisition was effected by the creation and issuance of a new class of common stock, called GO.com common stock, in exchange for outstanding Infoseek shares, at an exchange rate of 1.15 shares of GO.com common stock for each Infoseek share. Upon consummation of the acquisition, the Company combined its Internet and direct marketing businesses with Infoseek to create a single Internet and direct marketing business called GO.com. On August 2, 2000, the Internet and direct marketing business was renamed Walt Disney Internet Group (hereinafter referred to as the Internet Group). The acquisition has been accounted for as a purchase, and the acquisition cost of $2.1 billion has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. Assets acquired totaled $130 million and liabilities assumed were $46 million. A total of approximately $2.0 billion, representing the excess of acquisition cost over the fair value of Infoseek's net assets, has been allocated to intangible assets, including goodwill of $1.9 billion, and is being amortized over two to nine years. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. Disney retains an interest of approximately 71% in the Internet Group at June 30, 2000. Effective November 18, 1999, shares of the Company's existing common stock were reclassified as Disney common stock, to track the financial performance of the Company's businesses other than the Internet Group, plus Disney's retained interest in the Internet Group. In November 1999, the Company sold Fairchild Publications which it had acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain of $243 million. In June 2000, the Company sold its 33% interest in Eurosport, a European sports cable service, for $155 million. The sale resulted in a pre-tax gain of $93 million. III-4 THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's consolidated results of operations have incorporated Infoseek's activity, on a consolidated basis, from November 18, 1999 and the activity of Fairchild Publications through the date of its disposal. The unaudited pro forma information below presents combined results of operations as if the Infoseek acquisition and the disposition of Fairchild Publications had occurred at the beginning of fiscal 1999. The unaudited pro forma information is not necessarily indicative of results of operations had the Infoseek acquisition and the disposition of Fairchild Publications occurred at the beginning of fiscal 1999, nor is it necessarily indicative of future results.
Nine Months Ended June 30, ------------------------------------- 2000 1999 --------------- --------------- (unaudited; in millions, except per share data) Revenues $19,296 $17,619 Net income 672 450 Diluted earnings (loss) per share Disney $ 0.44 $ 0.32 Internet Group $ (5.45) $ (4.83)
Pro forma amounts for the nine-month periods exclude purchased in-process research and development expenditures of $23 million and $117 million in 2000 and 1999, respectively, the gain on the sale of Fairchild Publications in fiscal 2000 and the Starwave gain in fiscal 1999. 3. During the nine months, the Company repaid $2.4 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $538 million. These repayments were partially funded by proceeds of $1.1 billion from various financing arrangements having effective interest rates ranging from 5.50% to 6.81% and maturities in fiscal 2002 through 2015. 4. During 1998, the Company's Board of Directors decided to move to an annual, rather than quarterly, dividend policy to reduce costs and simplify payments to stockholders. During the first quarter of fiscal 2000, the Company paid a dividend of $434 million ($0.21 per share) applicable to fiscal 1999. 5. 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. Common equivalent shares are excluded from the computation in periods in which they would have an anti- dilutive effect. The difference between basic and diluted earnings per share is solely attributable to stock options, which are considered anti-dilutive when the option exercise prices exceed the weighted average market price per share of common stock during the period. For the three months ended June 30, 2000 and 1999, options for 3 million and 36 million shares, respectively, were excluded from the Disney diluted earnings per share calculation. For the nine-month periods, options for 22 million and 26 million shares, respectively, were excluded. For the quarter and nine months ended June 30, 2000, all Internet Group stock options were anti-dilutive and, accordingly, options for 26 million and 17 million shares, respectively, were excluded from the Internet Group loss per share calculation. Net loss per share attributed to the Internet Group reflects the results of operations after November 17, 1999, the date the Company acquired the remaining interest in Infoseek that it did not already own and first issued Internet Group common stock. 6. During the nine months, a subsidiary of the Company repurchased 3.8 million shares of Disney common stock for approximately $115 million. Under its share repurchase program, the Company is authorized to purchase up to an additional 395 million shares. The Company evaluates share repurchase decisions on an ongoing basis, taking into account borrowing capacity, management's target capital structure, and other investment opportunities. III-5 THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In April 2000, the Company's Board of Directors approved a share repurchase program for up to five million shares of Internet Group common stock in the open market. No shares have been repurchased under this program. 7. Comprehensive income is as follows:
Three Months Ended Nine Months Ended June 30, June 30, ----------------------------------- ------------------------------------ (unaudited, in millions) 2000 1999 2000 1999 ------------- ---------------- -------------- ---------------- Net income $ 361 $ 368 $ 753 $1,215 Cumulative translation and other adjustments, net of tax -- (5) 6 (16) ----- ----- ----- ------ Comprehensive income $ 361 $ 363 $ 759 $1,199 ===== ===== ===== ======
8. The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating income or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. During the first quarter of the current year, the Company completed the merger of television production activities of the Walt Disney Studios with those of the ABC Television Network. Accordingly, television production activities formerly reported in Studio Entertainment are now reported in the Media Networks segment. All prior-year amounts have been restated to reflect the current presentation.
Three Months Ended Nine Months Ended June 30, June 30, --------------------------------------- --------------------------------------- (unaudited, in millions) 2000 1999 2000 1999 ---------------- ---------------- ---------------- ---------------- Revenues: Media Networks $2,270 $1,886 $ 7,420 $ 6,041 ------ ------ ------- ------- Studio Entertainment Third parties 1,228 1,258 4,434 4,590 Intersegment 15 11 64 47 ------ ------ ------- ------- 1,243 1,269 4,498 4,637 ------ ------ ------- ------- Parks & Resorts 1,940 1,720 5,088 4,576 ------ ------ ------- ------- Consumer Products Third parties 526 625 2,058 2,278 Intersegment (15) (11) (64) (47) ------ ------ ------- ------- 511 614 1,994 2,231 ------ ------ ------- ------- Internet Group 87 42 286 159 ------ ------ ------- ------- $6,051 $5,531 $19,286 $17,644 ====== ====== ======= ======= Operating income (loss): Media Networks $ 662 $ 485 $ 1,838 $ 1,216 Studio Entertainment (3) (1) 23 238 Parks & Resorts 565 497 1,258 1,151 Consumer Products 59 117 355 503 Internet Group (83) (21) (299) (43) Amortization of intangible assets (340) (117) (910) (332) ------ ------ ------- ------- 860 960 2,265 2,733 Gain on sale of Fairchild -- -- 243 -- Gain on sale of Starwave -- -- -- 345 ------ ------ ------- ------- $ 860 $ 960 $ 2,508 $ 3,078 ====== ====== ======= =======
III-6 THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. In July 2000, the Internet Group sold Ultraseek Corp., a subsidiary that provides intranet search software, which it had acquired as part of its acquisitions of Infoseek. Proceeds from the sale consisted of shares of common stock of the purchaser, Inktomi Corp., a publicly held company, and approximately $4 million in cash. The transaction will be recorded in the fourth quarter. 10. On August 11, 2000, a jury returned a verdict against the Company in the amount of $240 million in a civil lawsuit in a Florida trial court in Orlando. The lawsuit asserted that the company misappropriated the concept for its Wide World of Sports complex at the Walt Disney World Resort. Based on the Jury's findings, the court has discretion, upon a motion by the Plaintiff, to add to the verdict an amount up to double the amount thereof. The Company intends to challenge the verdict in the trial court and, if necessary, on appeal and believes that there are substantial grounds for complete reversal or reduction of the verdict. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on the Company's results of operations, financial position or cash flow. III-7 THE WALT DISNEY COMPANY 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 quarter and nine months ended June 30, 2000 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 and home video releases. Release dates for theatrical and home video 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. Internet Group revenues for the Internet commerce and Direct Marketing businesses fluctuate as a result of seasonal consumer purchasing behavior, with a significant portion of annual revenues generated in the first quarter. Internet media revenues are influenced by advertiser demand and visitor traffic. RESULTS OF OPERATIONS On November 4, 1999, the Company sold Fairchild Publications, which was acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999, stockholders of the Company and Infoseek approved the Company's acquisition of the remaining interest in Infoseek that the Company did not already own. To enhance comparability, certain information for the current nine months and prior-year periods is presented on a pro forma basis, which assumes that these events had occurred at the beginning of fiscal 1999. The pro forma results are not necessarily indicative of the consolidated results that would have occurred had these events actually occurred at the beginning of fiscal 1999, nor are they necessarily indicative of future results. Pro forma operating income excludes purchased in-process research and development expenditures of $23 million and $73 million for the nine months ended June 30, 2000 and 1999, respectively. III-8 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Consolidated Results - Quarter
Three Months Ended June 30, -------------------------------------------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 ------------------ -------------------- -------------------- -------------------- (unaudited, in millions) Revenues $6,051 $5,530 9 % $5,531 Costs and expenses 4,851 4,483 (8)% 4,454 Amortization of intangible assets 340 344 1 % 117 ------ ------ ------ Operating income 860 703 22 % 960 Corporate and other activities (1) (28) 96 % (17) Gain on sale of Eurosport 93 -- n/m Equity in Infoseek loss -- -- n/m (87) Net interest expense (124) (161) 23 % (166) ------ ------ ------ Income before income taxes and minority interests 828 514 61 % 690 Income taxes (425) (313) (36)% (296) Minority interests (42) (25) (68)% (26) ------ ------ ------ Net income $ 361 $ 176 105 % $ 368 ====== ====== ======
Net income for the quarter increased to $361 million compared to prior-year pro forma net income of $176 million, driven by increased operating income, the gain on the sale of Eurosport, decreased net interest expense and improvements in Corporate and other activities, partially offset by increased minority interests. Increased operating income reflected higher Media Networks and Parks & Resorts results, partially offset by lower Consumer Products and Internet Group results. Lower net interest expense reflected lower average debt balances, partially offset by higher interest rates. Lower average debt balances were driven by reductions of debt, which were funded by increased cash flow. Corporate and other activities improved due to increased income from equity investments. As previously discussed, the Company completed its acquisition of Infoseek during the quarter ended December 31, 1999 (see Note 2 to the Condensed Consolidated Financial Statements). The acquisition resulted in a significant increase in intangible assets. Intangible assets are being amortized over periods ranging from two to nine years. The impact of amortization related to the November 1998 and November 1999 Infoseek acquisitions, after the impact of the Ultraseek sale (see Note 9 to the Condensed Combined Financial Statements), is expected to be $212 million for the remaining three months of fiscal 2000, $641 million in 2001, $595 million in 2002, $84 million in 2003 and $13 million over the remainder of the amortization period. The Company determined the economic useful life of acquired goodwill by giving consideration to the useful lives of Infoseek's identifiable intangible assets, including developed technology, trademarks, user base, joint venture agreements and in-place workforce. In addition, the Company considered the competitive environment and the rapid pace of technological change in the Internet industry. On an as-reported basis, net income decreased from $368 million to $361 million. The as-reported comparison reflects the items described above, as well as the consolidation of Infoseek operations beginning November 18, 1999, the incremental amortization of intangible assets in the current quarter related to the Infoseek acquisition, and equity in Infoseek losses in the prior-year quarter. The higher effective tax rate for the current quarter reflects the impact of incremental non-deductible amortization of intangible assets related to the Infoseek acquisition. III-9 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Consolidated Results - Nine Months
Nine Months Ended June 30, ----------------------------------------------------------------------------------------- Pro Forma As Reported --------------------------------------------------------- ------------------------------ 2000 1999 % Change 2000 1999 ------------- --------------- --------------- ------------ -------------- (unaudited, in millions) Revenues $19,296 $17,619 10 % $19,286 $17,644 Costs and expenses 16,116 14,656 (10)% 16,111 14,579 Amortization of intangible assets 1,028 1,011 (2)% 910 332 Gain on sale of Fairchild -- -- n/m 243 -- Gain on sale of Starwave -- -- n/m -- 345 ------- ------- ------- ------- Operating income 2,152 1,952 10 % 2,508 3,078 Corporate and other activities (34) (117) 71 % (36) (125) Gain on sale of Eurosport 93 -- n/m 93 -- Equity in Infoseek loss -- -- n/m (41) (246) Net interest expense (443) (492) 10 % (447) (504) ------- ------- ------- ------- Income before income taxes and minority interests 1,768 1,343 32 % 2,077 2,203 Income taxes (1,010) (825) (22)% (1,238) (919) Minority interests (86) (68) (26)% (86) (69) ------- ------- ------- ------- Net income $ 672 $ 450 49 % $ 753 $ 1,215 ======= ======= ======= =======
On a pro forma basis, net income for the nine months increased 49% to $672 million, driven by higher operating income, the gain on the sale of Eurosport, improvements in Corporate and other activities and decreased net interest expense, partially offset by increased minority interests. Increased operating income reflected higher Media Networks and Parks & Resorts results, partially offset by lower Studio Entertainment, Consumer Products and Internet Group results and increased amortization of intangible assets. Corporate and other activities improved due to increased income from equity investments. Lower net interest expense reflected gains from the sale of investments and lower average debt balances, partially offset by higher interest rates and charges related to certain financial instruments. Lower average debt balances were driven by reductions of debt, which were funded by increased cash flow. As noted above, the Company completed the sale of Fairchild Publications during the first quarter. The sale resulted in a pre-tax gain of $243 million. Income taxes on the transaction largely offset the pre-tax gain. On an as-reported basis, net income decreased 38% or $462 million and operating income decreased 19% or $570 million. The as-reported results reflect the items described above, as well as the impact of the sale of Fairchild Publications and equity in Infoseek loss in the current nine months and the gain on the sale of Starwave and higher Infoseek equity losses in the prior-year period. The prior-year equity in Infoseek loss includes a charge for purchased in-process research and development expenditures of $44 million. Current-period as-reported operating income and net income also reflect increased amortization of intangible assets resulting from the Infoseek acquisition and a $23 million charge for purchased in-process research and development expenditures. The higher effective tax rate for the current nine months reflects the income tax impact of the sale of Fairchild Publications and the impact of higher non- deductible amortization of intangible assets. III-10 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Quarter
Three Months Ended June 30, ------------------------------------------------------------------------------------- Pro Forma As Reported 2000 1999 % Change 1999 -------------------- ---------------- ------------------ -------------------- (unaudited, in millions) Revenues: Media Networks $2,270 $1,886 20 % $1,886 Studio Entertainment 1,243 1,269 (2)% 1,269 Parks & Resorts 1,940 1,720 13 % 1,720 Consumer Products 511 577 (11)% 614 Internet Group 87 78 12 % 42 ------ ------ ------ $6,051 $5,530 9 % $5,531 ====== ====== ====== Operating income (loss): /(1)/ Media Networks $ 662 $ 485 36 % $ 485 Studio Entertainment (3) (1) n/m (1) Parks & Resorts 565 497 14 % 497 Consumer Products 59 114 (48)% 117 Internet Group (83) (48) (73)% (21) Amortization of intangible assets (340) (344) 1 % (117) ------ ------ ------ $ 860 $ 703 22 % $ 960 ====== ====== ====== (1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization (EBITDA) is as follows: Media Networks $ 697 $ 521 $ 521 Studio Entertainment 9 14 14 Parks & Resorts 731 631 631 Consumer Products 89 152 156 Internet Group (74) (42) (19) ------ ------ ------ $1,452 $1,276 $1,303 ====== ====== ======
Management believes that segment EBITDA provides additional information useful in analyzing the underlying business results. However, segment EBITDA is a non- GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Three Months Ended June 30, ------------------------------------------------------------------ 2000 1999 % Change ------------------ ------------------ ------------------ (unaudited, in millions) Revenues: Broadcasting $1,509 $1,215 24 % Cable Networks 761 671 13 % ------ ------ $2,270 $1,886 20 % ====== ====== Operating income: Broadcasting $ 421 $ 209 101 % Cable Networks 241 276 (13)% ------ ------ $ 662 $ 485 36 % ====== ======
III-11 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Revenues increased 20%, or $384 million, to $2.3 billion, driven by increases of $294 million from Broadcasting and $90 million at the Cable Networks. Broadcasting revenues were driven by growth at the ABC television network and the Company's owned television stations. Increases at the television network and owned television stations were driven by the continued success of Who Wants to Be a Millionaire, a strong advertising market and higher overall ratings on network programming. The television stations also benefited from higher spot advertising rates driven by ABC placing first in the May and February sweeps. The strong advertising market also drove improvements at the radio stations. Cable Networks revenue growth was driven by increased advertising and affiliate revenues due to a strong advertising market and subscriber growth. Operating income increased 36%, or $177 million to $662 million, reflecting increased Broadcasting and Cable Networks revenues, partially offset by higher costs. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 15% or $207 million, driven by higher sports programming costs at the Cable Networks, principally related to National Hockey League (NHL) and Major League Baseball broadcasts. In addition, higher costs at the Cable Networks and expenses reflected start-up costs associated with the January launch of SoapNet and various international Disney Channels. The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating income from cable television activities," which comprise the Cable Networks and the Company's cable equity investments:
Three Months Ended June 30, -------------------------------------------------------------------- 2000 1999 % Change ------------------ ------------------ ------------------ (unaudited, in millions) Operating income: Cable Networks $ 241 $ 276 (13)% Equity investments: A&E, Lifetime and E! Entertainment Television 183 147 24 % Other (1) 124 26 n/m ----- ----- Operating income from cable television activities 548 449 22 % Partner share of operating income (169) (154) (10)% ----- ----- Company share of operating income $ 379 $ 295 28 % ===== =====
(1) Includes a gain of $93 million from the sale of Eurosport during the current quarter Note: Operating income from cable television activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Company's share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Consolidated Statements of Income. Equity investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Consolidated Statements of Income. Management believes that operating income from cable television activities provides additional information useful in analyzing the underlying business results. However, operating income from cable television activities is a non-GAAP financial metric and should be considered in addition to, not as a substitute for, reported operating income. The Company's share of cable television operating income increased 28%, or $84 million to $379 million, driven by the gain on the sale of Eurosport and increased advertising revenues at Lifetime Television, The History Channel, A&E Television and E! Entertainment Television, partially offset by decreases at the Cable Networks. III-12 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Studio Entertainment Revenues decreased 2%, or $26 million, to $1.2 billion, driven by declines of $82 million in worldwide home video and $82 million in network television production and distribution, partially offset by growth of $67 million in domestic theatrical motion picture distribution and $34 million in stage plays and music. In worldwide home video, the successful performance of Tarzan and other Gold Collection titles on VHS and DVD and The Sixth Sense on DVD faced difficult comparisons to the prior-year quarter, which included A Bug's Life and Lion King II: Simba's Pride. The decline in network television production and distribution revenue reflected the production of Home Improvement in the prior- year quarter, partially offset by strong performances of 101 Dalmatians and Air Force One in international markets. Growth in domestic theatrical motion picture distribution reflected the performances of Dinosaur, Gone in 60 Seconds and Shanghai Noon in the current quarter compared to Tarzan in the prior-year quarter. Growth in stage play revenues was driven by the performance of The Lion King, Beauty and the Beast and Aida in the current quarter and music revenues reflected sales of the Mission: Impossible 2 soundtrack. Operating losses increased to $3 million, due to declines in domestic theatrical motion picture distribution, where cost increases exceeded revenue gains, partially offset by growth in network television production and distribution and worldwide home video, where cost decreases exceeded revenue declines, and stage plays. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, participations expense, product costs, labor and leasehold expenses, decreased 2% or $24 million. Lower costs and expenses reflected decreases at network television production and distribution and domestic home video, partially offset by increases at domestic theatrical motion picture distribution. Production cost amortization decreased in network television production and distribution due to the production of Home Improvement and pilot programs in the prior-year quarter and the distribution of more classic animated titles in the current year, which have a lower amortization cost relative to recent titles. Domestic home video distribution, selling and participation costs decreased due to a reduction in videotape unit sales and significant participation payments made to Pixar on A Bug's Life in the prior-year quarter. Cost increases in domestic theatrical motion picture distribution reflected increased distribution expenses for Dinosaur, Gone in 60 Seconds and Shanghai Noon and higher production cost amortization in the current quarter. Parks & Resorts Revenues increased 13%, or $220 million, to $1.9 billion, driven by growth of $133 million at the Walt Disney World Resort, reflecting increased guest spending and record theme park attendance; $21 million at Disney Cruise Line, reflecting a full quarter of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior-year quarter; and $11 million at Disneyland, reflecting increased attendance. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration. Higher attendance at Disneyland was driven by the 45th Anniversary Celebration and the strength of the Annual Pass program. Operating income increased 14%, or $68 million, to $565 million, driven by revenue growth at the Walt Disney World Resort and Disneyland, partially offset by higher costs and expenses. Costs and expenses, which consist principally of labor, costs of merchandise, food and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sales expense, increased 12% or $152 million. Increased operating costs were driven by higher theme park attendance, the ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise Line operations. III-13 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Consumer Products Revenues decreased 11%, or $66 million, to $511 million, compared to prior- year pro forma amounts, driven by a decline of $56 million in worldwide merchandise licensing and publishing and $8 million at the Disney Stores, partially offset by growth of $8 million at Disney Interactive. Merchandise licensing revenues reflected continued worldwide softness. Publishing revenues reflected declines primarily in North America and Europe. Disney Store revenues decreased due to lower comparative store sales, principally domestically, partially offset by improved comparative store sales in certain European markets. Disney Interactive revenues increased due to the success of the Who Wants to Be a Millionaire video games and Pooh learning titles. On an as-reported basis, revenues decreased 17% or $103 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Operating income decreased 48%, or $55 million, to $59 million, compared to prior-year pro forma amounts, reflecting declines in worldwide merchandise licensing, partially offset by improvements at the Disney Store, driven by improvements in North America, due to cost reductions, and in certain European markets, and also at Disney Interactive. Costs and expenses, which consist primarily of labor; product costs, including product development costs; distribution and selling expenses; and leasehold expenses, decreased 2% or $11 million, driven by the Disney Stores domestically due to better product mix and labor cost savings, partially offset by higher advertising and international infrastructure costs. On an as-reported basis, operating income decreased 50% or $58 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Internet Group Revenues increased 12%, or $9 million to $87 million, compared to prior-year pro forma amounts, driven by an increase of $20 million in Internet revenues, partially offset by a $11 million decrease in direct marketing revenues. Internet revenue growth was driven by increased advertising and sponsorship revenues reflecting increased advertiser demand and online site traffic, higher intranet software sales and sales growth at DisneyStore.com and DisneyTravel.com. Lower direct marketing revenues were due principally to planned reductions in catalog circulation, fewer product offerings and lower catalog response rates due to changes in the Company's merchandising strategy and customer migration to the Internet Group's online business. On an as-reported basis, revenues increased 107% or $45 million, reflecting the items described above, as well as the operations of Infoseek, which were consolidated into the Internet Group beginning November 18, 1999. Operating loss increased $35 million to $83 million, compared to prior-year pro forma amounts, reflecting increased costs and expenses, partially offset by higher Internet revenues. Costs and expenses, which consist primarily of cost of revenues, sales and marketing costs, other operating expenses and depreciation expense increased 35% or $44 million. Higher costs and expenses were driven by continued investment in Web site technology and infrastructure, new product initiatives, enhancements to existing Web sites and the ongoing redesign of the GO.com Web site. On an as-reported basis, operating loss increased $62 million to $83 million, reflecting the items described above, as well as losses at Infoseek, which was consolidated into the Internet Group beginning November 18, 1999. III-14 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Business Segment Results - Nine Months
Nine Months Ended June 30, ---------------------------------------------------------------------------------------- Pro Forma As Reported ----------------------------------------------------- ------------------------------- 2000 1999 % Change 2000 1999 ------------- --------------- --------------- --------------- -------------- (unaudited, in millions) Revenues: Media Networks $ 7,420 $ 6,041 23 % $ 7,420 $ 6,041 Studio Entertainment 4,498 4,637 (3)% 4,498 4,637 Parks & Resorts 5,088 4,576 11 % 5,088 4,576 Consumer Products 1,980 2,105 (6)% 1,994 2,231 Internet Group 310 260 19 % 286 159 ------- ------- ------- ------- $19,296 $17,619 10 % $19,286 $17,644 ======= ======= ======= ======= Operating income (loss): /(1)/ Media Networks $ 1,838 $ 1,216 51 % $ 1,838 $ 1,216 Studio Entertainment 23 238 (90)% 23 238 Parks & Resorts 1,258 1,151 9 % 1,258 1,151 Consumer Products 354 487 (27)% 355 503 Internet Group (293) (129) (127)% (299) (43) Amortization of intangible assets (1,028) (1,011) (2)% (910) (332) ------- ------- ------- ------- 2,152 1,952 10 % 2,265 2,733 Gain on sale of Fairchild -- -- n/m 243 -- Gain on sale of Starwave -- -- n/m -- 345 ------- ------- ------- ------- $ 2,152 $ 1,952 10 % $ 2,508 $ 3,078 ======= ======= ======= ======= (1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows: Media Networks $ 1,942 $ 1,313 $ 1,942 $ 1,313 Studio Entertainment 63 283 63 283 Parks & Resorts 1,696 1,518 1,696 1,518 Consumer Products 434 587 435 604 Internet Group (267) (112) (276) (37) ------- ------- ------- ------- $ 3,868 $ 3,589 $ 3,860 $ 3,681 ======= ======= ======= =======
III-15 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Media Networks The following table provides supplemental revenue and operating income detail for the Media Networks segment:
Nine Months Ended June 30, ------------------------------------------------- 2000 1999 % Change --------- -------- ---------- (unaudited, in millions) Revenues: Broadcasting $4,876 $3,955 23 % Cable Networks 2,544 2,086 22 % ------ ------ $7,420 $6,041 23 % ====== ====== Operating income: Broadcasting $1,008 $ 495 104 % Cable Networks 830 721 15 % ------ ------ $1,838 $1,216 51 % ====== ======
Revenues increased 23%, or $1.4 billion, to $7.4 billion, driven by increases of $921 million from Broadcasting and $458 million at the Cable Networks. Increased Broadcasting revenues were driven by growth at the ABC television network and the Company's owned television stations. Increases at the television network and owned television stations were driven by a strong advertising market, the continued success of Who Wants to Be a Millionaire and higher overall ratings on network programming, including Good Morning America. The television stations also benefited from higher spot advertising rates driven by ABC placing first in the May and February sweeps. Cable Networks revenue growth was driven by increased advertising revenues due to a strong advertising market, as well as higher affiliate fees due to contractual rate adjustments and subscriber growth. Operating income increased 51%, or $622 million, to $1.8 billion, reflecting increased Broadcasting and Cable Network revenues, partially offset by higher costs. Costs and expenses increased 16% or $757 million, driven by higher sports programming costs, principally related to National Football League (NFL) and NHL broadcasts. In addition, start-up costs associated with the January launch of SoapNet and various international Disney Channels contributed to increased costs and expenses. During the second quarter of 1998, the Company entered into a new agreement with the NFL for the right to broadcast NFL football games on the ABC Television Network and ESPN. The contract provides for total payments of approximately $9 billion over an eight-year period, and commenced with the 1998 season. Under the terms of the contract, the NFL has the right to cancel the contract after five years. The programming rights fees under the new contract are significantly higher than those required by the previous contract and the fee increases exceed the estimated revenue increases over the contract term. The higher fees under the new contract reflect various factors, including increased competition for sports programming rights and an increase in the number of games to be broadcast by ESPN. The Company continues to pursue a variety of strategies, including marketing efforts, to reduce the impact of the higher costs. The contract's impact on the Company's results over the remaining contract term is dependent upon a number of factors, including the strength of advertising markets, effectiveness of marketing efforts and the size of viewer audiences. III-16 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) The cost of the NFL contract is charged to expense based on the ratio of each period's gross revenues to estimated total gross revenues over the non- cancelable contract period. Estimates of total gross revenues can change significantly and, accordingly, they are reviewed periodically and amortization is adjusted if necessary. Such adjustments could have a material effect on results of operations in future periods. The Company has investments in cable operations that are accounted for as unconsolidated equity investments. The table below presents "Operating income from cable television activities," which comprise the Cable Networks and the Company's cable equity investments:
Nine Months Ended June 30, -------------------------------------------------- 2000 1999 % Change ---------- ---------- ---------- (unaudited, in millions) Operating income: Cable Networks $ 830 $ 721 15 % Equity Investments: A&E, Lifetime and E! Entertainment Television 501 382 31 % Other (1) 175 33 n/m ------ ------ Operating income from cable television activities 1,506 1,136 33 % Partner share of operating income (487) (363) (34)% ------ ------ Company share of operating income $1,019 $ 773 32 % ====== ======
(1) Includes a gain of $93 million from the sale of Eurosport during the current quarter Note: Operating income from cable television activities presented in this table represents 100% of the operating income of both the Company's owned cable businesses and its cable equity investees. The Company share of operating income represents the Company's ownership interest in cable television operating income. Cable Networks are reported in "Operating income" in the Condensed Consolidated Statements of Income. Equity Investments are accounted for under the equity method and the Company's proportionate share of the net income of its cable equity investments is reported in "Corporate and other activities" in the Condensed Consolidated Statements of Income. The Company's share of cable television operating income increased 32%, or $246 million, to $1.0 billion, driven by increased advertising revenues at Lifetime Television, The History Channel, E! Entertainment Television and A&E Television; growth at the Cable Networks; and the gain on the sale of Eurosport. Studio Entertainment Revenues decreased 3%, or $139 million, to $4.5 billion, driven by declines of $269 million in worldwide home video and $133 million in network television production and distribution, partially offset by growth of $191 million in worldwide theatrical motion picture distribution and $57 million in stage plays. Worldwide home video revenues reflected fewer unit sales in the current year, as the prior year included the successful releases of Lion King II: Simba's Pride, Mulan, Armageddon and A Bug's Life. The decline in network television production and distribution reflects the production of Home Improvement in the prior year. Growth in worldwide theatrical motion picture distribution reflected the performance of Toy Story 2, Tarzan, The Sixth Sense and Dinosaur. Growth in stage play revenues was driven by the performances of The Lion King, Beauty and the Beast and Aida. III-17 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Operating income decreased 90%, or $215 million to $23 million, due to revenue declines in worldwide home video and declines in domestic theatrical motion picture distribution, where cost increases exceeded revenue gains. These declines were partially offset by improvements in international theatrical motion picture distribution. Costs and expenses increased 2% or $76 million. Cost increases in worldwide theatrical motion picture distribution reflected higher production cost amortization and increased participation costs due to The Sixth Sense and Toy Story 2. Stage play operating and production cost amortization expenses increased due to The Lion King and Aida. Production cost amortization decreased in network television production and distribution, reflecting the production of Home Improvement in the prior year and the distribution of more classic animated titles in the current year. Worldwide home video distribution and selling costs and production cost amortization decreased due to a reduction in videotape unit sales compared to the prior year. Increases in production and participation costs also are reflective of industry trends: as competition for creative talent has increased, costs within the industry have increased at a rate significantly higher than inflation. Parks & Resorts Revenues increased 11%, or $512 million, to $5.1 billion, driven by growth of $293 million at the Walt Disney World Resort, reflecting increased guest spending, record theme park attendance and record occupied room nights; $89 million at Disney Cruise Line, reflecting a full nine months of operations from both cruise ships, the Disney Magic and the Disney Wonder, compared to just the Disney Magic in the prior year; and $13 million at Disneyland, reflecting increased guest spending. Increased guest spending and record attendance at the Walt Disney World Resort were driven by the ongoing Millennium Celebration and higher occupied room nights reflecting the opening of the All Star Movies Resort, which opened in the second quarter of the prior year. At Disneyland, increased attendance and guest spending were driven by the 45th Anniversary Celebration, enhanced merchandise and food and beverage offerings throughout the park and the strength of the Annual Pass program. Operating income increased 9%, or $107 million, to $1.3 billion, driven by revenue growth at the Walt Disney World Resort, improved results at Disney Cruise Line and higher guest spending at Disneyland. Costs and expenses increased 12% or $405 million, driven by higher theme park attendance and the ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise Line operations. Consumer Products Pro forma revenues decreased 6%, or $125 million, to $2.0 billion, driven by declines of $140 million in worldwide merchandise licensing and publishing, partially offset by an increase of $25 million at Disney Interactive. Lower merchandise licensing and publishing revenues were primarily attributable to declines domestically and in Europe. Disney Interactive revenues increased due to the success of the Who Wants to Be a Millionaire video games, Pooh learning titles and the Toy Story 2 action game. On an as-reported basis, revenues decreased 11% or $237 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. Pro forma operating income decreased 27%, or $133 million, to $354 million, driven by declines in worldwide merchandise licensing and softer publishing results domestically and in Europe, partially offset by an increase at Disney Interactive. Costs and expenses were comparable to the prior year. On an as-reported basis, operating income decreased 29% or $148 million, reflecting the items described above, as well as the impact of the disposition of Fairchild Publications in the first quarter of the current year. III-18 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Internet Group Pro forma revenues increased 19%, or $50 million to $310 million, driven by an increase of $72 million in Internet revenues, partially offset by a $22 million decrease in direct marketing revenues. Internet revenue growth reflected increased advertising and sponsorship revenues driven by increased advertiser demand and online site traffic, sales growth at DisneyStore.com, operations at toysmart.com, which was acquired in the fourth quarter of fiscal 1999, and higher intranet software sales. Lower direct marketing revenues were due principally to planned reductions in catalog circulation, fewer product offerings and lower catalog response rates due to changes in the Company's merchandising strategy and inventory liquidation initiatives. On an as-reported basis, revenues increased 80% or $127 million, reflecting the items described above, as well as the operations of Infoseek, which were consolidated into the Internet Group beginning November 18, 1999. Pro forma operating loss increased $164 million to $293 million, reflecting increased costs and expenses, partially offset by higher Internet revenues. Costs and expenses increased 55% or $214 million driven by continued investment in Web site technology and infrastructure, new product initiatives, enhancements to existing Web sites, a non-cash charge of $31 million to reflect the impairment of certain intangible assets, one-time employee retention payments of $17 million required by the 1999 Infoseek acquisition agreement and operations at toysmart.com, which was acquired in the fourth quarter of fiscal 1999. On an as-reported basis, operating loss increased $256 million to $299 million, reflecting the items described above, as well as losses from Infoseek, which was consolidated into the Internet Group beginning November 18, 1999. Costs and expenses for the remainder of the year are expected to reflect continued investment in Web site technology and infrastructure, new product initiatives and incremental marketing and sales expenditures. The Internet Group has begun participating in the traditional television network up-front marketplace and has sold approximately $30 million in Internet advertising which it expects to fulfill and recognize as revenue during fiscal 2001. FINANCIAL CONDITION For the nine months ended June 30, 2000, cash provided by operations increased $480 million to $4.9 billion, driven by increased net income excluding amortization of intangible assets, higher amortization of television broadcast rights relative to cash payments and increased amortization of film and television costs, partially offset by higher income tax payments due to certain payments attributable to the prior fiscal year. During the nine months, the Company invested $2.0 billion to develop, produce and acquire rights to film and television properties, a decrease of $288 million. The decrease was primarily due to a $310 million payment related to the acquisition of a film library in the prior year. During the nine months, the Company invested $1.4 billion in parks, resorts and other properties. These expenditures reflected continued expansion activities related to Disney's California Adventure and certain resort facilities at the Walt Disney World Resort. The decrease of $157 million from the prior year reflects the final payment for the second cruise ship, the Disney Wonder, in the prior year, partially offset by increased spending on Disney's California Adventure in the current year. During the nine months, the Company invested $91 million in Euro Disney S.C.A. to maintain its 39% ownership interest after a Euro Disney equity rights offering, the proceeds of which will be used to fund construction of a new theme park. III-19 THE WALT DISNEY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Total commitments to purchase broadcast programming approximated $13.5 billion at June 30, 2000, including approximately $11.0 billion related to sports programming rights, primarily NFL, College Football, Major League Baseball and NHL. Substantially all of this amount is payable over the next six years. The Company expects the ABC Television Network, ESPN and the Company's television and radio stations to continue to enter into programming commitments to purchase the broadcast rights for various feature films, sports and other programming. During the nine months, the Company repaid $2.4 billion of term debt, which matured during the period, and reduced its commercial paper borrowings by $538 million. These repayments were partially funded by proceeds of $1.1 billion from various financing arrangements. Commercial paper borrowings outstanding as of June 30, 2000 totaled $1.4 billion, with maturities of up to one year, supported by bank facilities totaling $4.8 billion, which expire in one to five years and allow for borrowings at various interest rates. The Company also has the ability to borrow under a U.S. shelf registration statement and a euro medium-term note program, which collectively permit the issuance of up to approximately $4.8 billion of additional debt. The Company is authorized as of June 30, 2000 to purchase up to 395 million shares of Disney common stock. During the nine months, a subsidiary of the Company acquired approximately 3.8 million shares of Disney common stock for approximately $115 million. The Company also used $434 million to fund dividend payments during the first quarter. The Company believes that its financial condition is strong and that its cash, other liquid assets, operating cash flows, access to equity capital markets and borrowing capacity, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses and development of new projects. OTHER MATTERS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Disney is evaluating the effect that adoption may have on its combined results of operations and financial position and will reflect such effect, if any, during fiscal 2001. In June 2000, the American Institute of Certified Public Accountants issued Statement of Position 00-2 Accounting by Producers or Distributors of Films (SOP 00-2). SOP 00-2 changes the accounting standards for costs to produce and distribute films and television properties. The Company expects to adopt the new standard effective October 1, 2000, and is evaluating the effect that such adoption may have on its combined results of operations and financial position. On August 11, 2000, a jury returned a verdict against the Company in the amount of $240 million in a civil lawsuit in a Florida trial court in Orlando. The lawsuit asserted that the company misappropriated the concept for its Wide World of Sports complex at the Walt Disney World Resort. Based on the jury's findings, the court has discretion, upon a motion by the Plaintiff, to add to the verdict an amount up to double the amount thereof. The Company intends to challenge the verdict in the trial court and, if necessary, on appeal and believes that there are substantial grounds for complete reversal or reduction of the verdict. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on the Company's results of operations, financial position or cash flow. III-20 EX-10.(A) 2 0002.txt AMEND. & RESTATED EMPL. AGREEMENT - MICHAEL EISNER Exhibit 10(a) AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN THE WALT DISNEY COMPANY AND MICHAEL D. EISNER Pursuant to this Amended and Restated Employment Agreement (the "Agreement"), dated June 29, 2000, Michael D. Eisner ("Executive") and The Walt Disney Company, a Delaware corporation ("Company"), hereby amend and restate Executive's Employment Agreement with Company, dated January 8, 1997, as amended by letter agreements dated December 29, 1998 and as of December 21, 1999 (the "Old Agreement"), to read in its entirety as follows: 1. Term The term of this Agreement shall commence on June 30, 2000 and shall terminate on September 30, 2006. 2. Duties Executive shall be employed by Company as its Chairman and Chief Executive Officer. Executive shall report directly and solely to the Company's Board of Directors ("Board"). Executive shall devote his full time and best efforts to the Company. Company agrees to nominate Executive for election to the Board as a member of the management slate at each annual meeting of stockholders during his employment hereunder at which Executive's director class comes up for election. Executive agrees to serve on the Board if elected. 3. Salary Executive shall receive an annual base salary of $1,000,000. The Board, in its discretion, may increase the base salary based upon relevant circumstances. 4. Bonus (a) Executive shall receive an annual incentive bonus hereunder subject to and pursuant to Company's Annual Bonus Performance Plan for Executive Officers (such plan, together with any successor plan of Company intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), being hereinafter referred to as the "Annual Bonus Performance Plan"). (b) Each incentive bonus (and any bonus payable pursuant to Section 4(c) or clause (ii) of Section 11 hereof) shall be payable (i) 30 days following the date Company's audited consolidated statement of income for the applicable fiscal year becomes available or (ii) on the January 15 following the end of that fiscal year, whichever is later (the "Bonus Payment Date"). (c) Executive shall be entitled to receive the bonus provided for in Section 4(a) above for each fiscal year during which he is employed hereunder and, in addition, to receive Post-Termination Bonuses (as defined below in this Section 4(c)) for the next twenty-four months following the fiscal year during which Executive's employment is terminated hereunder, except that said post- termination bonus coverage (i) shall only extend for twelve months after termination if Executive takes employment (other than as an independent producer) with another major entertainment company within twelve months of termination and (ii) shall not apply if this Agreement is terminated for good cause. The term "Post-Termination Bonuses" shall mean the bonuses payable in respect of the first and second twelve-month period of the twenty-four month period immediately following the fiscal year in which Executive's employment hereunder is terminated. The amount of the Post-Termination Bonus for each such twelve-month period shall be equal to the greater of (A) $6 million or (B) the average of the three highest annual bonus amounts paid (or payable) to Executive by Company in respect of the four fiscal years of Company ending immediately prior to the fiscal year in which termination occurs (including fiscal years, if any, for which the bonus amount paid is $0). All bonus payments pursuant to this Agreement shall be in cash. 5. Stock Options (a) Effective as of the date of this Agreement, Executive holds stock options (the "Options") to purchase 24 million shares (the "Shares") of the common stock of Company, which Options were granted to him on September 30, 1996 under Company's 1995 Stock Incentive Plan (the "Plan") and related Rules Relating to Stock Options or Stock Appreciation Rights for Disney Common Stock (the "Rules") and which are evidenced by a Non-Qualified Stock Option Agreement dated as of September 30, 1996 (the "Stock Option Agreement"). Pursuant to the Stock Option Agreement (and the Old Agreement) the Options are comprised of an Option A, a Group 1 Option, a Group 2 Option and a Group 3 Option, in each case as defined in the Stock Option Agreement (and the Old Agreement), and the Group 1 Option, Group 2 Option and Group 3 Option are sometimes collectively referred to therein and herein as the "B Options." The terms and conditions of the Options relating to the vesting thereof are hereby amended, effective as of the date of this Agreement, as provided below in this Section 5(a). 1. Option A (which is comprised in its entirety of 15 million Shares) shall become vested and exercisable (i) as to 3 million Shares on June 30, 2000, (ii) as to 6 million Shares on September 30, 2001, and (iii) as to 6 million Shares on September 30, 2002. 2. The B Options shall become vested and exercisable in their entirety (i.e., as to the full 9 million Shares covered by the B Options) ---- on September 30, 2003. (b) Except as provided in Section 5(c) below and in Section 11 hereof, any Shares acquired upon exercise of the Options shall not be saleable, assignable or otherwise transferable 2 by Executive (or by a permitted transferee under Section 5(c)) until the following dates: Option A - September 30, 2003; Group 1 Option - September 30, 2004; Group 2 Option - September 30, 2005; and Group 3 Option - September 30, 2006. (C) EXECUTIVE SHALL, WITH THE CONSENT OF THE EXECUTIVE PERFORMANCE SUBCOMMITTEE OF THE COMPENSATION COMMITTEE OF THE BOARD, BE PERMITTED (I) TO ASSIGN OR TRANSFER AT ANY TIME AFTER SEPTEMBER 30, 2001 A PORTION OF THE OPTIONS (NOT TO EXCEED 8 MILLION SHARES) TO THE EXTENT PERMITTED BY SECTION 9(B) OF THE PLAN RELATING TO FAMILY TRANSFERS (INCLUDING WITHOUT LIMITATION, TRANSFERS TO FAMILY LIMITED PARTNERSHIPS) AND (II) TO HAVE SHARES WITHHELD TO THE EXTENT NECESSARY TO SATISFY THE COMPANY'S MINIMUM STATUTORY TAX WITHHOLDING REQUIREMENTS RESULTING FROM THE EXERCISE OF OPTIONS OR, IF NO SHARES ARE SO WITHHELD, TO SELL AN EQUIVALENT NUMBER THEREOF. (D) EXECUTIVE AND COMPANY HAVE CONCURRENTLY ENTERED INTO AN AMENDMENT AND RESTATEMENT OF THE STOCK OPTION AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT A (THE "AMENDED AND RESTATED STOCK OPTION AGREEMENT"), CONTAINING THE TERMS AND PROVISIONS GOVERNING THE OPTIONS, ALL OF WHICH TERMS COMPANY ACKNOWLEDGES AND AGREES ARE PERMITTED UNDER THE PLAN AND RULES AND ARE NOT SUPERSEDED BY ANY OTHER TERM OR PROVISION OF THE PLAN OR RULES. (e) Company shall us its best efforts to maintain the effectiveness of the registration of all shares issuable upon the exercise of any stock options previously granted to Executive by Company pursuant to the appropriate form of registration statement under the Securities Act of 1933. (f) Company shall, to the extent permitted by law, make loans to Executive in reasonable amounts on reasonable terms and conditions during his employment by Company to facilitate the exercise of the options granted to him as described above. 6. Benefits Executive shall be entitled to receive all benefits generally made available to executives of Company. In addition, Company shall provide a death benefit to Executive's estate having an after-tax value of $3,000,000 in the event of Executive's death during the term hereof. 7. Reimbursement for Expenses Executive shall be expected to incur various business expenses customarily incurred by persons holding like positions, including but not limited to traveling, entertainment and similar expenses incurred for the benefit of Company. Subject to Company's policy regarding the reimbursement of such expenses (which does not necessarily provide for reimbursement of all 3 such expenses), Company shall reimburse Executive for such expenses from time to time, at Executive's request, and Executive shall account to Company for such expenses. 8. Protection of Company's Interests (a) During the term of this Agreement Executive shall not directly or indirectly engage in competition with, or own any interest in any business which competes with, any business of Company or any of its subsidiaries; provided, however, that the provisions of this Section 8 shall not prohibit his ownership of not more than 5% of voting stock of any publicly held corporation. (b) Except for actions taken in the course of his employment hereunder, at no time shall Executive divulge, furnish or make accessible to any person any information of a confidential or proprietary nature obtained by him while in the employ of Company. Upon termination of his employment by Company, Executive shall return to the Company all such information which exists in written or other physical form and all copies thereof in his possession or under his control. (c) Company and its successors and assigns shall, in addition to Executive's services, be entitled to receive and own all of the results and proceeds of said services (including, without limitation, literary material and other intellectual property) produced or created during the term of Executive's employment hereunder except with respect to any book or writing autobiographical in nature. Executive will, at the request of Company, execute such assignments, certificates or other instruments as Company may from time to time deem necessary or desirable to evidence, establish, maintain, protect, enforce or defend its right or title in or to any such material. (d) Executive shall not, either alone or jointly, with or on behalf of others, either directly or indirectly, whether as principal, partner, agent, shareholder, director, employee, consultant or otherwise, at any time during a period of two years following Executive's termination of employment hereunder for any reason, offer employment to, or solicit the employment or engagement of, or otherwise entice away from the employment of Company or any affiliated entity, either for Executive's own account or for any other person, firm or company, any person who is employed by Company or any such affiliated entity, whether or not such person would commit any breach of his or her contract of employment by reason of leaving the service of Company or any affiliated entity. (e) Executive recognizes that the services to be rendered by him hereunder are of a character giving them peculiar value, the loss of which cannot be adequately compensated for in damages, and in the event of a breach of this Agreement by Executive, Company shall be entitled to equitable relief by way of injunction or any other legal or equitable remedies. 4 9. Termination by Company (a) Company shall have the right to terminate this Agreement under the following circumstances: (i) Upon the death of Executive. (ii) Upon notice from Company to Executive in the event of an illness or other disability which has incapacitated him from performing his duties for six consecutive months as determined in good faith by the Board. (iii) For good cause upon notice from Company. Termination by Company of Executive's employment for "good cause" as used in this Agreement shall be limited to gross negligence or malfeasance by Executive in the performance of his duties under this Agreement (whether before or after a corporate sale or combination event identified in Section 10(ii) below) or the voluntary resignation by Executive as an employee of Company without the prior written consent of Company. (b) If this Agreement is terminated pursuant to Section 9(a) above, Executive's rights and Company's obligations hereunder shall forthwith terminate except as expressly provided in this Agreement and as further provided with respect to the Options in the Amended and Restated Stock Option Agreement. (c) If this Agreement is terminated pursuant to Section 9(a)(i) or (ii) hereof, Executive or his estate shall be entitled to receive a cash payment equal to the present value (based on Company's then current cost of borrowing as determined by Company's chief financial officer for the remainder of the term hereof) of his base salary for the balance of the term of this Agreement, payable within 30 days of the date of termination. Executive shall also be entitled to receive the bonus payment provided for in Section 4(a) hereof for the fiscal year in which the termination occurred plus the Post-Termination Bonuses provided for in Section 4(c) hereof for the twenty-four months following such fiscal year. Notwithstanding the foregoing, no such payments shall be made until such payment is no longer subject to Section 162(m) of the Code. All stock options granted to Executive shall also immediately vest upon such termination and remain exercisable until the earlier of the fifth anniversary of the date of such termination or the expiration of such options on the scheduled expiration dates set forth in the stock option agreements related thereto. (d) Whenever compensation is payable to Executive hereunder during a time when he is partially or totally disabled and such disability (except for the provisions hereof) would entitle him to disability income or to salary continuation payments from Company according to the terms of any plan now or hereafter provided by Company or according to any Company policy in effect at the time of such disability, the compensation payable to him hereunder shall be inclusive of any such disability income or salary continuation and shall not be in addition thereto. If disability income is payable directly to Executive by an insurance company under an insurance policy paid for by Company, the amounts paid to him by said insurance company shall be 5 considered to be part of the payments to be made by Company to him pursuant to this Section 9, and shall not be in addition thereto. 10. Termination by Executive Executive shall have the right to terminate his employment under this Agreement upon 30 days' notice to Company given within 60 days following the occurrence of any of the following events, each of which shall constitute "good reason" for such termination: (i) Executive is not elected or retained as Chairman and Chief Executive Officer and a director of Company. (ii) Company acts to materially reduce Executive's duties and responsibilities hereunder. Executive's duties and responsibilities shall not be deemed materially reduced for purposes hereof solely by virtue of the fact that Company is (or substantially all of its assets are) sold to, or is combined with, another entity provided that (a) Executive shall continue to have the same duties, responsibilities and authority with respect to Company's businesses as he has as of the date hereof and as Executive may have with respect to businesses added hereafter, including but not limited to, entertainment and recreation, broadcasting, cable, direct broadcast satellite, filmed entertainment, consumer products, music, the internet, parks and resorts, etc., (b) Executive shall report solely and directly to the board of directors (and not to the chief executive officer or chairman of the board of directors) of the entity (or to the individual) that acquires Company or its assets or, if there shall be an ultimate parent of such entity, then to the board of directors of such ultimate parent and (c) Executive shall be elected and retained as a member of the board of directors of such entity or ultimate parent (if there shall be one). (iii) Company acts to change the geographic location of the performance of Executive's duties from Los Angeles California metropolitan area. 11. Consequences of Breach by Company If Executive's employment is terminated pursuant to Section 10 hereof, or if Company shall terminate Executive's employment under this Agreement in any other way that is a breach of this Agreement by Company, the following shall apply: (i) Executive shall receive a cash payment equal to the present value (based on Company's then current cost of borrowing as determined by the chief financial officer of Company for the remainder of the term hereof) of Executive's base salary hereunder for the remainder of the term, payable within 30 days of the date of such termination. (ii) Executive shall be entitled to bonus payments as provided in Section 4 hereof for the remainder of the term hereof plus twenty-four months (or twelve months if clause (i) of the first sentence of Section 4(c) is applicable), it being understood that the amount of the bonus payments for any fiscal years of Company ending on or before the scheduled termination date of this Agreement (i.e., September 30, 2006) and after the ---- 6 date of termination shall not be determined pursuant to Section 4(a) hereof but shall instead be calculated in the same manner as is provided in Section 4(c) hereof for Post-Termination Bonuses in respect of the 24 months following such termination date. Notwithstanding any other term or provision hereof, any Post-Termination Bonus made hereunder to which this Section 11 is applicable (and any bonus calculated in the same manner as a Post-Termination Bonus as provided above) shall be made no earlier than thirty days following the date upon which such payment is no longer subject to Section 162(m) of the Code. (iii) Subject to Section 14 hereof, all stock options granted by Company to Executive under the Plan and/or Rules prior to the date hereof shall accelerate and become immediately exercisable and thereafter remain exercisable until the earlier of the fifth anniversary of the date of such termination or the scheduled expiration dates for such options set forth in the stock option agreements relating thereto, and all restrictions imposed by this Agreement and in the Stock Option Agreement as agreed to be amended pursuant to Section 5(d) hereof relating to the sale, assignment or other transfer of Shares acquired or to be acquired upon exercise of the Options shall immediately lapse. 12. Post-Termination Consulting Services Upon expiration of this Agreement on September 30, 2006 (i.e., after the --- completion of the full term of service by Executive hereunder), Executive shall serve as a consultant to Company at a fee to be mutually agreed upon which shall be at least $1.00 per year plus continuation of the same benefits and/or perquisites provided to Executive during his term as Chief Executive Officer of Company, excluding, however, any items which would conflict with any laws, regulations and/or tax qualifications applicable to group health, pension and employee welfare plans of Company and, except as otherwise provided herein with respect to certain specified continuing obligations of Company to Executive, salary, bonuses and/or stock options. The consulting arrangement shall continue until notice is given as provided below following the earlier of: (i) acceptance by Executive of full-time employment with a third party, (ii) the rendering by Executive of any services to a competitor of Company or (iii) Executive's disability for a period of six months which shall render him substantially incapable of performing any consulting services for Company. If notice is given pursuant to clauses (i) and (ii) above, the consulting arrangement shall terminate three business days after the giving of such notice, and if such notice is given pursuant to clause (iii), such termination shall occur three months after the giving of such notice. 13. Remedies Company recognizes that because of Executive's special talents, stature and opportunities in the entertainment industry, and because of the special creative nature of and compensation practices of said industry and the material impact that individual projects can have on an entertainment company's results of operations, in the event of termination by Company hereunder (except under Section 9(a)), or in the event of termination by Executive under Section 10, before the end of the agreed term, Company and Executive acknowledge and agree that the provisions of this Agreement regarding further payments of base salary, bonuses and the 7 exercisability of stock options constitute fair and reasonable provisions for the consequences of such termination, do not constitute a penalty, and such payments and benefits shall not be limited or reduced by amounts Executive might earn or be able to earn from any other employment or ventures during the remainder of the agreed term of this Agreement. 14. Excise Tax Limit In the event that the vesting of the Options together with all other payments and the value of any benefit received or to be received by the Executive would result in all or a portion of such payment being subject to excise tax under Section 4999 of the Code, then the Executive's payment shall be either (A) the full payment or (B) such lesser amount that would result in no portion of the payment being subject to excise tax under Section 4999 of the Code (the "Excise Tax"), whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by the Executive, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of the payment may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 14 shall be made by PricewaterhouseCoopers or any other nationally recognized accounting firm which is the Company's outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax, which firm must be reasonably acceptable to Executive (the "Accounting Firm"). The Company shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Company and Executive. Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling Executive to a payment under this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by the Company. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). For the purposes of all calculations under Section 280G of the Code and the application of this Section 14, Company and Executive hereby elect and agree to make all determination as to present value using 120 percent of the applicable Federal rate (determined under Section 1274(d) of the Code) compounded semiannually, as in effect on the date of this Agreement. Company agrees to reimburse Executive (on an after-tax basis) for his reasonable legal and other professional expenses of pursuing any reasonable contest, claim or cause of action (including any claim of tax refund) on his own behalf that may arise (notwithstanding the application of the foregoing provisions of this Section 14) as a result of (i) the Internal Revenue Service seeking to impose an Excise Tax on Executive or (ii) Company (or any successor) withholding or seeking to withhold any Excise Tax from any payment or benefit to Executive without Executive's consent; provided, however, reimbursement will only be provided under this subsection (ii) if Executive prevails (excluding a settlement). 15. Binding Agreement This Agreement shall be binding upon and inure to the benefit of Executive, his heirs, distributees and assigns and Company, its successors and assigns. Executive may not, without the express written permission of the Company, assign or pledge any rights or obligations hereunder to any person, firm or corporation. 8 16. Amendment; Waiver This Agreement contains the entire agreement of the parties with respect to the employment of Executive by Company and supersedes, on and as of the date hereof, the Old Employment Agreement. No amendment or modification of this Agreement shall be valid unless evidenced by a written instrument executed by the parties hereto. No waiver by either party of any breach by the other party of any provision or condition of this Agreement shall be deemed a waiver of any similar or dissimilar provision or condition at the same or any prior or subsequent time. 17. Governing Law (a) This Agreement shall be governed by and construed under and in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws; and the laws of that state shall govern all of the rights remedies, liabilities, powers and duties of the parties under this Agreement and of any arbitrator or arbitrators to whom any matter hereunder may be submitted for resolution by the parties hereto, as contemplated by and pursuant to Title 6, Section 2708 of the Delaware Code. (b) Any legal action or proceeding with respect to this Agreement shall be brought exclusively in the federal or state courts of the State of Delaware, and by execution and delivery of this Agreement, Executive and Company irrevocably consent to the jurisdiction of those courts. Executive and Company irrevocably waive any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which either may now or hereafter have to -------------------- the bringing of any action or proceeding in such jurisdiction in respect of this Agreement or any transaction related hereto. Executive and Company acknowledge and agree that any service of legal process by mail in the manner provided for notices under this Agreement constitutes proper legal service of process under applicable law in any action or proceeding under or in respect of this Agreement. (c) The parties agree that this Agreement (together with any stock option agreements entered into between Company and Executive and any other documents or agreements specifically referred to herein) shall constitute the sole and conclusive basis for establishing Executive's compensation for all services provided by him hereunder. 18. Notices All notices which a party is required or may desire to give to the other party under or in connection with this Agreement shall be given in writing by addressing the same to the other party as follows: If to Executive to: Michael D. Eisner Los Angeles, California 90024 and 9 If to Company, to: The Walt Disney Company 500 South Buena Vista Street Burbank, California 91521 Attn: Senior Executive Vice President and Chief of Operations or at such other place as may be designated in writing by like notice. Any notice shall be deemed to have been given within 48 hours after being addressed as required herein and deposited, first-class postage prepaid, in the United States mail. IN WITNESS WHEREOF, the parties have executed this Agreement this 29th day of June, 2000. THE WALT DISNEY COMPANY ___________________________ By:_____________________________ Michael D. Eisner Name: Stanley P. Gold Title: Chairman of the Executive Performance Subcommittee 10 EX-10.(B) 3 0003.txt AGREEMENT TO REGISTRANT'S STOCK INCENTIVE PLAN Exhibit 10(b) AMENDMENT TO THE WALT DISNEY COMPANY STOCK INCENTIVE PLANS This is an amendment to (i) the Amended and Restated 1995 Stock Incentive Plan of The Walt Disney Company (the "Corporation"), (ii) the 1990 Stock Incentive Plan of the Corporation, (iii) the 1987 Stock Incentive Plan of the Corporation and (iv) the 1984 Stock Incentive Plan of the Corporation (collectively, the "Plans"). This amendment adds a new Section 11 to each Plan that reads as follows, and any existing Section 11 shall be renumbered as Section 12, and all succeeding sections shall be renumbered accordingly: "11. Change In Control ----------------- "(a) Accelerated Vesting. Except to the extent an award agreement ------------------- provides for a different result (in which case the award agreement will govern and this Section 11 of the Plan shall not be applicable), notwithstanding anything elsewhere in the Plan or any rules adopted by the Committee pursuant to the Plan to the contrary, if a Triggering Event shall occur within the 12-month period beginning with a Change in Control of Disney, then, effective immediately prior to such Triggering Event, (i) each outstanding stock option, warrant and stock appreciation right, to the extent that it shall not otherwise have become vested and exercisable, shall automatically become immediately and fully vested and exercisable, (ii) each outstanding award of restricted stock shall become immediately and fully vested and all transfer restrictions under the terms of the award shall lapse and (iii) each outstanding award of phantom stock, performance shares or similar award shall become immediately and fully vested, all performance or other conditions related to the payment of or rights under the award shall lapse, and the award shall be immediately paid in the form specified in the award agreement. "(b) Definitions. For purposes of this Section 11, the following ----------- terms shall have the meanings set forth below. "(1) Change in Control. For purposes hereof, a "Change in ----------------- Control" of Disney shall mean: "(i) the occurrence of (A) an acquisition by any individual, entity or group (within the meaning of section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a percentage of the combined voting power of the then outstanding voting securities of Disney entitled to vote generally in the election of directors (the "Disney Voting Securities") (but 11 excluding (1) any acquisition directly from Disney (other than an acquisition by virtue of the exercise of a conversion privilege of a security that was not acquired directly from Disney), (2) any acquisition by Disney or an Affiliate and (3) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by Disney or any Affiliate) (an "Acquisition") that is thirty percent (30%) or more of the Disney Voting Securities; and (B) the termination of employment, within six (6) months following the Acquisition, of the individual who is the Chief Executive Officer of Disney immediately prior to the Acquisition, for any reason other than death, permanent and total disability, Cause, or voluntary resignation (but excluding any termination for "good reason" under any employment agreement and any resignation that was requested by the Board or any such Person (or its employees or representatives) that completes an Acquisition); "(ii) at any time during a period of two (2) consecutive years or less, individuals who at the beginning of such period constitute the Board (and any new directors whose election by the Board or nomination for election by Disney's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was so approved) cease for any reason (except for death, disability or voluntary retirement) to constitute a majority thereof; "(iii) an Acquisition that is fifty percent (50%) or more of the Disney Voting Securities; "(iv) the consummation of a merger, consolidation, reorganization or similar corporate transaction, whether or not Disney is the surviving company in such transaction, other than a merger, consolidation, or reorganization that would result in the Persons who are beneficial owners of the Disney Voting Securities outstanding immediately prior thereto continuing to beneficially own, directly or indirectly, in substantially the same proportions, at least fifty percent (50%) of the combined voting power of the Disney Voting Securities (or the voting securities of the surviving entity) outstanding immediately after such merger, consolidation or reorganization; "(v) the sale or other disposition of all or substantially all of the assets of Disney; "(vi) the approval by the stockholders of Disney of a complete liquidation or dissolution of Disney; or 12 "(vii) the occurrence of any transaction or event, or series of transactions or events, designated by the Board in a duly adopted resolution as representing a change in the effective control of the business and affairs of Disney, effective as of the date specified in any such resolution. "(2) Triggering Event. For purposes hereof, the term ---------------- "Triggering Event" shall mean (i) the termination of employment of a participant by Disney or an Affiliate (or any successor thereof) other than on account of death, permanent and total disability or Cause (ii) the occurrence of a Constructive Termination, or (iii) any failure by Disney (or a successor entity) to assume, replace, convert or otherwise continue any award in connection with the Change in Control (or another corporate transaction or other change effecting the Common Stock) on the same terms and conditions as applied immediately prior to such transaction, except for equitable adjustments to reflect the changes in the Common Stock pursuant to Section 8 hereof. "(3) Cause. For purposes hereof, the term "Cause" shall mean a ----- determination by the Committee that a participant (i) has been convicted of, or entered a plea of nolo contendere to, a crime that ---- ---------- constitutes a felony under federal or state law, (ii) has engaged in willful gross misconduct in the performance of his or her duties to Disney or an Affiliate or (iii) has committed a material breach of any written agreement with Disney or any Affiliate with respect to confidentiality, noncompetition, nonsolicitation or similar restrictive covenant. Subject to the first sentence of this Section (a), above, in the event that a participant is a party to an employment agreement with Disney or any Affiliate that defines a termination on account of "Cause" (or a term having similar meaning), such definition shall apply as the definition of a termination on account of "Cause" for purposes hereof, but only to the extent that such definition provides the participant with greater rights. A termination on account of Cause shall be communicated by written notice to the participant, and shall be deemed to occur on the date such notice is delivered to the participant. "(4) Constructive Termination. For purposes hereof, the term ------------------------ "Constructive Termination" shall mean a termination of employment by a participant within 60 days following the occurrence of any one or more of the following events without the participant's written consent (i) any reduction in position, title (for Vice Presidents or above), overall responsibilities, level of authority, level of reporting (for Vice Presidents or above), base compensation, annual incentive compensation opportunity, aggregate employee benefits, or a request that the participant's location of employment be relocated by more than fifty (50) miles. Subject to the first sentence of this Section (a), above, in the event that a participant is a party to an employment agreement with Disney or any Affiliate (or a successor entity) that defines a termination on account of "Constructive Termination", 13 "Good Reason", "Breach of Agreement" (or a term having a similar meaning), such definition shall apply as the definition of "Constructive Termination" for purposes hereof in lieu of the foregoing, but only to the extent that such definition provides the participant with greater rights. A Constructive Termination shall be communicated by written notice to the Committee, and shall be deemed to occur on the date such notice is delivered to the Committee, unless the circumstances giving rise to the Constructive Termination are cured within five (5) days of such notice. "(c) Excise Tax Limit. In the event that the vesting of the Awards ---------------- together with all other payments and the value of any benefit received or to be received by the participant would result in all or a portion of such payment being subject to excise tax under Section 4999 of the Code, then the participant's payment shall be either (A) the full payment or (B) such lesser amount that would result in no portion of the payment being subject to excise tax under Section 4999 of the Code (the "Excise Tax"), whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by the participant, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of the payment may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 11 shall be made by PricewaterhouseCoopers or any other nationally recognized accounting firm which is Disney's outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax (the "Accounting Firm"). Disney shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to Disney and participant. All fees and expenses of the Accounting Firm shall be borne solely by Disney. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). With respect to awards outstanding on June 26, 2000, for the purposes of all calculations under Section 280G of the Code and the application of this Section 11, all determinations as to present value shall be made using 120 percent of the applicable Federal rate (determined under Section 1274(d) of the Code) compounded semiannually, as in effect on June 26, 2000." IN WITNESS WHEREOF, this Amendment has been duly executed on behalf of the Corporation and is adopted and is effective as of this 26th day of June 2000. THE WALT DISNEY COMPANY By /s/ Marsha Reed Vice President and Secretary 14 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 9-MOS SEP-30-2000 OCT-01-1999 JUN-30-2000 690 0 3,800 0 654 10,234 18,755 6,813 44,777 7,885 7,249 0 0 11,853 11,973 44,777 0 19,286 0 16,778 70 0 447 1,991 1,238 753 0 0 0 753 0.46 0.46
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