-----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, PRL2/MGhVZpk4AwCOguSaGlwMD7Uh+Du4fpuYICDhHYRTKI+YzCjFyRA52WCuuz5 mo/OjiUemTdSt5O1XADoMQ== 0000898430-98-004473.txt : 19981221 0000898430-98-004473.hdr.sgml : 19981221 ACCESSION NUMBER: 0000898430-98-004473 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALT DISNEY CO/ CENTRAL INDEX KEY: 0001001039 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 954545390 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11605 FILM NUMBER: 98772234 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 1998 Commission File Number 1- 11605 [LOGO OF THE WALT DISNEY COMPANY] Incorporated in Delaware I.R.S. Employer Identification No. 500 South Buena Vista Street, Burbank, California 91521 (818) 560-1000 95-4545390 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange on Which Registered Title of Each Class New York Stock Exchange Common Stock, $.01 par value Pacific Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of November 30, 1998, the aggregate market value of registrant's common stock held by non-affiliates (based on the closing price on such date as reported on the New York Stock Exchange-Composite Transactions) was $66.0 billion. All executive officers and directors of registrant and all persons filing a Schedule 13D with the Securities and Exchange Commission in respect to registrant's common stock have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant. There were 2,050,798,550 shares of common stock outstanding as of December 17, 1998 (including 507,300 shares held by TWDC Stock Compensation Fund, an affiliate of the Company). Documents Incorporated by Reference Certain information required for Part III of this report is incorporated herein by reference to an amendment to this report on Form 10-K/A to be filed within 120 days after the end of the fiscal year covered by this report. PART I ITEM 1. BUSINESS The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company with operations in three business segments: Creative Content, Broadcasting and Theme Parks and Resorts. Information on revenues, operating income, identifiable assets and supplemental revenue of the Company's business segments appears in Note 11 to the Consolidated Financial Statements included in Item 8 hereof. The Company employs approximately 117,000 people. On February 9, 1996, the Company completed its acquisition of ABC, Inc. ("ABC"). Information on the acquisition appears in Note 2 to the Consolidated Financial Statements included in Item 8 hereof. As a result of the acquisition, a new parent company, with the name "The Walt Disney Company," replaced the old parent company of the same name. Unless the context otherwise requires, the term "Company" is used to refer collectively to the parent company and the subsidiaries through which its various businesses are actually conducted. CREATIVE CONTENT The Creative Content segment produces live-action and animated motion pictures, television programs and musical recordings, licenses the Company's characters and other intellectual property for use in connection with merchandise and publications and publishes books and magazines. Within the segment, films and characters are often promoted through the release of audiocassettes and compact discs and children's books and magazines. In addition, television programs have been created that contain characters originated in animated films. Character merchandising and publications licensing promote the Company's films and television programs, as well as the Company's other operations. The Company also operates "The Disney Stores," which are direct retail distribution outlets for products based on the Company's characters and films. The Company is also engaged directly in the home video and television distribution of its film and television library. The Company is an industry leader in producing and acquiring live-action and animated motion pictures for distribution to the theatrical, television and home video markets and produces original television programming for the network and first-run syndication markets. In addition, the Company produces music recordings and live stage plays. The Company licenses the name "Walt Disney," as well as the Company's characters, visual and literary properties and songs and music, to various consumer manufacturers, retailers, show promoters and publishers throughout the world. Company subsidiaries also engage in direct retail distribution through the Disney Stores; publish books, magazines and comics in the United States and Europe; produce popular music, children's audio products and computer software for the entertainment market, as well as film and video products for the educational marketplace. THEATRICAL FILMS Walt Disney Pictures and Television, a subsidiary of the Company, produces and acquires live-action motion pictures that are distributed under the banners Walt Disney Pictures, Touchstone Pictures and Hollywood Pictures. Another subsidiary, Miramax Film Corp., acquires and produces motion pictures that are primarily distributed under the Miramax and Dimension banners. The Company also produces and distributes animated motion pictures under the banner Walt Disney Pictures. In addition, the Company distributes films produced or acquired by certain independent production companies. During fiscal 1999, the Company expects to distribute approximately 21 feature films under the Walt Disney Pictures, Touchtone Pictures and Hollywood Pictures banners and approximately 36 films under the Miramax and Dimension banners, including several live-action family films and one to two full length animated films, with the remainder targeted to teenagers and adults. In addition, the -1- Company periodically reissues previously released animated films. As of September 30, 1998, the Company had released 547 full length live-action features (primarily color), 36 full length animated color features and approximately 478 cartoon shorts. The Company distributes and markets its filmed products principally through its own distribution and marketing companies in the United States and major foreign markets. In 1998, the Company's international distributor, Buena Vista International, became the first international distribution company to gross more than $1 billion at the box office for four consecutive years. HOME VIDEO The Company directly distributes home video releases from each of its banners in the domestic market. In the international market, the Company distributes both directly and through foreign distribution companies. In addition, the Company develops, acquires and produces original programming for direct to video release. For two years in a row, the Company has distributed seven of the ten top selling home videos. In addition, the Company distributed three of the five top rental titles in 1998. As of September 30, 1998, 1,247 produced and acquired titles, including 661 feature films and 527 cartoon shorts and animated features, were available to the domestic marketplace and 1,349 produced and acquired titles, including 715 feature films and 634 cartoon shorts and animated features, were available to the international home entertainment market. TELEVISION PRODUCTION AND DISTRIBUTION The Company develops, produces and distributes television programming to global broadcasters, cable and satellite operators, including the major television networks, the Disney Channel and other cable broadcasters, under the Buena Vista Television, Touchstone Television and Walt Disney Television labels. Program development is carried out in collaboration with a number of independent writers, producers and creative teams under various development arrangements. The Company focuses on the development, production and distribution of half-hour comedies and one-hour dramas for network prime-time broadcast. Half-hour comedies Home Improvement, Boy Meets World, Smart Guy and Unhappily Ever After were all renewed for the 1998/99 television season. New prime-time series premiering in the fall of 1998 included the half-hour comedy Sports Night and the one-hour drama Felicity. Midseason orders include the half-hour comedies The PJ's and Zoe Bean. The Company is also producing six original television movies for The Wonderful World of Disney, which was renewed for the 1998/99 television season and continues to air on ABC on Sunday evenings. The 1998/99 Saturday morning television season returned with a second year of the two-hour kids' show, Disney's One Saturday Morning on ABC. Disney's One Saturday Morning is a show comprised of audience participation segments, cartoons and pre-recorded comedy segments that "wrap-around" the weekly series Disney's Doug, Recess and Pepper Ann. Other television animation series on ABC include the premiere of Disney's Hercules, and the return of Disney's 101 Dalmatians: The Series and The New Adventures of Winnie the Pooh. Midseason on Saturday morning will feature the premiere of Mouseworks, the first cartoon series since the 1950's featuring Mickey Mouse and his friends. The Company also provides a variety of prime-time specials for exhibition on network television. Additionally, the Company produces first-run animated and live-action syndicated programming. The Disney Afternoon is a one-and-a-half hour block, airing five days per week, including Disney's Hercules, Disney's Doug and Ducktales. Live-action programming includes Live! With Regis and Kathie Lee, a daily talk show; Honey, I Shrunk the Kids, a weekly family action hour; Siskel & Ebert, a weekly motion picture review program; Disney Presents Bill Nye the Science Guy and Sing Me a Story with Belle, weekly educational programs for children, as well as daily game shows on cable including Make Me Laugh and Win Ben Stein's Money. -2- The Company licenses the theatrical and television film library to the domestic television syndication market. Television programs in off-network syndication or cable include Home Improvement, Ellen, Boy Meets World, Blossom, Dinosaurs, Golden Girls, Brotherly Love and Empty Nest. Major packages of the Company's feature films and television programming have been licensed for broadcast over several years. The Company also licenses its theatrical and television properties in a number of foreign television markets. In addition, certain of the Company's television programs are syndicated by the Company abroad, including The Disney Club, a weekly series that the Company produces for foreign markets. The Company has licensed to the Encore pay television services, over a multi-year period, exclusive domestic pay television rights to certain films released under the Miramax, Touchstone, Hollywood, Dimension and Walt Disney Pictures banners. In addition, the Company has licensed to the Showtime pay television services over a multi-year period, exclusive domestic pay television rights to certain films released under the Dimension banner. AUDIO PRODUCTS AND MUSIC PUBLISHING The Company also produces and distributes compact discs, audiocassettes and records, consisting primarily of soundtracks for animated films and read-along products, directed at the children's market in the United States, France and the United Kingdom, and licenses the creation of similar products throughout the rest of the world. In addition, the Company commissions new music for its motion pictures and television programs and records and licenses the song copyrights created for the Company to others for printed music, records, audiovisual devices and public performances. Domestic retail sales of compact discs, audiocassettes and records are the largest source of music-related revenues, while direct marketing, which utilizes catalogs, coupon packages and television, is a secondary means of music distribution for the Company. The Company's Hollywood Records subsidiary develops, produces and markets recordings from new talent across the spectrum of popular music, as well as soundtracks from certain of the Company's live-action motion pictures. The Company's Mammoth Records develops, produces and markets a diverse group of artists in the popular and alternative music fields. The Company also owns the Nashville-based music label Lyric Street Records. WALT DISNEY THEATRICAL PRODUCTIONS In November 1997, the Broadway production of The Lion King opened at the newly renovated New Amsterdam Theater. In 1998, The Lion King won six Tony Awards, including Best Musical. In 1994, the Company produced an adaptation of its animated feature film Beauty and the Beast for the Broadway stage. The production celebrated its fourth anniversary on Broadway this year and is currently touring the United States. The show has also been produced in seven countries around the world. CHARACTER MERCHANDISE AND PUBLICATIONS LICENSING The Company's worldwide licensing activities generate royalties, which are usually based on a fixed percentage of the wholesale or retail selling price of the licensee's products. The Company licenses characters based upon both traditional and newly created film properties. Character merchandise categories that have been licensed include apparel, toys, gifts, home furnishings and housewares, stationery and sporting goods. Publication categories that have been licensed include continuity-series books, book sets, art and picture books and magazines. In addition to receiving licensing fees, the Company is actively involved in the development and approval of licensed merchandise and in the conceptualization, development, writing and illustration -3- of licensed publications. The Company continually seeks to create new characters to be used in licensed products. THE DISNEY STORES The Company markets Disney-related products directly through its retail facilities operated under "The Disney Store" name. These facilities are generally located in leading shopping malls and similar retail complexes. The stores carry a wide variety of Disney merchandise and promote other businesses of the Company. During fiscal 1998, the Company opened 18 new stores in the United States and Canada, 8 in Europe and 21 in the Asia-Pacific area. The Company also closed 2 stores in Europe as part of cost reduction efforts, bringing the total number of stores to 681 as of September 30, 1998. The Company expects to open additional stores in the future in selected markets throughout the United States, as well as in Asian and European countries. BOOKS AND MAGAZINES The Company has book imprints in the United States offering books for children and adults as part of the Buena Vista Publishing Group. The Company also produces several magazines including Family Fun, Disney Adventures as well as Discover, a general science magazine. In addition, the Company produces ESPN The Magazine as part of a joint venture with ESPN, Inc. and The Hearst Company. MULTIMEDIA BUENA VISTA INTERNET GROUP - During the first quarter of 1998, Buena Vista Internet Group ("BVIG") was formed to coordinate the Company's internet initiatives. BVIG develops, publishes and distributes content for narrow-band on-line services, the interactive software market, interactive television platforms, internet web sites, including Disney.com, Disney's Daily Blast, ESPN.com, ABCNews.com and the Disney Store Online which offers Disneythemed merchandise over the internet. Effective November 18, 1998, the Company acquired 43% of Infoseek Corporation, an internet search company. In connection with its investment in Infoseek, BVIG and Infoseek announced the creation of the Go NetworkSYMBOL 212 \f "Symbol" \s 10. The Go Network will be an internet portal serving as an interactive link through which people can gain access to the internet at large, as well as every form of information and entertainment that Disney offers. DISNEY INTERACTIVE - Disney Interactive is a software business that licenses, develops and markets entertainment and educational computer software and video game titles for home and school. OTHER ACTIVITIES The Company produces audiovisual materials for the educational market, including videocassettes and film strips. It also licenses the manufacture and sale of posters and other teaching aids. The Company markets and distributes, through various channels, animation cel art and other animation-related artwork and collectibles. In addition, the Company directly sells merchandise through The Disney Catalog. COMPETITIVE POSITION The success of the Creative Content operations is heavily dependent upon public taste, which is unpredictable and subject to change. In addition, filmed entertainment operating results fluctuate due to the timing and performance of theatrical and home video releases. Release dates are determined by several factors, including timing of vacation and holiday periods and competition. Operating results for the licensing and retail distribution business are influenced by seasonal consumer purchasing behavior and by the timing and performance of animated theatrical releases. The Company's Creative Content businesses compete with all forms of entertainment. A significant number of companies produce and/or distribute theatrical and television films, exploit -4- products in the home video market, provide pay television programming services, sponsor live theater and/or produce interactive software. The Company also competes to obtain creative talents, story properties, advertiser support, broadcast rights and market share, which are essential to the success of all the Company's Creative Content businesses. The Company competes in its character merchandising and other licensing, publishing and retail activities with other licensers, publishers and retailers of character, brand and celebrity names. Although public information is limited, the Company believes it is the largest worldwide licenser of character-based merchandise and producer/distributor of children's audio and film-related products. BROADCASTING TELEVISION AND RADIO NETWORK The Company operates the ABC Television Network, which as of September 30, 1998 had 224 primary affiliated stations operating under long-term agreements reaching 99.9% of all U.S. television households. The ABC Television Network broadcasts programs in "dayparts" and types as follows: Monday through Friday Early Morning, Daytime and Late Night, Monday through Sunday Prime Time and News, Children's and Sports. The Company also operates the ABC Radio Networks, which reach more than 144 million domestic listeners weekly and consist of over 8,900 program affiliations on more than 4,400 radio stations. The ABC Radio Networks also produce and distribute a number of radio program series for radio stations nationwide and can be heard in more than 90 countries worldwide. Generally, the networks pay the cost of producing their own programs or acquiring broadcast rights from other producers for network programming and pay varying amounts of compensation to affiliated stations for broadcasting the programs and commercial announcements included therein. Substantially all revenues from network operations are derived from the sale to advertisers of time in network programs for commercial announcements. The ability to sell time for commercial announcements and the rates received are primarily dependent on the quantitative and qualitative audience that the network can deliver to the advertiser as well as overall advertiser demand for time in the network marketplace. TELEVISION AND RADIO STATIONS The Company owns nine very high frequency (VHF) television stations, five of which are located in the top ten markets in the United States; one ultra high frequency (UHF) television station; fifteen standard (AM) radio stations; and fifteen frequency modulation (FM) radio stations. All of the television stations are affiliated with the ABC Television Network, and most of the 30 radio stations are affiliated with the ABC Radio Networks. The Company's television stations reach 24% of the nation's television households, calculated using the multiple ownership rules of the Federal Communications Commission (FCC). The Company's radio stations reach more than 14 million people weekly in the top twenty United States advertising markets. Markets, frequencies and other station details are set forth in the following tables: TELEVISION STATIONS
EXPIRATION TELEVISION DATE OF FCC MARKET STATION AND MARKET CHANNEL AUTHORIZATION RANKING (1) - ------------------ ------- ------------- ----------- WABC-TV (New York, NY) 7 Jun. 1, 1999 1 KABC-TV (Los Angeles, CA) 7 Dec. 1, 1998 2 WLS-TV (Chicago, IL) 7 Dec. 2, 2005 3 WPVI-TV (Philadelphia, PA) 6 Aug. 1, 1999 4 KGO-TV (San Francisco, CA) 7 Dec. 1, 1998 5 KTRK-TV (Houston, TX) 13 Aug. 1, 2006 11
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EXPIRATION TELEVISION DATE OF FCC MARKET STATION AND MARKET CHANNEL AUTHORIZATION RANKING (1) - ------------------ ------- ------------- ----------- WTVD (Raleigh-Durham, NC) 11 Dec. 1, 2004 29 KFSN-TV (Fresno, CA) 30 Dec. 1, 1998 55 WJRT-TV (Flint, MI) 12 Oct. 1, 2005 63 WTVG (Toledo, OH) 13 Oct. 1, 2005 66 RADIO STATIONS FREQUENCY EXPIRATION RADIO AM-KILOHERTZ DATE OF FCC MARKET STATION AND MARKET FM-MEGAHERTZ AUTHORIZATION RANKING (2) - ------------------ ------------ ------------- ----------- WABC (New York, NY) 770 K June 1, 2006 1 KABC (Los Angeles, CA) 790 K Dec. 1, 2005 2 KDIS (Los Angeles, CA) 710 K Dec. 1, 2005 2 WLS (Chicago, IL) 890 K Dec. 1, 2004 3 KGO (San Francisco, CA) 810 K Dec. 1, 2005 4 KSFO (San Francisco, CA) 560 K Dec. 1, 2005 4 KMKY (San Francisco, CA) 1310 K Dec. 1, 2005 4 WBAP (Dallas-Fort Worth, TX) 820 K Aug. 1, 2005 6 WJR (Detroit-MI) 760 K Oct. 1, 2004 7 WMAL (Washington, DC) 630 K Oct. 1, 2003 8 WDWD (Atlanta, GA) 590 K Apr. 1, 2004 12 KKDZ (Seattle, WA) 1250 K Feb. 1, 2006 13 KDIZ (Minneapolis, MN) 1440 K Apr. 1, 2005 14 WIBV (St. Louis, MO) 1260 K Dec. 1, 2004 18 WMIH (Cleveland, OH) 1260 K Oct. 1, 2004 23 WPLJ (FM) (New York, NY) 95.5 M June 6, 2006 1 KLOS (FM) (Los Angeles, CA) 95.5 M (3) WXCD (FM) (Chicago, IL) 94.7 M Dec. 1, 2004 3 KSCS (FM) (Dallas-Fort Worth, TX) 96.3 M Aug. 1, 2005 6 WPLT (FM) (Detroit, MI) 96.3 M Oct. 1, 2004 7 WDRQ (FM) (Detroit, MI) 93.1 M Oct. 1, 2001 7 WRQX (FM) (Washington, DC) 107.3 M Oct. 1, 2003 8 WJZW (FM) (Washington, DC) 105.9 M Oct. 1, 2001 8 WKHX (FM) (Atlanta, GA) 101.5 M Apr. 1, 2004 12 WYAY (FM) (Atlanta, GA) 106.7 M Apr. 1, 2004 12 KQRS (FM) (Minneapolis-St.Paul, MN) 92.5 M Apr. 1, 2005 14 KXXR (FM) (Minneapolis-St.Paul, MN) 93.7 M Apr. 1, 2005 14 KZNR (FM) (Minneapolis-St.Paul, MN)) 105.1 M Apr. 1, 2005 14 KZNT (FM) (Minneapolis-St.Paul, MN) 105.3 M Apr. 1, 2005 14 KZNZ (FM) (Minneapolis-St.Paul, MN) 105.7 M Apr. 1, 2005 14
- -------- (1) Based on Nielsen U.S. Television Household Estimates, September 1998 (2) Based on 1998 Arbitron Radio Market Rank (3) Renewal application pending CABLE AND INTERNATIONAL BROADCAST OPERATIONS The Company's cable and international broadcast operations are principally involved in the production and distribution of cable television programming, the licensing of programming to domestic and international markets and investing in foreign television broadcasting, production and distribution entities. The Company owns the Disney Channel, Toon Disney, 80% of ESPN, Inc., 37.5% of the A&E Television Networks, 50% of Lifetime Entertainment Services, 39.6% of E! Entertainment Television and has various other international investments. During the first quarter of 1998, the Company acquired the Classic Sports Network. -6- The Disney Channel, which has approximately 43 million domestic subscribers, is a cable and satellite television service. New shows developed for original use by the Disney Channel include dramatic, adventure, comedy and educational series, as well as documentaries and first-run television movies. In addition, entertainment specials include shows originating from both the Walt Disney World Resort(R) and Disneyland Park(R). The balance of the programming consists of products acquired from third parties and products from the Company's theatrical film and television programming library. Toon Disney, a 24-hour cable and satellite channel airing Disney animation, was launched April 18, 1998, the fifteenth anniversary of the Disney Channel. Toon Disney reaches 6 million subscribers. The Disney Channel International reaches approximately 9 million subscribers. Programming consists primarily of the Company's theatrical film and television programming library, as well as products acquired from third parties and locally produced programming. The Disney Channels in Taiwan and the U.K. premiered in 1995, followed by the launch of the Disney Channels in Australia and Malaysia in 1996, the Disney Channels France and Middle East in 1997, the Disney Channel Spain in April 1998, and the Disney Channel Italy in October 1998. Planned launches include Disney Channels in Germany and Brazil in October 1999 and the Disney Channel Latin America in January 2000. The Company continues to explore the development of the Disney Channel in other countries around the world. ESPN, Inc. operates ESPN, a cable and satellite sports programming service reaching 75 million households, ESPN2, which reaches 61 million domestic subscribers, Classic Sports Network, which reaches more than 15 million homes and ESPNEWS, a 24-hour sports news service that reaches approximately 10 million subscribers nationwide. ESPN, Inc., owns or has equity interests in 20 international networks, reaching more than 152 million households outside the U.S. in more than 180 countries and territories. ESPN, Inc., owns 33% of Eurosport, a pan-European cable and direct-to-home sports programming service, and 50% of ESPN Brazil. ESPN, Inc. owns a 50% interest in the ESPN STAR joint venture, which delivers sports programming throughout most of Asia, and 32% of the NetStar, which owns The Sports Network (TSN) and Les Reseau des Sports, among other media properties in Canada. ESPN, Inc. also holds a 20% interest in Sports-i ESPN in Japan, the country's only cable and direct-to-home all- sports network. The A&E Television Networks are cable programming services devoted to cultural and entertainment programming. The A&E cable service reaches 78 million subscribers. The History Channel, which is owned by A&E, reaches 51 million subscribers. Lifetime Entertainment Services owns Lifetime Television, which reaches 73 million cable subscribers and is devoted to women's lifestyle programming. During 1998, Lifetime launched the Lifetime Movie Network, a 24-hour digital channel. E! Entertainment Television is a cable programming service which reaches 51 million cable subscribers and is devoted to the world of entertainment. E! Entertainment Television also launched Style in October 1998. Style is a 24- hour network devoted to style, fashion and design (available to both analog and digital systems). The Company's share of the financial results of the cable and international broadcast services, other than the Disney Channel and ESPN, Inc., is reported under the heading "Corporate activities and other" in the Company's Consolidated Statements of Income. COMPETITIVE POSITION The ABC Television Network, the Disney Channel, ESPN and other broadcasting affiliates primarily compete for viewers with the other television networks, independent television stations, other video media such as cable television, satellite television program services and videocassettes. In the sale of advertising time, the broadcasting operations compete with other television networks, -7- independent television stations, suppliers of cable television programs and other advertising media such as newspapers, magazines and billboards. The ABC Radio Networks likewise compete with other radio networks and radio programming services, independent radio stations and other advertising media. The Company's television and radio stations are in competition with other television and radio stations, cable television systems, satellite television program services, videocassettes and other advertising media such as newspapers, magazines and billboards. Such competition occurs primarily in individual market areas. A television station in one market does not compete directly with other stations in other market areas. There has been a continuing decline in viewership at all major broadcast networks, including ABC, reflecting the growth in the cable industry's share of viewers, which has resulted in increased competitive pressures for advertising revenues. In addition, sports and other programming costs have increased due to increased competition. FEDERAL REGULATION Television and radio broadcasting are subject to the jurisdiction of the Federal Communications Commission ("FCC") under the Communications Act of 1934, as amended (the "Communications Act"). The Communications Act empowers the FCC, among other things, to issue, revoke or modify broadcasting licenses, determine the location of stations, regulate the equipment used by stations, adopt such regulations as may be necessary to carry out the provisions of the Communications Act and impose certain penalties for violation of its regulations. FCC regulations also restrict the ownership of stations and cable operations in certain circumstances, and regulate the practices of network broadcasters, cable providers and competing services. Such laws and regulations are subject to change, and the Company generally cannot predict whether new legislation or regulations, or a change in the extent of application or enforcement of current laws and regulations, would have an adverse impact on the Company's operations. RENEWALS Broadcasting licenses are granted for a maximum period of eight years, and are renewable upon application therefor if the Commission finds that the public interest would be served thereby. During certain periods when a renewal application is pending, other parties may file petitions to deny the application for renewal of a license. A renewal application is now pending for KLOS (FM), in Los Angeles. All of the Company's other owned stations have been granted license renewals by the FCC for maximum terms. -8- THEME PARKS AND RESORTS The Company operates the Walt Disney World Resort in Florida and the Disneyland Park and two hotels in California. The Company also earns royalties on revenues generated by the Tokyo Disneyland theme park and has an ownership interest in Disneyland Paris. WALT DISNEY WORLD RESORT The Walt Disney World Resort is located on approximately 30,500 acres of land owned by Company subsidiaries 15 miles southwest of Orlando, Florida. The resort includes four theme parks (the Magic Kingdom, Epcot, Disney-MGM Studios, and Disney's Animal Kingdom), hotels and villas, a retail, dining and entertainment complex, a sports complex, conference centers, campgrounds, golf courses, water parks and other recreational facilities designed to attract visitors for an extended stay. In addition, the resort operates Disney Cruise Line from Port Canaveral, Florida. The Company markets the entire Walt Disney World destination resort through a variety of national, international and local advertising and promotional activities. A number of attractions in each of the theme parks are sponsored by corporate participants through long-term participation agreements. MAGIC KINGDOM - The Magic Kingdom, which opened in 1971, consists of seven principal areas: Main Street U.S.A., Liberty Square, Frontierland, Tomorrowland, Fantasyland, Adventureland and Mickey's Toontown Fair. These areas feature themed rides and attractions, restaurants, refreshment areas and merchandise shops. EPCOT - Epcot, which opened in 1982, consists of two major themed areas: Future World and World Showcase. Future World dramatizes certain historical developments and addresses the challenges facing the world today through major pavilions devoted to high-tech products of the future ("Innoventions"), communication and technological exhibitions ("Spaceship Earth"), and energy, transportation, imagination, life and health, the land and seas. World Showcase presents a community of nations focusing on the culture, traditions and accomplishments of people around the world. World Showcase includes as a central showpiece the American Adventure, which highlights the history of the American people. Other nations represented are Canada, China, France, Germany, Italy, Japan, Mexico, Morocco, Norway and the United Kingdom. Both areas feature themed rides and attractions, restaurants and merchandise shops. DISNEY-MGM STUDIOS - The Disney-MGM Studios, which opened in 1989, consists of a theme park, an animation studio and a film and television production facility. The park centers around Hollywood as it was during the 1930's and 1940's and features Disney animators at work and a backstage tour of the film and television production facilities in addition to themed food service and merchandise facilities and other attractions. The production facility consists of three sound stages, merchandise shops and a back lot area and currently hosts both feature film and television productions. In late 1998, Disney-MGM Studios began featuring Fantasmic!, a night-time entertainment production spectacular. DISNEY'S ANIMAL KINGDOM - Disney's Animal Kingdom, which opened in April 1998, consists of a 145-foot Tree of Life as the centerpiece surrounded by four themed areas: Dinoland U.S.A., Africa, Conservation Station and Camp Minnie-Mickey. Each themed area contains adventure attractions, entertainment shows, restaurants and merchandise shops. The park features more than 200 species of animals and 4,000 varieties of trees and plants on more than 500 acres of land. An additional themed area, Asia, is scheduled to open during 1999. Among its attractions will be a river raft thrill ride and viewings of tigers and various other animals. RESORT FACILITIES - As of September 30, 1998, the Company owned and operated 13 resort hotels and a complex of villas and suites at the Walt Disney World Resort, with a total of approximately -9- 16,700 rooms and 318,000 square feet of conference meeting space. Currently under development is phase three of Disney's All-Star Resorts, Disney's All- Star Movies Resort. This resort will provide an additional 1,920 rooms and is expected to be completed in early 1999. In addition, Disney's Fort Wilderness camping and recreational area offers approximately 1,200 campsites and wilderness homes. The resort also offers professional development and personal enrichment programs at The Disney Institute. Recreational amenities and activities available at the resort include five championship golf courses, miniature golf courses, full-service spas, an animal sanctuary, tennis, sailing, water skiing, swimming, horseback riding and a number of other noncompetitive sports and leisure time activities. The resort also operates three water parks: Blizzard Beach, River Country and Typhoon Lagoon. The Company has also developed a 120-acre retail, dining and entertainment complex known as Downtown Disney, which consists of the Downtown Disney Marketplace, Pleasure Island and Downtown Disney West Side. In addition to more than 20 specialty retail shops and restaurants, the Downtown Disney Marketplace is home to the 50,000-square-foot World of Disney, the largest Disney retail outlet. Pleasure Island, an entertainment center adjacent to the Downtown Disney Marketplace, includes restaurants, night clubs and shopping facilities. Downtown Disney West Side is situated on 66 acres on the west side of Pleasure Island and includes a DisneyQuest facility and several third-party retail, dining and entertainment operations. Disney's Wide World of Sports, which opened in 1997, is a 200-acre sports complex providing professional caliber training and competition, festival and tournament events and interactive sports activities. The complex's venues accommodate more than 30 different sporting events, including baseball, tennis, basketball, softball, track and field, football and soccer. Its 9,000- seat stadium is the spring training site for the Atlanta Braves. The tennis venue is the home of the U.S. Men's Clay Court championships and the sports fields are home of the NFL Quarterback Challenge. In addition, the Harlem Globetrotters use the facility for their official training site and holiday season games. The Amateur Athletic Union hosts more than 30 championship events per year at the facility. Under continued phased-in development are Celebration, a 4,900-acre town, and Disney Cruise Line, a cruise vacation line that includes an 85,000 ton- ship, the Disney Magic, which sailed its maiden voyage in July 1998. A second ship, the Disney Wonder, is expected to launch in the second half of 1999. Both ships cater to children, families and adults with distinctly themed areas for each group. Additionally, each ship features 875 staterooms, 73% of which are outside staterooms providing guests with ocean views. The staterooms generally offer 25% more living space than the current cruise line industry average. Each cruise vacation includes a visit to Disney's Castaway Cay, a 1,000-acre private Bahamian island in the Abacos. The Company packages cruise vacations with visits to the Walt Disney World Resort and also offers cruise- only options. At the Downtown Disney Marketplace Hotel Plaza, seven independently operated hotels are situated on property leased from the Company. These hotels have a capacity of approximately 3,700 rooms. Additionally, two hotels--The Walt Disney World Swan and the Walt Disney World Dolphin, with an aggregate capacity of approximately 2,300 rooms--are independently operated on property leased from the Company near Epcot. The Disney Vacation Club offers ownership interests in several resort facilities, including the 497-unit Disney Old Key West Resort and 383 villas at Disney's BoardWalk Resort at the Walt Disney World Resort, a 175-unit resort in Vero Beach, Florida, and a 102-unit resort on Hilton Head Island, South Carolina. A 34-unit expansion at Disney's Old Key West is scheduled to open in 2000 and a 134-unit expansion adjacent to Disney's Wilderness Lodge is scheduled for opening in 2001. Available units at each facility are intended to be sold under a vacation ownership plan and operated partially as rental property until sold. -10- DISNEYLAND RESORT The Company owns 330 acres and has under long-term lease an additional 39 acres of land in Anaheim, California. Disneyland, which opened in 1955, consists of eight principal areas: Toontown, Fantasyland, Adventureland, Frontierland, Tomorrowland, New Orleans Square, Main Street and Critter Country. These areas feature themed rides and attractions, restaurants, refreshment stands and merchandise shops. A number of the Disneyland attractions are sponsored by corporate participants. The Company markets Disneyland through international, national and local advertising and promotional activities. The Company also owns and operates the 1,100-room Disneyland Hotel and the 500-room Disneyland Pacific Hotel near Disneyland. The Company completed a substantial renovation of Tomorrowland, including new rides and attractions, in the third quarter of 1998. The Company has begun construction on a new theme park, Disney's California Adventure, projected to open in 2001. The new theme park will be constructed on property adjacent to Disneyland. Disney's California Adventure will celebrate the many attributes of the state of California and will feature Disneyland Center, a themed complex of shopping, dining and entertainment venues; the Grand Californian, a deluxe 750-room hotel located inside the park; and an assortment of California-themed areas with associated rides and attractions. DISNEY REGIONAL ENTERTAINMENT Through the Disney Regional Entertainment group, the Company is developing a variety of new entertainment concepts to be located in metropolitan and suburban locations in the United States and around the world. These businesses include sports concepts, interactive entertainment venues, family play centers and other operations that are based on Disney brands and creative properties. In January 1998, Disney Regional Entertainment opened its second Club Disney in California. Club Disney is a community play center designed to entertain and enrich young families with imaginative play. Club Disney offers a variety of unique activities, as well as a cafe, exclusive retail merchandise, themed birthday parties and educational field trips. Club Disney is now operating in Thousand Oaks and West Covina, California and will open this winter in Chandler and Glendale, Arizona, both outside Phoenix, and in Lone Tree, Colorado, outside Denver. Additional Club Disney openings are planned in various suburban markets. In 1998 the Company launched its first ESPN Zone in Baltimore's Inner Harbor. The ESPN Zone is a 35,000 square-foot sports-themed dining and entertainment experience featuring three integrated components: The Studio Grill, offering dining in an ESPN studio environment; the Screening Room, offering fans any game on the air in the ultimate sports viewing environment; and the Sports Arena, challenging fans with a variety of interactive and competitive attractions. ESPN Zone is scheduled to open in Chicago's River North District and New York's Times Square in the summer of 1999. In the summer of 1998, the first DisneyQuest opened in Downtown Disney at the Walt Disney World Resort. DisneyQuest is a five story, 100,000 square-foot facility, where guests of all ages are launched into a wide range of virtual, interactive adventures. DisneyQuest is scheduled to open in the summer of 1999 in Chicago and in Philadelphia in 2000. TOKYO DISNEY RESORT The Company earns royalties on revenues generated by the Tokyo Disneyland theme park, which is owned and operated by Oriental Land Co., Ltd. ("OLC"), an unrelated Japanese corporation. The park, which opened in 1983, is similar in size and concept to Disneyland and is located approximately six miles from downtown Tokyo, Japan. -11- In the fourth quarter of 1998, OLC commenced construction of a second theme park designed by Walt Disney Imagineering, which will be called Tokyo DisneySea. Tokyo DisneySea is scheduled to open in fall 2001, together with a 500-room Disney-branded hotel and monorail system. OLC is also developing a retail, dining and entertainment complex adjacent to Tokyo Disneyland in what is known as the Maihama Station Area, which will include a second 500-room Disney-branded hotel owned and operated by OLC under license from a Company subsidiary. Construction costs on the development projects are being borne by OLC, which is also reimbursing the Company for its design, technical and operational assistance costs. Under the Company's agreements with OLC, the Company will be entitled to royalties from Tokyo DisneySea and the new hotels. DISNEYLAND PARIS Disneyland Paris is located on a 4,800-acre site at Marne-la-Vallee, approximately 20 miles east of Paris, France. The theme park, which opened in 1992, features 42 attractions in its five themed lands. Seven themed hotels, with a total of approximately 5,800 rooms, are part of the resort complex, together with an entertainment center offering a variety of retail, dining and show facilities. The project was developed pursuant to a 1987 master agreement with French governmental authorities by Euro Disney S.C.A., a publicly-held French company in which the Company currently holds a 39% equity interest and which is managed by a subsidiary of the Company. The financial results of the Company's investment in Euro Disney are reported under the heading "Corporate activities and other" in the Company's Consolidated Statements of Income. Development of the site continues with the Val d'Europe project at the gates of Disneyland Paris. Construction of an international shopping mall and the associated road infrastructure is now underway, with an opening date expected in the second half of the year 2000. WALT DISNEY IMAGINEERING Walt Disney Imagineering provides master planning, real estate development, attraction and show design, engineering support, production support, project management and other development services, including research and development for the Company's operations. ANAHEIM SPORTS, INC. Anaheim Sports, Inc. a subsidiary of the Company, owns and operates a National Hockey League franchise, the Mighty Ducks of Anaheim. In addition, a Company subsidiary is the managing general partner of Anaheim Angels, L.P., the holder of the Anaheim Angels Major League Baseball franchise. The Company owns a 25% general partnership interest in Anaheim Angels L.P., with an option to purchase the entire partnership interest on or before March 31, 1999. COMPETITIVE POSITION All of the theme parks and most of the associated resort facilities are operated on a year-round basis. Historically, the theme parks and resort business experiences fluctuations in park attendance and resort occupancy resulting from the nature of vacation travel. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring holiday periods. The Company's theme parks and resorts compete with all other forms of entertainment, lodging, tourism and recreational activities. The profitability of the leisure-time industry is influenced by various factors that are not directly controllable, such as economic conditions including business cycle and exchange rate fluctuations, amount of available leisure time, oil and transportation prices and weather patterns. -12- ITEM 2. PROPERTIES The Walt Disney World Resort, Disneyland Park and other properties of the Company and its subsidiaries are described in Item 1 under the caption Theme Parks and Resorts. Film library properties are described in Item 1 under the caption Creative Content. Radio and television stations owned by the Company are described under the caption Broadcasting. A subsidiary of the Company owns approximately 51 acres of land in Burbank, California on which the Company's studios and executive offices are located. The studio facilities are used for the production of both live-action and animated motion pictures and television products. In addition, Company subsidiaries lease office and warehouse space for certain studio and corporate activities. Other owned properties include a 400,000 square-foot office building in Burbank, California, which is used for the Company's operations. A subsidiary of the Company owns approximately 1.8 million square feet of office and warehouse buildings on approximately 96 acres in Glendale, California. The buildings are used for the Company's operations and also contain space leased to third parties. The Company's broadcasting segment corporate offices are located in a building owned by a subsidiary of the Company in New York City. A Company subsidiary also owns the ABC Television Center adjacent to the corporate offices and ABC Radio Networks' studios, also in New York City. Subsidiaries of the Company own the ABC Television Center and lease the ABC Television Network offices in Los Angeles, the ABC News Bureau facility in Washington, DC and a computer facility in Hackensack, New Jersey, under leases expiring on various dates through 2034. The Company's 80%-owned subsidiary, ESPN, Inc., owns ESPN Plaza in Bristol, Connecticut, from which it conducts its technical operations. The Company owns the majority of its other broadcast studios and offices and broadcast transmitter sites elsewhere, and those which it does not own are occupied under leases expiring on various dates through 2039. A U.K. subsidiary of the Company owns buildings on a four-acre parcel under long-term lease in London, England. The mixed-use development consists of 140,000 square feet of office space occupied by subsidiary operations, a 27,000 square-foot building leased to a third party and 65,000 square feet of retail space. A second phase of this development, completed in 1998, includes a 142,000 square-foot office building occupied by Company subsidiaries in 1999. Company subsidiaries also lease office space in other parts of Europe and in Asia and Latin America. The Disney Stores and Disney Regional Entertainment lease retail space for their operations. ITEM 3. LEGAL PROCEEDINGS The Company, together with, in some instances, certain of its directors and officers, is a defendant or co-defendant in various legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses. Management does not expect the Company to suffer any material liability by reason of such actions. In re The Walt Disney Company Derivative Litigation. On October 8, 1998, the Delaware Court of Chancery dismissed an amended and consolidated complaint filed on May 28, 1997 that named each of the Company's directors as of December 1996 as defendants. The amended complaint, filed by William and Geraldine Brehm and thirteen other individuals, had sought, among other things, a declaratory judgment that the Company's 1995 employment agreement with its former president, Michael S. Ovitz, was void, or alternatively that Mr. Ovitz's termination should be deemed a termination "for cause" and any severance payments to him forfeited. The complaint also sought compensatory or rescissory damages and injunctive and other equitable relief from the named defendants, as well as class-action status to pursue a claim for damages and invalidation of the 1997 election of directors. In its ruling on October 8, 1998, the Delaware court dismissed all counts of the amended complaint. -13- On November 4, 1998, plaintiffs filed a notice of appeal from the court's decision. Similar or identical claims have also been filed by the same plaintiffs (other than William and Geraldine Brehm) in the Superior Court of the State of California, Los Angeles County, beginning with a claim filed by Richard and David Kaplan on January 3, 1997. On May 18, 1998, an additional claim was filed in the same California court by Dorothy L. Greenfield. All of the California claims have been consolidated and stayed pending final resolution of the Delaware proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are elected each year at the organizational meeting of the Board of Directors which follows the annual meeting of the stockholders and at other meetings as appropriate. Each of the executive officers has been employed by the Company in the position or positions indicated in the list and pertinent notes below. Messrs. Eisner, Disney and Litvack have been employed by the Company as executive officers for more than five years. At September 30, 1998, the executive officers were as follows:
Executive Officer Name Age Title Since ------------------ --- ------------------------------------------ --------- Michael D. Eisner 56 Chairman of the Board and Chief Executive 1984 Officer Roy E. Disney 68 Vice Chairman of the Board 1984 Sanford M. Litvack 62 Senior Executive Vice President and Chief 1991 of Corporate Operations Louis M. Meisinger 56 Executive Vice President and General 1998 Counsel /1/ Peter E. Murphy 35 Executive Vice President and Chief 1998 Strategic Officer /2/ John F. Cooke 56 Executive Vice President-Corporate Affairs 1995 /3/ Thomas O. Staggs 37 Executive Vice President and Chief 1998 Financial Officer /4/
- -------- /1/ Mr. Meisinger, was named Executive Vice President and General Counsel of the Company on July 6, 1998. Prior to joining the Company, he was a senior partner with the law firm of Troop, Meisinger, Steuber & Pasich in Los Angeles, California, a firm he co-founded in 1975. Mr. Meisinger specialized in the litigation of complex entertainment, commercial and securities matters. /2/ Mr. Murphy joined the Company's strategic planning operation in 1988 and was named Senior Vice President-Strategic Planning and Development of the Company in July 1995. From August 1997 to May 1998 he served as Chief Financial Officer of ABC, Inc. He assumed his present position in May 1998. /3/ Mr. Cooke served as President of the Disney Channel from 1985 until assuming his present position in February 1995. /4/ Mr. Staggs joined the Company's strategic planning operation in 1990 and was named Senior Vice President-Strategic Planning and Development of the Company in July 1995, serving in that capacity until assuming his present position in May 1998. -14- PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York and Pacific stock exchanges (NYSE symbol DIS). The following sets forth the high and low composite closing sale prices for the fiscal periods indicated, adjusted to reflect the three-for-one split of the Company's common shares effective June 1998.
Sales Price ------------------- High Low --------- --------- 1998 4th Quarter.......................................... $39 7/8 $24 7/16 3rd Quarter.......................................... 42 3/8 35 1/64 2nd Quarter.......................................... 38 19/64 31 31/64 1st Quarter.......................................... 33 25 59/64 1997 4th Quarter.......................................... $26 63/64 $25 1/16 3rd Quarter.......................................... 28 11/64 23 45/64 2nd Quarter.......................................... 26 3/64 22 29/64 1st Quarter.......................................... 25 21/64 20 53/64
The Company declared a first quarter dividend of $0.0442 per share and three subsequent quarterly dividends of $.0525 per share in 1998, and in 1997, declared a first quarter dividend of $.0367 per share and three subsequent quarterly dividends of $0.0442 per share. As of September 30, 1998, the approximate number of record holders of the Company's common stock was 658,000. -15- ITEM 6. SELECTED FINANCIAL DATA (In millions, except per share data)
1998 1997(2) 1996(3) 1995 1994 ------- ------- ------- ------- ------- Statements of income Revenues $22,976 $22,473 $18,739 $12,151 $10,090 Operating income 4,015 4,447 3,033 2,466 1,972 Net income 1,850 1,966 1,214 1,380 1,110 Per share (1) Earnings Diluted 0.89 0.95 0.65 0.87 0.68 Basic 0.91 0.97 0.66 0.88 0.69 Dividends 0.20 0.17 0.14 0.12 0.10 Balance sheets Total assets $41,378 $38,497 $37,341 $14,995 $13,110 Borrowings 11,685 11,068 12,342 2,984 2,937 Stockholders' equity 19,388 17,285 16,086 6,651 5,508 Statements of cash flows Cash provided by operations $ 5,115 $ 5,099 $ 3,707 $ 3,510 $ 2,808 Investing activities (5,665) (3,936) (12,546) (2,288) (2,887) Financing activities 360 (1,124) 8,040 (332) (97)
- -------- (1) The earnings and dividends per share have been adjusted to give effect to the three-for-one split of the Company's common shares effective June 1998. See Note 8 to the Consolidated Financial Statements. (2) 1997 results include a $135 million gain from the sale of KCAL-TV. The diluted earnings per share impact of the gain was $0.04. See Note 2 to the Consolidated Financial Statements. (3) 1996 results include a $300 million non-cash charge pertaining to the implementation of SFAS 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and a $225 million charge for costs related to the acquisition of ABC. The earnings per share impacts of these charges were $0.10 and $0.07, respectively. See Notes 2 and 11 to the Consolidated Financial Statements. -16- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company acquired the operations of ABC, Inc. ("ABC") on February 9, 1996. During 1997, the Company sold KCAL, a Los Angeles television station, completed its final ABC purchase price allocation and determination of the related intangible assets and disposed of certain ABC publishing assets. To enhance comparability, certain information for 1997 and 1996 is presented on a "pro forma" basis, which assumes that these events occurred at the beginning of 1996. The pro forma results are not necessarily indicative of the combined results that would have occurred had these events actually occurred at the beginning of 1996. CONSOLIDATED RESULTS (in millions, except per share data)
PRO FORMA AS REPORTED (unaudited) ------------------------- ---------------- 1998 1997 1996 1997 1996 ------- ------- ------- ------- ------- Revenues: Creative Content $10,302 $10,937 $10,159 $10,098 $ 9,564 Broadcasting 7,142 6,522 4,078 6,501 6,009 Theme Parks and Resorts 5,532 5,014 4,502 5,014 4,502 ------- ------- ------- ------- ------- Total $22,976 $22,473 $18,739 $21,613 $20,075 ======= ======= ======= ======= ======= Operating income: (1) Creative Content $ 1,403 $ 1,882 $ 1,561 $ 1,693 $ 1,435 Broadcasting 1,325 1,294 782 1,285 1,084 Theme Parks and Resorts 1,287 1,136 990 1,136 990 Gain on sale of KCAL -- 135 -- -- -- Accounting change -- -- (300) -- (300) ------- ------- ------- ------- ------- Total 4,015 4,447 3,033 4,114 3,209 Corporate activities and other (236) (367) (309) (367) (249) Net interest expense (622) (693) (438) (693) (698) Acquisition-related costs -- -- (225) -- -- ------- ------- ------- ------- ------- Income before income taxes 3,157 3,387 2,061 3,054 2,262 Income taxes (1,307) (1,421) (847) (1,282) (988) ------- ------- ------- ------- ------- Net income $ 1,850 $ 1,966 $ 1,214 $ 1,772 $ 1,274 ======= ======= ======= ======= ======= Earnings per share: (3) Diluted $ 0.89 $ 0.95 $ 0.65 $ 0.86 $ 0.62 ======= ======= ======= ======= ======= Basic $ 0.91 $ 0.97 $ 0.66 $ 0.88 $ 0.63 ======= ======= ======= ======= ======= Net income excluding non- recurring items (2) $ 1,850 $ 1,886 $ 1,534 $ 1,772 $ 1,457 ======= ======= ======= ======= ======= Earnings per share excluding non- recurring items: (2) (3) Diluted $ 0.89 $ 0.92 $ 0.83 $ 0.86 $ 0.70 ======= ======= ======= ======= ======= Basic $ 0.91 $ 0.93 $ 0.84 $ 0.88 $ 0.72 ======= ======= ======= ======= ======= Amortization of intangible assets included in operating income $ 431 $ 439 $ 301 $ 413 $ 413 ======= ======= ======= ======= ======= Average number of common and common equivalent shares outstanding: (3) Diluted 2,079 2,060 1,857 2,060 2,067 ======= ======= ======= ======= ======= Basic 2,037 2,021 1,827 2,021 2,037 ======= ======= ======= ======= ======= - -------- (1) Includes depreciation and amortization (excluding film costs) of: Creative Content............... $ 219 $ 222 $ 186 $ 187 $ 145 Broadcasting................... 543 508 382 521 521 Theme Parks and Resorts........ 444 408 358 408 358 ------- ------- ------- ------- ------- $ 1,206 $ 1,138 $ 926 $ 1,116 $ 1,024 ======= ======= ======= ======= =======
-17- (2) The 1997 results include a $135 million gain from the sale of KCAL. See Note 2 to the Consolidated Financial Statements. The 1996 results include two non-recurring charges. The Company adopted Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which resulted in the Company recognizing a $300 million non-cash charge. In addition, the Company recognized a $225 million charge for costs related to the acquisition of ABC. See Notes 2 and 11 to the Consolidated Financial Statements. (3) Earnings per share and average shares outstanding have been adjusted to give effect to the three-for-one split of the Company's common shares in June 1998. The following discussion of 1998 versus 1997 and 1997 versus 1996 performance includes comparisons to pro forma results for 1997 and 1996. The Company believes pro forma results represent a meaningful comparative standard for assessing net income, changes in net income and earnings trends because the pro forma results include comparable operations in each year presented. The discussion of the Theme Parks and Resorts segment does not include pro forma comparisons, since the pro forma adjustments did not impact this segment. CONSOLIDATED RESULTS 1998 VS. 1997 Compared to 1997 pro forma results, revenues increased 6% to $23 billion, driven by growth in all business segments. Net income and diluted earnings per share increased 4% and 3% to $1.9 billion and $.89, respectively. These results were driven by a reduction in net expense associated with corporate activities and other and lower net interest expense, partially offset by decreased operating income. The reduction in net expense associated with corporate activities and other was driven by improved results from the Company's equity investments, including A&E Television and Lifetime Television, and a gain on the sale of the Company's interest in Scandinavian Broadcasting System. Decreased net interest expense reflected lower average debt balances during the year. Lower operating income was driven by a decline in Creative Content results, partially offset by improvements from Theme Parks and Resorts and Broadcasting. As reported revenues increased 2% and net income and diluted earnings per share decreased by 6%. The as reported results reflect the items described above as well as the impact of the disposition of certain ABC publishing assets and the sale of KCAL in 1997. In April 1997, the Company purchased a significant equity stake in Starwave Corporation ("Starwave"), an internet technology company. In connection with the acquisition, the Company was granted an option to purchase substantially all the remaining shares of Starwave. The Company exercised the option during the third quarter of 1998. Accordingly, the accounts of Starwave have been included in the Company's September 30, 1998 consolidated financial statements. On June 18, 1998, the Company reached an agreement for the acquisition of Starwave by Infoseek Corporation ("Infoseek"), a publicly-held internet search company, pursuant to a merger. On November 18, 1998, the shareholders of both Infoseek and Starwave approved the merger. As a result of the merger and the Company's purchase of additional shares of Infoseek common stock pursuant to the merger agreement, the Company owns approximately 43% of Infoseek's outstanding common stock. In addition, pursuant to the merger agreement, the Company purchased warrants enabling it, under certain circumstances, to achieve a majority stake in Infoseek. These warrants vest over a three-year period and expire in five years. Effective as of the November 18, 1998 closing date of the transaction, the Company will record a significant non-cash gain, a write-off for purchased in-process research and development costs and an increase in investments, reflecting the Company's share of the fair value of Infoseek's intangible assets. The Company is currently performing the necessary valuations to determine the gain, the research and development write-off and the amount of and amortization period for the intangible assets. Thereafter, the Company will account for its investment in Infoseek under the equity method. The merger is not expected to have a material effect on the Company's financial position. -18- 1997 VS. 1996 Compared to 1996 pro forma results, pro forma revenues increased 8% to $21.6 billion, reflecting growth in all business segments. Pro forma net income and diluted earnings per share, excluding non-recurring items, increased 22% and 23% to $1.8 billion and $.86, respectively. These results were driven by increased operating income across all business segments, partially offset by an increase in corporate activities and other driven by certain non-recurring items in both years. 1997 reflects settlements with former senior executives and 1996 reflects certain gains at ABC, primarily related to the sale of an investment in a cellular communications company. As reported revenues increased 20%, reflecting increases in all business segments and the impact of the acquisition of ABC. Net income, excluding the non-recurring items discussed above, increased 23%, driven by increased operating income for each business segment. Diluted earnings per share, excluding the non-recurring items, increased 11%, reflecting net income growth, partially offset by the impact of additional shares issued in connection with the acquisition. Results for 1997 included a full period of ABC's operations. BUSINESS SEGMENT RESULTS CREATIVE CONTENT 1998 VS. 1997 Revenues increased 2% or $204 million to $10.3 billion compared with pro forma 1997, driven by growth of $204 million in television distribution, $136 million in the Disney Stores, $54 million in domestic publishing and $51 million in domestic character merchandise licensing. These increases were partially offset by declines in worldwide home video and theatrical motion picture distribution of $330 million. Growth in television distribution revenue was driven by higher volume of television programming and theatrical releases distributed to the worldwide television market. Increased revenues at the Disney Stores reflected an increase in comparable store sales in North America and Europe and continued worldwide expansion, partially offset by a decrease in comparable store sales in Asian markets. The increase in domestic publishing revenues resulted from the success of book titles such as Don't Sweat the Small Stuff and the launch of ESPN The Magazine. Character merchandise licensing growth was driven primarily by the continued strength of Winnie the Pooh in the domestic market, partially offset by declines internationally, primarily due to softness in Asian markets. Lower worldwide home video revenues reflected difficult comparisons to the prior year, which benefited from the strength of Toy Story, The Hunchback of Notre Dame and 101 Dalmatians, compared to the current year release of Lady & the Tramp, Hercules and The Little Mermaid, as well as economic weaknesses in Asian markets. In worldwide theatrical motion picture distribution, while current year revenues reflected successful box-office performances of Armageddon, Disney's highest- grossing live-action film, and Mulan, its most recent animated release, revenues were lower overall due to difficult comparisons to the prior year, which benefited from the strong performances of 101 Dalmatians, Ransom and The English Patient. On an as reported basis, revenues decreased $635 million or 6%, reflecting the items described above, as well as the impact of the disposition of certain ABC publishing assets in the prior year. Operating income decreased 17% or $290 million to $1.4 billion compared with pro forma 1997 results, reflecting declines in worldwide theatrical motion picture distribution and international home video. These declines were partially offset by growth in television distribution, increases in domestic merchandise licensing, Disney Store growth in North America and Europe and improved results in domestic home video, driven by the success of The Little Mermaid, Lady & the Tramp and Peter Pan. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, product costs, labor and leasehold expenses, increased 6% or $494 million. The increase was driven by increased write-downs related to domestic theatrical live-action releases and an increase in production costs for theatrical and television product, as well as an increase in the number of shows produced for network television and syndication. Production cost increases are reflective of industry -19- trends: as competition for creative talent has increased, costs within the industry have increased at a rate significantly above inflation. Cost and expense increases were also due to increased activity related to internet start-up businesses. In addition, current year costs and expenses reflected charges totaling $64 million related to strategic downsizing in the Company's consumer product business, particularly in response to Asian economic difficulties, and consolidation of certain studio operations in its filmed entertainment business. Increased expenses for the year were partially offset by declines in distribution and selling expenses in the home video and domestic theatrical motion picture distribution markets reflecting lower volume, declines within television distribution due to the termination of a network production joint venture and a decrease in development and other operating expenses at Disney Interactive. On an as reported basis, operating income decreased $479 million or 25%, reflecting the items described above, as well as the impact of the disposition of certain ABC publishing assets in the prior year. 1997 VS. 1996 Pro forma revenues increased 6% or $534 million to $10.1 billion compared with pro forma 1996, driven by growth of $210 million in the Disney Stores, $143 million in character merchandise licensing, $104 million in television distribution and $88 million in home video. Growth at the Disney Stores reflected continued worldwide expansion with 106 new stores opening in 1997. Increases in character merchandise licensing reflected the strength of Winnie the Pooh and Toy Story domestically, and standard characters and 101 Dalmatians worldwide. The increase in television revenues was driven by an increase in the distribution of film and television product in the international television market. Home video results reflected the successful performance of Toy Story, The Hunchback of Notre Dame and 101 Dalmatians worldwide and Bambi and Sleeping Beauty domestically. On an as reported basis, revenues increased $778 million or 8%, reflecting the items described above, as well as increased revenues from ABC's publishing assets up to the date of disposition. Additionally, 1997 included a full period of revenues from certain ABC Television production operations. Pro forma operating income increased 18% or $258 million to $1.7 billion compared with pro forma 1996, reflecting improved results for theatrical distribution, character merchandise licensing and television distribution, partially offset by a reduction in home video results. Costs and expenses, increased 3% or $276 million, reflecting increased amortization in the home video market and continued expansion of the Disney Stores, offset by a reduction in distribution costs in the domestic theatrical market and the write-off of certain theatrical development projects in the prior year. On an as reported basis, operating income increased $321 million or 21%, reflecting the items described above as well as higher operating income from ABC's publishing assets up to the date of disposition. BROADCASTING 1998 VS. 1997 Revenues increased 10% or $641 million to $7.1 billion compared with pro forma 1997 results, reflecting a $427 million increase at ESPN and the Disney Channel, a $110 million increase at the television network and an $81 million increase at the television stations. A strong advertising market resulted in increased revenues at ESPN and the television stations and subscriber growth contributed to revenue increases at ESPN and the Disney Channel. Television network growth was driven by higher sports advertising revenues, primarily attributable to the 1998 soccer World Cup. On an as reported basis, revenues increased $620 million or 10%, reflecting the items described above, partially offset by the impact of the sale of KCAL in the prior year. -20- Operating income increased 3% or $40 million to $1.3 billion compared with pro forma 1997 results reflecting increased revenues at ESPN, the Disney Channel and the television stations, partially offset by lower results at the television network and start-up and operating losses from new business initiatives. Results at the television network reflected the impact of lower ratings and increased costs and expenses. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 12% or $601 million, reflecting increased programming and production costs at ESPN, higher program amortization at the television network, reflecting a reduction in benefits from the ABC acquisition, increased costs related to the NFL contract (see discussion below) and start-up and operating costs related to new business initiatives. On an as reported basis, operating income increased $31 million or 2%, reflecting the items described above, partially offset by the impact of the sale of KCAL in the prior year. The Company has continued to invest in its existing cable television networks and in new cable ventures to diversify and expand the available distribution channels for acquired and Company programming. During 1998, the Company acquired the Classic Sports Network, a cable network devoted to memorable sporting events, invested in a number of international cable ventures and continued its international expansion of the Disney Channel. The Company's cable operations continue to provide strong earnings growth. The Company's results for 1998 reflect an increase in pretax income of $148 million or 18% for mature cable properties compared with 1997 results, including the Company's share of earnings from ESPN, the Disney Channel, A&E Television and Lifetime Television. These increases were partially offset by the Company's recognition of its proportionate share of losses associated with start-up cable ventures. Start-up cable ventures are generally operations that are in the process of establishing distribution channels and a subscriber base and that have not reached their full level of normalized operations. These include various domestic and international ESPN and Disney Channel start-up cable ventures. The Company's pretax income reflected an increase of 20% from all cable properties. The financial results of ESPN and the Disney Channel are included in Broadcasting operating income. The Company's share of all other cable operations and the ESPN minority interest deduction are reported in "Corporate activities and other" in the Consolidated Statements of Income. There has been a continuing decline in viewership at all major broadcast networks, including ABC, reflecting the growth in the cable industry's share of viewers. In addition, there have been continuing increases in the cost of sports and other programming. During the second quarter of 1998, the Company entered into a new agreement with the National Football League (the "NFL") for the right to broadcast NFL football games on the ABC Television Network and ESPN. The contract provides for total payments of approximately $9 billion over an eight-year period, commencing with the 1998 season. The programming rights fees under the new contract are significantly higher than those required by the previous contract and the fee increases exceed the estimated revenue increases over the contract term. The higher fees under the new contract reflect various factors, including increased competition for sports programming rights and an increase in the number of games to be broadcast by ESPN. The Company is pursuing a variety of strategies, including marketing efforts, to reduce the impact of the higher costs. The contract's impact on the Company's results over the remaining contract term is dependent upon a number of factors, including the strength of advertising markets, effectiveness of marketing efforts and the size of viewer audiences. The cost of the NFL contract is charged to expense based on the ratio of each period's gross revenues to estimated total gross revenues. Estimates of total gross revenues can change significantly and accordingly, they are reviewed periodically and amortization is adjusted if necessary. Such adjustments could have a material effect on results of operations in future periods. -21- 1997 VS. 1996 Pro forma revenues increased 8% or $492 million to $6.5 billion compared with pro forma 1996, driven by increases of $336 million at ESPN and the Disney Channel, and $74 million at the television network. The increases at ESPN and the Disney Channel were due primarily to higher advertising revenues and affiliate fees due primarily to expansion, subscriber growth and improved advertising rates. Growth in revenues at the television network was primarily the result of improved performance of sports, news and latenight programming, partially offset by a decline in primetime ratings. On an as reported basis, revenues increased $2.4 billion or 60%, reflecting a full period of ABC's broadcasting operations in 1997. Pro forma operating income increased 19% or $201 million to $1.3 billion compared with pro forma 1996, reflecting increases in revenues at ESPN and the Disney Channel, as well as improved results at the television stations, partially offset by decreases at the television network. Results at the television network reflected the impact of lower ratings, partially offset by benefits arising from the period's sporting events, improvements in children's programming, continued strength in the advertising market and decreased program amortization. Costs and expenses increased 6% or $291 million. This increase reflected increased programming rights and production costs, driven by international growth at ESPN and increases at the television network, partially offset by benefits arising from reductions in program amortization and other costs at the television network, primarily attributable to the acquisition. On an as reported basis, operating income increased $512 million or 65%, reflecting a full period of ABC's broadcasting operations in 1997. The Company's results for 1997 reflect an increase in pretax income of $182 million or 28% for mature cable properties compared with 1996 results. These increases were partially offset by the Company's recognition of its proportionate share of losses associated with start-up cable ventures. Overall, the Company's pretax income increased 29% in 1997 from all cable properties. THEME PARKS AND RESORTS 1998 VS. 1997 Revenues increased 10% or $518 million to $5.5 billion, driven by growth at the Walt Disney World Resort, reflecting contributions of $256 million, from increased guest spending and record attendance, growth of $106 million from higher occupied room nights and $76 million from Disney Cruise Line. Higher guest spending reflected strong per capita spending, due in part to new food, beverage and merchandise offerings throughout the resort, and higher average room rates. Increased occupied room nights reflected additional capacity resulting from the opening of Disney's Coronado Springs Resort in August 1997. Record theme park attendance resulted from growth in domestic and international tourist visitation due to the opening of the new theme park, Disney's Animal Kingdom. Disneyland's revenues for the year increased slightly as higher guest spending was largely offset by reduced attendance driven primarily by difficult comparisons to the prior year's Main Street Electrical Parade farewell season and construction of New Tomorrowland in the first half of 1998. Operating income increased 13% or $151 million to $1.3 billion, resulting primarily from higher guest spending, increased occupied room nights and record attendance at the Walt Disney World Resort, partially offset by start- up and operating costs associated with Disney's Animal Kingdom and Disney Cruise Line. Costs and expenses, which consist principally of labor, costs of merchandise, food, and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sales expenses, increased 9% or $367 million. Increased costs and expenses were driven by higher theme park attendance, start-up and operating costs at the new theme park and Disney Cruise Line. 1997 VS. 1996 Revenues increased 11% or $512 million to $5.0 billion, reflecting growth at the Walt Disney World Resort, which celebrated its 25th Anniversary. Growth at the resort included $272 million from greater -22- guest spending, $111 million from increased occupied rooms and $97 million due to record theme park attendance. Higher guest spending reflected increased merchandise and food and beverage sales, higher admission prices and increased room rates at hotel properties. Increased merchandise spending reflected sales of the 25th Anniversary products and the performance of the World of Disney, the largest Disney retail outlet, which opened in October 1996. The increase in occupied rooms reflected higher occupancy and a complete year of operations at Disney's BoardWalk Resort, which opened in the fourth quarter of 1996. Occupied rooms also increased due to the opening of Disney's Coronado Springs Resort in August 1997. Record theme park attendance resulted from growth in domestic tourist visitation. Disneyland's revenues for the year were flat due to higher guest spending offset by reduced attendance from the prior-year's record level. Operating income increased 15% or $146 million to $1.1 billion, resulting primarily from higher guest spending, increased occupied rooms and record theme park attendance at the Walt Disney World Resort. Costs and expenses increased 10% or $366 million. Increased operating costs were associated with growth in theme park attendance and occupied rooms, higher guest spending and increased marketing and sales expenses primarily associated with Walt Disney World Resort's 25th Anniversary celebration. Additional cost increases resulted from theme park and resort expansions including Disney's Animal Kingdom and Disney Cruise Line, which both began operations in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company generates significant cash from operations and has substantial borrowing capacity to meet its operating and discretionary spending requirements. Cash provided by operations was comparable to the prior year, at $5.1 billion. In 1998, the Company invested $3.3 billion to develop and produce film and television properties and $2.3 billion to design and develop new theme park attractions, resort properties, real estate developments and other properties. 1997 investments totaled $3.1 billion and $1.9 billion, respectively. The $246 million increase in investment in film and television properties was primarily driven by higher live-action and animation spending. Live-action production spending was driven by increases at Miramax and higher animation spending reflected an increase in the number of films in production. The $392 million increase in investment in theme parks, resorts and other properties resulted primarily from initiatives including Disney's California Adventure and Disney Cruise Line. Capital spending is expected to increase in 1999, driven by increased spending for Disney's California Adventure. The Company acquires shares of its stock on an ongoing basis and is authorized as of September 30, 1998 to purchase up to an additional 400 million shares. This amount reflects an increase in the repurchase authorization and the three-for-one split of the Company's common shares, both effected in June 1998. During 1998, a subsidiary of the Company acquired approximately 1.1 million shares of the Company's common stock for approximately $30 million. The Company also used $412 million to fund dividend payments during the year. During 1998, total borrowings increased to $11.7 billion. The Company borrowed approximately $1.8 billion in 1998, with effective interest rates, including the impact of interest rate swaps, ranging from 5.2% to 6.8% and maturities in fiscal 1999 through fiscal 2008. Certain of these financing agreements are denominated in foreign currencies, and the Company has entered into cross-currency swap agreements effectively converting these obligations into U.S. dollar denominated LIBOR-based variable rate debt instruments. In August 1998, the Company filed a new U.S. registration statement, which replaced the existing U.S. shelf registration statement, and provides for issuance of up to $5.0 billion of debt. As of September 30, 1998, the Company had the ability to borrow under the U.S. shelf registration statement and a euro medium-term note program, which collectively permitted the issuance of up to approximately $5.8 billion of additional debt. In addition, the Company has $5.2 billion available under bank facilities to support its commercial paper activities. -23- The Company's financial condition remains strong. The Company believes that its cash, other liquid assets, operating cash flows and access to capital markets, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses and development of new projects. OTHER MATTERS YEAR 2000 The Y2K Problem. The Company is devoting significant resources throughout its business operations to minimize the risk of potential disruption from the "year 2000 ("Y2K') problem." This problem is a result of computer programs having been written using two digits (rather than four) to define the applicable year. Any information technology ("IT") systems that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations and system failures. The problem also extends to many "non-IT" systems; that is, operating and control systems that rely on embedded chip systems. In addition, like every other business enterprise, the Company is at risk from Y2K failures on the part of its major business counterparts, including suppliers, distributors, licensees and manufacturers, as well as potential failures in public and private infrastructure services, including electricity, water, gas, transportation and communications. System failures resulting from the Y2K problem could adversely affect operations and financial results in all of the Company's business segments. Failures may affect security, payroll operations or employee and guest health and safety, as well as such routine but important operations as billing and collection. In addition, the Company's business segments face more specific risks. For example: The Company's Theme Parks and Resorts operations could be significantly impeded by failures in hotel and cruise line reservation and operating systems; in theme park operating systems, including those controlling individual rides, attractions, parades and shows; and in security, health and safety systems. In the Creative Content segment, Y2K failures could interfere with critical systems in such areas as the production, duplication and distribution of motion picture and home video product and the ordering, distribution and sale of merchandise at the Company's retail stores and catalog operations. In the Broadcasting segment, at-risk operations include satellite transmission and communication systems. Y2K failures in such systems could adversely affect the Company's television and radio networks, including cable services, as well as its owned and operated stations. Addressing the Problem. The Company has developed a six-phase approach to resolving the Y2K issues that are reasonably within its control. All of these efforts are being coordinated through a senior-level task force chaired by the Company's Chief Information Officer ("CIO"), as well as individual task forces in each major business unit. As of September 30, 1998, approximately 400 employees were devoting more than half of their time to Y2K efforts, in addition to approximately 400 expert consultants retained on a full-time basis to assist with specific potential problems. The CIO reports periodically to the Audit Review Committee of the Board of Directors with respect to the Company's Y2K efforts. The Company's approach to and the anticipated timing of each phase are described below. Phase 1 - Inventory. The first phase entails a worldwide inventory of all hardware and software (including business and operational applications, operating systems and third-party products) that may be at risk, and identification of key third-party businesses whose Y2K failures might most significantly impact the Company. The IT system inventory process has been completed, and the inventories of key third-party businesses and of internal non-IT systems are expected to be completed by December 31, 1998. -24- Phase 2 - Assessment. Once each at-risk system has been identified, the Y2K task forces assess how critical the system is to business operations and the potential impact of failure, in order to establish priorities for repair or replacement. Systems are classified as "critical," "important" or "non- critical." A "critical" system is one that, if not operational, would cause the shutdown of all or a portion of a business unit within two weeks, while an "important" system is one that would cause such a shutdown within two months. This process has been completed for all IT systems, resulting in the identification of nearly 600 business systems that are "critical" to continued functioning and more than 1,000 that are either "important" or are otherwise being monitored. The assessment process for internal non-IT systems and for key third-party businesses is expected to be completed by mid-1999. Systems that are known to be critical or important are receiving top priority in assessment and remediation. Phase 3 - Strategy. This phase involves the development of appropriate remedial strategies for both IT and non-IT systems. These strategies may include repairing, testing and certifying, replacing or abandoning particular systems (as discussed under Phases 4 and 5 below). Selection of appropriate strategies is based upon such factors as the assessments made in Phase 2, the type of system, the availability of a Y2K-compliant replacement and cost. The strategy phase has been completed for all IT systems. For some non-IT embedded systems, strategy development is continuing. At the Company's theme parks, the majority of ride and show control systems have been tested and certified. A strategy for addressing embedded systems in office buildings is being developed in concert with building managers and systems vendors and should be completed by spring 1999. The process of analysis, certification or replacement or "workaround" for embedded systems in office buildings is expected to consume the first half of 1999. Strategies for other embedded systems, such as satellite communications systems, are being developed and are also expected to be complete by mid-1999. Phase 4 - Remediation. The remediation phase involves creating detailed project plans, marshalling necessary resources and executing the strategies chosen. For IT systems, this phase is approximately 75% complete for critical and important systems, and is expected to be completed (including certification) by July 31, 1999. For non-critical systems, most corrections are expected to be completed by December 31, 1999. For those systems that are not expected to be reliably functional after January 1, 2000, detailed manual workaround plans will be developed prior to the end of 1999. Phase 5 - Testing and Certification. This phase includes establishing a test environment, performing systems testing (with third parties if necessary), and certifying the results. The certification process entails having functional experts review test results, computer screens and printouts against pre- established criteria to ensure system compliance. The Company expects all critical and important IT systems to be certified by July 31, 1999. Testing for non-IT systems has been initiated; however, due to the Company's reliance on many third-party vendors for these systems, the Company cannot estimate precisely when this phase will be completed. The majority of embedded systems at the Company's theme parks are expected to be certified by December 31, 1998. The Company's target for all critical and important non-IT systems is July 1999. The Company has initiated written and telephonic communications with key third-party businesses, as well as public and private providers of infrastructure services, to ascertain and evaluate their efforts in addressing Y2K compliance. It is anticipated that the majority of testing and certification with these entities will occur in 1999. Phase 6 - Contingency Planning. This phase involves addressing any remaining open issues expected in 1999 and early 2000. As a precautionary measure, the Company is currently developing contingency plans for all systems that are not expected to be Y2K compliant by March 1999. A variety of automated as well as manual fallback plans are under consideration, including the use of electronic spreadsheets, resetting system dates to 1972, a year in which the calendar coincides with that of 2000, and manual workarounds. The Company estimates that all of these plans will be completed by December 1999. -25- Costs. As of September 30, 1998, the Company had incurred costs of approximately $136 million related to its Y2K project, of which $82 million has been capitalized. The estimated additional costs to complete the project are currently expected to be approximately $125 million, of which $60 million is expected to be capitalized. A significant portion of these costs have not been incremental, but rather reflect redeployment of internal resources from other activities. The Company does not expect these redeployments to have a material adverse effect on other ongoing business operations of the Company and its subsidiaries, although it is possible that certain maintenance and upgrading processes will be delayed as the result of the priority being given to Y2K remediation. All of the costs of the Y2K project are being borne out of the Company's operating cash flow. Based upon its efforts to date, the Company believes that the vast majority of both its IT and its non-IT systems, including all critical and important systems, will remain up and running after January 1, 2000. Accordingly, the Company does not currently anticipate that internal systems failures will result in any material adverse effect to its operations or financial condition. During 1999, the Company will also continue and expand its efforts to ensure that major third-party businesses and public and private providers of infrastructure services, such as utilities, communications services and transportation, will also be prepared for the year 2000, and to develop contingency plans to address any failures on their part to become Y2K compliant. At this time, the Company believes that the most likely "worst- case" scenario involves potential disruptions in areas in which the Company's operations must rely on such third parties whose systems may not work properly after January 1, 2000. In addition, the Company's international operations may be adversely affected by failures of businesses in other parts of the world to take adequate steps to address the Y2K problem. While such failures could affect important operations of the Company and its subsidiaries, either directly or indirectly, in a significant manner, the Company cannot at present estimate either the likelihood or the potential cost of such failures. The nature and focus of the Company's efforts to address the Year 2000 problem may be revised periodically as interim goals are achieved or new issues are identified. In addition, it is important to note that the description of the Company's efforts necessarily involves estimates and projections with respect to activities required in the future. These estimates and projections are subject to change as work continues, and such changes may be substantial. CONVERSION TO THE EURO CURRENCY On January 1, 1999, certain member countries of the European Union are scheduled to establish fixed conversion rates between their existing currencies and the European Union's common currency (euro). The Company conducts business in member countries. The transition period for the introduction of the euro will be between January 1, 1999 and June 30, 2002. The Company is addressing the issues involved with the introduction of the euro. The more important issues facing the Company include: converting information technology systems; reassessing currency risk; negotiating and amending licensing agreements and contracts; and processing tax and accounting records. Based upon progress to date the Company believes that use of the euro will not have a significant impact on the manner in which it conducts its business affairs and processes its business and accounting records. Accordingly, conversion to the euro is not expected to have a material effect on the Company's financial condition or results of operations. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to the Company's stockholders. All statements that express expectations and projections with respect to future matters, including the launching or prospective development of -26- new business initiatives; anticipated motion picture or television releases; internet or theme park and resort projects; "Year 2000" remediation efforts; and preparations for the introduction of the euro, are forward-looking statements within the meaning of the Act. These statements are made on the basis of management's views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management's expectations will necessarily come to pass. Factors that may affect forward-looking statements. For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance, including the following: Changes in Company-wide or business-unit strategies, which may result in changes in the types or mix of businesses in which the Company is involved or chooses to invest; Changes in U.S., global or regional economic conditions, which may affect attendance and spending at the Company's theme parks and resorts, purchases of Company-licensed consumer products and the performance of the Company's broadcasting and motion picture operations; Changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede the Company's access to, or increase the cost of, external financing for its operations and investments; Increased competitive pressures, both domestically and internationally, which may, among other things, affect the performance of the Company's theme park, resort and regional entertainment operations and lead to increased expenses in such areas as television programming acquisition and motion picture production and marketing; Legal and regulatory developments that may affect particular business units, such as regulatory actions affecting environmental activities, consumer products, broadcasting or internet activities or the protection of intellectual properties, the imposition by foreign countries of trade restrictions or motion picture or television content requirements or quotas, and changes in international tax laws or currency controls; Adverse weather conditions or natural disasters, such as hurricanes and earthquakes, which may, among other things, impair performance at the Company's theme parks and resorts; Technological developments that may affect the distribution of the Company's creative products or create new risks to the Company's ability to protect its intellectual property; Labor disputes, which may lead to increased costs or disruption of operations in any of the Company's business units; and Changing public and consumer taste, which may affect the Company's entertainment, broadcasting and consumer products businesses. This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. -27- ITEM 7A. MARKET RISK The Company is exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market values of its investments. POLICIES AND PROCEDURES In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates and fluctuations in the value of foreign currencies using a variety of financial instruments. The Company's objective in managing its exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company primarily uses interest rate swaps to manage net exposure to interest rate changes related to its portfolio of borrowings. The Company maintains fixed rate debt as a percentage of its net debt between a minimum and maximum percentage, which is set by policy. The Company's objective in managing the exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency assets, liabilities, commitments and anticipated foreign currency revenues. The Company uses option strategies that provide for the sale of foreign currencies to hedge probable, but not firmly committed, revenues. The principal currencies hedged are the Japanese yen, French franc, German mark, British pound, Canadian dollar and Italian lira. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures for periods not to exceed five years. The gains and losses on these contracts offset changes in the value of the related exposures. It is the Company's policy to enter into foreign currency and interest rate transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency or interest rate transactions for speculative purposes. VALUE AT RISK The Company utilizes a "Value-at-Risk" ("VAR") model to determine the maximum potential one-day loss in the fair value of its interest rate and foreign exchange sensitive financial instruments. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. There are various modeling techniques which can be used in the VAR computation. The Company's computations are based on the interrelationships between movements in various currencies and interest rates (a "variance/co-variance" technique). These interrelationships were determined by observing interest rate and foreign currency market changes over the preceding quarter for the calculation of VAR amounts at year-end and over each of the four quarters for the calculation of average VAR amounts during the year. The model includes all of the Company's debt as well as all interest rate and foreign exchange derivative contracts. The values of foreign exchange options do not change on a one-to-one basis with the underlying currencies, as exchange rates vary. Therefore, the hedge coverage assumed to be obtained from each option has been adjusted to reflect its respective sensitivity to changes in currency values. Anticipated transactions, firm commitments and receivables and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, were excluded from the model. The VAR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market factors. (See Note 12 to the Consolidated Financial Statements regarding the Company's financial instruments at September 30, 1998 and 1997.) -28- The estimated maximum potential one-day loss in fair value, calculated using the VAR model, follows (in millions):
Interest Rate Currency Sensitive Financial Sensitive Financial Combined Instruments Instruments Portfolio - ------------------------------------------------------------------------------- VAR as of September 30, 1998 $32 $29 $56 Average VAR during the year 21 26 32 ended September 30, 1998
The higher VAR combined portfolio exposure at September 30, 1998 is primarily due to the volatile financial market environment existing at year end. Since the Company utilizes currency sensitive derivative instruments to hedge anticipated foreign currency transactions, a loss in fair value for those instruments is generally offset by increases in the value of the underlying anticipated transactions. NEW ACCOUNTING GUIDANCE In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which the Company is required to adopt effective October 1, 1999. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other stockholders' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretative guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements and Supplemental Data on page 36. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -29- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS Information regarding directors appearing under the caption "Election of Directors" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement") is hereby incorporated by reference. Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION Information appearing under the captions "How are directors compensated?" and "Executive Compensation" in the 1999 Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information setting forth the security ownership of certain beneficial owners and management appearing under the caption "Stock Ownership" in the 1999 Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain related transactions appearing under the caption "Certain Relationships and Related Transactions" in the 1999 Proxy Statement is hereby incorporated by reference. -30- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statements and Schedules (1) Financial Statements and Schedules See Index to Financial Statements and Supplemental Data at page 36. (2) Exhibits The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.
EXHIBIT LOCATION ------- -------- 3(a) Restated Certificate of Incorporation Exhibit 3(a) to the Form 8- of the Company B/A Registration Statement, dated Jan. 23, 1996, of the Company 3(b) Bylaws of the Company Exhibit 4.2 to Amendment No. 1 to the Form S-3 Registration Statement, dated Aug. 3, 1998, of the Company 4(a) Form of Registration Rights Agreement Exhibit B to Exhibit 2.1 to entered into or to be entered into the Form 8-K, dated July 31, with certain stockholders 1995, of Disney Enterprises, Inc. ("DEI") 4(b) Rights Agreement, dated as of Nov. 8, Exhibit 4.2 to the Form S-4 1995 Registration Statement, dated Nov. 13, 1995 (No. 33-64141) of the Company 4(c) Five-Year Credit Agreement, dated as Exhibit 4(d) to the 1996 Form of Oct. 30, 1996 10-K of the Company 4(d) Indenture, dated as of Nov. 30, 1990, Exhibit 2 to the Current between DEI and Bankers Trust Report on Form 8-K, dated Company, as Trustee Jan. 14, 1991, of DEI 4(e) Indenture, dated as of Mar. 7, 1996, Exhibit 4.1(a) to the Form 8- between the Company and Citibank, K, dated Mar. 7, 1996, of the N.A., as Trustee Company 4(f) Other long-term borrowing instruments are omitted pursuant to Item 601(b) (4) (iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Commission upon request. 10(a) (i) Agreement on the Creation and the Exhibits 10(b) and 10(a), Operation of Euro Disneyland en respectively, to the Form 8- France, dated Mar. 25, 1987, and (ii) K, dated Apr. 24, 1987, of Letter relating thereto of the DEI Chairman of Disney Enterprises, Inc., dated Mar. 24, 1987 10(b) Composite Limited Recourse Financing Exhibit 10(b) to the 1997 Facility Agreement, dated as of Apr. Form 10-K of the Company 27, 1988, between DEI and TDL Funding Company, as amended 10(c) Employment Agreement, dated as of Exhibit 10.2 to the Form 10-Q Jan. 8, 1997, between the Company and for the period ended Dec. 31, Michael D. Eisner 1996, of the Company
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EXHIBIT LOCATION ------- -------- 10(d) (i) Profit Participation Contract, Exhibits 1 and 3, dated Dec. 14, 1979, with E. Cardon respectively, to the 1980 Walker and (ii) Amendment thereto, Form 10-K of DEI dated Aug. 8, 1980 10(e) Form of Indemnification Agreement for Annex C to the Proxy certain officers and directors of DEI Statement for the 1988 Annual Meeting of DEI 10(f) 1995 Stock Option Plan for Non- Exhibit 20 to the Form S-8 Employee Directors Registration Statement (No. 33-57811), dated Feb. 23, 1995, of DEI 10(g) 1990 Stock Incentive Plan and Rules Exhibits 28(a) and 28(b), respectively, to the Form S-8 Registration Statement (No. 33-39770), dated Apr. 5, 1991, of DEI 10(h) Amended and Restated 1990 Stock Appendix B-2 to the Joint Incentive Plan and Rules Proxy Statement/Prospectus included in the Form S-4 Registration Statement (No. 33-64141), dated Nov. 13, 1995, of DEI 10(i) 1995 Stock Incentive Plan and Rules Appendix B-1 to the Joint Proxy Statement/Prospectus included in the Form S-4 Registration Statement (No. 33-64141), dated Nov. 13, 1995, of DEI 10(j) (i) 1987 Stock Incentive Plan and Exhibits 1(a), 1(b), 2(a), Rules, (ii) 1984 Stock Incentive Plan 2(b), 3(a), 3(b) and 4, and Rules, (iii) 1981 Incentive Plan respectively, to the and Rules and (iv) 1980 Stock Option Prospectus contained in the Plan Form S-8 Registration Statement (No. 33-26106), dated Dec. 20, 1988, of DEI 10(k) Contingent Stock Award Rules under Exhibit 10(t) to the 1986 DEI's 1984 Stock Incentive Plan Form 10-K of DEI 10(l) Bonus Performance Plan for Executive Filed herewith Officers 10(m) Performance-Based Compensation Plan Included in the Proxy for the Company's Chief Executive Statement dated Jan. 9, 1997, Officer for the 1997 Annual Meeting of the Company 10(n) Key Employees Deferred Compensation Exhibit 10(p) to the 1997 and Retirement Plan Form 10-K of the Company 10(o) Group Personal Excess Liability Exhibit 10(x) to the 1997 Insurance Plan Form 10-K of the Company 10(p) Family Income Assurance Plan (summary Exhibit 10(y) to the 1997 description) Form 10-K of the Company 10(q) Disney Salaried Savings and Exhibit 10(s) to the 1995 Investment Plan Form 10-K of DEI 10(r) First Amendment to the Disney Exhibit 10(r) to the 1997 Salaried Savings and Investment Plan Form 10-K of the Company 10(s) Second Amendment to the Disney Exhibit 10(s) to the 1997 Salaried Savings and Investment Plan Form 10-K of the Company 10(t) ABC, Inc. Savings and Investment File herewith Plan, as amended 10(u) Employee Stock Option Plan of Capital Exhibit 10(f) to the 1992 Cities/ABC, Inc., as amended Form 10-K of Capital Cities/ABC, Inc. 10(v) 1991 Stock Option Plan of Capital Exhibit 6(a)(i) to the Form Cities/ABC, Inc., as amended 10-Q for the period ended Mar. 31, 1996, of the Company
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EXHIBIT LOCATION ------- -------- 21 Subsidiaries of the Company Filed herewith. 23 Consent of PricewaterhouseCoopers LLP Included herein at page 37. 27 Financial Data Schedule Filed herewith. 28(a) Financial statements of the Disney Included in Form 10-K/A, Salaried Savings and Investment Plan dated June 29, 1998, of the for the year ended Dec. 31, 1998 Company 28(b) Financial statements of the ABC Included in Form 10-K/A, Salaried Savings and Investment Plan dated June 29, 1998, of the for the year ended Dec. 31, 1997 Company 99 Pro forma financial information for Exhibit 99 to the 1997 Form 1997 events. 10-K of the Company
(b) Reports on Form 8-K (i) The Company filed a Current Report on Form 8-K on August 6, 1998 in connection with the effectiveness of its registration statement on Form S-3 with respect to the issuance of up to an aggregate of $5,000,000,000 of debt securities, preferred stock, common stock and warrants. -33- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE WALT DISNEY COMPANY ----------------------------------------------------- (Registrant) Date: December 18, 1998 By: MICHAEL D. EISNER ----------------------------------------------------- (Michael D. Eisner, Chairman of the Board and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Principal Executive Officer MICHAEL D. EISNER Chairman of the Board and December 18, 1998 - -------------------------------- Chief Executive Officer (Michael D. Eisner) Principal Financial and Accounting Officers THOMAS O. STAGGS Executive Vice President and December 18, 1998 - -------------------------------- Chief Financial Officer (Thomas O. Staggs) JOHN J. GARAND Senior Vice President- December 18, 1998 - -------------------------------- Planning and Control (John J. Garand) Directors REVETA F. BOWERS Director December 18, 1998 - -------------------------------- (Reveta F. Bowers) ROY E. DISNEY Director December 18, 1998 - -------------------------------- (Roy E. Disney) MICHAEL D. EISNER Director December 18, 1998 - -------------------------------- (Michael D. Eisner) JUDITH ESTRIN Director December 18, 1998 - -------------------------------- (Judith Estrin) STANLEY P. GOLD Director December 18, 1998 - -------------------------------- (Stanley P. Gold) SANFORD M. LITVACK Director December 18, 1998 - -------------------------------- (Sanford M. Litvack) IGNACIO E. LOZANO, JR. Director December 18, 1998 - -------------------------------- (Ignacio E. Lozano, Jr.) GEORGE J. MITCHELL Director December 18, 1998 - -------------------------------- (George J. Mitchell)
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Signature Title Date --------- ----- ---- THOMAS S. MURPHY Director December 18, 1998 - ----------------------------- (Thomas S. Murphy) RICHARD A. NUNIS Director December 18, 1998 - ----------------------------- (Richard A. Nunis) LEO J. O'DONOVAN, S.J. Director December 18, 1998 - ----------------------------- (Leo J. O'Donovan, S.J.) SIDNEY POITIER Director December 18, 1998 - ----------------------------- (Sidney Poitier) IRWIN E. RUSSELL Director December 18, 1998 - ----------------------------- (Irwin E. Russell) ROBERT A.M. STERN Director December 18, 1998 - ----------------------------- (Robert A.M. Stern) ANDREA VAN DE KAMP Director December 18, 1998 - ----------------------------- (Andrea Van de Kamp) E. CARDON WALKER Director December 18, 1998 - ----------------------------- (E. Cardon Walker) RAYMOND L. WATSON Director December 18, 1998 - ----------------------------- (Raymond L. Watson) GARY L. WILSON Director December 18, 1998 - ----------------------------- (Gary L. Wilson)
-35- THE WALT DISNEY COMPANY AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page ---- Report of Independent Accountants and Consent of Independent Accountants.. 37 Consolidated Financial Statements of The Walt Disney Company and Subsidiaries Consolidated Statements of Income for the Years Ended September 30, 1998, 1997 and 1996.................................................... 38 Consolidated Balance Sheets as of September 30, 1998 and 1997........... 39 Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996.................................................... 40 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996...................................... 41 Notes to Consolidated Financial Statements.............................. 42 Quarterly Financial Summary............................................. 60
Schedules other than those listed above are omitted for the reason that they are not applicable or the required information is included in the financial statements or related notes. -36- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The Walt Disney Company In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Walt Disney Company and its subsidiaries (the "Company") at September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California November 19, 1998 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-26106, 33-35405 and 33-39770) and Form S-3 (Nos. 33-49891 and 333-52659) of The Walt Disney Company of our report dated November 19, 1998 which appears above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California December 18, 1998 -37- CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share data) Year Ended September 30 1998 1997 1996 - ----------------------------------------------------------------------------- Revenues $ 22,976 $ 22,473 $ 18,739 Costs and expenses (18,961) (18,161) (15,406) Gain on sale of KCAL -- 135 -- Accounting change -- -- (300) -------- -------- -------- Operating income 4,015 4,447 3,033 Corporate activities and other (236) (367) (309) Net interest expense (622) (693) (438) Acquisition-related costs -- -- (225) -------- -------- -------- Income before income taxes 3,157 3,387 2,061 Income taxes (1,307) (1,421) (847) -------- -------- -------- Net income $ 1,850 $ 1,966 $ 1,214 ======== ======== ======== Earnings per share Diluted $ 0.89 $ 0.95 $ 0.65 ======== ======== ======== Basic $ 0.91 $ 0.97 $ 0.66 ======== ======== ======== Average number of common and common equivalent shares outstanding Diluted 2,079 2,060 1,857 ======== ======== ======== Basic 2,037 2,021 1,827 ======== ======== ========
See Notes to Consolidated Financial Statements -38- CONSOLIDATED BALANCE SHEETS (In millions) September 30 1998 1997 - ---------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 127 $ 317 Receivables 3,999 3,329 Inventories 899 853 Film and television costs 3,223 2,186 Deferred income taxes 463 482 Other assets 664 486 ------- ------- Total current assets 9,375 7,653 Film and television costs 2,506 2,215 Investments 1,814 1,914 Theme parks, resorts and other property, at cost Attractions, buildings and equipment 14,037 11,787 Accumulated depreciation (5,382) (4,857) ------- ------- 8,655 6,930 Projects in progress 1,280 1,928 Land 411 93 ------- ------- 10,346 8,951 Intangible assets, net 15,769 16,011 Other assets 1,568 1,753 ------- ------- $41,378 $38,497 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts and taxes payable and other accrued liabilities $ 4,767 $ 4,748 Current portion of borrowings 2,123 897 Unearned royalties and other advances 635 631 ------- ------- Total current liabilities 7,525 6,276 Borrowings 9,562 10,171 Deferred income taxes 2,488 2,161 Other long term liabilities, unearned royalties and other advances 2,415 2,604 Stockholders' Equity Preferred stock, $.01 par value Authorized--100 million shares Issued--none Common stock, $.01 par value Authorized--3.6 billion shares Issued--2.1 billion shares and 2.0 billion shares 8,995 8,548 Retained earnings 10,981 9,543 Cumulative translation and other 13 (12) ------- ------- 19,989 18,079 Treasury stock, at cost, 29 million shares and 24 million shares (593) (462) Shares held by TWDC Stock Compensation Fund, at cost-- 0.4 million shares and 13 million shares (8) (332) ------- ------- 19,388 17,285 ------- ------- $41,378 $38,497 ======= =======
See Notes to Consolidated Financial Statements -39- CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Year Ended September 30 1998 1997 1996 - ------------------------------------------------------------------------------ NET INCOME $ 1,850 $ 1,966 $ 1,214 ITEMS NOT REQUIRING CASH OUTLAYS Amortization of film and television costs 2,514 1,995 1,786 Depreciation 809 738 672 Amortization of intangible assets 431 439 301 Gain on sale of KCAL -- (135) -- Accounting change -- -- 300 Other (75) (15) 22 CHANGES IN Receivables (664) (177) (297) Inventories (46) 8 (13) Other assets 179 (441) (399) Accounts and taxes payable and accrued liabilities 218 608 56 Film and television costs television broadcast rights (447) (179) 58 Deferred income taxes 346 292 (78) Investments in trading securities -- -- 85 ------- ------- -------- 3,265 3,133 2,493 ------- ------- -------- CASH PROVIDED BY OPERATIONS 5,115 5,099 3,707 ------- ------- -------- INVESTING ACTIVITIES Film and television costs (3,335) (3,089) (2,760) Investments in theme parks, resorts and other property (2,314) (1,922) (1,745) Acquisitions (213) (180) -- Proceeds from sale of marketable securities and other investments 238 31 409 Purchases of marketable securities (13) (56) (18) Investment in and loan to E! Entertainment (28) (321) -- Proceeds from disposal of publishing operations -- 1,214 -- Acquisition of ABC, net of cash acquired -- -- (8,432) Proceeds from disposal of KCAL -- 387 -- ------- ------- -------- (5,665) (3,936) (12,546) ------- ------- -------- FINANCING ACTIVITIES Borrowings 1,830 2,437 13,560 Reduction of borrowings (1,212) (4,078) (4,872) Repurchases of common stock (30) (633) (462) Dividends (412) (342) (271) Exercise of stock options and other 184 180 85 Proceeds from formation of REITs -- 1,312 -- ------- ------- -------- 360 (1,124) 8,040 ------- ------- -------- (Decrease) Increase in Cash and Cash Equivalents (190) 39 (799) Cash and Cash Equivalents, Beginning of Year 317 278 1,077 ------- ------- -------- Cash and Cash Equivalents, End of Year $ 127 $ 317 $ 278 ======= ======= ======== Supplemental disclosure of cash flow information: Interest paid $ 555 $ 777 $ 379 ======= ======= ======== Income taxes paid $ 1,107 $ 958 $ 689 ======= ======= ========
See Notes to Consolidated Financial Statements -40- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In millions, except per share data)
TWDC Cumulative Stock Common Retained Translation Treasury Compensation Shares Stock Earnings and Other Stock Fund Total - --------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 1,573 $1,240 $ 6,976 $ 38 $(1,603) $ -- $ 6,651 Impact of ABC acquisition 464 7,206 -- -- 1,603 -- 8,809 Exercise of stock options, net 9 144 -- -- -- -- 144 Common stock repurchased (24) -- -- -- (462) -- (462) Dividends ($.14 per share) -- -- (271) -- -- -- (271) Cumulative translation and other -- -- -- 1 -- -- 1 Net income -- -- 1,214 -- -- -- 1,214 ----- ------ ------- ---- ------- ----- ------- BALANCE AT SEPTEMBER 30, 1996 2,022 8,590 7,919 39 (462) -- 16,086 Exercise of stock options, net 15 (42) -- -- -- 301 259 Common stock repurchased (24) -- -- -- -- (633) (633) Dividends ($.17 per share) -- -- (342) -- -- -- (342) Cumulative translation and other -- -- -- (51) -- -- (51) Net income -- -- 1,966 -- -- -- 1,966 ----- ------ ------- ---- ------- ----- ------- BALANCE AT SEPTEMBER 30, 1997 2,013 8,548 9,543 (12) (462) (332) 17,285 Common stock issued 4 160 -- -- -- -- 160 Exercise of stock options, net 34 287 -- -- (131) 354 510 Common stock repurchased (1) -- -- -- -- (30) (30) Dividends ($.20 per share) -- -- (412) -- -- -- (412) Cumulative translation and other -- -- -- 25 -- -- 25 Net income -- -- 1,850 -- -- -- 1,850 ----- ------ ------- ---- ------- ----- ------- BALANCE AT SEPTEMBER 30, 1998 2,050 $8,995 $10,981 $ 13 $ (593) $ (8) $19,388 ===== ====== ======= ==== ======= ===== =======
See Notes to Consolidated Financial Statements -41- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in millions, except per share amounts) 1 Description of the Business and Summary of Significant Accounting Policies The Walt Disney Company, together with its subsidiaries (the "Company"), is a diversified international entertainment organization with operations in the following businesses. CREATIVE CONTENT The Company produces and acquires live-action and animated motion pictures for distribution to the theatrical, home video and television markets. The Company also produces original television programming for the network and first-run syndication markets. The Company distributes its filmed product through its own distribution and marketing companies in the United States and most foreign markets. The Company licenses the name "Walt Disney," as well as the Company's characters, visual and literary properties and songs and music, to various consumer manufacturers, retailers, show promoters and publishers throughout the world. The Company also engages in direct retail distribution principally through the Disney Stores, and produces books and magazines for the general public in the United States and Europe. In addition, the Company produces audio and computer software products for the entertainment market, as well as film, video and computer software products for the educational marketplace. Buena Vista Internet Group ("BVIG") coordinates the Company's internet initiatives. BVIG develops, publishes and distributes content for narrow-band on-line services, the interactive software market, interactive television platforms, internet web sites, including Disney.com, Disney's Daily Blast, ESPN.com, ABCNews.com and the Disney Store Online, which offers Disneythemed merchandise over the internet. BROADCASTING The Company operates the ABC Television Network, which has affiliated stations providing coverage to U.S. television households. The Company also owns television and radio stations, most of which are affiliated with either the ABC Television Network or the ABC Radio Networks. The Company's cable and international broadcast operations are principally involved in the production and distribution of cable television programming, the licensing of programming to domestic and international markets and investing in foreign television broadcasting, production and distribution entities. Primary domestic cable programming services, which operate through subsidiary companies and joint ventures, are ESPN, the A&E Television Networks, Lifetime Entertainment Services and E! Entertainment Television. The Company provides programming for and operates cable and satellite television programming services, including the Disney Channel and Disney Channel International. THEME PARKS AND RESORTS The Company operates the Walt Disney World Resort(R) in Florida, and Disneyland Park(R), the Disneyland Hotel and the Disneyland Pacific Hotel in California. The Walt Disney World Resort includes the Magic Kingdom, Epcot, Disney-MGM Studios and Disney's Animal Kingdom, thirteen resort hotels and a complex of villas and suites, a retail, dining and entertainment complex, a sports complex, conference centers, campgrounds, golf courses, water parks and other recreational facilities. In addition, the resort operates Disney Cruise Line from Port Canaveral, Florida. Disney Regional Entertainment designs, develops and operates a variety of new entertainment concepts based on Disney brands and creative properties, operating under the names Club Disney, ESPN Zone and DisneyQuest. The Company earns royalties on revenues generated by the Tokyo Disneyland(R) theme park near Tokyo, Japan, which is owned and operated by an unrelated Japanese corporation. The -42- Company also has an investment in Euro Disney S.C.A., a publicly-held French entity that operates Disneyland Paris. The Company's Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The Company also manages and markets vacation ownership interests in the Disney Vacation Club. Included in Theme Parks and Resorts are the Company's National Hockey League franchise, the Mighty Ducks of Anaheim, and its ownership interest in the Anaheim Angels, a Major League Baseball team. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of the Company include the accounts of The Walt Disney Company and its subsidiaries after elimination of intercompany accounts and transactions. Accounting Changes During the first quarter, the Company adopted Statement of Financial Accounting Standards No. 128 Earnings Per Share ("SFAS 128"), which specifies the method of computation, presentation and disclosure for earnings per share ("EPS"). SFAS 128 requires the presentation of two EPS amounts, basic and diluted. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS includes the dilution that would occur if outstanding stock options and other dilutive securities were exercised and is comparable to the EPS the Company has historically reported. The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price over the period. During 1997, the Company adopted SFAS 123 Accounting for Stock-Based Compensation ("SFAS 123"), which requires disclosure of the fair value and other characteristics of stock options (see Note 9). The Company has chosen under the provisions of SFAS 123 to continue using the intrinsic-value method of accounting for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees ("APB 25"). During 1996, the Company adopted SFAS 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121") (see Note 11). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. Revenue Recognition Revenues from the theatrical distribution of motion pictures are recognized when motion pictures are exhibited. Revenues from video sales are recognized on the date that video units are made widely available for sale by retailers. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecasting by the licensee and when certain other conditions are met. Broadcast advertising revenues are recognized when commercials are aired. Revenues from television subscription services related to the Company's primary cable programming services are recognized as services are provided. Revenues from participants and sponsors at the theme parks are generally recorded over the period of the applicable agreements commencing with the opening of the related attraction. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. -43- Investments Debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and reported at amortized cost. Debt securities not classified as held-to-maturity and marketable equity securities are classified as either "trading" or "available-for-sale," and are recorded at fair value with unrealized gains and losses included in earnings or stockholders' equity, respectively. All other equity securities are accounted for using either the cost method or the equity method. The Company's share of earnings or losses in its equity investments accounted for under the equity method is included in "Corporate activities and other" in the consolidated statements of income. Inventories Carrying amounts of merchandise, materials and supplies inventories are generally determined on a moving average cost basis and are stated at the lower of cost or market. Film and Television Costs Film and television costs are stated at the lower of cost, less accumulated amortization, or net realizable value. Television broadcast program licenses and rights and related liabilities are recorded when the license period begins and the program is available for use. Film and television production and participation costs are expensed based on the ratio of the current period's gross revenues to estimated total gross revenues from all sources on an individual production basis. Television network and station rights for theatrical movies and other long-form programming are charged to expense primarily on accelerated bases related to the usage of the programs. Television network series costs and multi-year sports rights are charged to expense based on the ratio of the current period's gross revenues to estimated total gross revenues from such programs. Estimates of total gross revenues can change significantly due to a variety of factors, including the level of market acceptance of film and television products, advertising rates and subscriber fees. Accordingly, revenue estimates are reviewed periodically and amortization is adjusted if necessary. Such adjustments could have a material effect on results of operations in future periods. Theme Parks, Resorts and Other Property Theme parks, resorts and other property are carried at cost. Depreciation is computed on the straight-line method based upon estimated useful lives ranging from three to fifty years. Intangible/Other Assets Intangible assets are amortized over periods ranging from two to forty years. The Company continually reviews the recoverability of the carrying value of these assets using the methodology prescribed in SFAS 121. The Company also reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount, including associated intangible assets, of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. Risk Management Contracts In the normal course of business, the Company employs a variety of off- balance-sheet financial instruments to manage its exposure to fluctuations in interest and foreign currency exchange rates, including interest rate and cross-currency swap agreements, forward, option, swaption and spreadlock contracts and interest rate caps. -44- The Company designates and assigns the financial instruments as hedges of specific assets, liabilities or anticipated transactions. When hedged assets or liabilities are sold or extinguished or the anticipated transactions being hedged are no longer expected to occur, the Company recognizes the gain or loss on the designated hedging financial instruments. The Company classifies its derivative financial instruments as held or issued for purposes other than trading. Option premiums and unrealized losses on forward contracts and the accrued differential for interest rate and cross- currency swaps to be received under the agreements are recorded in the balance sheet as other assets. Unrealized gains on forward contracts and the accrued differential for interest rate and cross-currency swaps to be paid under the agreements are included in accounts and taxes payable and other accrued liabilities. Realized gains and losses from hedges are classified in the income statement consistent with the accounting treatment of the items being hedged. The Company accrues the differential for interest rate and cross- currency swaps to be paid or received under the agreements as interest and exchange rates shift as adjustments to net interest expense over the lives of the swaps. Gains and losses on the termination of swap agreements, prior to their original maturity, are deferred and amortized to net interest expense over the remaining term of the underlying hedged transactions. Cash flows from hedges are classified in the statement of cash flows under the same category as the cash flows from the related assets, liabilities or anticipated transactions (see Notes 5 and 12). Earnings Per Share Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. The difference between basic and diluted earnings per share, for the Company, is solely attributable to stock options. For the years ended September 30, 1998, 1997 and 1996, options for 18 million, 15 million and 39 million shares, respectively, were excluded from diluted earnings per share. Earnings per share amounts have been adjusted, for all years presented, to reflect the three-for-one split of the Company's common shares effective June 1998 (see Note 8). Reclassifications Certain reclassifications have been made in the 1997 and 1996 financial statements to conform to the 1998 presentation, including the change in format from an unclassified balance sheet to a classified balance sheet, which separately presents the current and non-current portions of assets and liabilities. Consistent with the classification of television broadcast rights as current assets, payments for such rights are now reclassified as operating cash flows. 2 Acquisition and Dispositions On February 9, 1996, the Company completed its acquisition of ABC. The aggregate consideration paid to ABC shareholders consisted of $10.1 billion in cash and 155 million shares of Company common stock valued at $8.8 billion based on the stock price as of the date the transaction was announced. As a result of the ABC acquisition, the Company sold its independent Los Angeles television station, KCAL, during the first quarter of 1997 for $387 million, resulting in a gain of $135 million. The Company completed its final purchase price allocation and determination of related goodwill, deferred taxes and other accounts during the second quarter of 1997. During the third and fourth quarters of 1997, the Company disposed of most of the publishing businesses acquired with ABC to various third parties for consideration approximating their carrying -45- amount. Proceeds consisted of $1.2 billion in cash, $1.0 billion in debt assumption and preferred stock convertible to common stock with a market value of $660 million. The unaudited pro forma information below presents results of operations as if the acquisition of ABC in 1996 and the sale of KCAL, the finalization of purchase price allocation and the disposition of certain ABC publishing assets in 1997 had occurred at the beginning of the respective years presented. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had these events occurred at the beginning of the years presented, nor is it necessarily indicative of future results.
Year Ended September 30, ---------------- 1997 1996 (a) ------- -------- Revenues $21,613 $20,075 Net income 1,772 1,274 Earnings per share Diluted $ 0.86 $ 0.62 Basic $ 0.88 $ 0.63
- -------- (a) 1996 includes the impact of a $300 million non-cash charge related to the initial adoption of a new accounting standard (see Note 11). The charge reduced diluted earnings per share by $.09 for the year. 3Investment in Euro Disney Euro Disney S.C.A. ("Euro Disney") operates the Disneyland Paris theme park and resort complex on a 4,800-acre site near Paris, France. The Company accounts for its 39% ownership interest in Euro Disney using the equity method of accounting. As of September 30, 1998, the Company's recorded investment in Euro Disney was $340 million. The quoted market value of the Company's Euro Disney shares at September 30, 1998 was approximately $452 million. In connection with the financial restructuring of Euro Disney in 1994, Euro Disney Associes S.N.C. ("Disney SNC"), a wholly-owned affiliate of the Company, entered into a lease arrangement with a noncancelable term of 12 years (the "Lease") related to substantially all of the Disneyland Paris theme park assets, and then entered into a 12-year sublease agreement (the "Sublease") with Euro Disney. Remaining lease rentals at September 30, 1998 of FF 8.3 billion ($1.5 billion) receivable from Euro Disney under the Sublease approximate the amounts payable by Disney SNC under the Lease. At the conclusion of the Sublease term, Euro Disney will have the option to assume Disney SNC's rights and obligations under the Lease. If Euro Disney does not exercise its option, Disney SNC may purchase the assets, continue to lease the assets or elect to terminate the Lease, in which case Disney SNC would make a termination payment to the lessor equal to 75% of the lessor's then outstanding debt related to the theme park assets, estimated to be $1.1 billion; Disney SNC could then sell or lease the assets on behalf of the lessor to satisfy the remaining debt, with any excess proceeds payable to Disney SNC. Also as part of the restructuring, the Company agreed to arrange for the provision of a 10-year unsecured standby credit facility of approximately $201 million, upon request, bearing interest at PIBOR. As of September 30, 1998, Euro Disney had not requested that the Company establish this facility. The Company also agreed, as long as any of the restructured debt is outstanding, to maintain ownership of at least 34% of the outstanding common stock of Euro Disney until June 1999, at least 25% for the subsequent five years and at least 16.67% for an additional term thereafter. -46- 4Film and Television Costs
1998 1997 - ------------------------------------------- Theatrical film costs Released, less amortization $2,035 $1,691 In-process 2,041 1,855 ------ ------ 4,076 3,546 ------ ------ Television costs Released, less amortization 374 276 In-process 589 279 ------ ------ 963 555 ------ ------ Television broadcast rights 690 300 ------ ------ 5,729 4,401 Less: current portion 3,223 2,186 ------ ------ Non-current portion $2,506 $2,215 ====== ======
Based on management's total gross revenue estimates as of September 30, 1998, approximately 82% of unamortized film and television costs (except in- process) are expected to be amortized during the next three years. 5Borrowings The Company's borrowings at September 30, 1998 and 1997, including interest rate swaps designated as hedges, are summarized below.
1998 --------------------------------------------------------------- STATED INTEREST RATE AND CROSS- EFFECTIVE INTEREST CURRENCY SWAPS (F) INTEREST SWAP BALANCE RATE (E) PAY FLOAT PAY FIXED RATE (G) MATURITIES ------- -------- ------------ ------------ --------- ---------- Commercial paper due 1999 (a) $2,225 5.5% $ -- $ 2,225 6.2% 1999 U.S. dollar notes and debentures due 1999-2093 (b) 6,321 6.6% 2,886 675 6.4% 1999-2012 Dual currency and foreign notes due 1999-2003 (c) 1,678 5.8% 1,678 -- 5.4% 1999-2003 Senior participating notes due 2000-2001 (d) 1,195 2.7% -- -- N/A N/A Other due 1999-2027 266 5.2% -- -- N/A N/A ------ 11,685 5.8% -- -- 6.2% Less current portion 2,123 ------ ------------ ------------ TOTAL LONG-TERM BORROWINGS $9,562 $ 4,564 $ 2,900 ====== ============ ============
-47-
1997 ---------------------------------------------------------------- Stated Interest rate and cross- Effective Interest currency swaps (f) Interest Swap Balance Rate (e) Pay Float Pay Fixed Rate (g) Maturities ------- -------- ------------- ------------ --------- ---------- Commercial paper due 1998 (a) $ 2,019 5.8% $ -- $ 950 6.2% 1999 U.S. dollar notes and debentures due 1998-2093 (b) 5,796 6.7% 2,086 -- 6.5% 1998-2012 Dual currency and foreign notes due 1998-2001 (c) 1,854 5.2% 1,812 -- 5.4% 1998-2001 Senior participating notes due 2000-2001 (d) 1,145 2.7% -- -- n/a n/a Other due 1998-2027 254 8.2% -- -- n/a n/a ------- 11,068 5.9% -- -- 6.3% Less current portion 897 ------- ------------- ----------- Total long-term borrowings $10,171 $ 3,898 $ 950 ======= ============= ===========
- -------- (a) The Company has established bank facilities totaling $5.2 billion which expire in one to four years. Under the bank facilities, the Company has the option to borrow at various interest rates. Commercial paper is classified as long-term since the Company intends to refinance these borrowings on a long-term basis through continued commercial paper borrowings supported by available bank facilities. (b) Includes $771 million in 1998 and $821 million in 1997 representing minority interest in a real estate investment trust established by the Company. (c) Denominated principally in U.S. dollars, Japanese yen, Australian dollars and Italian lira. (d) The average coupon rate is 2.7% on $1.3 billion face value of notes. Additional interest may be paid based on the performance of designated portfolios of films. The effective interest rates at September 30, 1998 and 1997 were 6.8% and 6.3%, respectively. (e) The stated interest rate represents the weighted average coupon rate for each category of borrowings. For floating rate borrowings, interest rates are based upon the rates at September 30, 1998 and 1997; these rates are not necessarily an indication of future interest rates. (f) Amounts represent notional values of interest rate swaps. (g) The effective interest rate reflects the effect of interest rate and cross-currency swaps entered into with respect to certain of these borrowings as indicated in the "Pay Float" and "Pay Fixed" columns. Borrowings, excluding commercial paper and minority interest, have the following scheduled maturities: 1999 $2,123 2000 2,074 2001 2,054 2002 -- 2003 92 Thereafter 2,346
The Company capitalizes interest on assets constructed for its theme parks, resorts and other property, and on theatrical and television productions in process. In 1998, 1997 and 1996, respectively, total interest costs incurred were $824 million, $841 million and $545 million, of which $139 million, $100 million and $66 million were capitalized. -48- 6Income Taxes
1998 1997 1996 - ----------------------------------------------------- Income before income taxes Domestic (including U.S. exports) $ 3,114 $ 3,193 $1,822 Foreign subsidiaries 43 194 239 ------- ------- ------ $ 3,157 $ 3,387 $2,061 ======= ======= ====== Income tax provision Current Federal $ 698 $ 1,023 $ 389 State 119 203 101 Foreign (including withholding) 139 190 235 ------- ------- ------ 956 1,416 725 ------- ------- ------ Deferred Federal 303 21 106 State 48 (16) 16 ------- ------- ------ 351 5 122 ------- ------- ------ $ 1,307 $ 1,421 $ 847 ======= ======= ====== Components of Deferred Tax Assets and Liabilities 1998 1997 - ----------------------------------------------------- Deferred tax assets Accrued liabilities $(1,051) $(1,257) Other, net (61) (89) ------- ------- Total deferred tax assets (1,112) (1,346) ======= ======= Deferred tax liabilities Depreciable, amortizable and other property 2,396 2,413 Licensing revenues 249 193 Leveraged leases 313 279 Investment in Euro Disney 129 90 ------- ------- Total deferred tax liabilities 3,087 2,975 ------- ------- Net deferred tax liability before valuation allowance 1,975 1,629 Valuation allowance 50 50 ------- ------- Net deferred tax liability $ 2,025 $ 1,679 ======= ======= Reconciliation of Effective Income Tax Rate 1998 1997 1996 - ----------------------------------------------------- Federal income tax rate 35.0% 35.0% 35.0% Nondeductible amortization of intangible assets 4.4 4.4 5.1 State taxes, net of federal income tax benefit 3.4 3.6 3.7 Other, net (1.4) (1.0) (2.7) ------- ------- ------ 41.4% 42.0% 41.1% ======= ======= ======
In 1998, 1997 and 1996, income tax benefits attributable to employee stock option transactions of $327 million, $81 million and $44 million, respectively, were allocated to stockholders' equity. -49- 7Pension and Other Benefit Programs The Company maintains pension plans and postretirement medical benefit plans covering most of its domestic employees not covered by union or industry-wide plans. Employees hired after January 1, 1994 are not eligible for the postretirement medical benefits. Pension benefits are generally based on years of service and/or compensation. The following chart summarizes the balance sheet impact, as well as the benefit obligations, assets, funded status and rate assumptions associated with the pension and postretirement medical benefit plans.
Postretirement Pension Plans Benefit Plans ---------------- ---------------- 1998 1997 1998 1997 ------- ------- ------- ------- Reconciliation of funded status of the plans and the amounts included in the Company's consolidated balance sheets: Projected benefit obligations Beginning obligations $(1,438) $(1,402) $ (293) $ (271) Service cost (71) (73) (11) (10) Interest cost (109) (106) (22) (21) Actuarial gains (losses) (247) 9 (2) 5 Benefits paid 63 62 10 9 Other 9 72 (3) (5) ------- ------- ------- ------- Ending obligations (1,793) (1,438) (321) (293) ------- ------- ------- ------- Fair value of plans' assets Beginning fair value 1,726 1,442 162 138 Actual return on plans' assets 294 304 26 22 Employer contributions 75 110 7 Participants' contributions 1 1 - 11 Benefits paid (63) (62) (10) (9) Expenses (15) (9) -- -- Other (4) (60) -- -- ------- ------- ------- ------- Ending fair value 2,014 1,726 185 162 ------- ------- ------- ------- Funded status of the plans 221 288 (136) (131) Unrecognized net gain (loss) (80) (219) (30) (20) Unrecognized prior service benefit (cost) (11) (2) 1 (34) Other 33 28 -- -- ------- ------- ------- ------- Net balance sheet asset (liability) $ 163 $ 95 $ (165) $ (185) ======= ======= ======= ======= Rate Assumptions Discount rate 6.8% 7.8% 6.8% 7.8% Rate of return on plans' assets 10.5% 10.5% 10.5% 10.5% Salary increases 4.4% 5.4% N/A n/a Annual increase in cost of benefits N/A n/a 6.4% 6.7%
The projected benefit obligations and the accumulated benefit obligations for the pension plans with accumulated benefit obligations in excess of plan assets were $96 million and $74 million for 1998, and $79 million and $50 million for 1997. The annual increase in cost of postretirement benefits is assumed to decrease .3 percentage points per year until reaching 4.9%. -50- Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement medical benefit plans. The effects of a one percentage point decrease in the assumed health care cost trend rates on total service and interest cost components and on postretirement benefit obligations are $9 million and $70 million, respectively. The effects of a one percentage point increase in the assumed health care cost trend rates on total service and interest cost components and on postretirement benefit obligations are ($7) million and ($53) million, respectively. The Company's accumulated pension benefit obligations at September 30, 1998 and 1997 were $1.6 billion and $1.3 billion, of which 97.7% and 97.8% were vested, respectively. The income statement costs of the pension plans for 1998, 1997 and 1996 totaled $12 million, $45 million and $58 million, respectively. The discount rate, rate of return on plan assets and salary increase assumptions for the pension plans were 7.8%, 10.0% and 5.6%, respectively, in 1996. The income statement credits for the postretirement benefit plans for 1998, 1997 and 1996 were $13 million, $18 million and $16 million, respectively. The discount rate, rate of return on plan assets and annual increase in cost of postretirement benefits assumptions were 7.8%, 10.0% and 7.0%, respectively, in 1996. The market values of the Company's shares held by the pension plan master trust as of September 30, 1998 and 1997 were $71 million and $75 million, respectively. 8Stockholders' Equity In June 1998, the Company effected a three-for-one split of its common stock, by means of a special stock dividend. Stockholders' equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying from retained earnings to common stock the par value of additional shares issued pursuant to the split. In connection with the common stock split, the Company amended its corporate charter to increase the Company's authorized common stock from 1.2 billion shares to 3.6 billion shares. The Board of Directors also approved an increase in the Company's share repurchase authorization to 133.3 million shares of common stock pre- split or 400 million post-split. All share and per share data included herein have been restated to reflect the split. In 1996, the Company established the TWDC Stock Compensation Fund pursuant to the repurchase program to acquire shares of the Company for the purpose of funding certain stock-based compensation. Any shares acquired by the fund that are not utilized must be disposed of by December 31, 1999. The Company has a stockholder rights plan, expiring June 30, 1999, which becomes operative upon certain events involving the acquisition of 25% or more of the Company's common stock by any person or group in a transaction not approved by the Company's Board of Directors. Upon the occurrence of such an event, each right, unless redeemed by the Board, entitles its holder to purchase for $350 an amount of common stock of the Company, or in certain circumstances the acquirer, having a $700 market value. In connection with the rights plan, 7 million shares of preferred stock were reserved. 9Stock Incentive Plans Under various plans, the Company may grant stock options and other awards to key executive, management and creative personnel at exercise prices equal to or exceeding the market price at the date of grant. In general, options become exercisable over a five-year period from the grant date and expire 10 years after the date of grant. In certain cases for senior executives, options become exercisable over periods up to 10 years and expire up to 15 years after date of grant. Shares available for future option grants at September 30, 1998, totaled 119 million. -51- The following table summarizes information about stock option transactions (shares in millions):
1998 1997 1996 --------------- --------------- --------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------ -------- ------ -------- ------ -------- Outstanding at beginning of year 183 $17.44 189 $15.84 105 $11.20 Awards canceled (10) 20.98 (18) 19.32 (6) 17.10 Awards granted 27 33.07 27 25.64 96 19.63 Awards exercised (37) 9.06 (15) 11.14 (9) 10.53 Awards transferred (ABC) -- -- 3 11.05 --- --- --- ------ Outstanding at September 30 163 $21.70 183 $17.44 189 $15.84 === === === Exercisable at September 30 51 $16.34 63 $11.77 51 $ 9.40 === === ===
The following table summarizes information about stock options outstanding at September 30, 1998 (shares in millions):
Outstanding Exercisable -------------------------------------- ------------------- Weighted Weighted Range of Weighted Average Average Average Exercise Number Remaining Years of Exercise Number Exercise Prices of Options Contractual Life Price of Options Price -------- ---------- ------------------ -------- ---------- -------- $ 2-$ 5 2 0.28 $ 5.71 2 $ 5.71 $ 5-$10 7 2.19 8.55 6 8.58 $10-$15 20 5.01 13.41 14 13.27 $15-$20 24 6.72 18.33 16 18.44 $20-$25 60 7.79 21.54 11 21.33 $25-$30 26 9.10 26.48 2 26.64 $30-$35 9 8.82 31.76 -- $35-$40 12 9.56 38.02 -- $40-$45 3 8.01 42.21 -- --- --- 163 51 === ===
During 1997, the Company adopted SFAS 123 and pursuant to its provisions, elected to continue using the intrinsic-value method of accounting for stock- based awards granted to employees in accordance with APB 25. Accordingly, the Company has not recognized compensation expense for its stock-based awards to employees. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of SFAS 123:
1998 1997 1996 ------ ------ ------ Net income: As reported $1,850 $1,966 $1,214 Pro forma 1,749 1,870 1,185 Diluted earnings per share: As reported 0.89 0.95 0.65 Pro forma 0.84 0.91 0.64
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. -52- The weighted average fair values of options at their grant date during 1998, 1997 and 1996, where the exercise price equaled the market price on the grant date, were $10.82 and $9.09, and $7.67, respectively. The weighted average fair values of options at their grant date during 1998 and 1996, where the exercise price exceeded the market price on the grant date, were $8.55 and $6.20, respectively. No such options were granted during 1997. The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. The weighted average assumptions used in the model were as follows:
1998 1997 1996 ---- ---- ---- Risk-free interest rate 5.4% 6.4% 6.2% Expected years until exercise 6.0 6.1 7.1 Expected stock volatility 23% 23% 23% Dividend yield .71% .71% .69%
10Detail of Certain Balance Sheet Accounts 1998 1997 - --------------------------------------------------------------------------- Current Receivables Trade, net of allowances $ 3,447 $ 3,002 Other 552 327 ------- ------- $ 3,999 $ 3,329 ======= ======= Accounts and taxes payable and other accrued liabilities Accounts payable $ 3,792 $ 3,560 Income taxes payable -- 383 Payroll and employee benefits 853 684 Other 122 121 ------- ------- $ 4,767 $ 4,748 ======= ======= Intangible assets Cost in excess of ABC's net assets acquired $14,248 $14,307 Trademark 1,100 1,100 FCC licenses 1,100 1,100 Other 474 211 Accumulated amortization (1,153) (707) ------- ------- $15,769 $16,011 ======= =======
-53- 11 Segments Business Segments 1998 1997 1996 - --------------------------------------------------------- Revenues Creative Content $10,302 $10,937 $10,159 Broadcasting 7,142 6,522 4,078 Theme Parks and Resorts 5,532 5,014 4,502 ------- ------- ------- $22,976 $22,473 $18,739 ======= ======= ======= Operating income Creative Content $ 1,403 $ 1,882 $ 1,561 Broadcasting 1,325 1,294 782 Theme Parks and Resorts 1,287 1,136 990 KCAL gain -- 135 -- Accounting change -- -- (300) ------- ------- ------- $ 4,015 $ 4,447 $ 3,033 ======= ======= ======= Capital expenditures Creative Content $ 221 $ 301 $ 359 Broadcasting 245 152 113 Theme Parks and Resorts 1,693 1,266 1,196 Corporate 155 203 77 ------- ------- ------- $ 2,314 $ 1,922 $ 1,745 ======= ======= ======= Depreciation expense Creative Content $ 209 $ 187 $ 163 Broadcasting 122 104 104 Theme Parks and Resorts 444 408 358 Corporate 34 39 47 ------- ------- ------- $ 809 $ 738 $ 672 ======= ======= ======= Identifiable assets Creative Content $ 9,509 $ 8,832 $ 8,837 Broadcasting 20,099 19,036 19,576 Theme Parks and Resorts 9,214 8,051 7,066 Corporate 2,556 2,578 1,862 ------- ------- ------- $41,378 $38,497 $37,341 ======= ======= ======= Supplemental revenue data Creative Content Theatrical product $ 5,085 $ 5,595 $ 5,472 Consumer products 3,452 3,076 2,518 Broadcasting Advertising 5,287 4,937 3,092 Theme Parks and Resorts Merchandise, food and beverage 1,780 1,754 1,555 Admissions 1,739 1,603 1,493
-54- Geographic Segments 1998 1997 1996 - ------------------------------------------------ Revenues United States $18,106 $17,868 $14,422 United States export 1,036 874 746 Europe 2,215 2,073 2,086 Rest of world 1,619 1,658 1,485 ------- ------- ------- $22,976 $22,473 $18,739 ======= ======= ======= Operating income United States $ 3,468 $ 3,712 $ 2,229 Europe 369 499 633 Rest of world 390 397 382 Unallocated expenses (212) (161) (211) ------- ------- ------- $ 4,015 $ 4,447 $ 3,033 ======= ======= ======= Identifiable assets United States $39,462 $36,706 $35,477 Europe 1,468 1,275 1,495 Rest of world 448 516 369 ------- ------- ------- $41,378 $38,497 $37,341 ======= ======= =======
During the second quarter of 1996, the Company implemented SFAS 121. This accounting standard changed the method that companies use to evaluate the carrying value of such assets by, among other things, requiring companies to evaluate assets at the lowest level at which identifiable cash flows can be determined. The implementation of SFAS 121 resulted in the Company recognizing a $300 million non-cash charge related principally to certain assets included in the Theme Parks and Resorts segment. 12 Financial Instruments Investments As of September 30, 1998 and 1997, the Company held $126 million and $137 million, respectively, of securities classified as available for sale. In 1998, 1997 and 1996, realized gains and losses on available-for-sale securities, determined principally on an average cost basis, and unrealized gains and losses on available-for-sale securities were not material. Interest Rate Risk Management The Company is exposed to the impact of interest rate changes. The Company's objective is to manage the impact of interest rate changes on earnings and cash flows and on the market value of its investments and borrowings. The Company maintains fixed rate debt as a percentage of its net debt between a minimum and maximum percentage, which is set by policy. The Company uses interest rate swaps and other instruments to manage net exposure to interest rate changes related to its borrowings and to lower its overall borrowing costs. Significant interest rate risk management instruments held by the Company at September 30, 1998 and 1997 included pay-floating and pay-fixed swaps, interest rate caps and swaption contracts. Pay-floating swaps effectively converted medium-term obligations to LIBOR-based or commercial paper variable rate instruments. These swap agreements expire in one to 14 years. Pay-fixed swaps and interest rate caps effectively converted floating rate obligations to fixed rate instruments. These instruments expire within one year. Swaption contracts were designated as hedges of floating rate debt and expired in 1998. -55- The following table reflects incremental changes in the notional or contractual amounts of the Company's interest rate contracts during 1998 and 1997. Activity representing renewal of existing positions is excluded.
September 30, Maturities/ SEPTEMBER 30, 1997 Additions Expirations Terminations 1998 - ------------------------------------------------------------------------------------ Pay-floating swaps $ 2,086 $ 950 $ (50) $ (100) $ 2,886 Pay-fixed swaps 950 6,000 (4,050) -- 2,900 Interest rate caps -- 3,100 (2,000) -- 1,100 Swaption contracts 300 -- (300) -- -- ------- -------- -------- ------- ------- $ 3,336 $ 10,050 $ (6,400) $ (100) $ 6,886 ======= ======== ======== ======= ======= September 30, Maturities/ September 30, 1996 Additions Expirations Terminations 1997 - ------------------------------------------------------------------------------------ Pay-floating swaps $ 1,520 $ 2,479 $ -- $(1,913) $ 2,086 Pay-fixed swaps 900 850 (200) (600) 950 Swaption contracts -- 1,100 -- (800) 300 Option contracts -- 593 -- (593) -- Spreadlock contracts -- 470 (470) -- -- ------- -------- -------- ------- ------- $ 2,420 $ 5,492 $ (670) $(3,906) $ 3,336 ======= ======== ======== ======= =======
The impact of interest rate risk management activities on income in 1998, 1997 and 1996, and the amount of deferred gains and losses from interest rate risk management transactions at September 30, 1998 and 1997 were not material. Foreign Exchange Risk Management The Company transacts business in virtually every part of the world and is subject to risks associated with changing foreign exchange rates. The Company's objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues and challenges. Accordingly, the Company enters into various contracts which change in value as foreign exchange rates change to protect the value of its exiting foreign currency assets and liabilities, commitments and anticipated foreign currency revenues. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures for periods not to exceed five years. The gains and losses on these contracts offset changes in the value of the related exposures. It is the Company's policy to enter into foreign currency transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for speculative purposes. The Company uses option strategies which provide for the sale of foreign currencies to hedge probable, but not firmly committed, revenues. While these hedging instruments are subject to fluctuations in value, such fluctuations are offset by changes in the value of the underlying exposures being hedged. The principal currencies hedged are the Japanese yen, French franc, German mark, British pound, Canadian dollar and Italian lira. The Company also uses forward contracts to hedge foreign currency assets, liabilities and foreign currency payments the Company is committed to make in connection with the construction of a cruise ship (see Note 13). Cross-currency swaps are used to hedge foreign currency-denominated borrowings. -56- At September 30, 1998 and 1997, the notional amounts of the Company's foreign exchange risk management contracts, net of notional amounts of contracts with counterparties against which the Company has a legal right of offset, the related exposures hedged and the contract maturities are as follows:
1998 1997 ---------------------------- ---------------------------- FISCAL Fiscal NOTIONAL EXPOSURES YEAR Notional Exposures Year AMOUNT HEDGED MATURITY Amount Hedged Maturity -------- --------- --------- -------- --------- --------- Option contracts $2,966 $1,061 1999-2000 $3,460 $1,633 1998-1999 Forward contracts 2,053 1,773 1999-2000 2,284 1,725 1998-1999 Cross-currency swaps 1,678 1,678 1999-2003 1,812 1,812 1998-2001 ------ ------ ------ ------ $6,697 $4,512 $7,556 $5,170 ====== ====== ====== ======
Gains and losses on contracts hedging anticipated foreign currency revenues and foreign currency commitments are deferred until such revenues are recognized or such commitments are met, and offset changes in the value of the foreign currency revenues and commitments. At September 30, 1998 and 1997, the Company had deferred gains of $245 million and $486 million respectively, and deferred losses of $118 million and $220 million, respectively, related to foreign currency hedge transactions. Deferred amounts to be recognized can change with market conditions and will be substantially offset by changes in the value of the related hedged transactions. The impact of foreign exchange risk management activities on operating income in 1998 and in 1997 was a net gain of $227 million and $166 million, respectively. Fair Value of Financial Instruments At September 30, 1998 and 1997, the Company's financial instruments included cash, cash equivalents, investments, receivables, accounts payable, borrowings and interest rate and foreign exchange risk management contracts. At September 30, 1998 and 1997, the fair values of cash and cash equivalents, receivables, accounts payable and commercial paper approximated carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures, determined based on broker quotes or quoted market prices or rates for the same or similar instruments, and the related carrying amounts are as follows:
1998 1997 ------------------ ------------------ CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value -------- -------- -------- -------- Investments $ 686 $ 765 $ 769 $ 1,174 Borrowings $(10,914) $(11,271) $(10,313) $(10,290) Risk management contracts: Foreign exchange forwards $ 49 $ 18 $ 43 $ 93 Foreign exchange options 58 178 177 367 Interest rate swaps 30 181 20 54 Cross-currency swaps 25 (89) 17 (77) -------- -------- -------- -------- $ 162 $ 288 $ 257 $ 437 ======== ======== ======== ========
Credit Concentrations The Company continually monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments and does not anticipate nonperformance by the counterparties. The Company would not realize a material loss as of September 30, 1998 in the event of nonperformance by any one counterparty. The Company enters into transactions only with financial institution counterparties which have a credit rating of A- or better. -57- The Company's current policy regarding agreements with financial institution counterparties is generally to require collateral in the event credit ratings fall below A- or in the event aggregate exposures exceed limits as defined by contract. In addition, the Company limits the amount of credit exposure with any one institution. At September 30, 1998, financial institution counterparties posted collateral of $83 million to the Company, and the Company was not required to collateralize its financial instrument obligations. The Company's trade receivables and investments do not represent significant concentration of credit risk at September 30, 1998, due to the wide variety of customers and markets into which the Company's products are sold, their dispersion across many geographic areas, and the diversification of the Company's portfolio among instruments and issuers. New Accounting Guidance In June 1998, the Financial Accounting Standards Board ("the FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which the Company is required to adopt effective October 1, 1999. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other stockholders' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretative guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position. 13 Commitments and Contingencies Pursuant to an agreement with a shipyard for the construction of a cruise ship for its Disney Cruise Line, the Company is committed to make payments totaling approximately $290 million in 1999. The Company is committed to the purchase of broadcast rights for various feature films, sports and other programming aggregating approximately $14.7 billion as of September 30, 1998. This amount is substantially payable over the next six years. The Company has various real estate operating leases, including retail outlets for the distribution of consumer products and office space for general and administrative purposes. Future minimum lease payments under these non- cancelable operating leases totaled $2 billion at September 30, 1998, payable as follows: 1999 $272 2000 259 2001 236 2002 214 2003 183 Thereafter 819
Rental expense for the above operating leases during 1998, 1997 and 1996, including overages, common-area maintenance and other contingent rentals, was $321 million, $327 million and $233 million, respectively. The Company, together with, in some instances, certain of its directors and officers, is a defendant or co-defendant in various legal actions involving copyright, breach of contract and various other -58- claims incident to the conduct of its businesses. Management does not expect the Company to suffer any material liability by reason of such actions, nor does it expect that such actions will have a material effect on the Company's liquidity or operating results. 14 Subsequent Event In April 1997, the Company purchased a significant equity stake in Starwave Corporation ("Starwave"), an internet technology company. In connection with the acquisition, the Company was granted an option to purchase substantially all the remaining shares of Starwave, which the Company exercised during the third quarter of 1998. Accordingly, the accounts of Starwave have been included in the Company's September 30, 1998 consolidated financial statements. On June 18, 1998, the Company reached an agreement for the acquisition of Starwave by Infoseek Corporation ("Infoseek"), a publicly-held internet search company, pursuant to a merger. On November 18, 1998, the shareholders of both Infoseek and Starwave approved the merger. As a result of the merger and the Company's purchase of additional shares of Infoseek common stock pursuant to the merger agreement, the Company owns approximately 43% of Infoseek's outstanding common stock. In addition, pursuant to the merger agreement, the Company purchased warrants enabling it, under certain circumstances, to achieve a majority stake in Infoseek. These warrants vest over a three-year period and expire in five years. Effective as of the November 18, 1998 closing date of the transaction, the Company will record a significant non-cash gain, a write-off for purchased in-process research and development costs and an increase in investments, reflecting the Company's share of the fair value of Infoseek's intangible assets. The Company is currently performing the necessary valuations to determine the gain, the research and development write-off and the amount of and amortization period for the intangible assets. Thereafter, the Company will account for its investment in Infoseek under the equity method. The merger is not expected to have a material effect on the Company's financial position. -59- QUARTERLY FINANCIAL SUMMARY (In millions, except per share data) (Unaudited) December 31 March 31 June 30 September 30 - ------------------------------------------------------------------------ 1998 Revenues $6,339 $5,242 $5,248 $6,147 Operating income 1,492 849 923 751 Net income 755 384 415 296 Earnings per share (/1/) Diluted 0.37 0.18 0.20 0.14 Basic 0.37 0.19 0.20 0.14 1997 Revenues $6,278 $5,481 $5,194 $5,520 Operating income (/2/) 1,562 864 1,060 961 Net income (/2/) 749 333 473 411 Earnings per share (/1/)(/2/) Diluted 0.36 0.16 0.23 0.20 Basic 0.37 0.16 0.23 0.20
- -------- (1) Amounts have been adjusted to give effect to the three-for-one split of the Company's common shares effective June 1998. See Note 8 to the Consolidated Financial Statements. (2) Reflects a $135 million gain on the sale of KCAL in the first quarter. The earnings per share impact of this gain was $0.04. See Note 2 to the Consolidated Financial Statements. -60- [DISNEY RECYCLING LOGO] EX-10.(L) 2 ANNUAL BONUS PERFORMANCE PLAN EXHIBIT 10(l) THE WALT DISNEY COMPANY ANNUAL BONUS PERFORMANCE PLAN FOR EXECUTIVE OFFICERS Section 1. PURPOSE OF PLAN The purpose of the Plan is to promote the success of the Company by providing to participating executives bonus incentives that qualify as performance-based compensation within the meaning of Section 162(m) of the Code. SECTION 2. DEFINITIONS AND TERMS 2.1 Accounting Terms. Except as otherwise expressly provided or the ---------------- context otherwise requires, financial and accounting terms are used as defined for purposes of, and shall be determined in accordance with, generally accepted accounting principles, as from time to time in effect, as applied and reflected in the consolidated financial statements of the Company, prepared in the ordinary course of business. 2.2 Specific Terms. The following words and phrases as used herein -------------- shall have the following meanings unless a different meaning is plainly required by the context: "Base Salary" in respect of any Performance Period means the aggregate ----------- base annualized salary of a Participant from the Company and all affiliates of the Company at the time Participant is selected to participate for that Performance Period, exclusive of any commissions or other actual or imputed income from any Company-provided benefits or perquisites, but prior to any reductions for salary deferred pursuant to any deferred compensation plan or for contributions to a plan qualifying under Section 401(k) of the Code or contributions to a cafeteria plan under Section 125 of the Code. "Base Salary Multiple" means an amount equal to ten times Base Salary -------------------- or, in the case of the Chief Executive Officer, twenty times Base Salary. "Bonus" means a cash payment or a payment opportunity as the context ----- requires. "Business Criteria" means any one or any combination of Net Income, ----------------- Return on Equity, Return on Assets, or EPS. "CapCities Acquisition" means the acquisition of Capital Cities/ABC, --------------------- Inc by the Company. "Code" means the Internal Revenue Code of 1986, as amended from time ---- to time. "Committee" means the Performance Plan Subcommittee which has been --------- established to administer the Plan in accordance with Section 3.1 and Section 162(m) of the Code. "Company" means The Walt Disney Company and any successor, whether by ------- merger, ownership of all or substantially all of its assets, or otherwise. "EPS" for any Year means earnings per share of the Company, as --- reported in the Company's Consolidated Statement of Income set forth in the audited annual financial statements of the Company for the Year. "Executive" means a key employee (including any officer) of the --------- Company who is (or in the opinion of the Committee may during the applicable Performance Period become) an "executive officer" as defined in Rule 3b-7 under the Securities Exchange Act of 1934. "Net Income" for any Year means the consolidated net income of the ---------- Company, as reported in the audited financial statements of the Company for the Year. "Participant" means an Executive selected to participate in the Plan ----------- by the Committee. "Performance Period" means the Year or Years with respect to which the ------------------ Performance Targets are set by the Committee. "Performance Target(s)" means the specific objective goal or goals --------------------- (which may be cumulative and/or alternative) that are timely set in writing by the Committee for each Executive for the Performance Period in respect of any one or more of the Business Criteria. "Plan" means this Annual Bonus Performance Plan for Executive Officers ---- of the Company, as amended from time to time. "Return on Assets" means Net Income divided by the average of the ---------------- total assets of the Company at the end of the four fiscal quarters of the Year, as reported by the Company in its consolidated financial statements. "Return on Equity" means the Net Income divided by the average of the ---------------- common stockholders equity of the Company at the end of each of the four fiscal quarters of the Year, as reported by the Company in its consolidated financial statements. "Section 162(m)" means Section 162(m) of the Code, and the regulations -------------- promulgated thereunder, all as amended from time to time. "Shares" means shares of common stock of the Company or any securities ------ or property, including rights into which the same may be converted by operation of law or otherwise. "Year" means any one or more fiscal years of the Company commencing on ---- or after October 1, 1996 that represent(s) the applicable Performance Period and end(s) no later than September 30, 2001. SECTION 3. ADMINISTRATION OF THE PLAN 3.1 The Committee. The Plan shall be administered by a Committee ------------- consisting of at least three members of the Board of Directors of the Company, duly authorized by the Board of Directors of the Company to administer the Plan, who (i)Eare not eligible to participate in the Plan and (ii)Eare "outside directors" within the meaning of Section 162(m). 3.2 Powers of the Committee. The Committee shall have the sole ----------------------- authority to establish and administer the Performance Target(s) and the responsibility of determining from among the Executives those persons who will participate in and receive Bonuses under the Plan and, subject to Sections 4 and 5 of the Plan, the amount of such Bonuses, and the time or times at which and the form and manner in which Bonuses will be paid (which may include elective or mandatory deferral alternatives) and shall otherwise be responsible for the administration of the Plan, in accordance with its terms. The Committee shall have the authority to construe and interpret the Plan (except as otherwise provided herein) and any agreement or other document relating to any Bonus under the Plan, may adopt rules and regulations governing the administration of the Plan, and shall exercise all other duties and powers conferred on it by the Plan, or which are incidental or ancillary thereto. For each Performance Period, the Committee shall determine, at the time the Business Criteria and the Performance Target(s) are set, those Executives who are selected as Participants in the Plan. 3.3 Requisite Action. A majority (but not fewer than two) of the ---------------- members of the Committee shall constitute a quorum. The vote of a majority of those present at a meeting at which a quorum is present or the unanimous written consent of the Committee shall constitute action by the Committee. 3.4 Express Authority (and Limitations on Authority) to Change Terms ---------------------------------------------------------------- and Conditions of Bonus; Acceleration or Deferral of Payment. Without limiting - ------------------------------------------------------------ the Committee's authority under other provisions of the Plan, but subject to any express limitations of the Plan and Section 5.8, the Committee shall have the authority accelerate a Bonus (after the attainment of the applicable Performance Target(s)) and to waive restrictive conditions for a Bonus (including any forfeiture conditions, but not Performance Target(s)), in such circumstances as the Committee deems appropriate. In the case of any acceleration of a Bonus after the attainment of the applicable Performance Target(s), the amount payable shall be discounted to its present value using an interest rate equal to Moody's Average Corporate Bond Yield for the month preceding the month in which such acceleration occurs. Any deferred payment shall be subject to Section 4.9 and, if applicable, Section 4.10. SECTION 4. BONUS PROVISIONS. 4.1 Provision for Bonus. Each Participant may receive a Bonus if and -------------------- only if the Performance Target(s) established by the Committee, relative to the applicable Business Criteria, are attained. The applicable Performance Period and Performance Target(s) shall be determined by the Committee consistent with the terms of the Plan and Section 162(m). Notwithstanding the fact that the Performance Target(s) have been attained, the Company may pay a Bonus of less than the amount determined by the formula or standard established pursuant to Section 4.2 or may pay no Bonus at all, unless the Committee otherwise expressly provides by written contract or other written commitment. 4.2 Selection of Performance Target(s). The specific Performance ---------------------------------- Target(s) with respect to the Business Criteria must be established by the Committee in advance of the deadlines applicable under Section 162(m) and while the performance relating to the Performance Target(s) remains substantially uncertain within the meaning of Section 162(m). At the time the Performance Target(s) are selected, the Committee shall provide, in terms of an objective formula or standard for each Participant, and for any person who may become a Participant after the Performance Target(s) are set, the method of computing the specific amount that will represent the maximum amount of Bonus payable to the Participant if the Performance Target(s) are attained, subject to Sections 4.1, 4.3, 4.7, 5.1 and 5.8. 4.3 Maximum Individual Bonus. Notwithstanding any other provision ------------------------ hereof, no Executive shall receive a Bonus under the Plan for the Year in excess of $15 million, or, if less, his or her Base Salary Multiple. No Executive shall receive aggregate bonuses under this Plan in excess of $75 million in the case of the Chief Executive Officer or $50 million in the case of any other Executive. The foregoing limits shall be subject to adjustments consistent with Section 3.4. 4.4 Selection of Participants. For each Performance Period, the ------------------------- Committee shall determine, at the time the Business Criteria and the Performance Target(s) are set, those Executives who will participate in the Plan. 4.5 Effect of Mid-Year Commencement of Service. To the extent ------------------------------------------ compatible with Sections 4.2 and 5.8, if services as an Executive commence after the adoption of the Plan and the Performance Target(s) are established for a Performance Period, the Committee may grant a Bonus that is proportionately adjusted based on the period of actual service during the Year; the amount of any Bonus paid to such person shall not exceed that proportionate amount of the applicable maximum individual bonus under Section 4.3. 4.6 Changes Resulting From Accounting Changes. Subject to Section ----------------------------------------- 5.8, if, after the Performance Target(s) are established for a Performance Period, a change occurs in the applicable accounting principles or practices, the amount of the Bonuses paid under this Plan for such Performance Period shall be determined without regard to such change. 4.7 Committee Discretion to Determine Bonuses. The Committee has the ----------------------------------------- sole discretion to determine the standard or formula pursuant to which each Participant's Bonus shall be calculated (in accordance with Section 4.2), whether all or any portion of the amount so calculated will be paid, and the specific amount (if any) to be paid to each Participant, subject in all cases to the terms, conditions and limits of the Plan and of any other written commitment authorized by the Committee. To this same extent, the Committee may at any time establish additional conditions and terms of payment of Bonuses (including but not limited to the achievement of other financial, strategic or individual goals, which may be objective or subjective) as it may deem desirable in carrying out the purposes of the Plan and may take into account such other factors as it deems appropriate in administering any aspect of the Plan. The Committee may not, however, increase the maximum amount permitted to be paid to any individual under Section 4.2 or 4.3 of the Plan or award a Bonus under this Plan if the applicable Performance Target(s) have not been satisfied. 4.8 Committee Certification. No Executive shall receive any payment ----------------------- under the Plan unless the Committee has certified, by resolution or other appropriate action in writing, that the amount thereof has been accurately determined in accordance with the terms, conditions and limits of the Plan and that the Performance Target(s) and any other material terms previously established by the Committee or set forth in the Plan were in fact satisfied. 4.9 Time of Payment; Deferred Amounts. Any Bonuses granted by the --------------------------------- Committee under the Plan shall be paid as soon as practicable following the Committee's determinations under this Section 4 and the certification of the Committee's findings under Section 4.8. Any such payment shall be in cash or cash equivalent or in such other form of equal value on such payment date (including Shares or share equivalents as contemplated by Section 4.10) as the Committee may approve or require, subject to applicable withholding requirements and Section 4.10. Notwithstanding the foregoing, the Committee, in its sole discretion (but subject to any prior written commitments and to any conditions consistent with Sections 3.4, 4.3, 4.10 and 5.8 that it deems appropriate), defer the payout or vesting of any Bonus and/or provide to Participants the opportunity to elect to defer the payment of any Bonus under a nonqualified deferred compensation plan and as contemplated by Section 4.10. In the case of any deferred payment of a Bonus after the attainment of the applicable Performance Target(s), any amount in excess of the amount otherwise payable shall be based on either Moody's Average Corporate Bond Yield over the deferral period or one or more predetermined actual investments (including Shares) such that the amount payable at the later date will be based upon actual returns, including any decrease or increase in the value of the investment(s), unless the alternative deferred payment is otherwise exempt from the limitations under Section 162(m). 4.10 Share Payouts. Any Shares payable under the Plan shall be ------------- pursuant to a combined Award under the Plan and the Company's 1995 Stock Incentive Plan, as amended or another stockholder approved stock incentive plan of the Company (the "Stock Plan"). The number of Shares or stock units (or similar deferred award representing a right to receive Shares) awarded in lieu of all or any portion of a cash bonus under the Plan shall be equal to the largest whole number of Shares which have an aggregate fair market value no greater than the amount of cash otherwise payable as of the date such cash payment would have been paid. For this purpose, "fair market value" shall mean the average of the high and low prices of Company common stock on such date. Any stock units (or similar rights) shall thereafter be subject to adjustments as contemplated by the Stock Plan. Dividend equivalent rights as earned may be accrued and payable in additional stock units, cash or Shares or any combination thereof, in the Committee's discretion. SECTION 5. GENERAL PROVISIONS 5.1 No Right to Bonus or Continued Employment. Neither the ----------------------------------------- establishment of the Plan nor the provision for or payment of any amounts hereunder nor any action of the Company (including, for purposes of this Section 5.1, any predecessor or subsidiary), the Board of Directors of the Company or the Committee in respect of the Plan, shall be held or construed to confer upon any person any legal right to receive, or any interest in, a Bonus or any other benefit under the Plan, or any legal right to be continued in the employ of the Company. The Company expressly reserves any and all rights to discharge an Executive in its sole discretion, without liability of any person, entity or governing body under the Plan or otherwise. Notwithstanding any other provision hereof and notwithstanding the fact that the Performance Target(s) have been attained and/or the individual maximum amounts pursuant to Section 4.2 have been calculated, the Company shall have no obligation to pay any Bonus hereunder nor to pay the maximum amount so calculated or any prorated amount based on service during the period, unless the Committee otherwise expressly provides by written contract or other written commitment. 5.2 Discretion of Company, Board of Directors and Committee. Any ------------------------------------------------------- decision made or action taken by the Company or by the Board of Directors of the Company or by the Committee arising out of or in connection with the creation, amendment, construction, administration, interpretation and effect of the Plan shall be within the absolute discretion of such entity and shall be conclusive and binding upon all persons. No member of the Committee shall have any liability for actions taken or omitted under the Plan by the member or any other person. 5.3 Absence of Liability. A member of the Board of Directors of the -------------------- Company or a member of the Committee of the Company or any officer of the Company shall not be liable for any act or inaction hereunder, whether of commission or omission. 5.4 No Funding of Plan. The Company shall not be required to fund or ------------------ otherwise segregate any cash or any other assets which may at any time be paid to Participants under the Plan. The Plan shall constitute an "unfunded" plan of the Company. The Company shall not, by any provisions of the Plan, be deemed to be a trustee of any property, and any obligations of the Company to any Participant under the Plan shall be those of a debtor and any rights of any Participant or former Participant shall be no greater than those of a general unsecured creditor. 5.5 Non-Transferability of Benefits and Interests. Except as --------------------------------------------- expressly provided by the Committee, no benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such attempted action be void and no such benefit shall be in any manner liable for or subject to debts, contracts, liabilities, engagements or torts of any Participant or former Participant. This Section 5.5 shall not apply to an assignment of a contingency or payment due after the death of the Executive to the deceased Executive's legal representative or beneficiary. 5.6 Law to Govern. All questions pertaining to the construction, ------------- regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of California. 5.7 Non-Exclusivity. Subject to Section 5.8, the Plan does not limit --------------- the authority of the Company, the Board or the Committee, or any subsidiary of the Company to grant awards or authorize any other compensation under any other plan or authority, including, without limitation, awards or other compensation based on the same Performance Target(s) used under the Plan. In addition, Executives not selected to participate in the Plan may participate in other plans of the Company. 5.8 Section 162(m) Conditions; Bifurcation of Plan. It is the intent ---------------------------------------------- of the Company that the Plan and Bonuses paid hereunder satisfy and be interpreted in a manner, that, in the case of Participants who are or may be persons whose compensation is subject to Section 162(m), satisfies any applicable requirements as performance-based compensation. Any provision, application or interpretation of the Plan inconsistent with this intent to satisfy the standards in Section 162(m) of the Code shall be disregarded. Notwithstanding anything to the contrary in the Plan, the provisions of the Plan may at any time be bifurcated by the Board or the Committee in any manner so that certain provisions of the Plan or any Bonus intended (or required in order) to satisfy the applicable requirements of Section 162(m) are only applicable to persons whose compensation is subject to Section 162(m). SECTION 6. AMENDMENTS, SUSPENSION OR TERMINATION OF PLAN The Board of Directors or the Committee may from time to time amend, suspend or terminate in whole or in part, and if suspended or terminated, may reinstate, any or all of the provisions of the Plan. Notwithstanding the foregoing, no amendment may be effective without Board of Directors and/or shareholder approval if such approval is necessary to comply with the applicable rules of Section 162(m) of the Code. CERTIFICATION The undersigned Secretary of the Company certifies that the foregoing constitutes a complete and correct copy of the Plan as amended on December 15, 1997 by the Performance Plan Subcommittee of the Board of Directors of The Walt Disney Company. _________________________ Secretary Date:__________________ EX-10.(T) 3 ABC, INC. SAVINGS AND INVESTMENT PLAN EXHIBIT 10(t) ABC, INC. SAVINGS & INVESTMENT PLAN (APRIL 1, 1998, RESTATEMENT) TABLE OF CONTENTS PREAMBLE............................................................... 1 ARTICLE I: DEFINITIONS AND CONSTRUCTION............................. 2 1.01 Definitions............................................. 2 1.02 Construction............................................ 8 ARTICLE II: MEMBERSHIP............................................... 10 2.01 Membership.............................................. 10 2.02 Duration of Membership.................................. 10 2.03 Reemployment............................................ 10 2.04 Enrollment.............................................. 10 2.05 Veterans' Benefits...................................... 10 ARTICLE III: COMPENSATION............................................. 11 3.01 Compensation............................................ 11 3.02 Compensation Limit...................................... 11 ARTICLE IV: SERVICE.................................................. 12 4.01 Service................................................. 12 4.02 Service of Part-Time Employees.......................... 12 4.03 Other Service-Crediting Provisions...................... 12 4.04 Interruption of Service................................. 12 4.05 Leaves of Absence....................................... 13 4.06 Employment With a Successor Company..................... 14 4.07 Fractional Months of Service............................ 14 4.08 Non-duplication......................................... 14 ARTICLE V: CONTRIBUTIONS............................................ 15 5.01 Pre-Tax Contributions................................... 15 5.02 After-Tax Contributions................................. 15 5.03 Change in Contribution Rate............................. 16 5.04 Company Matching Contributions.......................... 16 5.05 Contributions Contingent on Deductibility............... 16 5.06 Rollover Contributions.................................. 16 5.07 Return of Employer Contributions........................ 17 5.08 Two Separate Contracts.................................. 17 ARTICLE VI: LIMITATIONS ON CONTRIBUTIONS............................. 18 6.01 Limit on Pre-Tax Contributions.......................... 18 6.02 Actual Deferral Percentage Test......................... 18 6.03 Actual Contribution Percentage Test..................... 18 6.04 Prohibition on Multiple Use............................. 18 6.05 Maximum Contributions................................... 19 6.06 Imposition of Limitations............................... 19 6.07 Return of Excess Deferrals and Excess Contributions..... 19
ARTICLE VII: INVESTMENTS AND ACCOUNTS................................. 24 7.01 Trust and Trustee....................................... 24 7.02 The Fund................................................ 24 7.03 Investment Funds........................................ 24 (1) The Walt Disney Company Common Stock Fund.......... 24 (2) Loan Fund.......................................... 24 7.04 Allocation of Contributions............................. 25 7.05 Change in Allocation.................................... 25 7.06 Valuation............................................... 26 7.07 Accounts................................................ 26 7.08 Risk of Loss............................................ 26 7.09 Interests in the Funds.................................. 26 7.10 Sole Source of Benefits................................. 26 7.11 ERISA Section 404(c) Requirements....................... 27 ARTICLE VIII: VOTING OF AND TENDER OR EXCHANGE OFFERS FOR COMMON STOCK............................................................. 28 8.01 Voting.................................................. 28 8.02 Tender and Exchange Offers.............................. 28 8.03 Conversions............................................. 30 ARTICLE IX: VESTING.................................................. 31 9.01 Immediately Vested Accounts............................. 31 9.02 Company Matching Account................................ 31 9.03 Forfeiture.............................................. 31 9.04 Old Company Matching Account............................ 32 ARTICLE X: LOANS.................................................... 33 10.01 Eligibility............................................. 33 10.02 Application Procedure................................... 33 10.03 Promissory Note......................................... 33 10.04 Maximum Amount.......................................... 33 10.05 Minimum Amount.......................................... 33 10.06 Term.................................................... 34 10.07 Interest Rate........................................... 34 10.08 Repayment............................................... 34 10.09 Prepayment.............................................. 34 10.10 Security................................................ 34 10.11 Default................................................. 34 10.12 Treatment as Investment................................. 34 10.13 Ordering Rules.......................................... 35 10.14 Fees.................................................... 35 ARTICLE XI: WITHDRAWALS.............................................. 36 11.01 After-Tax Contribution Account.......................... 36 11.02 Pre-Tax Contribution Account............................ 36 11.03 Hardship Withdrawals.................................... 36 11.04 Notice.................................................. 36 11.05 Dollar Limitations...................................... 37
11.06 Priority of Accounts.................................... 37 11.07 Source of Funds......................................... 37 11.08 Valuation............................................... 37 11.09 Outstanding Loan........................................ 38 11.10 Inactive Employees...................................... 38 ARTICLE XII: DISTRIBUTIONS............................................ 39 12.01 Severance from Service Required......................... 39 12.02 Notice Regarding Form and Payment of Distributions...... 39 12.03 Normal Form of Payment.................................. 40 12.04 Optional Forms of Payment............................... 40 12.05 Mandatory Lump Sum...................................... 41 12.06 Distribution Date....................................... 42 12.07 Death................................................... 42 12.08 Designation of Beneficiary.............................. 42 12.09 Payment Medium.......................................... 43 12.10 Risk of Loss............................................ 43 12.11 Minimum Required Distributions.......................... 43 12.12 Direct Rollover......................................... 44 ARTICLE XIII: ADMINISTRATION........................................... 45 13.01 Employee Benefits Committee............................. 45 13.02 Chairman and Secretary.................................. 45 13.03 Committee Meetings and Votes............................ 45 13.04 Evidence of Action of the Committee..................... 45 13.05 Records and Reports..................................... 45 13.06 Powers and Duties of the Committee...................... 45 13.07 Professional Assistance................................. 45 13.08 Allocation and Delegation of Committee Responsibilities. 45 13.09 Compensation and Expenses............................... 45 13.10 Investment Responsibilities............................. 45 13.11 Plan Administrator...................................... 47 13.12 Multiple Fiduciary Capacities........................... 47 ARTICLE XIV: BENEFIT CLAIMS PROCEDURE................................. 48 14.01 Claims Procedure........................................ 48 14.02 Review Procedure........................................ 48 14.03 Required Information.................................... 48 ARTICLE XV: AMENDMENT, MERGER, AND TERMINATION OF THE PLAN........... 49 15.01 Amendment of the Plan................................... 49 15.02 Merger or Consolidation of the Plan..................... 49 15.03 Termination of the Plan................................. 49 (a) Reservation of Right to Terminate.................. 49 (b) Date of Termination................................ 49 (c) Rights of Affected Members......................... 49 15.04 Design Decisions........................................ 49 ARTICLE XVI: MISCELLANEOUS............................................ 50 16.01 Employment Rights Not Affected by Plan.................. 50
16.02 Booklets and Brochures Subject to Plan Provisions....... 50 16.03 Doubt as to Identity.................................... 50 16.04 Liability Limited....................................... 50 16.05 Overpayments............................................ 50 16.06 Incapacity.............................................. 50 16.07 Assignment and Liens.................................... 51 (a) Nonalienability of Benefits........................ 51 (b) Exception for Qualified Domestic Relations Orders.. 51 (1) Establishment of Procedures................... 51 (2) Disposition of Benefits Pending Determination. 51 (3) Multiple Spouses.............................. 51 (4) Restrictions on Distributions................. 51 (c) General Limitation................................. 51 16.08 Withholding Taxes....................................... 52 16.09 Titles and Headings Not to Control...................... 52 16.10 Notice of Process....................................... 52 16.11 Nonreversion............................................ 52 16.12 Governing Law........................................... 52 16.13 Interpretation of Plan and Trust........................ 52 16.14 Severability............................................ 52 16.15 Complete Statement of Plan.............................. 52 ARTICLE XVII: TOP-HEAVY PLAN PROVISIONS................................ 53 17.01 Application of Article XVII............................. 53 17.02 Definitions Concerning Top-Heavy Status................. 53 (1) Aggregation Group.................................. 53 (2) Annual Compensation................................ 53 (3) Company Plan....................................... 53 (4) Key Employee....................................... 53 (5) Required Aggregation Group......................... 53 (6) Top-Heavy.......................................... 53 (7) Top-Heavy Determination Date....................... 53 (8) Top-Heavy Ratio.................................... 53 (9) Top-Heavy Year..................................... 53 17.03 Calculation of Top-Heavy Ratio.......................... 54 (1) Determination of Accrued Benefits.................. 54 (2) Aggregation........................................ 54 17.04 Effect of Top-Heavy Status.............................. 54 (a) Minimum Contribution............................... 54 (b) Accelerated Vesting................................ 54 (c) Reduction in Section 415 Limits.................... 54 (d) Inapplicability to Union Employees................. 54 17.05 Effect of Discontinuance of Top-Heavy Status............ 55 17.06 Intent of Article XVII.................................. 55 SCHEDULE I............................................................. 56 SCHEDULE II............................................................ 57 SCHEDULE III........................................................... 58
SCHEDULE IV............................................................ 59 SCHEDULE V............................................................. 60 SCHEDULE VI............................................................ 61 SCHEDULE VII........................................................... 62 SCHEDULE VIII.......................................................... 63 SCHEDULE IX............................................................ 64 SCHEDULE X............................................................. 66 SCHEDULE XI............................................................ 68 SCHEDULE XII........................................................... 69 SCHEDULE XIII.......................................................... 70 SCHEDULE XIV........................................................... 71 SCHEDULE XV............................................................ 72 SCHEDULE XVI........................................................... 73 SCHEDULE XVII.......................................................... 74 SCHEDULE XVIII......................................................... 75 SCHEDULE XIX........................................................... 76 SCHEDULE XX............................................................ 77 SCHEDULE XXI........................................................... 78 SCHEDULE XXII.......................................................... 79 SCHEDULE XXIII......................................................... 80 SCHEDULE XXIV.......................................................... 82 SCHEDULE XXV........................................................... 83 SCHEDULE XXVI.......................................................... 85 SCHEDULE XXVII......................................................... 87
ABC, INC. SAVINGS & INVESTMENT PLAN (April 1, 1998, Restatement) PREAMBLE This document amends and restates in its entirety the ABC, Inc. Savings & Investment Plan (the "Plan"), effective as of April 1, 1998. The most recent previous restatement of the Plan was effective as of June 1, 1994. The Plan has been amended from time to time since June 1, 1994. This restatement incorporates all such previous amendments to the Plan and reflects changes in the laws, rules and regulations that apply to the Plan through February 28, 1998. The purposes of the Plan are to provide eligible employees with opportunities for (i) convenient and regular personal savings; (ii) sharing in contributions by the Company; and (iii) receiving benefits from the Fund, based on the contributions by the Company and the Member and the performance of the Fund's investments. Except as otherwise specifically provided herein, this restatement shall apply only to contributions to the Plan, and the operation of the Plan, from and after April 1, 1998. The operation of the Plan before April 1, 1998, shall be determined under the applicable instruments then in effect, except as otherwise provided herein. In general, the Plan as in effect before the effective date of any amendment shall continue to apply to those who terminated employment before such date. In no event shall any amendment (including any amendment made by this restatement) cause a Member's accrued benefit under the Plan to be less on the date the amendment was adopted (the "Amendment Date") than it was immediately before the Amendment Date. The provisions of Articles I through XVII of the Plan are modified by the provisions of the Schedules attached to the Plan. To the extent that the provisions of the Schedules are inconsistent with the provisions of Articles I through XVII of the Plan, the provisions of the Schedules shall supersede the conflicting provisions in Articles I through XVII. Effective April 1, 1998 (except to the extent that a particular provision of the Plan or the Schedule of Effective Dates specifies a different effective date), the Plan is hereby amended and restated to read in its entirety as follows: 2 ARTICLE I DEFINITIONS AND CONSTRUCTION ---------------------------- 1.01 Definitions. For purposes of the Plan, unless a different meaning is ----------- plainly required by the context or is expressly provided, the following words and phrases, when used in capitalized form in the Plan, shall be defined as follows: (a) "Account" - a Member's After-Tax Contribution Account, Pre-Tax ------- Contribution Account, Company Matching Account, and, if applicable, Old Company Matching Account, maintained in accordance with Section 7.07. (b) "Affiliate" - --------- (1) a member of a controlled group of corporations of which the Company is a member, as determined under Section 414(b) of the Code; (2) an unincorporated trade or business that is under common control with the Company, as determined under Section 414(c) of the Code; (3) a member of any affiliated service group that includes the Company, as determined under Section 414(m) of the Code; (4) except to the extent otherwise provided in Treasury Regulations, a leasing organization with respect to the periods of service performed by an individual who is a leased employee, within the meaning Section 414(n) of the Code, with respect to the Company or an Affiliate (determined without regard to this paragraph (4)); and (5) any entity that is required to be aggregated with the Company pursuant to Treasury Regulations under Section 414(o) of the Code; provided that an entity described in this Section shall not be considered an Affiliate during the period preceding the date on which it becomes, or after the date on which it ceases to be, an Affiliate within the meaning of this Section. (c) "After-Tax Contributions" - Member contributions made in accordance ----------------------- with Section 5.02 (or any predecessor thereof). (d) "After-Tax Contribution Account" - the bookkeeping account, maintained ------------------------------ in accordance with Section 7.07, that reflects the current value of the Member's After-Tax Contributions. (e) "Alternate Payee" - an alternate payee within the meaning of Section --------------- 414(p)(8) of the Code and Section 206(d)(3)(K) of ERISA. (f) "Beneficiary" - a person to whom a death benefit is payable in ----------- accordance with Article XII. (g) "Board of Directors" or "Board" - the Board of Directors of the ------------------ ----- Corporation (or the 3 Executive Committee of the Board of Directors) as constituted from time to time. (h) "Break in Service" - in the case of a Full-Time Employee, the period ---------------- following a Severance from Service and preceding reemployment by the Company or an Affiliate; and in the case of a Part-Time Employee, any Computation Period during which a Part-Time Employee does not complete at least 501 Hours of Service. (i) "Code" - the Internal Revenue Code of 1986, as from time to time ---- amended. (j) "Committee" - the Employee Benefits Committee provided for in Section --------- 13.01. (k) "Common Stock" - the common stock of Disney. ------------ (l) "Company" - the Corporation and any subsidiary or affiliate of the ------- Corporation that, with the approval of the Board of Directors and subject to such conditions as the Board of Directors may impose, adopts the Plan; provided that an entity shall cease to be part of the Company, and shall cease to participate in the Plan, after the date on which it ceases to be a member of the controlled group of corporations that includes the Corporation, as determined under Section 414(b) of the Code. An entity will be considered to have adopted the Plan with the approval of the Board of Directors if it takes significant action that is consistent with the adoption of the Plan, the Board or Committee is aware of the action, and neither objects to the action. (m) "Company Matching Account" - the bookkeeping account, maintained in ------------------------ accordance with Section 7.07, that reflects the current value of the Company Matching Contributions made with respect to the Member on or after the Merger Date. (n) "Company Matching Contribution" - contributions made to the Plan by ----------------------------- the Company pursuant to Section 5.04 (or any predecessor thereof). (o) "Compensation" - the amount paid by the Company to a Member who is an ------------ Eligible Employee, determined in accordance with Article III. (p) "Computation Period" - the Plan Year. Notwithstanding the foregoing, ------------------ solely for purposes of Section 2.01, the Computation Period shall be, initially, the 12-consecutive-month period beginning on the first day for which the Employee is entitled to be credited with an Hour of Service described in Section 1.01(cc)(1)(i) (the "Employment Commencement Date"), and thereafter shall be the Plan Year (beginning with the Plan Year that includes the first anniversary of his Employment Commencement Date); provided that, solely for purposes of Section 2.01, an Employee who is credited with 1,000 Hours of Service in both the initial Computation Period and in the Plan Year that includes the first anniversary of his Employment Commencement Date shall be credited with two years of Service. (q) "Corporation" - ABC, Inc., and any successor thereto. ----------- (r) "Deferred Retirement Date" - in the case of a Member who is employed ------------------------ by the Company or an Affiliate after his Normal Retirement Date, the first day of the month coincident with or next following his Severance from Service. 4 (s) "Disabled" - the Member's continuous inability, because of sickness or -------- accident, to engage in any and every duty of his occupation. (t) "Disney" - The Walt Disney Company, a Delaware Corporation. ------ (u) "Distribution Date" - the date as of which a withdrawal or ----------------- distribution is made hereunder. (v) "Eligible Employee" - an Employee who is a staff or talent employee of ----------------- the Company and who is remunerated in U.S. currency, except that an individual described by any of the following paragraphs shall not be an Eligible Employee: (1) an Employee of the Company who is represented by a union unless the union and the Employer have entered into a collective bargaining or other agreement that provides that the Employee shall participate in the Plan; or (2) an Employee of the Company if at the time of the adoption of the Plan by the Employer, or thereafter, the Employer elects to exclude some or all employees described in Section 410(b)(3)(C) of the Code and the Employee is excluded from the Plan by reason of such election; or (3) an individual who is hired for what is intended by the Company to be a temporary period for a position in connection with a special event, such as Olympics coverage or Presidential election coverage; or (4) an individual who is hired in a position for a specific prime time program or series produced by the Entertainment Division of the ABC Television Network; or (5) an individual who is employed by the Company pursuant to an agreement that provides that the individual shall not be eligible to participate in the Plan; or (6) an Employee who is not classified as an employee by the Company, but who is treated as an Employee by reason of being treated as a "common law" employee of the Company pursuant to the standards prescribed by Internal Revenue Service Revenue Ruling 87-41 or any successor thereto; or (7) an Employee who is an Employee by reason of being treated as a "leased employee" of the Company pursuant to Section 414(n) or (o) of the Code; or (8) an Employee whose basic compensation for services on behalf of the Company is not paid directly by the Company. Notwithstanding the provisions of paragraphs (3) and (4) of this Section 1.01(v), an Employee described in either of said paragraphs shall be treated as an Eligible Employee to the extent that the terms of a collective bargaining agreement to which the Company is a party require the Employee to be treated as an Eligible Employee. Expiration of a collective bargaining agreement shall not by itself affect an Employee's status as an Eligible Employee pending execution of a new collective bargaining agreement. 5 (w) "Employee" - a person who is an employee of the Company or an -------- Affiliate, including a "leased employee" (within the meaning of Section 414(n) or (o) of the Code). (x) "Employer" - the Corporation or a subsidiary or affiliate of the -------- Corporation that is part of the Company. (y) "ERISA" - the Employee Retirement Income Security Act of 1974, as from ----- time to time amended. (z) "Full-Time Employee" - an Employee who is designated as full-time by ------------------ the Employer or Affiliate that employs him under standards uniformly applicable to similarly situated Employees. (aa) "Fund" - the assets of the Plan held by the Trustee. ---- (bb) "Highly Compensated Employee" - an Employee who is a highly --------------------------- compensated active employee within the meaning of Section 414(q) of the Code and the Treasury Regulation thereunder, the provisions of which are hereby incorporated herein by this reference, and any former Employee who had a separation year before the determination year and who was an active Highly Compensated Employee for either such former Employee's separation year or any determination year ending on or after the Employee's 55th birthday. For purposes of determining who is a Highly Compensated Employee under the Plan in accordance with Section 414(q) of the Code and this Section 1.01(bb), the following definitions and rules shall apply: (1) "compensation" means compensation within the meaning of Treasury Regulation Section 1.415-2(d)(2) and (3), including all elective or salary- reduction contributions to a cafeteria plan or a cash or deferred arrangement; (2) "determination year" means the Plan Year for which such determination is made; and (3) "separation year" means the determination year in which the Employee Severs from Service. (cc) "Hour of Service" - --------------- (1) each hour for which an Employee is directly or indirectly paid or entitled to payment by the Company or an Affiliate (i) for the performance of duties or (ii) for reasons other than the performance of duties (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence; (2) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company or an Affiliate, excluding any hours credited under paragraph (1), above; and (3) solely for the purpose of determining whether a Break in Service has occurred, hours, not in excess of 501, that would have been credited normally (or, if undeterminable, at the rate of eight hours per work day) but for an Employee's absence from work by reason of (i) the Employee's 6 pregnancy, (ii) the birth of the Employee's child, (iii) the placement of a child with the Employee in connection with the Employee's adoption of the child, or (iv) the Employee's caring for such a child immediately following such birth or placement. Hours of Service described in this paragraph (3) shall be credited to the Computation Period in which the absence begins, if necessary to avoid a Break in Service, or if not so necessary, to the immediately following Computation Period. Hours of Service under this paragraph (3) shall be credited only if the Employee timely furnishes to the Employee's Employer (or the appropriate Affiliate if the Employee is employed by an Affiliate) such information as it requires to establish the reason for and the length of the absence. Notwithstanding the foregoing, no more than 501 Hours of Service shall be credited under paragraph (1)(ii) of this Section 1.01(cc) to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not that period occurs in a single Computation Period); an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if the payment is made or due under a plan maintained solely for the purpose of complying with applicable workers' compensation or unemployment compensation or disability insurance laws; and Hours of Service shall not be credited for a payment that solely reimburses an Employee for medical or medically related expenses incurred by the Employee. An individual who is a "leased employee" (within the meaning of Section 414(n) or (o) of the Code) of the Company or an Affiliate shall be credited with Hours of Service to the same extent as if he had been employed and paid by the Company or the Affiliate for which he performs services; provided that a leased employee shall not be credited with Hours of Service for any period during which the safe harbor requirement of Section 414(n)(5) of the Code is satisfied with respect to such leased employee. The provisions of Labor Regulation Section 2530.200b-2(b) and (c) are incorporated herein by this reference. Notwithstanding anything in this Section 1.01(cc) to the contrary, and except as otherwise required by Labor Regulation Section 2530.200b-3(e), an Employee's Hours of Service shall be determined exclusively by crediting the Employee with 10 Hours of Service for each day in which the Employee completes at least one Hour of Service and without regard to whether the Employee actually completes more (or less) than 10 Hours of Service on that day. (dd) "Investment Committee" - the Investment and Administrative Committee -------------------- of The Walt Disney Company Sponsored Qualified Benefit Plans and Key Employees Deferred Compensation and Retirement Plan. (ee) "Investment Fund" - an investment fund maintained pursuant to Section --------------- 7.03. (ff) "Investment Manager" - a Plan fiduciary (other than the Trustee) that ------------------ (i) has the power to manage, acquire, or dispose of any asset of the Plan; (ii) has acknowledged in writing that it is a fiduciary with respect to the Plan; and (iii) is registered as an investment adviser under the Investment Advisers Act of 1940, is a bank as defined in that Act, or is an insurance company qualified to perform services described in clause (i) of this Section 1.01(ff) under the laws of more than one State. (gg) "Labor Regulation" - a regulation issued by the Secretary of Labor ---------------- under ERISA. 7 (hh) "Leave of Absence" - a temporary period of absence (of up to two ---------------- years) from employment with the Company and the Affiliates that is approved by the Employer or an Affiliate in accordance with rules that shall be applied uniformly, so that all Employees in similar circumstances are treated alike. Any Employee who leaves the Company and the Affiliates directly to perform service in the armed forces of the United States under conditions entitling him to reemployment rights under the laws of the United States shall be regarded as being on a Leave of Absence during his absence from the Company and the Affiliates; provided that if the Employee fails to make application for reemployment with the Company or an Affiliate within the period specified by such laws for the preservation of reemployment rights, the Employee shall be regarded as having Separated from Service on the date the Leave of Absence began. (ii) "Limitation Year" - the calendar year. --------------- (jj) "Loan" - a loan by the Plan to a Member in accordance with Article X. ---- (kk) "Lump-Sum Distribution" - a Voluntary Lump-Sum Distribution or a --------------------- Mandatory Lump-Sum Distribution. (ll) "Mandatory Lump-Sum Distribution" - a single payment made in ------------------------------- accordance with Section 12.05 or 12.07. (mm) "Member" - an Eligible Employee who becomes a Member pursuant to ------ Article II, or a former Eligible Employee who previously became a Member pursuant to Article II, but only for so long as such Eligible Employee or former Eligible Employee is considered a Member in accordance with Section 2.02. (nn) "Merger" - the merger of the Corporation with DCB Merger Corp., a ------ Delaware corporation. (oo) "Merger Date" - the effective date of the Merger. ----------- (pp) "Normal Retirement Age" - age 65. --------------------- (qq) "Normal Retirement Date" - the first day of the month coincident with ---------------------- or next following the attainment of Normal Retirement Age. (rr) "Old Company Matching Account" - the bookkeeping account, maintained ---------------------------- in accordance with Section 7.07, that reflects the current value of the Company Matching Contributions made with respect to the Member before the Merger Date. (ss) "Optional Form of Payment" - a form of payment described in Section ------------------------ 12.04. (tt) "Part-Time Employee" - an Employee who is not a Full-Time Employee. ------------------ (uu) "Plan" - the ABC, Inc. Savings & Investment Plan, as the same may be ---- amended from time to time. 8 (vv) "Plan Administrator" - the Corporation when acting in its capacity as ------------------ the "administrator" of the Plan pursuant to Section 13.11. (ww) "Plan Year" - the calendar year. --------- (xx) "Pre-Tax Contributions" - contributions made to the Plan by the --------------------- Company at the election of the Member pursuant to Section 5.01 (or any predecessor thereof). (yy) "Pre-Tax Contribution Account" - the bookkeeping account, maintained ---------------------------- in accordance with Section 7.07, that reflects the current value of the Pre-Tax Contributions made with respect to a Member. (zz) "Predecessor Company" - an entity or predecessor thereof, prior, in ------------------- either case, to its becoming, or to its becoming part of, the Company or an Affiliate, as determined by the Board of Directors. (aaa) "Qualified Domestic Relations Order" - a qualified domestic ---------------------------------- relations order within the meaning of Section 206(d)(3) of ERISA and Section 414(p) of the Code. (bbb) "Retirement" - the Member's retirement under the terms of a defined ---------- benefit Tax-Qualified Plan maintained, or contributed to, by the Company or an Affiliate. (ccc) "Rollover Contributions" - contributions to the Plan pursuant to ---------------------- Section 5.06 (or any predecessor thereof). (ddd) "Section" - a section of the Plan, except that where, in context, ------- the term "Section" plainly refers to a statutory or regulatory provision, "Section" shall refer to a section of the pertinent statute or regulation (e.g., ---- Section 401(a) of the Code or Section 3(16)(A) of ERISA). (eee) "Service" - a Member's service with the Company or an Affiliate, ------- computed in accordance with Article IV and used to determine vesting or eligibility for membership under the Plan. (fff) "Sever from Service" - incur a Severance from Service. ------------------ (ggg) "Severance from Service" - the earlier of (1) the date an Employee ---------------------- terminates employment with the Company and the Affiliates by reason of a quit, discharge, retirement, or death and (2) the first anniversary of the date the Employee is first absent (but not on a Leave of Absence) from employment by the Company and the Affiliates for any other reason. (hhh) "Schedule" - a schedule appearing at the end of the Plan. -------- (iii) "Successor Company" - a former part of the Company, a former ----------------- Affiliate, or a former part of an Affiliate, after the date on which it ceases to be a part of the Company, an Affiliate, or a part of an Affiliate. (jjj) "Surviving Spouse" - the individual to whom a Member is married on ---------------- the date of the Member's death. (kkk) "Tax-Qualified Plan" - a plan that is, or that has been determined ------------------ by the Internal 9 Revenue Service to be, qualified under Section 401(a) or 403(a) of the Code. (lll) "Treasury Regulation" - a regulation issued by the Secretary of the ------------------- Treasury under the Code. (mmm) "Trust" - any trust that holds all or part of the Fund. Any such ----- trust may also hold the assets of plans other than this Plan. (nnn) "Trust Agreement" - the agreement or agreements entered into by the --------------- Corporation evidencing the Trust, as the same may be amended from time to time. (ooo) "Trustee" - the trustee or trustees acting under the Trust ------- Agreement. (ppp) "Valuation Date" - the last business day of each calendar month and -------------- any other date or dates designated by the Committee for the valuation of Accounts. (qqq) "Value" - the value of an Account, determined in accordance with ----- Section 7.07. (rrr) "Voluntary Lump-Sum Distribution" - a single payment made in ------------------------------- accordance with Article XII (other than a Mandatory Lump-Sum Distribution or a distribution made in accordance with Section 12.04). 1.02 Construction. Unless the contrary is plainly required by the ------------ context, wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender, and vice versa, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form, and vice versa. 10 ARTICLE II MEMBERSHIP ---------- 2.01 Membership. An individual who was a Member on March 31, 1998, shall ---------- be a Member on April 1, 1998. Every other Employee shall be eligible to become a Member as of the first day of the month that coincides with or next follows his completion of one year of Service, but only if he is an Eligible Employee on that date. If he is not an Eligible Employee on that date, he shall be eligible to become a Member on the first day of the first calendar month thereafter on which he is an Eligible Employee. 2.02 Duration of Membership. Once an Eligible Employee has become a ---------------------- Member, he shall continue to be a Member until his entire nonforfeitable accrued benefit under the Plan has been distributed or his death, whichever occurs first. Once his entire nonforfeitable accrued benefit under the Plan has been distributed or his death occurs, a Member shall cease to be a Member. 2.03 Reemployment. If a current or former Member is no longer an ------------ Eligible Employee, he shall cease to be eligible to participate actively in the Plan, but if he is reemployed by the Company as an Eligible Employee, he shall be eligible to participate actively in the Plan on the first day of the first calendar month occurring on or after the date on which he again performs an Hour of Service (within the meaning of Section 1.01(cc)(1)(i)) for the Company as an Eligible Employee. 2.04 Enrollment. An Eligible Employee who is eligible to become a Member ---------- in accordance with the preceding provisions of this Article II may become a Member by enrolling in the Plan in such manner and form, and at such time, as the Committee shall prescribe. Similarly, a Member who has ceased to participate actively in the Plan, but who is eligible to resume active participation, may resume active participation in the Plan by re-enrolling in the Plan in such manner and form, and at such time, as the Committee shall prescribe. 2.05 Veterans' Benefits. Notwithstanding any provision of this Plan to ------------------ the contrary, in the case of reemployments initiated on or after December 12, 1994, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Code. 11 ARTICLE III COMPENSATION ------------ 3.01 Compensation. ------------ (a) Except as provided in Section 3.01(b), "Compensation" means amounts paid by the Company to a Member who is an Eligible Employee as basic salary and as commissions and sales bonuses, if any, and amounts contributed on behalf of the Member to a cafeteria plan or a cash or deferred arrangement and not included in the Member's gross income for federal income tax purposes under Section 125 or 402(e)(3) of the Code, but excluding bonuses (other than sales bonuses), incentive compensation, profit participation, and compensation for overtime or extended work week and any other items of remuneration. (b) In the case of a Member who is represented by a union, "Compensation" means the amount of covered compensation prescribed by the collective bargaining agreement with the Employer pursuant to which he is treated as an Eligible Employee. 3.02 Compensation Limit. In addition to other applicable limitations ------------------ that may be set forth in the Plan, and notwithstanding any other contrary provision of the Plan, annual Compensation taken into account under the Plan for the purpose of calculating the contributions to the Plan by or in respect of a Member for any Plan Year shall not exceed the applicable compensation limit under Section 401(a)(17) of the Code and the Treasury Regulation interpreting that Section, adjusted for changes in the cost of living as provided in that Section and the applicable Treasury Regulation. Effective January 1, 1989, the annual compensation used in determining contributions for periods beginning on or after that date was $200,000 (indexed). Effective January 1, 1994, the annual compensation used in determining contributions for periods beginning on or after that date is $150,000 (indexed). 12 ARTICLE IV SERVICE ------- 4.01 Service. Except as otherwise provided in this Article IV, a Full- ------- Time Employee's Service shall be the sum of the years and fractions of a year of service credited as follows: (a) The Employee's service through December 31, 1983, if any, as determined under the Plan as in effect on December 31, 1983, or under the Plan as in effect on January 1, 1984, whichever results in the greater number of years of Service; plus (b) The Employee's years and fractions of a year in completed months as an Employee of the Company or an Affiliate (but only from the date it became an Affiliate) after December 31, 1983, until he Severs from Service (provided that if an Employee completes an Hour of Service, within the meaning of Section 1.01(cc)(1)(i), before the first anniversary of his Severance from Service, the Severance from Service shall be deemed not to have occurred for purposes of this Section 4.01(b)). 4.02 Service of Part-Time Employees. Except as otherwise provided in ------------------------------ this Article IV, a Part-Time Employee's Service shall be determined as follows and without regard to the provisions of Section 4.01: (a) A year of Service shall include any Computation Period beginning before January 1, 1976, if such period qualified as a year of Service under the Plan as in effect on either December 31, 1975, or January 1, 1976. (b) A year of Service shall include any Computation Period beginning after December 31, 1975, in which the Employee completes 1,000 or more Hours of Service with the Company and the Affiliates. 4.03 Other Service-Crediting Provisions. ---------------------------------- (a) To the extent determined by the Board of Directors, the Member's Service shall include his service as an employee of a Predecessor Company if the Member was an employee of the Predecessor Company when it became, or became a part of, the Company and the Affiliates. (b) An individual who is a "leased employee" (within the meaning of Section 414(n) or (o) of the Code) of the Company or an Affiliate shall be credited with Service to the same extent as if he had been employed and paid by the Company or Affiliate for which he performs services; provided that a leased employee shall not be credited with Service for any period during which the safe harbor requirement of Section 414(n)(5) of the Code is satisfied with respect to the leased employee. 4.04 Interruption of Service. ----------------------- (a) Employment before January 1, 1976, shall be disregarded in determining Service if such employment would have been disregarded under the rules of the Plan with regard to breaks in service as such rules were in effect on December 31, 1975. (b) If a Full-Time Employee Severs from Service before having acquired a nonforfeitable 13 interest in the Value of his Company Matching Account, and if he thereafter returns to employment with the Company or an Affiliate at a time when his Break in Service equals or exceeds the greater of (i) five years and (ii) his years of Service, upon his subsequent return to employment with the Company or an Affiliate, his prior Service shall be disregarded for all purposes. (c) If a Full-Time Employee Severs from Service and returns to employment with the Company or an Affiliate as an Employee, and Section 4.04(b) does not apply, all of his Service shall be added together except for such Service as is disregarded pursuant to the other provisions of this Section 4.04 (by reason of prior or subsequent breaks in service) or Section 4.08; provided that for purposes of determining a Member's nonforfeitable interest in his Company Matching Account, periods of Service shall not be added together pursuant to this Section before the Employee completes one year of Service following his resumption of employment. (d) If a Part-Time Employee incurs a Break in Service before having acquired a nonforfeitable interest in the Value of his Company Matching Account, and if he thereafter returns to employment with the Company or an Affiliate at a time when his Break in Service equals or exceeds the greater of (i) five years and (ii) his years of Service, upon his subsequent return to employment with the Company or an Affiliate, his prior Service shall be disregarded for all purposes. (e) If a Part-Time Employee incurs a Break in Service and returns to employment with the Company or an Affiliate as an Employee, and Section 4.04(d) does not apply, all of his Service shall be added together except for such Service as is disregarded pursuant to the other provisions of this Section 4.04 (by reason of prior or subsequent breaks in service) or Section 4.08; provided that for purposes of determining a Member's nonforfeitable interest in his Company Matching Account, periods of Service shall not be added together pursuant to this Section before the Employee completes one year of Service following his resumption of employment. (f) For purposes of this Section 4.04, all references to the Member's Company Matching Account shall be deemed to refer both to the Member's Company Matching Account and to the Member's Old Company Matching Account, if any. 4.05 Leaves of Absence. ----------------- (a) The period of a Leave of Absence shall be included in determining an Employee's Service. An Employee shall be deemed to remain an Employee during any Leave of Absence, provided that he returns to employment as an Employee on or before the expiration of the Leave or any extension thereof or shall die during such Leave. (b) If a period of family or medical leave is not otherwise treated as a Leave of Absence pursuant to this Section 4.05, the Employee shall be credited with Service during such period, and shall participate in any Plan changes that become effective during such period, but only to the extent required by the Family and Medical Leave Act of 1993. (c) If a Full-Time Employee is absent from employment with the Company and the Affiliates by reason of (i) the Employee's pregnancy, (ii) the birth of the Employee's child, (iii) the placement of a child with the Employee in connection with the Employee's adoption of the child, or (iv) the Employee's caring for such a child immediately following such birth or placement, the period between the first and second anniversaries of his period of absence shall be treated neither as a period 14 of Service (unless the Employee is otherwise on a Leave of Absence during such period) nor as a Break in Service; provided that this Section 4.05(c) shall apply only if the Employee timely furnishes to the Employee's Employer (or the appropriate Affiliate if the Employee is employed by an Affiliate) such information as it requires to establish the reason for and the length of the absence. 4.06 Employment With a Successor Company. ----------------------------------- (a) Except as provided in Section 4.06(b), a Member's Service shall not include the Member's years and fractions of a year in completed months as an employee of a Successor Company. (b) The Board of Directors may adopt an amendment to the Plan pursuant to which Members shall continue to accrue Service, to the extent specified in the amendment, for employment with a particular Successor Company identified in the amendment. (c) For purposes of any provision of the Plan that permits a Member to receive a distribution on or after his Severance from Service, the Member shall not be entitled to receive such a distribution during either of the following periods: (1) Any period during which the Member continues to accrue Service with a Successor Company pursuant to a written amendment described in Section 4.06(b). (2) With respect to the Member's Pre-Tax Account, any period during which the Member remains employed by a Successor Company or by a member of the Successor Company's controlled group (within the meaning of Section 414(b), (c), (m), or (o) of the Code) except to the extent that a distribution is permitted by Section 401(k)(2)(B)(i)(II) of the Code and the Treasury Regulation thereunder. 4.07 Fractional Months of Service. Fractional years and months of ---------------------------- Service (and fractional years and months of a Break in Service) completed by a Full-Time Employee shall be aggregated. For this purpose, 12 months shall be deemed to equal one year, and 30 days shall be deemed to equal one month. 4.08 Non-duplication. Notwithstanding anything to the contrary in this --------------- Article IV, a Member shall not receive credit under the Plan for a single period of service more than once for computing Service. 15 ARTICLE V CONTRIBUTIONS ------------- 5.01 Pre-Tax Contributions. --------------------- (a) A contribution made pursuant to this Section 5.01 shall be known as a "Pre-Tax Contribution." Subject to the limitations imposed by this Article V and Article VI, each Member may elect that his Employer shall contribute monthly to the Plan a whole percentage of his Compensation (designated by the Member) equal to not less than 1 percent nor more than 10 percent of his Compensation for the Plan Year; provided that such elected whole percentage (of not less than 1 percent nor more than 10 percent) shall be applied separately to the Member's Compensation in each payroll period; and provided further that combined Pre-Tax and After-Tax Contributions on a Member's behalf for any payroll period may not exceed 10 percent of the Member's Compensation in that payroll period. (b) Contributions pursuant to this Section 5.01 shall be made only with respect to amounts that the Member could otherwise elect to receive in cash and that are not currently available to the Employee as of the date of his election. (c) The Pre-Tax Contributions for a calendar month shall be transmitted to the Trustee as soon as practicable after the end of that month, and the Member's Compensation shall be reduced by the amount of the Pre-Tax Contributions made on his behalf. Pre-Tax Contributions made on behalf of a Member shall be credited to his Pre-Tax Contribution Account as soon as practicable after the Pre-Tax Contributions are received by the Trustee. (d) If the limitation imposed by Section 6.01 prevents the Employer from making a Pre-Tax Contribution on behalf of a Member, the Member shall automatically be deemed to have elected to make an After-Tax Contribution equal to the amount of the Pre-Tax Contribution that the Employer was prevented from making except to the extent that the Committee determines that such After-Tax Contributions would cause the Plan to exceed (or to continue to exceed) the actual percentage contribution test imposed by Section 6.03 or to violate (or to continue to violate) the prohibition against multiple use imposed by Section 6.04. 5.02 After-Tax Contributions. ----------------------- (a) A contribution made pursuant to this Section 5.02 shall be known as an "After-Tax Contribution." Subject to the limitations imposed by this Article V and Article VI, each Member may elect to contribute to the Plan a whole percentage of his Compensation (designated by the Member) equal to not less than 1 percent nor more than 10 percent of the Member's Compensation for the Plan Year; provided that such elected whole percentage (of not less than 1 percent nor more than 10 percent) shall be applied separately to the Member's Compensation in each payroll period; and provided further that combined Pre-Tax and After-Tax Contributions on a Member's behalf for any payroll period may not exceed 10 percent of the Member's Compensation in that payroll period. (b) After-Tax Contributions shall be made exclusively by payroll deduction in a manner to be determined by the Committee. 16 (c) The After-Tax Contributions for a calendar month shall be paid to the Trustee as soon as practicable after the end of that month. After-Tax Contributions shall be credited to the Member's After-Tax Contribution Account as soon as practicable after the After-Tax Contributions are received by the Trustee. 5.03 Change in Contribution Rate. --------------------------- (a) Subject to Sections 5.01 and 5.02, a Member may change the rate at which future Pre-Tax Contributions and/or After-Tax Contributions are made on the Member's behalf by notifying the Company in such manner and form, and at such time, as the Company shall require. The change shall become effective as soon as administratively possible after such notice is received. (b) This Section 5.03 also applies to a Member who wishes to elect to suspend future Pre-Tax Contributions and/or After-Tax Contributions and to an Eligible Employee who wishes to commence Pre-Tax Contributions and/or After-Tax Contributions. A Member who has elected to suspend Pre-Tax Contributions and/or After-Tax Contributions may elect to resume making such contributions in accordance with the preceding provisions of this Section 5.03. 5.04 Company Matching Contributions. ------------------------------ (a) A contribution made pursuant to this Section 5.04 shall be known as a "Company Matching Contribution." Subject to the limitations imposed by Article VI, each Member's Employer shall make Company Matching Contributions to the Plan in an amount equal to 50 percent of so much of the combined Pre-Tax Contributions and After-Tax Contributions on behalf of the Member as do not exceed five percent of the Member's Compensation. (b) The Company Matching Contributions for a Plan Year shall be made by the Company to the Trustee by the due date for the filing of the Company's federal income tax return for the Plan Year (including any extensions thereof) or at such earlier date or dates as the Company may determine in its sole discretion. Company Matching Contributions made on behalf of a Member shall be credited to his Old Company Contribution Account (for Company Matching Contributions made before the Merger Date) or to his Company Matching Account (for Company Matching Contributions made on or after the Merger Date) as soon as practicable after the Company Matching Contributions are received by the Trustee. 5.05 Contributions Contingent on Deductibility. Each Pre-Tax ----------------------------------------- Contribution and each Company Matching Contribution shall be made on the condition that it is deductible under Section 404 of the Code in the taxable year of the Employer with respect to which the contribution is made. 5.06 Rollover Contributions ---------------------- (a) A contribution made pursuant to this Section 5.06 shall be known as a "Rollover Contribution." At the discretion of the Committee, an individual who becomes an Eligible Employee as the direct result of the acquisition of a Predecessor Company by the Company may elect to contribute or to transfer to the Fund, in cash, all or part of his account balance under a Tax-Qualified Plan maintained by the Predecessor Company, but only if the contribution or transfer meets such conditions as the Committee may establish and only if the Committee determines that, in the case of a contribution, the amount to be contributed qualifies as an "eligible rollover distribution" within the meaning of Section 402(c)(4) of the Code, or, in the case of a transfer, that the transfer will not cause 17 the Plan to become subject, in whole or in part, to the joint and survivor annuity and qualified preretirement survivor annuity requirements imposed by Sections 401(a)(11)(A) and 417 of the Code, unless otherwise authorized by the Committee. (b) A Member's Rollover Contribution shall be allocated among the segments of the Member's Account as determined by the Committee in its sole discretion. (c) Company Matching Contributions shall not be made with respect to Rollover Contributions. 5.07 Return of Employer Contributions. If a Pre-Tax Contribution or a -------------------------------- Company Matching Contribution was made (i) by reason of a mistake of fact, or (ii) on the condition that it was currently deductible as provided in Section 5.05 and such amount is subsequently determined not to be currently deductible as provided in Section 5.05, the contribution (adjusted for any investment losses allocable thereto, but not for any investment gains allocable thereto) shall be refunded to the Company; provided that in the case of a contribution described in clause (i), the refund may be made only within one year after the payment of the contribution; and provided further that in the case of a contribution described in clause (ii), the refund may be made only within one year after the disallowance of the deduction and may be made only to the extent that the deduction was disallowed. 5.08 Two Separate Contracts. Contributions to the Plan shall be made ---------------------- pursuant to two separate contracts for purposes of Section 72(e) of the Code. After-Tax Contributions made after December 31, 1986, plus any gains and minus any losses thereon, shall be allocated to one contract (the "first contract"), and all other contributions to the Plan, plus any gains and minus any losses thereon, shall be allocated to the other contract (the "second contract"). If a Member withdraws After-Tax Contributions from the Plan pursuant to Article XI, the withdrawal shall be made first from the second contract (until all of the Member's After-Tax Contributions thereunder have been withdrawn) and then from the first contract. 18 ARTICLE VI LIMITATIONS ON CONTRIBUTIONS ---------------------------- 6.01 Limit on Pre-Tax Contributions. For Plan Years beginning on or ------------------------------ after January 1, 1987, the aggregate elective deferrals (as defined in Section 402(g)(3) of the Code) made on behalf of each Member under the Plan shall not exceed: (a) $7,000 (as adjusted by the Secretary of the Treasury or his delegate for increases in the cost of living pursuant to Section 402(g) of the Code, provided that no such adjustment shall be taken into account hereunder before the Plan Year in which it becomes effective), reduced by (b) the sum of any of the following amounts that were contributed on behalf of the Member for the Plan Year under a plan, contract, or arrangement other than this Plan: (1) any employer contribution under a qualified cash or deferred arrangement (as defined in Section 401(k) of the Code) to the extent not includable in the Member's gross income for the taxable year under Section 402(a)(8) of the Code (determined without regard to Section 402(g) of the Code); (2) any employer contribution to the extent not includable in the Member's gross income for the taxable year under Section 402(h)(1)(B) of the Code (determined without regard to Section 402(g) of the Code); and (3) any employer contribution to purchase an annuity contract under Section 403(b) of the Code under a salary reduction agreement (within the meaning of Section 3121(a)(5)(D) of the Code); provided that no contribution described in this subsection (b) shall be taken into account for the purpose of reducing the dollar limit in subsection (a), above, if the plan, contract, or arrangement is not maintained by the Company or an Affiliate unless the Member has filed a notice with the Committee, in such manner and former, at such time, and containing such information concerning the contribution as the Committee shall require. 6.02 Actual Deferral Percentage Test. For Plan Years beginning after ------------------------------- December 31, 1986, the Plan shall satisfy the actual deferral percentage test set forth in Section 401(k)(3) of the Code and Treasury Regulation Section 1.401(k)-1(b), the provisions of which are hereby incorporated herein by this reference. For Plan Years beginning after December 31, 1996, the actual deferral percentage test shall be applied using the prior year testing method set forth in Section 401(k)(3) of the Code and the Treasury Regulations and other guidance issued thereunder. 6.03 Actual Contribution Percentage Test. For Plan Years beginning after ----------------------------------- December 31, 1986, the Plan shall satisfy the actual contribution percentage test set forth in Section 401(m)(2) of the Code and Treasury Regulation Section 1.401(m)-1(b), the provisions of which are hereby incorporated herein by this reference. For Plan Years beginning after December 31, 1996, the actual contribution percentage test shall be applied using the prior year testing method set forth in Section 401(m)(2) of the Code and the Treasury Regulations and other guidance issued thereunder. 19 6.04 Prohibition on Multiple Use. For Plan Years beginning after --------------------------- December 31, 1988, the Plan shall not violate the prohibition against multiple use of the alternative methods of compliance with Section 401(k) and (m) of the Code. The prohibition is set forth in Section 401(m)(9) of the Code and Treasury Regulation Section 1.401(m)-2, the provisions of which are hereby incorporated herein by this reference. 6.05 Maximum Contributions. --------------------- (a) In addition to any other limitation set forth in the Plan and notwithstanding any other provision of the Plan, in no event shall the annual additions to a Member's Account under the Plan, together with the aggregate annual additions to the Member's accounts under all other defined contribution plans required to be aggregated with the Plan under the provisions of Section 415 of the Code, increase to an amount that exceeds the maximum amount permitted under Section 415 of the Code, the provisions of which are incorporated herein by this reference. (b) For Plan Years beginning before January 1, 2000, if the sum of the Member's defined benefit plan fraction and defined contribution plan fraction (as defined in Section 415(e) of the Code) exceeds 1.0 for a Limitation Year (except to the extent permitted under any transition rule described in Section 1106(i) of the Tax Reform Act of 1986 (and any other transition rules that preserved the Member's existing accrued benefit upon the adoption of Section 415 of the Code or upon any subsequent amendment to Section 415), or under Treasury Regulations or other guidance under Section 415), the Company shall cause the annual additions to the Member's Account under the Plan to be reduced to the extent necessary to comply with the limitation imposed by Section 415(e). (c) If the limitations imposed by this Section 6.05 apply to a Member who is entitled to benefits and/or annual additions under one or more tax- qualified plans with which the Plan is aggregated for purposes of Section 415 of the Code, the benefits and/or annual additions under the Plan and such other plan or plans shall be reduced in the following order, to the extent necessary to prevent the Member's benefits and/or annual additions from exceeding the limitations imposed by this Section (after the application of Section 6.07(a)): (1) Benefits under all defined benefit plans in which the Member participated and with which the Plan is aggregated for purposes of Section 415 of the Code, in an order based on the chronology of the accrual of the benefits, beginning with the benefit that accrued last and ending with the benefit that accrued first; and (2) Annual additions under the Plan and all defined contribution plans in which the Member participated and with which the Plan is aggregated for purposes of Section 415 of the Code, in an order based on the chronology of the annual additions to the plans, beginning with the last annual addition and ending with the first annual addition. 6.06 Imposition of Limitations. The Committee may limit the amount of a ------------------------- Member's Pre-Tax Contributions and After-Tax Contributions during a Plan Year to the extent that the Committee determines that the imposition of such a limit is necessary or appropriate to ensure that the Plan will satisfy the requirements of this Article. Any such limitation may be imposed either at the beginning of the Plan Year, during the Plan Year, or both, as determined by the Committee in its discretion. 6.07 Return of Excess Deferrals and Excess Contributions. --------------------------------------------------- 20 (a) If a Member's Pre-Tax Contributions or After-Tax Contributions cause the annual additions to a Member's Account to exceed the limit imposed by Section 6.05, such excess contributions (plus or minus any gains or losses thereon) shall be returned to the Member (with priority being given first to the Pre-Tax Contributions and After-Tax Contributions for which no Company Matching Contributions were made and then to After-Tax Contributions rather than to Pre- Tax Contributions). Contributions returned pursuant to this subsection (a) shall be disregarded in applying the limits imposed by Sections 6.01 through 6.04. (b) After any excess annual additions (plus or minus any gains or losses thereon) with respect to a Plan Year have been distributed as provided in subsection (a), above, if a Member's elective deferrals (as defined in Section 402(g)(3) of the Code) with respect to a Plan Year exceed the limit imposed by Section 402(g) of the Code (as incorporated in Section 6.01), the following rules shall apply to such excess (the Member's "excess deferrals"): (1) Not later than the first January 31 following the close of the Plan Year, the Member may allocate to the Plan all or any portion of the Member's excess deferrals for the Plan Year (provided that the amount of the excess deferrals allocated to the Plan shall not exceed the amount of the Member's Pre-Tax Contributions to the Plan for the Plan Year that have not been withdrawn or distributed) and may notify the Employer, in writing, of the amount allocated to the Plan. (2) If excess deferrals have been made to the Plan on behalf of a Member for a Plan Year, the Member shall be deemed to have allocated such excess deferrals to the Plan pursuant to subsection (b)(1), above, and the Plan shall distribute such excess deferrals pursuant to subsection (b)(3), below. (3) As soon as practicable, but in no event later than the first April 15th following the close of the Plan Year, the Plan shall distribute to the Member the amount allocated or deemed allocated to the Plan under subsection (b)(1) or (b)(2), above (plus or minus any gains or losses thereon). The distribution described in this subsection (b)(3) shall be made notwithstanding any other provision of the Plan. (c) After any excess annual additions (plus or minus any gains or losses thereon) with respect to a Plan Year have been distributed as provided in subsection (a), above, after any excess deferrals (plus or minus any gains or losses thereon) with respect to a Plan Year have been distributed as provided in subsection (b), above, and after any action pursuant to Section 6.06 with respect to the Plan Year has been taken, if the actual deferral percentage for the Plan Year of those Members who are Highly Compensated Employees exceeds the limit imposed by Section 6.02, the following rules apply: (1) The amount of the excess contributions for the Plan Year (determined in accordance with paragraph (3), below), plus or minus any gains or losses thereon, shall be distributed to Members who are Highly Compensated Employees on the basis of the portion of the excess contributions attributable to each such Member (determined in accordance with paragraph (4), below). This distribution shall be made as soon as practicable, but in no event later than the close of the Plan Year following the close of the Plan Year with respect to which the excess contributions were made. The gains or losses on excess contributions shall be determined by multiplying the total annual earnings (positive or negative) for the Plan Year in the Member's Pre-Tax Contribution Account by a fraction, the numerator of which is the amount of the excess contributions and the denominator of which is the 21 value of the Member's Pre-Tax Contribution Account as of the last day of the Plan Year, reduced by any positive earnings (or increased by any negative earnings) credited to the Member's Pre-Tax Contribution Account for the Plan Year. (2) In accordance with Treasury Regulations, and subject to such other rules as the Committee shall prescribe, a Member who is a Highly Compensated Employee may elect, in such manner and at such time as the Committee shall prescribe, to treat as an After-Tax Contribution the portion of the excess contributions attributable to him (determined in accordance with paragraph (4), below), except to the extent that such After-Tax Contribution would cause the Plan to exceed (or to continue to exceed) the contribution percentage limit imposed by Section 6.03 or to violate (or to continue to violate) the prohibition against multiple use imposed by Section 6.04. (3) The amount of the excess contributions for a Plan Year is the total of the amounts (if any) by which the Pre-Tax Contributions of each Highly Compensated Employee for the Plan Year would have to be reduced in order that each Highly Compensated Employee's actual deferral ratio not exceed the highest permitted actual deferral ratio under the Plan. To calculate the highest permitted actual deferral ratio under the Plan, the actual deferral ratio of the Highly Compensated Employee with the highest actual deferral ratio is reduced by the amount required to cause his actual deferral ratio to equal the actual deferral ratio of the Highly Compensated Employee with the next highest actual deferral ratio. If a lesser reduction would enable the Plan to satisfy the actual deferral percentage test (determined in accordance with Section 6.02) if only the actual deferral ratio as so reduced were taken into account, only the lesser reduction may be made. This process shall be repeated until the Plan would satisfy the actual deferral percentage test if only the actual deferral ratios as so reduced were taken into account. The highest actual deferral ratio remaining under the Plan after the foregoing leveling process has been completed shall be the highest permitted actual deferral ratio. (4) The portion of the excess contributions for a Plan Year (determined in accordance with paragraph (3), above) that is attributable to a Highly Compensated Employee is determined by (i) reducing the amount of the Pre- Tax Contributions of the Highly Compensated Employee with the largest amount of Pre-Tax Contributions for the Plan Year by the amount required to cause the amount of his Pre-Tax Contributions to equal the amount of the Pre-Tax Contributions of the Highly Compensated Employee with the next largest amount of Pre-Tax Contributions for the Plan Year, (ii) treating the amount of the reduction as the portion of the excess contributions that is attributable to the first Highly Compensated Employee, and (iii) continuing in the same manner until all excess contributions for the Plan Year have been attributed to a Highly Compensated Employee. The distribution described in paragraph (1), above, shall be made notwithstanding any other provision of the Plan. The distribution described in paragraph (1), above, or recharacterized under paragraph (2), above, for a Plan Year with respect to a Member shall be reduced by any excess deferral previously distributed from the Plan to such Member for the Member's taxable year ending with or within such Plan Year. Paragraphs (3) and (4) shall be interpreted and applied in accordance with Section 401(k)(3) of the Code and the Treasury Regulations and other guidance issued thereunder. (d) If a Member's Pre-Tax Contributions or After-Tax Contributions (plus or minus any gains or losses thereon) are returned to him pursuant to the provisions of this Section 6.07, any Company Matching Contributions (plus or minus any gains or losses thereon) with respect to such returned Pre-Tax Contributions or After-Tax Contributions shall be immediately forfeited. Any such forfeitures shall be applied to reduce the Company's obligation to make Company Matching 22 Contributions pursuant to Article V. (e) After any excess deferrals (plus or minus any gains or losses thereon), and any excess contributions (plus or minus any gains or losses thereon), with respect to a Plan Year have been distributed and/or recharacterized, in accordance with subsections (a), (b), (c), and (d), above, and after any action pursuant to Section 6.06 with respect to the Plan Year has been taken, if the contribution percentage for the Plan Year of those Members who are Highly Compensated Employees exceeds the actual contribution percentage limit imposed by Section 6.03, the following rules shall apply: (1) The amount of the excess aggregate contributions for the Plan Year (determined in accordance with paragraph (3), below), plus or minus any gains or losses thereon, shall be distributed (or, if forfeitable, shall be forfeited) as soon as practicable and in any event before the close of the Plan Year following the close of the Plan Year with respect to which the excess aggregate contributions were made. The gains or losses on excess aggregate contributions shall be determined by multiplying the total annual earnings (positive or negative) for the Plan Year in the Member's After-Tax Contribution and Company Matching Accounts by a fraction, the numerator of which is the amount of the excess aggregate contributions and the denominator of which is the value of the Member's After-Tax Contribution and Company Matching Accounts as of the last day of the Plan Year, reduced by any positive earnings (or increased by any negative earnings) credited to the Member's After-Tax Contribution and Matching Contribution Accounts for the Plan Year. (2) Any distribution in accordance with paragraph (2), above, shall be made to Members who are Highly Compensated Employees on the basis of the portion of the excess aggregate contributions attributable to each such Member (determined in accordance with paragraph (4), below). Such distributions shall be made notwithstanding any other provision of the Plan. (3) The amount of the excess aggregate contributions for a Plan Year is the total of the amounts (if any) by which the After-Tax and Company Matching Contributions of each Highly Compensated Employee for the Plan Year would have to be reduced in order that each Highly Compensated Employee's actual contribution ratio not exceed the highest permitted actual contribution ratio under the Plan. To calculate the highest permitted actual contribution ratio under the Plan, the actual contribution ratio of the Highly Compensated Employee with the highest actual contribution ratio is reduced by the amount required to cause his actual contribution ratio to equal the actual contribution ratio of the Highly Compensated Employee with the next highest actual contribution ratio. If a lesser reduction would enable the Plan to satisfy the actual contribution percentage test (determined in accordance with Section 6.03) if only the actual contribution ratio as so reduced were taken into account, only the lesser reduction may be made. This process shall be repeated until the Plan would satisfy the actual contribution percentage test if only the actual contribution ratios as so reduced were taken into account. The highest actual contribution ratio remaining under the Plan after the foregoing leveling process has been completed shall be the highest permitted actual contribution ratio. (4) The portion of the excess aggregate contributions for a Plan Year (determined in accordance with paragraph (3), above) that is attributable to a Highly Compensated Employee is determined by (i) reducing the amount of the After-Tax and Company Matching Contributions of the Highly Compensated Employee with the largest amount of After-Tax and Company Matching Contributions for the Plan Year by the amount required to cause the amount of his After-Tax and Company Matching Contributions to equal the amount of the After-Tax and Company Matching 23 Contributions of the Highly Compensated Employee with the next largest amount of After-Tax and Company Matching Contributions for the Plan Year, (ii) treating the amount of the reduction as the portion of the excess aggregate contributions that is attributable to the first Highly Compensated Employee, and (iii) continuing in the same manner until all excess aggregate contributions for the Plan Year have been attributed to a Highly Compensated Employee. The determination of the excess aggregate contributions under this subsection for any Plan Year shall be made after taking the measures called for by the preceding subsections of this Section 6.07. Paragraphs (3) and (4) shall be interpreted and applied in accordance with Section 401(m)(2) of the Code and the Treasury Regulations and other guidance issued thereunder. (f) If, after all the actions required or permitted by Section 6.06 and the preceding provisions of this Section 6.07 have been taken, the Pre-Tax Contributions, After-Tax Contributions, and Company Matching Contributions of those Members who are Highly Compensated Employees cause the Plan to violate the prohibition against multiple use imposed by Section 6.04, the contribution percentage of those Members shall be reduced to the extent necessary to cause the Plan to comply with that prohibition, and the excess aggregate contributions shall be distributed (or, if forfeitable, shall be forfeited) in the manner described in subsection (e), above. 24 ARTICLE VII INVESTMENTS AND ACCOUNTS ------------------------ 7.01 Trust and Trustee. The Corporation has entered into a Trust ----------------- Agreement with the Trustee, in such form and containing such provisions as the Corporation deems appropriate. The Trust Agreement shall be deemed to form a part of the Plan, and any and all rights or benefits that may accrue to any person under the Plan shall be subject to all of the provisions of the Trust Agreement. 7.02 The Fund. All contributions under the Plan shall be made to the -------- Fund held by the Trustee. 7.03 Investment Funds. ---------------- (a) The Investment Committee shall have the authority to direct the Trustee to maintain the assets of the Fund in multiple Investment Funds so as to provide alternative investment vehicles for the assets of the Plan. Such separate funds shall include, but are not limited to, the Investment Funds described below. Additional funds may be established by the Investment Committee, which shall have sole discretion to determine the number and character of such additional Investment Funds. The Investment Committee, in its sole discretion, shall have the authority to limit or eliminate the availability of any of the Investment Funds established pursuant to this Article VII, including but not limited to the Investment Funds described below. (1) The Walt Disney Company Common Stock Fund - This Investment Fund ----------------------------------------- shall be invested, without distinction between principal and income, principally in The Walt Disney Company Common Stock. Portions of this Investment Fund may be invested by the Trustee in high-grade short-term obligations and money market instruments for purposes of liquidity to meet exchange and distribution requirements. The Trustee shall regularly purchase, or cause to be purchased, Common Stock in the open market in accordance with a non-discretionary purchasing program. Each Member's proportional interest in this Investment Fund shall be measured in units of participation, rather than shares of Common Stock. Such units shall represent a proportionate interest in all of the assets of this Investment Fund, which includes shares of Common Stock, short-term investments and at all times, receivables for dividends and/or Common Stock sold and payables for Common Stock purchased. A Net Asset Value ("NAV") per unit will be determined as of each Valuation Date for each unit outstanding in this Investment Fund. The NAV shall be adjusted by gains or losses realized on sales of this Investment Fund, appreciation or depreciation in the market price of those shares owned, interest on the short-term investments held by this Investment Fund, expenses that pursuant to the Investment Committee's direction the Trustee accrues from this Investment Fund, and commissions on purchases and sales of Common Stock. Dividends received by this Investment Fund are reinvested in additional shares of Common Stock (to the extent it is unnecessary to retain such dividends as cash to maintain the target liquidity percentage) and Members will receive additional units. (2) Loan Fund - The Loan Fund shall consist principally of cash or --------- cash equivalents and promissory notes received in connection with loans made pursuant to Article X. The Loan Fund shall not be available to receive contributions and transfers of funds at the direction of a Member, but shall be administered solely in connection with loans to Members pursuant to Article X. (b) Notwithstanding anything in the Plan to the contrary, the Trustee may, in its discretion, 25 and in accordance with the provisions of the Trust Agreement, hold all or part of the assets allocated to one or more of the Investment Funds in cash or cash equivalents. (c) Dividends, interest, and other distributions with respect to assets allocated to an Investment Fund shall be allocated to, and reinvested in, that Investment Fund. Expenses incurred by the Trustee with respect to an Investment Fund shall be allocated to that Investment Fund. 7.04 Allocation of Contributions. --------------------------- (a) All Pre-Tax, After-Tax, and Rollover Contributions shall be allocated by the Member among the Investment Funds (other than the Loan Fund) in writing at the time and in the manner prescribed by the Committee. A Member may elect to have his Pre-Tax, After-Tax, and Rollover Contributions allocated in any proportion to any one or more of the Investment Funds (other than the Loan Fund). Except as provided in Section 12.04(g), all Company Matching Contributions shall be allocated to The Walt Disney Company Common Stock Fund. (b) If a Member fails to make an allocation in accordance with this Section 7.04 with respect to any portion of the Member's Pre-Tax, After-Tax, and Rollover Contributions, but has made an allocation election with respect to any other portion of his contributions, the unallocated portion of the Member's contributions shall be allocated by the Committee in the same manner as the Member's most recent allocation election with respect to the allocated portions of the Member's contributions. (c) If a Member fails to make any allocation in accordance with this Section 7.04 with respect to his Pre-Tax, After-Tax, and Rollover Contributions, such unallocated funds shall be allocated by the Committee to such Investment Fund as the Committee may prescribe in its discretion. (d) The Committee shall implement (or cause to be implemented) a Member's investment directions in accordance with the terms of this Article VII and such procedures as are prescribed by the Committee. 7.05 Change in Allocation. -------------------- (a) A Member may change a direction previously given pursuant to Section 7.04 by submitting a notification to the Committee, in such manner and form, and at such time, as the Committee shall prescribe, directing such a change. (b) By submitting a notification to the Committee in such manner and form, and at such time, as the Committee shall prescribe, a Member may direct that all or part of the Value of the Member's Account attributable to a particular Investment Fund be liquidated and transferred to any of the other available Investment Funds (other than the Loan Fund); provided that, except as provided in Section 12.04(g), the Member's Company Matching Account shall be invested at all times entirely in The Walt Disney Company Common Stock Fund. (c) If distribution of the Value of a Member's Account is deferred pursuant to Article XII past the Valuation Date coincident with or next following the date on which he terminates employment with the Company and the Affiliates, the Member may continue to direct the investment of his Account in accordance with subsection (b), above. 26 (d) If all or part of a Member's Account is reallocated in accordance with subsection (b) or (c), above, the Member's Account shall be debited and credited with the appropriate amounts in a manner consistent with Section 7.07 in order to reflect the reallocation. 7.06 Valuation. --------- (a) As of each Valuation Date, the Trustee shall determine the fair market value of the assets in each Investment Fund. (b) The Trustee shall make the valuations called for by subsection (a), above, in accordance with sound and accepted banking and trust accounting practices. Such valuations shall reflect the current fair market value of the assets in each Investment Fund (as determined by the Trustee), the Pre-Tax Contributions, After-Tax Contributions, Rollover Contributions, and Company Matching Contributions received by the Trustee with respect to each Member since the most recent Valuation Date, and the withdrawals and distributions with respect to each Member since the most recent Valuation Date. 7.07 Accounts. -------- (a) A Pre-Tax Contribution Account, an After-Tax Contribution Account, and a Company Matching Account shall be established for each Member. In addition, an Old Company Matching Account shall be established for each Member or Beneficiary for whom, immediately before the Merger Date, there was in effect a Company Matching Account (as that term was defined by the Plan immediately before the Merger Date). The Member's interest in each Investment Fund that is allocable to the Pre-Tax Contributions made on behalf of the Member shall be credited to his Pre-Tax Contribution Account. The Member's interest in each Investment Fund that is allocable to the Member's After-Tax Contributions shall be credited to his After-Tax Contribution Account. The Member's interest in each Investment Fund that is allocable to Company Matching Contributions made before the Merger Date shall be credited to his Old Company Matching Account. The Member's interest in The Walt Disney Company Common Stock Fund that is allocable to Company Matching Contributions with respect to the Member made on or after the Merger Date shall be credited to his Company Matching Account. The Member's interest in each Investment Fund that is allocable to any Rollover Contribution with respect to the Member shall be credited to the Member's Pre-Tax Contribution Account, After-Tax Contribution Account, Old Company Matching Account, and/or Company Matching Account, as determined by the Committee in its discretion. (b) The Value of each Member's Account shall reflect the current fair market value and the gains, losses, income, and expenses of the Investment Funds to which the Account is allocated and the amount of any withdrawals, distributions, and loans (including loan repayments) with respect to the Member. 7.08 Risk of Loss. The Plan and the Company do not guarantee that the ------------ fair market value of the Investment Funds, or of any particular Investment Fund, will be equal to or greater than the amounts allocated thereto. The Plan and the Company do not guarantee that the Value of the Accounts will be equal to or greater than the contributions credited thereto. The Members assume all risk of any decrease in the value of the Investment Funds and the Accounts. 7.09 Interests in the Funds. No Member, Surviving Spouse, or Beneficiary ---------------------- shall have any 27 claim, right, title, or interest in or to any specific assets of any Investment Fund or of the Fund until distribution of such assets is made to the Member, Surviving Spouse, or Beneficiary. No Member, Surviving Spouse, or Beneficiary shall have any claim, right, title, or interest in or to the Fund, except as and to the extent expressly provided herein. 7.10 Sole Source of Benefits. Members, Surviving Spouses, and ----------------------- Beneficiaries shall look only to the Trust for the payment of benefits under the Plan, and except as otherwise required by law, the Company assumes no responsibility or liability therefor. 7.11 ERISA Section 404(c) Requirements. The Plan is designed to be a --------------------------------- plan described in Section 404(c) of ERISA. Accordingly, the Plan must satisfy, among other requirements, subsections (a), (b) and (c) below. (a) Choice of Broad Range of Investment Alternatives. Members shall ------------------------------------------------ be able to choose from at least three investment alternatives. The three alternatives shall constitute a broad range of choices ("core alternatives") which (i) are diversified, (ii) demonstrate materially different risk and return characteristics, (iii) in the aggregate, enable a Member to achieve a portfolio with risk and return characteristics at any point within the range normally appropriate by choosing among the core alternatives, and (iv) tend to minimize, through diversification and in combination with the other alternatives, the overall risk to the Member's portfolio. (b) Frequency of Investment Instructions. The Member shall provide ------------------------------------ investment instructions to a person designated by the Company as an agent for this purpose. The agent is obligated to comply with the instructions of the Member, except as permitted by law. The Member shall have the ability to provide investment instructions for each investment alternative as frequently as is appropriate given the volatility of the investment, but no less frequently than once within any three month period. (c) Provision of Sufficient Information to Member or Beneficiary. ------------------------------------------------------------ The Member or Beneficiary shall be provided information sufficient to make informed decisions regarding the investment alternatives under the Plan. Such information shall (i) explain that the Plan is intended to be in compliance with Section 404(c)of ERISA and that Plan fiduciaries may be relieved of liability for losses that arise from the Member's investment choices, (ii) describe all investment alternatives, including a general description of the investment objectives of each alternative and the level of diversification in each alternative, (iii) explain that Members may review any prospectuses or similar materials made available to the Plan for each alternative, (iv) identify any designated investment manager, (v) explain the circumstances under which a Member may give investment instructions along with any limitations on those instructions, (vi) describe any transaction fees, charge or expenses to a Member's Account in connection with the purchase or sale of any investment alternative, (vii) provide the name, address and telephone number of the Plan fiduciary responsible for providing information on request, with a description of such information available upon request, (viii) explain the established procedures designed to provide for the confidentiality of information concerning the purchase, holding or sale of employer securities, (ix) provide a copy of the most recent prospectus in the case of an initial purchase of an alternative subject to the Securities Act of 1933, and (x) provide any materials provided to the Plan which relate to the exercise of voting, tender of similar rights passed through to Members. Information which must be provided on request in accordance with Department of Labor Regulations section 2550.404c-1(b)(2) includes certain information relating to financial reports of investment alternatives, operating expenses of the alternatives, overall investment performance of the alternatives, and information relating to the shares of an investment in the requesting Member's Account. 28 Additional information may be available upon request. If Section 404(c) of ERISA does not apply to any direction, instruction or election given or made by a Member or Beneficiary under the Plan, the Member of Beneficiary shall be a named fiduciary of the Plan with respect to such direction, instruction or election. 29 ARTICLE VIII VOTING OF AND TENDER OR EXCHANGE OFFERS FOR COMMON STOCK -------------------------------------------------------- 8.01 Voting. ------ (a) Each Member with an interest in The Walt Disney Company Common Stock Fund shall have the right to direct the Trustee as to the manner in which the Trustee is to vote (including not to vote) that number of shares of Common Stock reflecting the Member's proportional interest in The Walt Disney Company Common Stock Fund (both vested and unvested). Directions from a Member to the Trustee concerning the voting of Common Stock shall be communicated in writing, or by mailgram or similar means. These directions shall be held in confidence by the Trustee and shall not be divulged to the Corporation, or any officer or employee thereof, or any other person. Upon its receipt of the directions, the Trustee shall vote the shares of Common Stock reflecting the Member's proportional interest in The Walt Disney Company Common Stock Fund as directed by the Member. With respect to the shares of Common Stock reflecting a Member's proportional interest in The Walt Disney Company Common Stock Fund for which it has received no directions from the Member, the Trustee shall vote such shares in the same proportion (for, against and abstention) on each issue as it votes those shares reflecting Members' proportional interests in The Walt Disney Company Common Stock Fund for which the Trustee received voting directions from Members. Notwithstanding the above, with respect to such shares for which the Trustee has received no voting directions, in the event of a tender offer, the Trustee shall vote such shares in accordance with voting directions received from the Corporation. (b) The Trustee shall vote that number of shares of Common Stock that are not reflected in the Members' proportional interests in The Walt Disney Company Common Stock Fund in the same ratio (for, against and abstention) on each issue as it votes those shares reflecting Members' proportional voting interests in The Walt Disney Company Common Stock Fund for which it receives voting directions from Members. Notwithstanding the above, in the event of a tender offer, the Trustee shall vote such unallocated shares in accordance with voting directions received from the Corporation. 8.02 Tender and Exchange Offers. -------------------------- (a) Upon the commencement of a tender offer for Common Stock, the Corporation shall notify each Member with an interest in The Walt Disney Company Common Stock Fund of the tender offer and utilize its best efforts to timely distribute or cause to be distributed to the Member the same information that is distributed to shareholders of the Corporation in connection with the tender offer, and, after consulting with the Trustee shall provide and pay for a means by which the Member may direct the Trustee whether or not to tender the Company Stock reflecting the Member's proportional interest in The Walt Disney Company Common Stock Fund (both vested and nonvested). The Trustee shall certify to the Corporation that the materials have been mailed or otherwise sent to such Members. (b) Each Member shall have the right to direct the Trustee to tender or not to tender some or all of the shares of Common Stock reflecting the Member's proportional interest in The Walt Disney Company Common Stock Fund (both vested and nonvested). Directions from a Member to the Trustee concerning the tender of Common Stock shall be communicated in writing, or by mailgram or such similar means as is agreed upon by the Trustee and the Corporation under subsection (a), above. These directions shall be held in confidence by the Trustee and shall not be divulged to the Corporation, or 30 any officer or employee thereof, or any other person except to the extent that the consequences of such directions are reflected in reports regularly communicated to any such persons in the ordinary course of the performance of the Trustee's services hereunder. The Trustee shall tender or not tender shares of Common Stock as directed by the Member. The Trustee shall not tender shares of Common Stock reflecting a Member's proportional interest in The Walt Disney Company Common Stock Fund for which it has received no direction from the Member. (c) The Trustee shall tender that number of shares of Common Stock that are not reflected in the Members' proportional interests in The Walt Disney Company Common Stock Fund which is determined by multiplying the total number of such shares by a fraction of which the numerator is the number of shares of Common Stock reflecting such Members' proportional interests in The Walt Disney Company Common Stock Fund credited to Members' Accounts for which the Trustee received directions from Members to tender (and which have not been withdrawn as of the date of this determination) and of which the denominator is the total number of shares of Common Stock reflected in the proportional interests of all Members under the Plan. (d) A Member who has directed the Trustee to tender some or all of the shares of Common Stock reflecting the Member's proportional interest in The Walt Disney Company Common Stock Fund may, at any time before the tender offer withdrawal date, direct the Trustee to withdraw some or all of the tendered shares reflecting the Member's proportional interest, and the Trustee shall withdraw the directed number of shares from the tender offer before the tender offer withdrawal deadline. Before the withdrawal deadline, if any shares of Common Stock not reflected in the Members' proportional interests in The Walt Disney Company Common Stock Fund have been tendered, the Trustee shall redetermine the number of shares of Common Stock that would have been tendered under subsection (c), above, if the date of the foregoing withdrawal were the date of determination, and withdraw from the tender offer the number of shares of Common Stock not reflected in the Members' proportional interests in The Walt Disney Company Common Stock Fund necessary to reduce the amount of tendered Common Stock not reflected in the Members' proportional interests in The Walt Disney Company Common Stock Fund to the amount so redetermined. A Member shall not be limited as to the number of directions to tender or withdraw that the Member may give to the Trustee. (e) A direction by a Member to the Trustee to tender shares of Common Stock reflecting the Member's proportional interest in The Walt Disney Company Common Stock Fund shall not be considered an election under the Plan by the Member to withdraw, or to have distributed, any or all of his withdrawable interest in the Plan. The Trustee shall credit to each proportional interest of the Member from which the tendered shares were taken the proceeds received by the Trustee in exchange for the shares of Common Stock tendered from that interest. Pending receipt of directions from the Member or the Committee, in accordance with the Plan, as to which of the remaining Investment Funds the proceeds should be invested in, the Trustee shall invest the proceeds in such Investment Fund as the Committee may prescribe in its discretion. (f) For purposes of this Section, the number of shares of Common Stock deemed "credited" to or "reflected" in a Member's proportional interest shall be determined as of the last preceding Valuation Date. The trade date is the date the transaction is valued. (g) With respect to all rights other than the right to vote, the right to tender, and the right to withdraw shares previously tendered, in the case of Common Stock credited to a Member's proportional interest in The Walt Disney Company Common Stock Fund, the Trustee shall follow the 31 directions of the Member and if no such directions are received, the directions of the Committee. The Trustee shall have no duty to solicit directions from Members. With respect to all rights other than the right to vote and the right to tender, in the case of Common Stock not reflected in Members' proportional interests in The Walt Disney Company Common Stock Fund, the Trustee shall follow the directions of the Committee. (h) All of the provisions of this Section 8.02 shall apply to exchange offers as well as to tender offers. 8.03 Conversions. All of the provisions of this Article VIII shall apply ----------- to securities received as a result of a conversion of Common Stock. 32 ARTICLE IX VESTING ------- 9.01 Immediately Vested Accounts. A Member shall have at all times a --------------------------- nonforfeitable interest in the Value of his Pre-Tax Contribution Account and in the Value of his After-Tax Contribution Account. 9.02 Company Matching Account ------------------------ (a) Before January 1, 1995, one-third of the Value of a Member's Company Matching Account attributable to Company Matching Contributions allocated to his Company Matching Account for a particular Plan Year (the "Contribution Year") shall be nonforfeitable at the end of the Contribution Year if the Member is an active Employee on the last day of the Contribution Year. Two-thirds of the Value of the Member's Company Matching Account attributable to the Company Matching Contributions allocated to his Company Matching Account for the Contribution Year shall be nonforfeitable at the end of the Plan Year immediately following the Contribution Year if the Member is an active Employee on the last day of that Plan Year. The entire Value of the Member's Company Matching Account attributable to Company Matching Contributions allocated to his Company Matching Account for the Contribution Year shall be nonforfeitable at the end of the second Plan Year following the Contribution Year if the Member is an active Employee on the last day of that Plan Year. (b) On and after January 1, 1995, one-half of the Value of a Member's Company Matching Account attributable to Company Matching Contributions allocated to his Company Matching Account for any Contribution Year shall be nonforfeitable at the end of that Contribution Year if the Member is an active Employee on the last day of the Contribution Year. The entire Value of the Member's Company Matching Account attributable to Company Matching Contributions allocated to his Company Matching Account for that Contribution Year shall be nonforfeitable at the end of the Plan Year immediately following that Contribution Year if the Member is an active Employee on the last day of that Plan Year. (c) A Member shall have a nonforfeitable interest in the Value of his Company Matching Account upon the first to occur of the following: (1) his completion of five years of Service; (2) his Retirement; (3) his attainment of Normal Retirement Age before he Severs from Service; or (4) his Severance from Service by reason of death or Disability. 9.03 Forfeiture. ---------- (a) Notwithstanding any provision of Section 9.02 to the contrary, if any portion of the Value of a Member's Company Matching Account is forfeitable when the Member Severs from Service for a reason other than death, Disability, or Retirement, such portion shall be forfeited immediately. 33 (b) If all or part of the Value of a Member's Company Matching Account is forfeited, and the Member is subsequently reemployed by the Company or an Affiliate without incurring a Break in Service of five years or more, the forfeited portion of the Value of his Company Matching Account shall be restored in full (but without adjustment for any subsequent gains or losses) if the Member repays to the Plan, within five years from the date of such reemployment, the full amount of any previous distributions to him from the Plan. Any amount restored or repaid pursuant to this Section 9.03(b) shall be credited to the Account to which such amount was credited when it was previously forfeited or distributed, as the case may be. (c) Notwithstanding any provision of this Article IX, Company Matching Contributions (plus or minus any gains or losses thereon) may be forfeited pursuant to the provisions of Section 6.07. (d) Forfeitures shall be applied to reduce the Company's obligation to make Company Matching Contributions pursuant to the provisions of Article V. 9.04 Old Company Matching Account. On and after the Merger Date, all ---------------------------- references in this Article IX to a Member's Company Matching Account shall be deemed to refer both to the Member's Company Matching Account and to the Member's Old Company Matching Account, if any. 34 ARTICLE X LOANS ----- 10.01 Eligibility. A Member shall be eligible to borrow from the Plan in ----------- accordance with this Article X if (i) the Member is actively employed by the Company or an Affiliate when the Loan is made, (ii) the Member's Account does not show that the Member has an outstanding Loan, and (iii) the Member will not be in default on the Loan under Section 10.11(a)(6) or (7) immediately after the Loan is made. 10.02 Application Procedure. A Member may apply for a Loan by making --------------------- application in accordance with such procedures as the Committee may prescribe from time to time. 10.03 Promissory Note. A Member may obtain a Loan only if he executes a --------------- promissory note in a form approved by the Committee. 10.04 Maximum Amount. The maximum amount a Member may borrow from the -------------- Plan is the smallest of: (a) 50% of the Value of his nonforfeitable interest in his Account (determined as of the date the Loan is made), disregarding any amount subject to a Qualified Domestic Relations Order; (b) (1) $50,000 minus (2) the sum of (i) the outstanding balance of any loans from all other Tax- Qualified Plans maintained by the Company and the Affiliates on the date the Loan is made, and (ii) the excess of (A) the highest outstanding balance of all prior plan loans (including both Loans and loans from any other Tax-Qualified Plans maintained by the Company and the Affiliates) during the one-year period ending on the day before the date the current Loan is made, over (B) the outstanding balance of all prior plan loans from Tax-Qualified Plans maintained by the Company and the Affiliates on the date the current Loan is made; and (c) the sum of the Value of the Member's Pre-Tax Contribution Account and the Value of the Member's After-Tax Contribution Account, as of the date the Loan is processed; provided that in no event may a Loan be made in an amount that will require payroll deductions to be made from the Member's compensation that exceeds the amount of the Member's net cash pay from the Company or an Affiliate (after taking into account all other payroll deductions and employment and 35 withholding taxes). 10.05 Minimum Amount. A Loan must be in an amount of at least $1,000. -------------- 10.06 Term. The term of a Loan may be for 12, 24, 36, 48, or 60 months, ---- as elected by the Member. 10.07 Interest Rate. The interest rate for a Loan shall be fixed on the ------------- date the Loan is approved and shall remain constant during the term of the Loan. The Committee shall establish either the interest rate or the methodology for determining the interest rate. 10.08 Repayment. A Loan must be repaid in level installments of principal --------- and interest by payroll deduction beginning with the Member's paycheck for the first payroll period beginning at least 30 days after the date the Loan is processed. If the Member is subsequently granted an unpaid leave of absence or is transferred to an Affiliate or a position or location within the Company that is not covered by the Plan (or ceases to have sufficient compensation from which the Loan payment can be made), the Member must continue to make timely level installment payments of principal and interest, by certified check, bank check, or money order. 10.09 Prepayment. A Member may prepay a Loan, in full, at any time and ---------- without penalty by certified check, bank check, or money order. Partial prepayment of a Loan is not permitted. 10.10 Security. A Member's obligation to repay a Loan shall be secured by -------- the portion of the Value of his nonforfeitable Account equal to the principal amount of the Loan. No other property shall be accepted as security for the Loan. 10.11 Default. ------- (a) A Member shall default on a Loan if any of the following events occurs: (1) the Member's Severance from Service for any reason (including the Member's death); (2) the Member's failure to make any payment of principal or interest on the Loan on the date the payment is due; (3) the Member's failure to perform or observe any covenant, duty, or agreement under the promissory note evidencing the Loan; (4) receipt by the Plan of an opinion of counsel to the effect that (i) the Plan will, or could, lose its status as a Tax-Qualified Plan unless the Loan is repaid or (ii) the Loan violates, or might violate, any provision of ERISA; (5) the occurrence of an event of default with respect to any other loan to the Member under any other plan maintained by the Company or an Affiliate; (6) any portion of the Member's Account that secures the Loan becomes payable to the Member, his Surviving Spouse or Beneficiary, an Alternate Payee, or any other person; 36 (7) the Member makes an assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, or becomes a subject of any wage earner plan under federal or state bankruptcy or insolvency law, or there is commenced against the Member any bankruptcy, insolvency, or similar proceeding that remains undismissed for a period of 60 days (or the Member by an act indicates his consent to, approval of, or acquiescence in any such proceeding); or (8) the termination of the Plan. (b) If a default on a Loan occurs, the entire outstanding balance of the Loan shall be immediately due and payable. (c) If a default on a Loan occurs, but the Member does not pay the entire outstanding balance of the Loan (together with accrued and unpaid interest) by the 60th day after the last day of the month in which the default occurs, the Member's nonforfeitable interest in his Account shall be applied immediately, to the extent lawful and to the extent the Member's Account is then available for withdrawal or distribution in accordance with the applicable provisions of the Plan, to pay the entire outstanding balance of the Loan (together with accrued and unpaid interest); provided that in the case of a default described in Section 10.11(a)(1), the Plan shall distribute the Member's promissory note to the Member (or, if the Member has died, to the Member's Beneficiary) in full satisfaction of the Plan's liability to the Member (or his Beneficiary) with respect to that portion of the Member's nonforfeitable interest in his Account equal to the outstanding balance of the Loan (including accrued and unpaid interest). Notwithstanding the foregoing, no portion of the Member's Pre-Tax Contribution Account shall be distributed or applied to pay an outstanding Loan before the date on which it is otherwise distributable or withdrawable under the Plan. (d) Any failure by the Committee to enforce the Plan's rights with respect to a default on a Loan shall not constitute a waiver of such rights either with respect to that default or any other default. 10.12 Treatment as Investment. A Loan shall be treated by the Plan as a ----------------------- separate investment of a portion of the borrowing Member's Account. All interest received by the Plan with respect to a Member's Loan shall be credited to the Member's Account, and all losses and expenses incurred by the Plan with respect to the Loan (including, without limitation, any collection expenses in the event of default) shall be charged against the Member's Account. 10.13 Ordering Rules. -------------- (a) The funds used to finance a Loan shall be derived from the borrowing Member's Account in the following sequence (to the extent necessary to obtain the amount necessary to finance the Loan): (i) the Member's Pre-Tax Contribution Account (to the extent attributable to Pre-Tax Contributions for which Company Matching Contributions were not made), (ii) the Member's Pre-Tax Contribution Account (to the extent attributable to Pre-Tax Contributions for which Company Matching Contributions were made), (iii) the Member's After-Tax Contribution Account (to the extent attributable to After-Tax Contributions for which Company Matching Contributions were not made), and (iv) the Member's After-Tax Contribution Account (to the extent attributable to After-Tax Contributions for which Company Matching Contributions were made). (b) Each repayment of principal and interest shall be (i) credited to the portion(s) of the Account from which the funds used to finance the Loan were derived, in proportion to the ratio of the amount derived from that portion to the total amount derived from the Member's Account to finance 37 the Loan, and (ii) invested in the Investment Funds in accordance with the Member's directions regarding the current Pre-Tax and After-Tax Contributions on his behalf to the Plan (or, if Pre-Tax and After-Tax Contributions are not currently being made on the Member's behalf, in accordance with the most recent directions given by the Member with respect to the investment of Pre-Tax or After-Tax Contributions). 10.14 Fees. A Member who receives a Loan shall pay such fees as the ---- Committee may establish from time to time. The amount, nature and manner of payment of the fees will be established from time to time by the Committee. 38 ARTICLE XI WITHDRAWALS ----------- 11.01 After-Tax Contribution Account. Subject to the restrictions imposed ------------------------------ by this Article XI, a Member who is employed by the Company or an Affiliate may withdraw all or part of the Value of his After-Tax Contribution Account at any time. 11.02 Pre-Tax Contribution Account. Subject to the restrictions imposed ---------------------------- by this Article XI, a Member who has attained age 59 1/2 and who is employed by the Company or an Affiliate may withdraw all or part of the Value of his Pre-Tax Contribution Account at any time. 11.03 Hardship Withdrawals. -------------------- (a) Subject to the restrictions imposed by this Article XI, if a Member satisfies the requirements of subsections (b) and (c), below, the Member may withdraw all or part of the Value of his Pre-Tax Contribution Account (excluding any gains on Pre-Tax Contributions other than gains credited to his Pre-Tax Contribution Account as of December 31, 1988) and his nonforfeitable interest in the Value of his Company Matching Account and his Old Company Matching Account, if any. (b) A Member may make a withdrawal pursuant to this Section 11.03 only if he requires the withdrawal for (1) costs directly related to the purchase of his principal residence, or a major rehabilitation of the living quarters in his principal residence, but excluding mortgage payments, (2) the payment of medical expenses described in Section 213(d) of the Code previously incurred by the Member, the Member's spouse, or any dependents of the Member (as defined in Section 152 of the Code), or expenses necessary for these persons to obtain medical care described in Section 213(d) of the Code, (3) the payment of tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the Member, or the Member's spouse, children, or dependents (as defined in Section 152 of the Code), or (4) payments necessary to prevent the eviction of the Member from the Member's principal residence or foreclosure on the mortgage on that residence. (c) A Member may make a withdrawal pursuant to this Section 11.03 only if (1) the amount of the withdrawal does not exceed the amount required to meet the need shown by the Member pursuant to Section 11.03(b), (2) the Member has obtained (or is concurrently obtaining) all distributions, withdrawals, and loans available under the Plan and all other plans maintained by the Company and the Affiliates, and (3) the need shown by the Member pursuant to Section 11.03(b) cannot be satisfied 39 from other resources reasonably available to the Member (including the resources of his spouse and minor children). (d) If a Member seeks to make a withdrawal pursuant to this Section, the Committee shall require the Member to present such evidence and certifications as the Committee considers necessary to determine whether the Member meets the requirements of this Section. 11.04 Notice. The Committee shall provide each Member who, before ------ attaining Normal Retirement Age, applies for a withdrawal pursuant to this Article XI with a written, nontechnical explanation of the Member's right to defer receipt of the withdrawal until Normal Retirement Age. The notice shall be furnished no less than 30 days and no more 90 days before the date as of which the withdrawal is scheduled to be made; provided that the withdrawal may be made less than 30 days after the Member receives the notice if the notice informs the Member of his right to a period of at least 30 days after receiving the notice to consider whether to elect the withdrawal and if the Member, after being informed of this right, affirmatively elects to make the withdrawal. 11.05 Dollar Limitations. A withdrawal pursuant to this Article may be ------------------ made in any whole dollar amount, except than a withdrawal may not be made for an amount that is less than $250. 11.06 Priority of Accounts. Withdrawals pursuant to this Article shall -------------------- be made in the following sequence: (a) first, from the Member's After-Tax Contribution Account pursuant to Section 11.01, and after exhaustion of the After-Tax Contribution Account, and (b) then, from the Member's Pre-Tax Contribution Account pursuant to Section 11.02 and Section 11.03 (to the extent then available), and after exhaustion of the Pre-Tax Contribution Account (to the extent then available), and (c) then, from the Member's Old Company Matching Account (to the extent of the Member's nonforfeitable interest therein) pursuant to Section 11.03 (to the extent then available), and (d) last, from the Member's Company Matching Account (to the extent of the Member's nonforfeitable interest therein) pursuant to Section 11.03 (to the extent then available). 11.07 Source of Funds. --------------- (a) A withdrawal pursuant to this Article shall be derived from the Investment Funds in which the applicable portion of the Member's Account is invested, in proportion to the percentage of the applicable portion of the Account that is invested in each Investment Fund. (b) A withdrawal from any Investment Fund other than The Walt Disney Company Common Stock Fund shall be paid in cash. (c) A withdrawal from The Walt Disney Company Common Stock Fund shall be made in shares of Common Stock (except that the value of fractional shares shall be distributed in cash); provided that a Member may elect to receive such a withdrawal entirely in cash. 11.08 Valuation. For purposes of this Article XI, the Value of a Member's --------- Account shall be 40 determined as of the Valuation Date determined in accordance with the following rules: (a) If the Member's request for a withdrawal is received by the time prescribed by the Committee, the Valuation Date shall be the Valuation Date coincident with or immediately preceding the date on which the request is received or as soon thereafter as practicable; and (b) If the Member's request for a withdrawal is not received by the time prescribed by the Committee, the Valuation Date shall be the Valuation Date that next follows the date on which the request is received or as soon thereafter as practicable; provided that if the Member has not waived the 30-day waiting period in accordance with Section 11.04, the Valuation Date shall be the Valuation Date that coincides with or next follows the expiration of the 30-day waiting period or as soon thereafter as practicable. 11.09 Outstanding Loan. Notwithstanding any other provision of this ---------------- Article, if a Member's Account shows that the Member has an outstanding balance under a Loan, the Member shall not be permitted to make a withdrawal pursuant to this Article of any portion of the Member's Account that secures the Loan. 11.10 Inactive Employees. An Employee who becomes a Member for the first ------------------ time on or after January 1, 1995, shall be entitled to make a withdrawal pursuant to this Article XI only if he is actively employed by the Company or an Affiliate on the date he applies for the withdrawal. 41 ARTICLE XII DISTRIBUTIONS ------------- 12.01 Severance from Service Required. Except to the extent otherwise ------------------------------- required by Section 12.11, a distribution shall not be made to a Member pursuant to this Article XII before the Member Severs from Service. 12.02 Notice Regarding Form and Payment of Distributions. -------------------------------------------------- (a) Subject to the provisions of subsections (b) and (c), below, in the case of a Member whose Distribution Date precedes his Normal Retirement Date, the Committee shall provide the Member with a written, nontechnical explanation of the items described in subparagraphs (i) and (ii), below, no more than 90 days, and no less than 30 days, before his Distribution Date: (i) In the case of a Member described in Section 12.04(a), the material features of the Normal Form of Payment and the Optional Forms of Payment to which the Member is entitled, or that he could elect to receive, under the Plan; and (ii) The Member's right to defer commencement of such benefit until as late as his Normal Retirement Date. (b) Notwithstanding subsection (a), above, the Distribution Date may occur less than 30 days after the Member receives the notice required by subsection (a) if the notice informs the Member of his right to a period of at least 30 days after receiving the notice to consider whether to elect the distribution and if the Member, after being informed of this right, affirmatively consents to the distribution. (c) Notwithstanding the foregoing, no notice pursuant to this Section 12.02 shall be required in the case of a Member who is required to receive a distribution in the form of a Mandatory Lump-Sum Distribution in accordance with Section 12.05. 12.03 Normal Form of Payment. Except as otherwise provided in this ---------------------- Article XII or in an applicable Schedule, the normal form of payment under the Plan shall be a Voluntary Lump-Sum Distribution based on the Value of the Member's nonforfeitable interest in his Account as of the Valuation Date determined in accordance with the following rules: (a) If the Member's request for a distribution is received by the time prescribed by the Committee, the Valuation Date shall be the Valuation Date coincident with or next following the date on which the request is received or as soon thereafter as practicable; and (b) If the Member's request for a distribution is not received by the time prescribed by the Committee, the Valuation Date shall be the Valuation Date that next follows the date on which the request is received or as soon thereafter as practicable; provided that if the Member has not waived the 30-day waiting period in accordance with Section 12.02, the Valuation Date shall be the Valuation Date that coincides with or next follows the expiration of the 30-day waiting period or as soon thereafter as practicable. 42 12.04 Optional Forms of Payment. ------------------------- (a) Subject to the provisions of Sections 12.05 and 12.11, a Member who first became a Member before April 1, 1994, and who Severs from Service (i) by reason of Retirement or Disability or (ii) at or after attaining Normal Retirement Age may elect to receive the Value of his nonforfeitable interest in his Account in a series of annual installments. (b) The period for which installments are paid pursuant to this Section shall be any whole number of years from a minimum of one year to a maximum period equal to the lesser of (i) the Member's life expectancy as determined under Section 401(a)(9) of the Code and the Treasury Regulations thereunder and (ii) ten years. (c) Subject to the provisions of Section 12.11, the date as of which installment payments begin pursuant to this Section shall be any day selected by the Member, beginning after the Member Severs from Service and no later than the last day of the first Plan Year commencing after the later of (i) the date on which the Member attains Normal Retirement Age and (ii) the date on which the Member Severs from Service. (d) If annual installment payments are made to a Member pursuant to this Section, the amount of each payment shall be equal to the Value of his Account, as of the applicable Valuation Date, multiplied by a fraction, the numerator of which is one and the denominator is the remaining number of installments (including the installment then to be paid). The Valuation Date for the first installment payment shall be determined in accordance with Section 12.03, and the Valuation Date for each subsequent installment payment shall occur on an anniversary thereof or as soon thereafter as practicable. (e) If a Member has elected to receive installment payments pursuant to this Section, the election shall be irrevocable as of the Member's Distribution Date; provided that a Member may elect to accelerate (and to receive in a lump sum) the payment of all (but not less than all) remaining installments at any time. (f) If a Member who elects to receive installment payments pursuant to this Section dies after his initial Distribution Date but before the Value of his nonforfeitable interest in his Account has been fully distributed, the Member's Beneficiary shall be entitled to receive, at the Beneficiary's election, either (i) the remaining installments on the dates they were originally scheduled to be paid (or as soon thereafter as practicable) or (ii) the Value of the Member's nonforfeitable interest in his Account (determined as of the date of the distribution) in a lump-sum payment as of a Valuation Date that occurs as soon as practicable following the Member's death and the Committee's receipt of all information and documentation that it requires before making the distribution. The Beneficiary's election shall be made in such manner and form, and at such time, as the Committee shall prescribe. (g) A Member who elects to receive installment payments pursuant to this Section may, concurrently with such election, elect that all or part of the Value of his Company Matching Account attributable to The Walt Disney Company Common Stock Fund be liquidated and transferred to any of the other available Investment Funds (other than the Loan Fund). 12.05 Mandatory Lump Sum. If, as of any date after a Member Severs from ------------------ Service, the 43 Value of the Member's nonforfeitable interest in his Account does not exceed $5,000, the Member shall receive an immediate Mandatory Lump-Sum Distribution equal to such Value. For purposes of this Section 12.05, if the Value of the Member's nonforfeitable interest in his Account at the time of any distribution to the Member exceeds $5,000, the Value of the Member's nonforfeitable interest in his Account at the time of any subsequent distribution to the Member also shall be deemed to exceed $5,000. If a Mandatory Lump-Sum Distribution pursuant to this Section 12.05 is delayed for administrative reasons, and the Member dies on or after his Distribution Date, but before the Mandatory Lump-Sum Distribution is paid to him, the Mandatory Lump-Sum Distribution shall be paid to his personal representative. 12.06 Distribution Date. ----------------- (a) Except as otherwise provided in this Section 12.06 or Section 12.04, 12.05, or 12.11, the Distribution Date of a Member who is entitled to a distribution pursuant to this Article shall be his Normal Retirement Date. (b) (1) A Member who Severs from Service before his Normal Retirement Date may designate any date thereafter and on or before his Normal Retirement Date as his Distribution Date. A Member may make an election under this Section 12.06(b) only if the election meets the requirements imposed by paragraph (2), below. (2) A Member may make an election under this Section, or revoke any such election, before his Distribution Date, but only after the Member receives the notice required by Section 12.02. Any such election, and any revocation of a previous election, shall be made in a form satisfactory to the Committee and delivered to the Committee within the period prescribed by the preceding sentence. (3) A Member may not make an election under this Section, or revoke an election previously made under this Section, on or after the Member's Distribution Date. (c) Subject to the provisions of Sections 12.05 and 12.11, a Member who Severs from Service by reason of Retirement or Disability or after attaining Normal Retirement Age may elect that his Distribution Date shall be a date (designated by the Member) that occurs in the Plan Year following the Plan Year in which his Severance from Service occurs. (d) Subject to the provisions of Sections 12.06(c) and 12.11, the Distribution Date of a Member who Severs from Service after his Normal Retirement Date shall occur as soon as practicable after his Severance from Service. (e) Unless the Member elects otherwise in writing, the Member's Distribution Date shall not occur later than the 60th day after the close of the Plan Year in which the latest of the following occurs: (i) the Member's attainment of Normal Retirement Age, (ii) the tenth anniversary of the year in which the Member commenced participation in the Plan, or (iii) the Member terminates employment with the Company and the Affiliates. This subsection is designed solely to comply with the provisions of Section 401(a)(14) of the Code and Section 206(a) of ERISA; this subsection does not give a Member the right to postpone the Distribution Date beyond the date otherwise required by the terms of the Plan. 44 (f) Notwithstanding any other provision of the Plan, a payment shall not be considered to be made after the Distribution Date merely because actual payment is reasonably delayed for the calculation and/or distribution of the benefit amount if all payments due are actually made. (g) If a Voluntary Lump-Sum Distribution pursuant to this Article XII is delayed for administrative reasons, and the Member dies after his Distribution Date, but before the Voluntary Lump-Sum Distribution is paid to him, the Voluntary Lump-Sum Distribution shall be paid to his personal representative. (h) If a Pre-Tax Contribution, After-Tax Contribution, or Company Matching Contribution is credited to a Member's Account after the Value of his Account has been distributed in its entirety pursuant to this Article XII, the Value of the Member's Account (reflecting such contribution) shall be distributed in accordance with the generally applicable provisions of this Article XII and without regard to any election made by the Member with respect to the prior distribution. 12.07 Death. Except as otherwise provided in Sections 12.05 and 12.06(g), ----- upon the death of a Member, the Value of the Member's nonforfeitable interest in his Account shall be distributed to his Beneficiary as of the Valuation Date coincident with or next following the Member's Normal Retirement Date or as of such earlier Valuation Date as the Beneficiary may elect (on or before such Valuation Date) in such form and manner, and at such time, as the Committee shall prescribe; provided that if, as of any date after the Member's death, the Value of the Member's Account does not exceed $5,000, the Beneficiary shall receive an immediate Mandatory Lump-Sum Distribution equal to such Value in accordance with Section 12.05. 12.08 Designation of Beneficiary. -------------------------- (a) Subject to the remaining provisions of this Section, a Member may designate a Beneficiary under the Plan at any time. (b) Subject to the remaining provisions of this Section, a Member may revoke a prior designation of a Beneficiary at any time by filing a written notice of revocation with the Committee and may designate a new Beneficiary by filing a written designation with the Committee. No such revocation or designation shall be effective unless and until it is received by the Committee before the Member's death in a form and manner that is acceptable to the Committee. (c) Subject to the remaining provisions of this Section, if a Member designates his spouse as his Beneficiary, that designation shall not be revoked or otherwise altered or affected by any (1) change in the marital status of the Member and such spouse, (2) agreement between the Member and such spouse, or (3) judicial decree (such as a divorce decree) affecting any rights that the Member and such spouse might have as a result of their marriage, separation, or divorce (except to the extent that a Qualified Domestic Relations Order directs the designation of a Beneficiary), until and unless the Member revokes his prior designation of Beneficiary and designates a Beneficiary in accordance with this Section, it being the intent of the Plan that any change in the designation of a 45 Beneficiary hereunder may be made by the Member only in accordance with the provisions of this Section or pursuant to a Qualified Domestic Relations Order. (d) Notwithstanding the preceding provisions of this Section, a Member's designation of a Beneficiary other than his Surviving Spouse shall be effective only with the written consent of such Surviving Spouse, witnessed by a representative of the Plan or a notary public, unless the Committee determines that spousal consent cannot be obtained because there is no Surviving Spouse, because the Surviving Spouse cannot be located, or because of other circumstances specified by the Secretary of the Treasury. The consent of a spouse to a Member's designation of a Beneficiary shall be effective only with respect to that spouse and shall not be effective with respect to any subsequent spouse. In the absence of spousal consent in accordance with this Section, a Member who is married on the date of his death shall be deemed to have designated his Surviving Spouse as his Beneficiary unless and to the extent that such designation is inconsistent with a Qualified Domestic Relations Order. (e) After a Member's death, the Member's Beneficiary shall have the same rights and options under the Plan as a Member who is a former Employee of the Company and the Affiliates, including the right to designate a Beneficiary. For example, a Beneficiary shall not have the right to make contributions to the Plan or to obtain a Loan from the Plan. 12.09 Payment Medium. -------------- (a) A distribution pursuant to this Article shall be derived from the Investment Funds in which the applicable Account is invested, in proportion to the percentage of the Account invested in each Investment Fund. (b) A distribution from any Investment Fund other than The Walt Disney Company Common Stock Fund shall be paid in cash. (c) A distribution from The Walt Disney Company Common Stock Fund shall be made in shares of Common Stock (except that the value of fractional shares shall be distributed in cash); provided that the distributee may elect to receive such a distribution entirely in cash. 12.10 Risk of Loss. The Value of a Member's nonforfeitable interest in ------------ his Account shall continue to be adjusted to reflect the investment performance of the Investment Fund(s) in which his Account is invested (and shall therefore remain subject to the risk of loss) during the period between the Member's Severance from Service and the date when the Member's nonforfeitable interest in his Account has been distributed in full. 12.11 Minimum Required Distributions. ------------------------------ (a) The Plan is designed to satisfy the requirements of Section 401(a)(9) of the Code and the Treasury Regulations thereunder without regard to the provisions of this Section 12.11. Nevertheless, to ensure that the Plan complies with those requirements, this Section 12.11 has been added to the Plan. The sole purpose of this Section 12.11 is to limit the manner in which benefits are paid under the Plan to accord with the requirements of Section 401(a)(9) of the Code and the Treasury Regulations thereunder. This Section 12.11 should be interpreted in a manner consistent with that purpose. The provisions of this Section 12.11 shall override any distribution options under the Plan that are inconsistent with the requirements of Section 401(a)(9) of the Code and the Treasury 46 Regulations thereunder. This Section 12.11 does not confer any rights or benefits upon any person. (b) Notwithstanding any other provision of the Plan, except as provided in the following subsection (c) the distribution of the Value of a Member's nonforfeitable interest in his Account shall commence not later than April 1 of the calendar year following the later of (1) the calendar year in which he attains age 70 1/2 and (2) the calendar year in which he retires from employment with the employer maintaining the Plan. (c) Clause (2) of the preceding subsection (b) shall not apply to a Member who is a 5% owner (as defined in Section 416(i)(1)(B) of the Code) with respect to the Plan Year ending with or within the calendar year in which he reaches age 70 1/2. In addition, a Member who became a Member before January 1, 1997, and attains age 70 1/2 before January 1, 1999, may irrevocably elect, at the time and in the manner prescribed by the Committee, to disregard clause (2). Members who were receiving distributions as of December 31, 1996, that were required by this Section as in effect on that date shall not have any right based on clause (2) to stop such distributions. (d) Unless the mode of distribution is a single payment, the Value of a Member's nonforfeitable interest in his Account shall be paid over a period not extending beyond the Member's life or life expectancy, or the joint lives or joint life expectancies of the Member and his Spouse or joint annuitant. If the Member's entire benefit is to be distributed over a period longer than one year, then the amount to be distributed each year shall be no less than the amount prescribed by the Treasury Regulations under Section 401(a)(9) of the Code. (e) If a Member dies before his Distribution Date, any benefit payable after his death shall be distributed to his Surviving Spouse in accordance with this Article XII and shall not begin later than the April 1 following the date on which the Member would have attained age 70 1/2 (or, if later, the first day of the month coincident with or next following the Member's death). (f) Payments shall not be made under the Plan pursuant to any payment schedule authorized by the Plan unless the payment schedule satisfies the incidental benefit requirement set forth in Section 401(a)(9)(G) of the Code and the Treasury Regulation thereunder. (g) This Section 12.11 shall not apply to any method of distribution designated in writing by a Member under the terms of the Plan (or any predecessor thereof) before January 1, 1985, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982. 12.12 Direct Rollover. If a Member, a Surviving Spouse, or an Alternate --------------- Payee named in a Qualified Domestic Relations Order is entitled to receive an "eligible rollover distribution" (within the meaning of Section 402(c)(4) of the Code) from the Plan on or after January 1, 1993, the Plan shall, at the election of the recipient, make a direct rollover of the taxable portion of the distribution to an eligible retirement plan. Notwithstanding the foregoing, the recipient may not make a direct rollover if the Corporation reasonably expects the total of such "eligible rollover distributions" from the Plan to the recipient to be less than $200 in the Plan Year; and if a recipient elects to have only a portion of an "eligible rollover distribution" paid to an eligible retirement plan in a direct rollover, that portion must be at least $500. This Section 12.12 is intended, and shall be construed, solely to satisfy the direct rollover requirements of Section 401(a)(31) of the Code: it shall not confer any rights other than those required under Section 401(a)(31) and the Treasury Regulation thereunder. 47 ARTICLE XIII ADMINISTRATION -------------- 13.01 Employee Benefits Committee. The Employee Benefits Committee shall --------------------------- consist of not less than three persons who shall be appointed by the Board of Directors. The members of the Committee may, but need not, be employees, officers, or directors of the Company or an Affiliate. The number of members of the Committee may be increased from time to time by the Board, and such new members shall be appointed by the Board, provided that the total number of members shall at all times be not less than three. Before becoming a member of the Committee, any person appointed to the Committee must accept his appointment in writing. Any member of the Committee may be removed by the Board at any time with or without cause. Any member of the Committee may resign by submitting a written resignation to the Board, and such resignation shall be effective on the date of receipt or on any subsequent date specified therein. A vacancy on the Committee shall be filled by the Board. 13.02 Chairman and Secretary. The Committee shall select a Chairman and ---------------------- may select a Secretary (who may, but need not be, a member of the Committee) to keep its records and to assist it in the performance of its duties. 13.03 Committee Meetings and Votes. The Committee shall hold meetings at ---------------------------- such time and place and upon such notice as the Committee may from time to time determine. A majority of the members of the Committee at the time in office shall constitute a quorum. All actions by the Committee shall be by majority vote of the Committee members present at such a meeting, but the Committee may also act without a meeting by consent of a majority of its members evidenced by a resolution signed by a majority of the members then in office. No member of the Committee shall have any right to vote or decide upon any matter relating solely to himself or solely to his rights or benefits under the Plan. 13.04 Evidence of Action of the Committee. The Committee may authorize ----------------------------------- one or more of its members to sign on its behalf any instructions, notices, or certifications to the Trustee or to any other person. 13.05 Records and Reports. The Committee shall maintain records of its ------------------- actions and determinations in administering the Plan. All such records, together with such other documents as may be necessary for the administration of the Plan, shall be preserved by the Committee. 13.06 Powers and Duties of the Committee. The Committee shall be a named ---------------------------------- fiduciary of the Plan and shall have the authority to control and manage the operation and administration of the Plan. The Committee shall have such discretionary power as may be necessary to carry out the provisions of the Plan and to perform its duties hereunder, including, without limiting the generality of the foregoing, the discretionary power to: (a) promulgate and enforce such rules and regulations as it shall deem necessary or appropriate for the administration of the Plan; (b) interpret the Plan and decide all matters arising thereunder, including the right to remedy possible ambiguities, inconsistencies, and omissions; 48 (c) resolve questions relating to individuals' eligibility for participation in the Plan, vesting, forfeitures, the amounts and manner of distribution, and the status of persons as Employees, Eligible Employees, Members, spouses, Surviving Spouses, Beneficiaries, and Alternate Payees; (d) require any person to furnish such documentation, information, or other matter as the Committee may require for the proper administration of the Plan and as a prerequisite to any payment or distribution by the Plan; (e) direct that the Fund be used to pay the reasonable administration expenses of the Plan; (f) employ or retain one or more persons to render advice with respect to its responsibilities under the Plan; (g) employ or retain one or more persons to assist in the administration of the Plan; and (h) impose reasonable restrictions (including temporary prohibitions) on Members' contribution elections, changes in contribution elections, investment elections, changes in investment elections, loans, withdrawals, and distributions to accommodate the administrative requirements of the Plan. All decisions of the Committee relating to matters within its jurisdiction shall be final. 13.07 Professional Assistance. The Committee may engage accountants, ----------------------- attorneys, actuaries, physicians, and such other personnel as it deems necessary or advisable for the proper administration of the Plan. The fees and costs of such services shall be paid by the Company unless they are paid out of the Fund. The Committee shall be entitled to obtain and act on the basis of all tables, valuations, certificates, opinions, and reports furnished by any accountant, attorney, actuary, physician, or other person so engaged. 13.08 Allocation and Delegation of Committee Responsibilities. The ------------------------------------------------------- Committee may allocate among any of the members of the Committee any of the responsibilities of the Committee under the Plan or delegate to any person (including a third-party administrator) not a member of the Committee authority to carry out any of the responsibilities of the Committee under the Plan. Any such allocation or delegation shall be made pursuant to a written instrument executed by each of the members of the Committee then in office or pursuant to a contract between a third-party administrator and the Corporation and approved by the Committee. Unless such written instrument or contract specifies otherwise, the one or more persons to whom responsibility is allocated or delegated pursuant to this Section shall have the same discretionary powers in carrying out such responsibility as the Committee itself would have had it carried out the responsibility itself. 13.09 Compensation and Expense. The members of the Committee shall serve ------------------------ without compensation from the Plan, but the Fund shall reimburse the Committee members for all reasonable expenses incurred in the administration of the Plan except to the extent that the expenses are borne by the Company. 13.10 Investment Responsibilities. The Investment Committee shall have --------------------------- the discretionary authority and power to: 49 (a) manage (including the power to acquire and dispose of) any assets under the Plan; (b) appoint an Investment Manager or Managers to manage (including the authority and power to acquire and dispose of) any assets of the Plan, including the power to replace or terminate any such Investment Managers; (c) appoint or direct the appointment of one or more named fiduciaries that do not qualify as Investment Managers to manage (including the power to acquire and dispose of) any assets of the Plan, including the power to replace or terminate any such named fiduciaries; (d) designate one or more investment companies, or other common, collective, or mutual funds, as Investment Funds pursuant to Section 7.03, including the power to replace or eliminate any such Investment Funds; (e) allocate investment responsibilities among the Trustee, the Investment Managers, any named fiduciaries appointed pursuant to subsection (c) of this Section 13.10, and the Investment Committee itself; (f) periodically review and evaluate the performance of the Trustee, the Investment Funds, the Investment Managers, and any named fiduciaries appointed pursuant to subsection (c) of this Section 13.10; and (g) employ or retain one or more persons to render advice with respect to its responsibilities under the Plan. 13.11 Plan Administrator. The Corporation shall be the "administrator" of ------------------ the Plan for purposes of Section 3(16)(A) of ERISA. 13.12 Multiple Fiduciary Capacities. Any person or group of persons may serve in more than one fiduciary capacity under the Plan. 50 ARTICLE XIV BENEFIT CLAIMS PROCEDURE ------------------------ 14.01 Claims Procedure. A claim for benefits under the Plan by a Member, ---------------- Surviving Spouse, Beneficiary, Alternate Payee, or any other person shall be filed by submitting to a person (the "claim administrator") designated by the Committee a written application on a form designated by the Committee. The claim administrator shall, within a reasonable time, consider the claim and shall issue his determination in writing. If the claim is denied in whole or in part by the claim administrator, the claim administrator shall, within a reasonable time, provide the claimant with a written notice setting forth in a manner calculated to be understood by the claimant: (a) The specific reason or reasons for the denial of the claim; (b) Specific reference to pertinent Plan provisions on which the denial is based; (c) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) An explanation of the Plan's claim review procedure. 14.02 Review Procedure. The Committee shall provide each claimant with a ---------------- reasonable opportunity to appeal a denial of the claim to the Committee for a full and fair review. The claimant or his duly authorized representative shall be permitted to request a review upon written application to the Committee to review pertinent documents, and to submit issues and comments in writing. The Committee may establish such time limits within which claimants may request review of denied claims as are reasonable in relation to the nature of the benefit that is the subject of the claim and to other attendant circumstances, but which in no event shall be less than 60 days after receipt by the claimant of written notice of denial of his claim. The decision by the Committee with respect to the claim shall be made not later than 60 days after receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible but not later than 120 days after receipt of the request for review. The decision on review shall be in writing, shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based, and shall be written in a manner calculated to be understood by the claimant. To the extent permitted by law, the decision of the claim administrator (if no review is properly requested) or the decision of the Committee on review, as the case may be, shall be final and binding on all parties if it is supported by the facts that were considered and is reasonably based on the applicable provisions of law, the Plan, and the Trust Agreement. 14.03 Required Information. Any person eligible to receive benefits -------------------- hereunder shall furnish to the claim administrator or the Committee any information or evidence requested by the claim administrator or the Committee and reasonably required for the proper administration of the Plan. Failure on the part of any person to comply with any such request within a reasonable period of time shall be sufficient grounds for delay in the payment of any benefits that may be due under the Plan until such information or evidence is received by the claim administrator or the Committee. The claim administrator or the Committee may recoup from the payments to any person any amount previously paid to such person to which he was not entitled under the provisions of the Plan. 51 ARTICLE XV AMENDMENT, MERGER, AND TERMINATION OF THE PLAN ---------------------------------------------- 15.01 Amendment of the Plan. The Board of Directors by duly adopted --------------------- written resolution may modify or amend the Plan in whole or in part, prospectively or retroactively, at any time and from time to time. The officers of the Corporation may take all actions necessary or appropriate to implement or effectuate any modification or amendment to the Plan described herein. 15.02 Merger or Consolidation of the Plan. To the extent that Section ----------------------------------- 414(l) of the Code applies, the Plan may not be merged or consolidated with, and its assets or liabilities may not be transferred to, any other plan unless each Member would receive a benefit immediately after the merger, consolidation, or transfer (if each plan then terminated) that is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated); provided that the foregoing provisions of this Section 15.02 shall not apply if such alternative requirements as may be imposed by the Treasury Regulations under Section 414(l) of the Code are satisfied. 15.03 Termination of the Plan. ----------------------- (a) Reservation of Right to Terminate. While the Plan was established as a --------------------------------- permanent program and the Company expects to continue the Plan indefinitely, the Corporation reserves the right to terminate the Plan, partially or in its entirety, at any time by a written resolution of the Board of Directors. (b) Date of Termination. If the Board of Directors adopts a resolution ------------------- to terminate the Plan, the Plan shall be terminated as of a date to be specified in the resolution. (c) Rights of Affected Members. In the event of the termination or -------------------------- partial termination of the Plan, or the discontinuance of contributions to the Plan, the rights of all affected Members to benefits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, shall be nonforfeitable. The benefits accrued to the date of such a termination, partial termination, or discontinuance shall be determined on the basis of the assumption that the employment of every affected Member terminated on such date (or, if earlier, on the date on which his employment actually terminated). In the event of a termination of the Plan, the benefits accrued to the date of the termination shall be funded only to the extent of the assets in the Fund as of such date; and in the event of a partial termination of the Plan, the benefits accrued by the affected Members shall be funded only to the extent that they would have been funded in the event of a complete termination of the Plan occurring on the date of the partial termination. For purposes of this subsection (c), the Members affected by the termination or partial termination of the Plan, or a discontinuance of contributions to the Plan, shall not include any former Member who does not have a balance in his Account on the date of the termination, partial termination, or discontinuance. 15.04 Design Decisions. Decisions regarding the design of the Plan shall be made in a settlor capacity and shall not be governed by the fiduciary responsibility provisions of ERISA. 52 ARTICLE XVI MISCELLANEOUS ------------- 16.01 Employment Rights Not Affected by Plan. The adoption and maintenance of the Plan shall not be deemed to constitute a contract between the Company and any Employee. Nothing herein contained shall be deemed to give to any Employee the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge any Employee at any time, nor shall it be deemed to give the Company the right to require the Employee to remain in its employ, nor shall it interfere with the Employee's right to terminate his employment. 16.02 Booklets and Brochures Subject to Plan Provisions. The Company ------------------------------------------------- shall from time to time issue to Members one or more booklets or brochures summarizing the Plan. In the event of any conflict between the terms of the Plan document and Trust Agreement and the terms of the booklets and brochures, the terms of the Plan document and Trust Agreement shall control. 16.03 Doubt as to Identity. -------------------- (a) If at any time any doubt exists as to the identity or whereabouts of any person entitled to payment hereunder or the amount or time of such payment, the Corporation may direct the Trustee either (i) to hold such sum in trust, uninvested, and without interest, until distribution is ordered by a court of competent jurisdiction, or (ii) to pay such sum into court in accordance with appropriate rules of law. (b) If, after reasonable efforts, the Committee is unable to determine the whereabouts of any person entitled to payment hereunder within three years after such sum first becomes payable, the Account of such person shall be forfeited and shall be treated as an actuarial gain that shall be used to reduce Company Matching Contributions to the Plan in accordance with Article V. For purposes of the preceding sentence, notice by registered mail sent to such person's most recent address (as reflected in the Plan records) at least once in each of three successive years shall constitute reasonable efforts to locate such person. If, however, such person subsequently makes proper claim to the Company for such sum, the forfeited benefit shall be reinstated, and shall be distributed in accordance with the terms of the Plan. 16.04 Liability Limited. Except as and to the extent otherwise provided ----------------- by applicable law, no liability whatever shall attach to or be incurred by the shareholders, directors, officers, or employees of the Company or any Affiliate under or by reason of any of the terms and conditions contained in the Plan or in any of the contracts procured pursuant thereto or implied therefrom. 16.05 Overpayments. If any overpayment of benefits is made under the Plan, the amount of the overpayment may be set off against further amounts payable to or on account of the person who received the overpayment until the overpayment has been recovered. The foregoing remedy is not intended to be exclusive. 16.06 Incapacity. If any person is unable to care for his affairs because ---------- of illness or accident, unless a duly qualified guardian or other legal representative has been appointed, any payment due from the Plan to that person may be paid, for the benefit of such person, to his spouse, parent, brother, sister, or other person deemed by the Committee to have incurred expenses for such person. 53 16.07 Assignment and Liens. -------------------- (a) Nonalienability of Benefits. Subject to subsections (b) and (c), --------------------------- below, the right of any person to any benefit or payment under the Plan shall not be subject to alienation, transfer, assignment, or encumbrance, or otherwise subject to lien, and any such attempt to alienate, transfer, assign, or encumber any benefit or payment under the Plan shall be null and void. (b) Exception for Qualified Domestic Relations Orders. Subsection (a), ------------------------------------------------- above, shall not apply to payments made pursuant to a Qualified Domestic Relations Order. The following rules shall apply with respect to Qualified Domestic Relations Orders: (1) Establishment of Procedure. The Committee shall establish -------------------------- reasonable written procedures to determine the qualified status of domestic relations orders and to administer distributions under orders determined to be Qualified Domestic Relations Orders, which procedures may include, without limitation, the adoption of one or more model Qualified Domestic Relations Orders. Such procedures shall be consistent with the requirements of Section 206(d) of ERISA and Sections 401(a)(13) and 414(p) of the Code. The Committee shall promptly notify the affected Member and any other Alternate Payee of the receipt of a domestic relations order and the procedures for determining the qualified status of domestic relations orders. Within a reasonable period after the receipt of such order, the Committee shall determine whether such order is a Qualified Domestic Relations Order and shall notify the Member and each Alternate Payee of such determination. (2) Disposition of Benefits Pending Determination. During any --------------------------------------------- period in which the qualified status of a domestic relations order is being determined (by the Committee, by a court, or otherwise), the Committee shall make arrangements to account separately for the amounts that would have been payable to each Alternate Payee if the order had been determined to be a Qualified Domestic Relations Order. If within 18 months of the receipt of the order, the order (or modification thereof) is determined to be a Qualified Domestic Relations Order, the Plan shall pay the amounts that have been separately accounted for to the person or persons entitled thereto. If within 18 months of the receipt of the order, it is determined that the order is not qualified, or the issue as to whether the order is qualified is not resolved by the end of the 18-month period, then the Plan shall pay the amounts that have been separately accounted for to the person or persons, if any, who would have been entitled to payment of such amounts if there had been no order. Any determination that an order is qualified which is made after the close of the 18-month period shall apply prospectively only. (3) Multiple Spouses. If, as a result of a Qualified Domestic ---------------- Relations Order, a Member is treated as having more than one spouse, the amount of benefits payable with respect to the Member under the Plan shall not exceed the amount of benefits that would be payable if he had only one spouse. (4) Restrictions on Distributions. If a Qualified Domestic ----------------------------- Relations Order requires distribution to an Alternate Payee of all or a portion of the Value of a Member's nonforfeitable interest in his Account, such distribution shall be made without regard to the restriction set forth in Section 12.01. (c) General Limitation. This Section 16.07 is intended to satisfy the ------------------ requirements of Section 206(d) of ERISA and Sections 401(a)(13) and 414(p) of the Code. This Section 16.07 shall not 54 be construed in a manner that would impose limitations that are more stringent than those required by Section 206(d) of ERISA and Sections 401(a)(13) and 414(p) of the Code. Thus, this Section 16.07 shall not restrict the alienation, transfer, assignment, or encumbrance of any benefit or payment under the Plan to the extent such alienation, transfer, assignment, or encumbrance is permitted under Section 206(d) of ERISA and Sections 401(a)(13) and 414(p) of the Code, and the regulations thereunder. If Congress should provide by statute, or the United States Labor Department, the United States Treasury Department, or the Internal Revenue Service should provide by regulation, ruling, or other guidance of general applicability, that any restriction set forth in this Section 16.07 is no longer necessary for the Plan to meet the requirements of Section 206(d) of ERISA or Section 401(a) of the Code or any other applicable provision of ERISA or the Code then in effect, such restriction shall become void and shall no longer apply, without the necessity of further amendment to the Plan. 16.08 Withholding Taxes. The Committee may make any appropriate ----------------- arrangements to deduct from all amounts paid under the Plan any taxes reasonably determined to be required to be withheld by any government or government agency. The Member, Surviving Spouse, Beneficiary, or Alternate Payee, as the case may be, shall bear all taxes on amounts paid under the Plan to the extent that no taxes are withheld, irrespective of whether withholding is required. 16.09 Titles and Headings Not to Control. The titles to articles and the ---------------------------------- headings of sections, subsections, paragraphs, and subparagraphs in the Plan are placed herein for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 16.10 Notice of Process. In any action or proceeding involving the Fund, ----------------- or any property constituting part or all thereof, or the administration thereof, the Company, the Committee, and the Trustee shall be the only necessary parties, and no Member, spouse, Surviving Spouse, Beneficiary, Alternate Payee, or other person having or claiming to have an interest in the Fund or under the Plan shall be entitled to any notice of process unless such notice is required by federal law. 16.11 Nonreversion. Except as provided in Section 5.07, all Plan assets ------------ shall be used for the exclusive benefit of Members, their Surviving Spouses, Beneficiaries, and Alternate Payees and for the payment of the reasonable expenses of administering the Plan and shall not revert to the Company. 16.12 Governing Law. The Plan shall be construed, administered and ------------- regulated in accordance with the provisions of ERISA and, to the extent not preempted thereby, in accordance with the laws of the State of New York. 16.13 Interpretation of Plan and Trust. It is the Company's intention -------------------------------- that the Plan shall be a qualified profit-sharing plan under Section 401(a) of the Code, that the Trust shall be exempt from federal income tax under Section 501(a) of the Code, and that the Plan and the Trust Agreement shall satisfy the applicable requirements of ERISA. The Plan and the Trust Agreement shall be construed to effectuate the foregoing intention. 16.14 Severability. If any provision of the Plan should be held illegal ------------ or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.15 Complete Statement of Plan. This document is a complete statement -------------------------- of the Plan and, as 55 of April 1, 1998, supersedes all prior plans. The Plan may be amended, modified, or terminated only in writing and then only as provided in Sections 15.01 and 15.03. 56 ARTICLE XVII TOP-HEAVY PLAN PROVISIONS ------------------------- 17.01 Application of Article XVII. This Article XVII shall apply only if --------------------------- the Plan is Top-Heavy, as defined below. If, as of any Top-Heavy Determination Date, as defined below, the Plan is Top-Heavy, the provisions of Section 17.04 shall take effect as of the first day of the Plan Year next following the Top- Heavy Determination Date and shall continue to be in effect until the first day of any subsequent Plan Year following a Top-Heavy Determination Date as of which it is determined that the Plan is no longer Top-Heavy. 17.02 Definitions Concerning Top-Heavy Status. In addition to the --------------------------------------- definitions set forth in Article I, the following definitions shall apply for purposes of this Article XVII, and shall be interpreted in accordance with the provisions of Section 416 of the Code and the Treasury Regulations thereunder: (1) Aggregation Group - a group of Company Plans consisting of each ----------------- Company Plan in the Required Aggregation Group and each other Company Plan selected by the Corporation for inclusion in the Aggregation Group that would not, by its inclusion, prevent the group of Company Plans included in the Aggregation Group from continuing to meet the requirements of Sections 401(a)(4) and 410 of the Code. (2) Annual Compensation - compensation for a calendar year within ------------------- the meaning of Treasury Regulation Section 1.415-2(d)(11)(ii) to the extent that such compensation does not exceed the annual compensation limit in effect for the calendar year under Section 401(a)(17) of the Code. (3) Company Plan - any Tax-Qualified Plan of the Companies. ------------ (4) Key Employee - any employee of the Companies who satisfies ------------ the criteria set forth in Section 416(i)(1) of the Code. (5) Required Aggregation Group - one or more Company Plans -------------------------- comprising each Company Plan in which a Key Employee is a participant and each Company Plan that enables any Company Plan in which a Key Employee is a participant to meet the requirements of Section 401(a)(4) or 410 of the Code. (6) Top-Heavy - the Plan is included in an Aggregation Group under --------- which, as of the Top-Heavy Determination Date, the sum of the present value of the cumulative accrued benefits of the Key Employees under all defined benefit plans in the Aggregation Group and the aggregate value of the accounts of Key Employees under all defined contribution plans in the Aggregation Group exceeds 60 percent of the analogous sum determined for all employees. The determination of whether the Plan is Top-Heavy shall be made in accordance with Section 416(g)(2)(B) of the Code and the Treasury Regulations thereunder. (7) Top-Heavy Determination Date - the December 31 immediately ---------------------------- preceding the Plan Year for which the determination is made. (8) Top-Heavy Ratio - the percentage calculated in accordance with --------------- paragraph (6), 57 above, and Section 416(g)(2) of the Code and the Treasury Regulations thereunder. (9) Top-Heavy Year - a Plan Year for which the Plan is Top-Heavy. -------------- 17.03 Calculation of Top-Heavy Ratio. The Top-Heavy Ratio with respect to ------------------------------ any Plan Year shall be determined in accordance with the following rules: (1) Determination of Accrued Benefits. The accrued benefit of any --------------------------------- current Member shall be calculated, as of the most recent valuation date that is within a 12-month period ending on the Top-Heavy Determination Date, as if the Member had voluntarily terminated employment as of such valuation date. Such valuation date shall be the same valuation date used for computing plan costs for purposes of the minimum funding provisions of Section 412 of the Code. Unless, as of the valuation date, the Plan provides for a nonproportional subsidy, the actuarial present value of the accrued benefit shall reflect a retirement income commencing at age 65 (or attained age, if later). If, as of the valuation date, the plan provides for a nonproportional subsidy, the benefit shall be assumed to commence at the age at which the benefit is most valuable. (2) Aggregation. The Plan shall be aggregated with all Company ----------- Plans included in the Aggregation Group. 17.04 Effect of Top-Heavy Status. -------------------------- (a) Minimum Contribution. Notwithstanding Article V, as of the last day -------------------- of each Top-Heavy Year, the Company shall make, for each Member, (i) the Company contributions it otherwise would have made under the Plan for such Top-Heavy Year, or if greater, (ii) contributions for such Top-Heavy Year that, when added to the contributions made by the Company for such Member (and any forfeitures allocated to his accounts) for such Top-Heavy Year under all other defined contribution plans of the Company, aggregate three percent of his Compensation; provided that the Plan shall meet the requirements of this subsection (a) and subsection (b), below, without taking into account Pre-Tax Contributions or other employer contributions attributable to a salary reduction or similar arrangement. (b) Accelerated Vesting. A Member who has completed at least three years ------------------- of Service and who is credited with an Hour of Service in a Top-Heavy Year shall have a nonforfeitable interest in his Account. For purposes of determining whether the Member's interest in his Account is nonforfeitable under the preceding sentence, Section 411(a)(3)(B) and (a)(3)(D) of the Code (relating to suspension of benefits and forfeitures upon withdrawal of mandatory contributions, respectively) shall not apply. (c) Reduction in Section 415 Limits. For purposes of applying Section ------------------------------- 6.05, the provisions of Section 415(e)(2)(B) and (e)(3)(B) of the Code shall be applied by substituting "1.0" for "1.25" therein. If application of the preceding sentence would otherwise cause a Member to exceed the limits imposed by Section 6.05, then application of the preceding sentence shall be suspended with respect to the Member until he no longer exceeds the limits of Section 6.05, as modified by the preceding sentence. In accordance with Section 416(h)(3) of the Code and the Treasury Regulation thereunder, during the period of such suspension there shall be no Company contributions, forfeitures, or voluntary nondeductible contributions allocated to the Member's accounts under the Plan or any other defined contribution plan of the Companies and no accruals for the Member under any defined benefit plan of the Companies. In addition, during the period of such suspension, for purposes of applying Section 6.05 to the Member, Section 415(e)(6)(B)(i) of the Code shall be applied as modified 58 by Section 416(h)(4) of the Code. (d) Inapplicability to Union Employees. The preceding provisions of ---------------------------------- this Section 17.04 shall not apply with respect to any employee included in a unit of employees covered by an agreement that the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and the Company, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and the Company. 17.05 Effect of Discontinuance of Top-Heavy Status. If, for any Plan Year -------------------------------------------- after a Top-Heavy Year, the Plan is no longer Top-Heavy, the provisions of Section 17.04 shall not apply with respect to such Plan Year, except that: (1) The accrued benefit of any Member shall not be reduced on account of the operation of this Section 17.05; (2) Each Member shall remain fully vested in any portion of the Member's accrued benefit that was fully vested before the Plan ceased to be Top- Heavy; and (3) Any Member who was a Member in a Top-Heavy Year and who has completed at least three years of Service as of the first day of the Plan Year in which the Plan is no longer Top-Heavy may elect to remain subject to the provisions of Section 17.04(b). 17.06 Intent of Article XVII. This Article XVII is intended to satisfy ---------------------- the requirements imposed by Section 416 of the Code and shall be construed in a manner that will effectuate this intent. This Article XVII shall not be construed in a manner that would impose requirements on the Plan that are more stringent than those imposed by Section 416 of the Code. IN WITNESS WHEREOF, ABC, Inc. has caused this instrument to be signed by its duly authorized officer and its corporate seal to be hereunto affixed on the __________ day of March, 1998. ABC, INC. By_____________________________________ 59 SCHEDULE I SPECIAL PROVISIONS APPLICABLE TO CERTAIN FORMER EMPLOYEES --------------------------------------------------------- OF ABC RECORDS, INC. -------------------- Any Employee of ABC Records, Inc. who Severed from Service as a result of the sale of the assets of ABC Records, Inc. to MCA Inc. on March 4, 1979, shall be fully vested in the Value of his Account which is attributable to Company Matching Contributions allocated to his Account as of the date of such Severance from Service. 60 SCHEDULE II SPECIAL PROVISIONS APPLICABLE TO CERTAIN FORMER EMPLOYEES OF ------------------------------------------------------------ R. L. WHITE COMPANY, INC. ------------------------- Any Employee of R. L. White Company, Inc. who Severed from Service as a result of the closing of the Information Systems division or the Multiple Listing Services division of R. L. White Company, Inc. on or about March 31, 1982, or the closing of the remainder of R. L. White Company, Inc. on or about June 30, 1982, shall be fully vested in the Value his Account which is attributable to the Company Matching Contributions allocated to his Account as of the date of such Severance from Service. 61 SCHEDULE III SPECIAL PROVISIONS APPLICABLE TO MEMBERS ON JULY 1, 1983 -------------------------------------------------------- Notwithstanding anything in the Plan to the contrary, any Employee who is a Member, or is eligible to become a Member on July 1, 1983, may make any number of elections with respect to his contributions and/or the investment of the Value of his Account attributable to his contributions, and such elections shall not be considered for purposes of the restrictions on the number of such elections permitted in any period of time by the Plan; provided that such elections are made on or before August 31, 1983, and are effective no earlier than July 1, 1983, and no later than September 1, 1983. Notwithstanding anything in the Plan to the contrary, all suspensions of a Member's right to contribute to the Plan that are in effect on July 1, 1983, shall be deemed to be terminated on such date, and any Member who had incurred such a suspension shall be eligible to make contributions to the Plan as of and from July 1, 1883, or such later date as may be permitted for the resumption of contributions and selected by the Member. 62 SCHEDULE IV SPECIAL PROVISIONS APPLICABLE TO FORMER MEMBERS OF THE ABC ---------------------------------------------------------- LEISURE MAGAZINES, INC. RETIREMENT SAVINGS PLAN ----------------------------------------------- Effective January 1, 1984, notwithstanding any other Section of the Plan, the following provisions shall apply to any former member of the ABC LEISURE MAGAZINES, INC. RETIREMENT SAVINGS PLAN (the "LM Plan"), which was merged into the Plan on or about January 1, 1984, and who is now a Member of the Plan: (a) (1) If the Member was fully vested under the LM Plan in the amount credited to his account which was attributable to Company Contributions (as defined in the LM Plan) immediately before the merger, he shall be fully vested in the Value of his Account which is attributable to Company Matching Contributions (i) as of the effective date of the merger; and (ii) after the effective date of the merger; and (2) If the Member was not fully vested under the LM Plan in the amount credited to his account which was attributable to Company Contributions (as defined in the LM Plan) immediately before the merger, he shall be vested in the Value of his Account which is attributable to Company Matching Contributions to not less than the same extent that he would have been vested had there been no merger and the provisions of the LM Plan still governed. (b) The Member's Service and Hours of Service shall include all Years of Service and Hours of Service (as defined in Section 1 of the LM Plan) credited to the Member under the LM Plan immediately before the merger. (c) The last paragraph of Section 3 of the Plan (as in effect at the time of the merger) shall not apply to any amounts attributable to Company Contributions (as defined in the LM Plan) credited to his Account immediately before the merger. 63 SCHEDULE V SPECIAL PROVISIONS APPLICABLE TO CERTAIN FORMER EMPLOYEES OF ------------------------------------------------------------ SILVER SPRINGS, INC. AND WEEKI-WACHEE SPRING, INC. -------------------------------------------------- Any Employee of Silver Springs, Inc. and Weeki-Wachee Spring, Inc. on the date of the sale of the stock of ABC Leisure Attractions, Inc. (scheduled to occur on or about May 25, 1984) shall be fully vested in the Value of his Account which is attributable to Company Matching Contributions as of the date of such sale and shall be deemed to have Severed from Service as of such date. 64 SCHEDULE VI SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF ABC RADIO ------------------------------------------------------- DALLAS, INC. ------------ In the case of any Employee of ABC Radio Dallas, Inc. who was employed by KIXK(FM) on July 16, 1984, Service shall include service with KIXK(FM) before its acquisition by American Broadcasting Companies, Inc. on July 16, 1984. Contributions of Members and Company Matching Contributions made on behalf of such Members shall be made based on the Member's Compensation received on and after October 1, 1984. 65 SCHEDULE VII SPECIAL PROVISIONS APPLICABLE TO CERTAIN EMPLOYEES OF STATIONS -------------------------------------------------------------- WABC-AM, WPLJ-FM, WLS-AM/FM, WRIF-FM, KSRR-FM, KTKS-FM, KABC ------------------------------------------------------------ -AM, KLOS-FM, KGO-AM AND WXYZ-TV AND CERTAIN EMPLOYEES OF --------------------------------------------------------- THE ABC RADIO DIVISION STAFF AND THE ABC OWNED RADIO STATIONS ------------------------------------------------------------- STAFF ----- Any Eligible Employee of stations WABC-AM, WPLJ-FM, WLS-AM/FM, WRIF- FM, KSRR-FM, KTKS-FM, KABC-AM, KLOS-FM, KGO-AM AND WXYZ-TV and any Employee of the ABC Owned Radio Station Staff and the ABC Radio Division Staff, with the exception of the President, ABC Radio, who Severed from Service as a result of the divestiture by the Company of any of the said stations and in connection with the merger of American Broadcasting Companies, Inc. and Capital Cities Communications, Inc. on or about the merger date or sale date, if later, shall be fully vested in the Value of his Account which is attributable to Company Matching Contributions. 66 SCHEDULE VIII SPECIAL PROVISIONS APPLICABLE TO CERTAIN FORMER EMPLOYEES OF ------------------------------------------------------------ ABC CONSUMER MAGAZINES, INC. ---------------------------- Any Employee of ABC Consumer Magazines, Inc. who Severed from Service as a result of the sale of Modern Photography and High Fidelity Magazines to Diamandis Communications, Inc. on June 6, 1989, shall be fully vested in the Value of his Account which is attributable to Company Matching Contributions. 67 SCHEDULE IX SPECIAL PROVISIONS APPLICABLE TO FORMER MEMBERS OF THE ------------------------------------------------------ SATELLITE MUSIC NETWORK INC. 401(k) PLAN ---------------------------------------- 1. "Service" shall include all of an Employee's service with Satellite Music Network, Inc. before January 1, 1990. 2. The Value of the Account attributable to Company Matching Contributions of any Member who was a participant in the Satellite Music Network, Inc. 401(k) Plan ("SMN Plan") on December 31, 1989, and who became eligible to participate in this Plan on January 1, 1990, shall be fully vested at all times. 3. Each Member's entire interest in the SMN Plan which is transferred to this Plan upon the effectiveness of the merger (the "Merger") of the SMN Plan and this Plan ("Entire SMN Interest") shall be fully vested at all times. 4. Each Member shall have the following investment elections with respect to his Entire SMN Interest: (a) A special transfer election, effective as of the date of the Merger, in accordance with which his Entire SMN Interest may be invested in the same way that Tax Deferred Contributions may be invested under Section 5(c) of the Plan (as then in effect). If a Member fails to make this special transfer election, his Entire SMN Interest shall be invested in fund (C) (as then in effect) as the effective date of the Merger. (b) Regular investment elections in accordance with which his Entire SMN Interest may be invested in the same way that Pre-Tax Contributions may be invested under the Plan. 5. Except as provided in the next sentence, each Member's Entire SMN Interest shall be treated as if it were comprised entirely of Pre-Tax Contributions for all purposes of the Plan including, but not limited to, the application of the loan provisions of the Plan. The portion of a Member's Entire SMN Interest that is attributable to employer discretionary contributions shall be treated as Company Matching Contributions for the purpose of applying the withdrawal rules of Section 11.03. 6. Any Member may obtain a Loan from the Plan with respect to his Entire SMN Interest without regard for the length of time he has been a Member. 7. (a) In addition to any method of retirement or termination benefit distribution that may be available under the Plan, a Member may elect to receive the distribution of his Entire SMN Interest in the form of payments over a period certain in monthly, quarterly, semiannual, or annual cash installments. The period over which such payments shall be made shall not extend beyond the Member's life expectancy (or the life expectancy of the Member and his designated beneficiary). (b) In addition to any method of death benefit distribution that may be available under the Plan, a deceased Member's beneficiary may elect to receive the distribution of the Member's Entire SMN Interest in the form of payments in monthly, quarterly, semiannual, or annual cash installments over a period to be determined by the Member or his beneficiary. 68 (i) After the commencement of the distribution of such periodic installments, the Member's beneficiary may direct the Committee to reduce the period over which such periodic installments are to be made, and the amount of each such installment shall be adjusted accordingly. (ii) At the election of the Member's beneficiary, the Committee shall cause the payment of any installment to be accelerated. (c) No method of benefit distribution may be elected under this Section unless it is in accordance with the requirements of Section 12.11. (d) For the purpose of this Section, the life expectancy of a Member and his spouse may, at the Member's or the spouse's election, be redetermined in accordance with the Treasury Regulations under Section 401(a)(9) of the Code. Such election, once made, shall be irrevocable. If no election is made by the date benefits must commence to be distributed under Section 401(a)(9) of the Code, such life expectancies shall not be subject to recalculation. 8. (a) A Member who has attained age 59 1/2 may at any time elect to withdraw any or all of his Entire SMN Interest. (b) A Member who has not attained age 59 1/2 may at any time elect to withdraw any or all of the portions of his Entire SMN Interest (i) attributable to employer discretionary contributions and (ii) consisting of Tax Deferred Contributions if such withdrawal complies with the rules of Section 11.03. 69 SCHEDULE X SPECIAL PROVISIONS APPLICABLE TO FORMER MEMBERS OF THE ------------------------------------------------------ INSTITUTIONAL INVESTOR, INC. EMPLOYEE SAVINGS PLAN -------------------------------------------------- 1. "Service" shall include all of an Employee's service with Institutional Investor, Inc. before April 1, 1990. 2. The Value of the Account attributable to Company Matching Contributions of any Member who was a participant in the Institutional Investor, Inc. Employee Savings Plan ("II Plan") on March 31, 1990, and who became eligible to participate in this Plan on April 1, 1990, shall be fully vested at all times. 3. Each Member's entire interest in the II Plan which is transferred to this Plan upon the effectiveness of the merger (the "Merger") of the II Plan and this Plan ("Entire II Plan Interest") shall be fully vested at all times. 4. Each Member shall have the following investment elections with respect to his Entire II Plan Interest: (a) A special transfer election, effective as of the date of the Merger, in accordance with which his Entire II Plan Interest may be invested in the same way that Tax Deferred Contributions may be invested under Section 5(c) of the Plan (as then in effect). If a Member fails to make this special transfer election, his Entire II Plan Interest shall be invested in fund (C) (as then in effect) at the effective date of the Merger. (b) Regular investment elections in accordance with which his Entire II Plan Interest may be invested in the same way that Pre-Tax Contributions may be invested under the Plan. 5. Except as provided in this Section, each Member's Entire II Plan Interest shall be treated as if it were comprised entirely of Pre-Tax Contributions for all purposes of the Plan including, but not limited to, the application of the loan provisions of the Plan and the Plan's restrictions on a Member's ability to make in-service withdrawals. Notwithstanding the foregoing: (a) The portion of a Member's Entire II Plan Interest that is attributable to employer matching contributions shall be treated as Company Matching Contributions for the purpose of applying the withdrawal rules of Section 11.03 unless such contributions were taken into account in meeting the actual deferral percentage test of Section 401(k)(3) of the Code (the "ADP Test"). (b) The portion of a Member's Entire II Plan Interest that is attributable to his own voluntary contributions shall be treated as After-Tax Contributions. 6. Any Member may obtain a Loan from the Plan with respect to his Entire II Plan Interest without regard for the length of time he has been a Member. 7. (a) In addition to any method of retirement or termination benefit distribution that may be available under the Plan, a Member may elect to receive the distribution of his Entire II Plan Interest in the form of payments over a period certain in monthly, quarterly, semiannual, or annual cash 70 installments. The period over which such payments shall be made shall not extend beyond the Member's life expectancy (or the life expectancy of the Member and his designated beneficiary). (b) In addition to any method of death benefit distribution that may be available under the Plan, a deceased Member's beneficiary may elect to receive the distribution of the Member's Entire II Plan Interest in the form of payments in monthly, quarterly, semiannual, or annual cash installments over a period to be determined by the Member or his beneficiary. (i) After the commencement of the distribution of such periodic installments, the Member's beneficiary may direct the Committee to reduce the period over which such periodic installments are to be made, and the amount of each such installment shall be adjusted accordingly. (ii) At the election of the Member's beneficiary, the Committee shall cause the payment of any installment to be accelerated. (c) No method of benefit distribution may be elected under this Section unless it is in accordance with the requirements of Section 12.11. (d) For the purpose of this Section, the life expectancy of a Member and his spouse may, at the Member's or the spouse's election, be redetermined in accordance with the Treasury Regulations under Section 401(a)(9) of the Code. Such election, once made, shall be irrevocable. If no election is made by the date benefits must commence to be distributed under Section 401(a)(9) of the Code, such life expectancies shall not be subject to recalculation. 8. (a) A Member who has attained age 59 1/2 may at any time elect to withdraw any or all of his Entire II Plan Interest. (b) A Member who has not attained age 59 1/2 may at any time elect to withdraw any or all of the portions of his Entire II Plan Interest attributable to employer matching contributions (unless such contributions were taken into account in meeting the ADP Test) and consisting of Tax Deferred Contributions if such withdrawal complies with the rules of Section 11.03. 71 SCHEDULE XI SPECIAL PROVISIONS APPLICABLE TO FORMER MEMBERS OF THE ------------------------------------------------------ EMPLOYEE STOCK OWNERSHIP PLAN OF AMERICAN BROADCASTING ------------------------------------------------------ COMPANIES, INC. --------------- 1. Any individual who was a Member of the Employee Stock Ownership Plan of American Broadcasting Companies, Inc. (the "ESOP") on July 15, 1991, the effective date of the Merger of the ESOP into this Plan (the "Merger Effective Date"), shall be a Member of this Plan on and after the Merger Effective Date. 2. All benefits under the ESOP at the Merger Effective Date shall be credited in full under this Plan on and after the Merger Effective Date. Any and all rights provided to Members in the ESOP at the Merger Effective Date shall be preserved to such Members under this Plan on and after the Merger Effective Date. 72 SCHEDULE XII SPECIAL PROVISIONS APPLICABLE TO FORMER MEMBERS OF THE ------------------------------------------------------ INTERNATIONAL MEDICAL NEWS GROUP PROFIT SHARING PLAN ---------------------------------------------------- 1. "Service" shall include all of an Employee's service with International Medical News Group and/or Mercury Press before February 6, 1992. 2. The Value of the Account attributable to Company Matching Contributions of any Member who was a participant in the International Medical News Group Profit Sharing Plan (the "IMNG Plan") on December 31, 1991, and who became eligible to participate in this Plan on January 1, 1992, shall be fully vested at all times. 3. Each Member's entire interest in the IMNG Plan which was transferred to this Plan upon the effectiveness of the merger (the "Merger") of the IMNG Plan and this Plan ("Entire IMNG Interest") shall be fully vested at all times. 4. Each Member shall have the following investment elections with respect to his Entire IMNG Interest: (a) A special transfer election, effective as of the date of the Merger, in accordance with which his Entire IMNG Interest may be invested in the same way that Tax Deferred Contributions may be invested under Section 5(c) of the Plan (as then in effect). If a Member fails to make this special transfer election, his Entire IMNG Interest shall be invested in fund (C) (as then in effect) at the effective date of the Merger. (b) Regular investment elections in accordance with which his Entire IMNG Interest may be invested in the same way that Pre-Tax Contributions may be invested under the Plan. 5. Except as provided in paragraph 4, above, each Member's Entire IMNG Interest shall be treated as if it were comprised entirely of Company Matching Contributions for all purposes of the Plan. 6. Any Member may obtain a Loan from the Plan with respect to his Entire IMNG Interest without regard for the length of time he has been a Member. 7. In addition to any method or form or time of retirement, death or termination benefit distribution available under the Plan, a Member (or, in the case of death, the Member's Beneficiary) may elect to receive (or commence to receive) the distribution of the Member's Entire IMNG Interest within the 60-day period following the end of the Plan Year in which he retires, dies or Severs from Service in the form of either (a) a lump-sum distribution or (b) a series of not more than ten annual installments, determined in accordance with Article XII. 73 SCHEDULE XIII SPECIAL PROVISIONS APPLICABLE TO FORMER EMPLOYEES OF RADIO ---------------------------------------------------------- STATIONS KRXY-AM AN -FM ----------------------- Any former employee of Radio Station KRXY-AM or of Station KRXY-FM whose service with KRXY Radio, Inc. was terminated as a result of either (a) the sale of all or substantially all of the assets of KRXY Radio, Inc. pursuant to the agreement between KRXY Radio, Inc. and Jefferson Pilot Communications Company ("Jefferson") dated August 20, 1992, (the "Sales Agreement") or (b) the implementation of the Time Management Brokerage Agreement between KRXY Radio, Inc. and Jefferson from and after August 31, 1992, shall be fully vested in the Value of his Account which is attributable to Company Matching Contributions, effective as of the date of the termination of his or her employment with KRXY Radio, Inc. 74 SCHEDULE XIV SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF WORD, --------------------------------------------------- INCORPORATED, AND WORD DIRECT MARKETING SERVICES, INC. ------------------------------------------------------ 1. All employees of Word, Incorporated and of Word Direct Marketing Services, Inc. shall be treated for all purposes of the Plan as having Severed from Service as of November 30, 1992. 2. Each Member to whom paragraph 1 of this Schedule applies shall be fully vested in his Account as of November 30, 1992. 75 SCHEDULE XV SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF --------------------------------------------- DISCRIMINATING DISTRIBUTION ENTERPRISES, INC. --------------------------------------------- 1. Effective February 1, 1994, Discriminating Distribution Enterprises, Inc. adopted the Plan and became a part of the Company within the meaning of Section 1.01(l). 2. The Service of each individual who is employed by Discriminating Distribution Enterprises, Inc. on February 1, 1994, shall include all employment with Devillier Donegan Enterprises, Inc. before February 1, 1994, that would constitute "Service" if such employment had been with the Corporation. 76 SCHEDULE XVI SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF --------------------------------------------- CAPITAL CITIES/ABC VIDEO PRODUCTIONS, INC. ------------------------------------------ 1. Effective June 1, 1994, Capital Cities/ABC Video Productions, Inc. adopted the Plan and became a part of the Company within the meaning of Section 1.01(l). 2. The Service of each individual who is employed by Capital Cities/ABC Video Productions, Inc. on June 1, 1994, shall include all employment with DIC Animation City, Inc. and DIC Entertainment, L.P. before June 1, 1994, that would constitute "Service" if such employment had been with the Corporation. 77 SCHEDULE XVII SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF CREATIVE SPORTS, -------------------------------------------------------------- INC. AND CREATIVE POST AND TRANSFER, INC. ----------------------------------------- 1. Creative Sports, Inc. and Creative Post and Transfer, Inc. have adopted the Plan, and shall become a part of the Company within the meaning of Section 1.01(l), effective January 1, 1995. 2. The Service of each individual who is employed by Creative Sports, Inc. or Creative Post and Transfer, Inc. on January 1, 1995, shall include all employment with Creative Sports, Inc., Creative Post and Transfer, Inc., and Creative Production Services, Inc. before January 1, 1995, that would constitute "Service" if such employment had been with the Corporation. 78 SCHEDULE XVIII SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF WORLDWIDE ------------------------------------------------------- TELEVISION NEWS CORPORATION --------------------------- 1. Worldwide Television News Corporation has adopted the Plan, and shall become a part of the Company within the meaning of Section 1.01(l), as of February 1, 1995. 2. The Service of each individual who is employed by Worldwide Television News Corporation on February 1, 1995, shall include all employment with Worldwide Television News Corporation before February 1, 1995, that would constitute "Service" if such employment had been with the Corporation. 79 SCHEDULE XIX TRANSITION RULES ADOPTED IN CONNECTION WITH THE JUNE 1, 1994 ------------------------------------------------------------ PLAN RESTATEMENT ---------------- 1. The restatement of the Plan as of June 1, 1994 (the "Restatement") shall not cause a Member's accrued benefit to be less on the date the Restatement was adopted (the "1994 Restatement Date") than it was immediately before the 1994 Restatement Date. 2. If a Member had a nonforfeitable interest in his Matching Account on the day immediately preceding the 1994 Restatement Date, the Member shall thereafter be deemed to have a nonforfeitable interest in his Matching Account, notwithstanding the provisions of the Plan that became effective as of June 1, 1994. 3. If a Member had completed at least three years of Service on the 1994 Restatement Date, whether the Member has completed at least five years of Service for purposes of Section 9.02(c)(1) shall be determined under the provisions of the Plan in effect on the 1994 Restatement Date or the provisions of the Plan in effect on the immediately preceding day, whichever produces the more favorable result for the Member. 80 SCHEDULE XX SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF SPORTSTICKER, ----------------------------------------------------------- INC. ---- 1. SportsTicker, Inc. has adopted the Plan, and shall become a part of the Company within the meaning of Section 1.01(l), effective January 5, 1995. 2. The Service of each individual who is employed by SportsTicker, Inc. on January 5, 1995, shall include all employment with SportsTicker, Inc., and SportsTicker Enterprises, L.P., a Delaware limited partnership, before January 5, 1995, that would constitute "Service" if such employment had been with the Corporation. 81 SCHEDULE XXI SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF WTVG, INC. AND ------------------------------------------------------------ WJRT, INC. ---------- 1. WTVG, Inc. ("WTVG") and WJRT, Inc. ("WJRT") have adopted the Plan, and shall become a part of the Company within the meaning of Section 1.01(l), as of October 1, 1995. 2. The Service of each individual who is employed by WTVG on October 1, 1995, shall include all employment with WTVG before October 1, 1995, that would constitute "Service" if such employment had been with the Corporation. 3. The Service of each individual who is employed by WJRT on October 1, 1995, shall include all employment with WJRT before October 1, 1995, that would constitute "Service" if such employment had been with the Corporation. 4. If on September 30, 1995, an individual then employed by WTVG had satisfied the requirements for eligibility to participate in the WTVG, Inc. Employees Savings & Retirement Plan, the individual shall be deemed to have satisfied the one year of Service requirement imposed by Section 2.01. 5. If on September 30, 1995, an individual then employed by WJRT had satisfied the requirements for eligibility to participate in the WJRT 401(k) Plan & Trust, the individual shall be deemed to have satisfied the one year of Service requirement imposed by Section 2.01. 6. On January 1, 1996, or as soon thereafter as practicable, the WTVG, Inc. Employees Savings & Retirement Plan shall be merged with and into the Plan. The Plan shall separately account for the portion of the Accounts of each Member or Beneficiary that is attributable to allocations made under the WTVG, Inc. Employees Savings & Retirement Plan before the merger (as adjusted to reflect subsequent investment experience). The terms on which a Member or Beneficiary is entitled to a withdrawal or distribution with respect to the portion of his Accounts that is attributable to such allocations under the WTVG, Inc. Employees Savings & Retirement Plan shall be governed by the provisions of that plan as in effect immediately before the merger into the Plan, which provisions are hereby incorporated by reference. 7. On January 1, 1996, or as soon thereafter as practicable, the WJRT 401(k) Plan & Trust shall be merged with and into the Plan. The Plan shall separately account for the portion of the Accounts of each Member or Beneficiary that is attributable to allocations made under the WJRT 401(k) Plan & Trust before the merger (as adjusted to reflect subsequent investment experience). The terms on which a Member or Beneficiary is entitled to a withdrawal or distribution with respect to the portion of his Accounts that is attributable to such allocations under the WTVG, Inc. Employees Savings & Retirement Plan shall be governed by the provisions of that plan as in effect immediately before the merger into the Plan, which provisions are hereby incorporated by reference. 8. Notwithstanding paragraphs 6 and 7 of this Schedule, a Member or Beneficiary described in either of such paragraphs shall be entitled to elect any withdrawal or distribution option offered under the generally applicable provisions of the Plan with respect to the portion of his Accounts that is attributable to the WTVG, Inc. Employees Savings & Retirement Plan or the WJRT 401(k) Plan 82 & Trust (the "predecessor plan"), but only if the Member or Beneficiary complies with the provisions of the predecessor plan that, in accordance with paragraphs 6 and 7, govern the election of withdrawal and distribution options. 83 SCHEDULE XXII SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES OF INTERNATIONAL ----------------------------------------------------------- MEDICAL NEWS GROUP ------------------ Each Member who was employed by the International Medical News Group of Capital Cities Media, Inc. on January 26, 1996, shall be fully vested in his Account as of January 26, 1996. 84 SCHEDULE XXIII MERGER WITH THE WALT DISNEY COMPANY ----------------------------------- 1. This Schedule governs the disposition of the Capital Cities/ABC, Inc. Common Stock Fund and the treatment of each Member's Old Company Matching Account and Company Matching Account following the Merger. For purposes of this Schedule, the term "Capital Cities/ABC, Inc. Common Stock Fund" shall have the meaning given to that term by the Plan as in effect immediately before the Merger Date. 2. Each Member with an interest in the Capital Cities/ABC, Inc. Common Stock Fund shall have the right to instruct the Trustee whether such Member wishes to make a Standard Election, a Stock Election, or a Cash Election for each share of Common Stock represented by the Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund. The terms and conditions under which a Member may provide such an instruction to the Trustee shall be determined by the Trustee in its discretion. If a Member does not provide such an instruction to the Trustee in accordance with such terms and conditions, the Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund shall be governed by the Cash Election. For purposes of this Schedule, the terms "Standard Election," "Stock Election," and "Cash Election" shall have the meanings given to them by the Amended and Restated Agreement and Plan of Reorganization, dated as of July 31, 1995 by and between The Walt Disney Company and the Corporation. 3. The Trustee shall make a Standard Election, a Stock Election, and/or a Cash Election with respect to the shares of Common Stock in the Capital Cities/ABC, Inc. Common Stock Fund in accordance with the instructions it has received (or is deemed to have received) from Members in accordance with paragraph 2 of this Schedule. 4. Any cash received by the Trustee as a result of the Merger in respect of the Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund shall be transferred to the Fidelity Retirement Money Market Fund described in Section 7.03(a)(2) of the Plan (as in effect before April 1, 1998). 5. Any Common Stock received by the Trustee as a result of the Merger in respect of the Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund shall be held initially in The Walt Disney Company Common Stock Fund. 6. Any cash and Common Stock received by the Trustee as a result of the Merger in respect of a Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund shall be credited to the Member's Old Company Matching Account to the extent that the Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund was credited to the Member's Company Matching Account immediately before the Merger. 7. Any cash and Common Stock received by the Trustee as a result of the Merger in respect of a Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund shall be credited to the Member's After-Tax Contribution Account or Pre-Tax Contribution Account to the extent that the Member's interest in the Capital Cities/ABC, Inc. Common Stock Fund was credited to the Member's After- Tax Contribution Account or Pre-Tax Contribution Account, as the case may be, immediately before the Merger. 85 8. Changes in the allocation of amounts credited to a Member's Old Company Matching Account (adjusted to reflect subsequent investment experience) among the Investment Funds shall be governed by the provisions of Section 7.05 of the Plan. 9. Notwithstanding any provision of the Plan to the contrary, Pre-Tax Contributions, After-Tax Contributions, and Rollover Contributions for the month preceding the month in which the Merger Date occurs, to the extent such contributions otherwise would have been allocated to the Capital Cities/ABC, Inc. Common Stock Fund, and all Company Matching Contributions for the month preceding the month in which the Merger Date occurs, shall be allocated to the Fidelity Retirement Money Market Fund described in Section 7.03(a)(2) of the Plan (as in effect before April 1, 1998). Changes in the allocation of such contributions (adjusted to reflect subsequent investment experience) shall be governed by the provisions of Section 7.05 of the Plan. 10. Notwithstanding any provision of the Plan to the contrary, the Committee may suspend, curtail, or postpone certain Plan operations (including, but not limited to, distributions, withdrawals, and loans from the Plan) following approval of the Merger by the shareholders of the Company to the extent that the Committee determines that such action is necessary or appropriate to take into account the unavailability to the Plan of complete, accurate, and current information regarding Capital Cities/ABC, Inc. Common Stock Fund and The Walt Disney Company Common Stock Fund during the period following approval of the Merger by the shareholders of the Company. 86 SCHEDULE XXIV SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES WITH SERVICE FOR ----------------------------------------------------------- THE WALT DISNEY COMPANY ----------------------- 1. Effective February 9, 1996 (the "Merger Date"), the Corporation was acquired by The Walt Disney Company. 2. Notwithstanding any other provision of the Plan to the contrary, effective on and after the Merger Date, the Service of an Employee shall include all employment before the Merger Date with The Walt Disney Company or a related entity employment with which was or would have been required to be taken into account for vesting purposes under Section 411 of the Code and Section 203 of ERISA under a plan maintained by The Walt Disney Company (together, the "Disney Control Group"), but only if: (a) Such employment would constitute Service if it had been with the Corporation; (b) Such employment could not have been disregarded under Section 411(a)(4)(B) of the Code and Section 203(b)(1)(B) of ERISA (years in which an employee declines to contribute to a plan requiring employee contributions) under any plan maintained by the Disney Control Group; and (c) The Employee commences employment with the Company or an Affiliate on or after the Merger Date and either (i) was fully vested under a defined contribution plan maintained by the Disney Control Group on his last date of employment with the Disney Control Group or (ii) commences employment with the Company or an Affiliate no more than five years after his last date of employment with the Disney Control Group. Compensation attributable to such employment shall not be taken into account in determining the Employee's Compensation, unless such compensation would be taken into account for that purpose without regard to this section 2. 87 SCHEDULE XXV SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES AFFECTED BY SALES ------------------------------------------------------------ OF PUBLISHING BUSINESSES ------------------------ 1. Before May 9, 1997, certain subsidiaries and affiliates of the Corporation carried on certain publishing businesses. Between May 9 and September 24, 1997, stock in certain of those subsidiaries and affiliates (the "Publishing Businesses") was sold to certain purchasers (the "Purchasers"). None of the Purchasers was related to the Corporation. Each of the sales that affected Members of the Plan (the "Sales") and the closing date of the Sale is listed below:
Transaction Closing Date ----------- ------------ Sale of ABC Media, Inc. to Knight-Ridder, Inc. May 9, 1997 Sale of NILS Holding Company to CCH Incorporated July 31, 1997 Sale of Great Lakes Media, Inc. to 21st Century Newspapers Acquisition, Inc. August 21, 1997 Sale of Legal Com of Delaware, Inc. to Dolan Media Company August 27, 1997 Sale of Institutional Investor, Inc. to Euromoney Publications PLC August 28, 1997 Sale of Chilton Holding Company, Inc., Hitchcock Holding Company, Inc. and Chilton Media, Inc. to Reed Elsevier, Inc. September 3, 1997 Sale of Farm Progress Holding Company, Inc. to Rural Press (USA) Limited September 5, 1997 Sale of Sutton Industries, Inc. and Pennypower of Kansas, Inc. to Harte-Hanks Communications, Inc. September 24, 1997
2. (a) Effective as of the closing date of each Sale (i) each Publishing Business sold in the Sale shall cease to be a participating employer in the Plan (if it ever was) and (ii) except to the extent provided in subsection (b) below, individuals employed by the Publishing Business shall cease to be eligible to participate in or to receive any additional allocations under the Plan (if he ever was or did). (b) Notwithstanding subsection (a) above, effective as of the closing date of the Sale to Dolan Media Company and the Sale to Rural Press (USA) Limited, the Account of each transferred employee who was eligible to participate in the Plan shall be credited with a matching contribution that is equal to the maximum matching contribution (half the maximum matching contribution in the case of the Sale to Dolan Media Company) to which he would have been entitled on account of contributions made after the closing date if he had remained employed by the Company or an Affiliate (whichever is appropriate) through February 9, 1998, based on expected earnings that the employee would have earned through such date as determined by the Committee. For this purpose, a "transferred employee" shall mean an employee of the Publishing Business on the closing date. 3. Effective as of the closing date of each Sale (except the Sale to Knight-Ridder, Inc.), the Account balance (including any additional allocation based on section 2 above) of each Member (including an employee who would have satisfied the eligibility requirements to become a Member between the closing date and February 9, 1998) employed on the closing date by a Publishing Business sold in the Sale, and his beneficiary, shall be fully vested. 4. (a) The Account balance of each Member employed on or before the closing date by a Publishing Business sold to Knight-Ridder, Inc. was transferred to the defined contribution plan specified in the sales agreement with Knight-Ridder, Inc., the relevant terms of which hereby are 88 incorporated by reference, in a trustee-to-trustee transfer on August 30, 1997 (August 29, 1997, in the case of active employees). The transfers were carried out in the manner specified in the sales agreement. Consistent with Articles VII and VIII, the Company continued to administer each account until the date of the transfer. Consistent with Section 10.01, Members whose accounts were transferred were not allowed to obtain new loans from the Plan after the closing date. Outstanding loans were transferred along with other assets in the Accounts. (b) Consistent with Section 12.01, after the Sale to CCH Incorporated, each Member employed on the closing date by a Publishing Business sold in the Sale was permitted to make a direct rollover of his Account balance to the defined contribution plan specified in the sales agreement with CCH Incorporated, the relevant terms of which hereby are incorporated by reference, in the manner specified in that plan and the sales agreement. (c) Notwithstanding Section 10.11(a)(1), a Member employed on the closing date by a Publishing Business sold to 21st Century Newspapers Acquisition, Inc. shall not be considered in default on a loan from the Plan solely because his employment is terminated as a result of the Sale. Such a Member shall be permitted to repay any loan from the Plan by making direct payments to the Plan in the manner specified in Section 10.08. (d) The Account balance of each Member employed on or before the closing date by a Publishing Business sold to Dolan Media Company was transferred to the defined contribution plan specified in the sales agreement with Dolan Media Company, the relevant terms of which hereby are incorporated by reference, in a trustee-to-trustee transfer. The transfers were carried out in the manner specified in the sales agreement. Outstanding loans were transferred along with other assets in the Accounts. (e) The Account balance of each Member employed on or before the closing date by a Publishing Business sold to Euromoney Publications PLC was transferred to the defined contribution plan specified in the sales agreement with Euromoney Publications PLC, the relevant terms of which hereby are incorporated by reference, in a trustee-to-trustee transfer. The transfers were carried out in the manner specified in the sales agreement. Outstanding loans were transferred along with other assets in the Accounts. (f) Consistent with Section 12.01, after the Sale to Reed Elsevier, Inc., each Member employed on the closing date by a Publishing Business sold in the Sale was permitted to make a direct rollover of his Account balance to the defined contribution plan specified in the sales agreement with Reed Elsevier, Inc., the relevant terms of which hereby are incorporated by reference, in the manner specified in that plan and the sales agreement. (g) Consistent with Section 12.01, after the Sale to Rural Press (USA) Limited, each Member employed on the closing date by a Publishing Business sold in the Sale was permitted to make a direct rollover of his Account balance to the defined contribution plan specified in the sales agreement with Rural Press (USA) Limited, the relevant terms of which hereby are incorporated by reference, in the manner specified in that plan and the sales agreement. (h) The Account balance of each Member employed on or before the closing date by a Publishing Business sold to Harte-Hanks Communications, Inc. was transferred to the defined contribution plan specified in the sales agreement with Harte-Hanks Communications, Inc., the relevant 89 terms of which hereby are incorporated by reference, in a trustee-to-trustee transfer. The transfers were carried out in the manner specified in the sales agreement. Outstanding loans were transferred along with other assets in the Accounts. 90 SCHEDULE XXVI VOLUNTARY EMPLOYEE CONTRIBUTIONS TO ----------------------------------- PUBLISHING PENSION PLAN ----------------------- 1. Certain participants in the Fairchild Publications, Inc. Publishing Pension Plan (the "Publishing Plan") were permitted to make employee contributions under the provisions of Article 15 of the Publishing Plan as in effect up to and including March 31, 1990. Effective after March 31, 1990, no participants were permitted to make employee contributions to the Publishing Plan. Employee contributions to the Publishing Plan were invested in the "Voluntary Employee Contribution Fund." An individual account (the "Voluntary Employee Contribution Account") was maintained within the Voluntary Employee Contribution Fund in the name of each participant who had made employee contributions (the "Contributing Participants"). 2. Effective as of April 1, 1998, the Voluntary Employee Contribution Fund, including all of its constituent Voluntary Employee Contribution Accounts, shall be transferred to and made a part of the Plan. The Voluntary Employee Contribution Fund shall be allocated initially to the Fidelity Retirement Money Market Fund described in Section 7.03(a)(2) of the Plan (as in effect before April 1, 1998). After the transfer, amounts credited to each Employee's Voluntary Employee Contribution Account shall continue to be separately accounted for under the Plan. Except as otherwise specifically provided in this Schedule, such amounts shall be treated in the same manner as After-Tax Contributions for which no Company Matching Contributions are made, including, for example, for purposes of Article VII (Investments and Accounts) and Article XII (Distributions). Terms used in this Schedule that are not otherwise defined in the Plan and this Schedule shall have the same meaning as they do under the Publishing Plan. 3. Notwithstanding anything to the contrary in the Plan: (a) A Contributing Participant may, at any time before his Termination of Employment, elect to withdraw some or all of his Voluntary Employee Contributions, but not the amount of any earnings thereon, with payment thereof to be made in a single sum in cash within 60 days after the end of the month in which the Contributing Participant requests such withdrawal. Such election, to be effective, must be in writing and, if the Contributing Participant has a Spouse at the withdrawal date, must be consented to by his Spouse. A Spouse's consent to an election for a withdrawal must acknowledge the effect of the election (including the form in which the benefit is to be paid) and must be witnessed by a representative of the Plan or a notary public. Notwithstanding this consent requirement, an election by a Contributing Participant shall be deemed valid if he establishes to the satisfaction of the Committee that such written consent cannot be obtained because there is no Spouse or the Spouse cannot be located. A Spouse's consent made under this provision will not be valid with respect (i) to a Spouse other than the Spouse who signed the consent, or (ii) to a changed withdrawal date. A revocation of an election to a withdrawal may be made by a Contributing Participant without the consent of the Spouse at any time before the withdrawal is made. Notices of withdrawals of Voluntary Employee Contributions and Spouses' consents to such withdrawals shall be made in such form as the Committee shall specify. (b) Except as otherwise provided in subsection (c) or (d) below, and subject to Sections 12.05 and 12.07 of the Plan, the distribution of a Contributing Participant's Account Balance shall be made in the form of: 91 (1) a Qualified Joint and Survivor Annuity if on the distribution commencement date the Contributing Participant is living and he has a Spouse, (2) a Life Annuity to the Contributing Participant if on the distribution commencement date he is living and does not have a Spouse, (3) a Life Annuity to the Surviving Spouse, if any, if the Contributing Participant is not living on the distribution commencement date, or (4) three annual cash installments to the Contributing Participant's Beneficiary if the Contributing Participant has died before the distribution commencement date and there is no Surviving Spouse. Any form of payment described in paragraph (1), (2) or (3) shall be the Actuarial Equivalent of the Contributing Participant's Account Balance on the distribution commencement date. The amount of any installment payment pursuant to paragraph (4) above shall be equal to the total amount of the Account Balance then remaining to be paid divided by the remaining number of installments due (including the installment then to be paid). (c) A Contributing Participant (but not a Surviving Spouse) may elect to have distribution of his Account Balance made on the first day of any month following whichever is the later to occur of (i) his Termination of Employment or (ii) the 55th anniversary of his date of birth in one of the optional forms set forth in Section 7.4 of the Publishing Plan, rather than in the form set forth in subsection (b) above. The procedures for the election of such an optional form shall be as set forth in Article XII of the Plan, provided that an election by a Contributing Participant who has a Spouse shall be subject to the notice and consent requirements of Section 7.5 of the Publishing Plan. The optional forms of payment available under this subsection (c) shall be in addition to and not in lieu of any optional forms of payment available under Article XII of the Plan. (d) The Surviving Spouse of a deceased Contributing Participant may elect to have distribution of the Contributing Participant's Account Balance made on the first day of any month following whichever is the later to occur of (i) the Contributing Participant's date of death or (ii) the 55th anniversary of his date of birth in one of the following Actuarial Equivalent alternative forms, rather than in the form set forth in subsection (b) above: (1) in the form of a single sum in cash; or (2) in the form of a Life Annuity with the provision that, in the event of the Spouse's death before receiving at least 120 monthly installments, payment of such benefit shall be continued to the beneficiary designated by the Spouse until a total of 120 monthly installments have been made to the Spouse and beneficiary combined. The optional forms of payment available under this subsection (d) shall be in addition to and not in lieu of any optional forms of payment available under Article XII of the Plan. 92 SCHEDULE XXVII SCHEDULE OF EFFECTIVE DATES --------------------------- This Schedule sets forth the effective dates (not otherwise specified in the Plan) of those provisions of the Plan that have been amended since March 24, 1989, to reflect changes in applicable law. Amendments to the Plan that are not identified in this Schedule (including amendments that are not legally required) shall be effective as of the dates set forth in the instruments adopting the amendments (including the last restatement of the Plan) or in the particular provisions of the Plan that are affected by the amendments, and otherwise as of April 1, 1998. PROVISIONS ADDED OR AMENDED EFFECTIVE JANUARY 1, 1985 - -----------------------------------------------------
Plan (S) 12.11(c) Minimum distribution provision amended to provide that Code (S) 401(a)(9) & a Member is considered to be a 5% owner if he was a 5% IRS Notice 87-28 owner at any time after the end of the year in which he reached age 65 1/2. Plan (S) 9.03(b) Provision governing repayment of prior distributions Code (S) 411(a)(7)(C) & amended to provide that the repayment must be made IRS Notice 87-28 before the earlier of (i) the date on which the Member incurs a five-year break in service, and (ii) the fifth anniversary of the date on which the Member is re-hired. Plan (S) 16.07(b)(4) QDRO provisions amended to provide that an alternate Code (S) 414(p)(10) & payee may elect to receive a distribution at a time IRS Notice 87-28 when a distribution to the Member would be prohibited. PROVISIONS ADDED OR AMENDED EFFECTIVE JANUARY 1, 1987 - ----------------------------------------------------- Plan (S) 16.13 Plan amended to state that it is intended to be a Code (S) 401(a)(27)(B) profit-sharing plan. Plan (S) 1.01(i) Definition of "Internal Revenue Code" updated to refer to the 1986 Code. Plan (S) 1.01(bb) Definition of "highly compensated employee" amended Code (S) 414(q) to incorporate the new statutory definition in Section 414(q). Plan (S) 6.01 Limit on elective deferrals amended to incorporate Code (S) 402(g) the new $7,000 limit. Plan (S) 6.05 Section 415 limits amended to reflect the fact that Code (S) 415(c) & all employee after-tax contributions count as annual IRS Notice 87-21 additions, and to incorporate the statutory limits by
93
reference. Plan (S) 6.02 Actual deferral percentage provisions amended to Code (S) 401(k)(3) incorporate the reduced statutory deferral limits. Plan (S) 6.03 New section added to incorporate the contribution Code (S) 401(m) percentage limit applicable to employee after-tax contributions and employer matching contributions. Plan (S) 6.07(b) New section added to permit the return of elective Code (S) 402(g) deferrals that exceed the $7,000 limit. Plan (S) 6.07(c)(2) New section added to permit recharacterization of Code (S) 401(k)(8)(A)(ii) & elective deferrals that exceed the actual deferral Treas. Reg. (S) 1.401(k)-1(f) percentage limit. Plan (S) 6.07(c)(1) New section added to permit distribution of elective Code (S) 401(k)(8)(A)(i) deferrals that exceed the actual deferral percentage limit. Plan (S) 6.07(e) New section added to permit distribution of employee Code (S) 401(m)(6) after-tax contributions and employer matching contributions that exceed the contribution percentage limit. Plan (S) 5.08 Provisions governing the withdrawal of after-tax Code (S) 72(e)(8) & contributions amended to reflect the pro-rata basis IRS Notice 87-13 recovery rule and the transition rule for pre-1987 contributions. PROVISIONS ADDED OR AMENDED EFFECTIVE DECEMBER 22, 1987 - ------------------------------------------------------- Plan (S) 5.07 Provision governing return of contributions amended to ERISA (S) 403(c)(2)(B) eliminate provision allowing the return of Rev. Rul. 91-4 contributions conditioned on the qualification of the Plan. PROVISIONS ADDED OR AMENDED EFFECTIVE JANUARY 1, 1988 - ----------------------------------------------------- Plan (S) 6.01 Elective deferral limit amended to provide that a Code (S) 401(a)(30) Member's deferrals under the Plan, and under any other plan sponsored by a member of the controlled group, may not exceed $7,000 (indexed). Plan (S) 6.07(b) Corrective provisions amended to provide that the Plan Code (S) 401(a)(30) will automatically distribute deferrals that exceed the limit specified in section 401(a)(30).
PROVISIONS ADDED OR AMENDED EFFECTIVE AUGUST 22, 1988 - ----------------------------------------------------- 94
Plan (S)(S) 11.04, 12.02 Distribution provisions amended to provide that if a Code 411(a)(11) & Treas. Reg. Member's vested account exceeds $3,500, he must receive (S) 1.411(a)-11(c)(2) a voluntary distribution notice 30-90 days before a distribution. PROVISIONS ADDED OR AMENDED EFFECTIVE JANUARY 1, 1989 - ----------------------------------------------------- Plan (S)(S) 1.01(o), 3.02 Definition of compensation amended to incorporate Code (S) 401(a)(17) the $200,000 limit. Plan (S) 1.01(bb) Definition of highly compensated employee revised to Code (S) 414(q) reflect the amendments made by the Tax Reform Act of 1986. Plan (S) 6.04 New section added to preclude multiple use of the Code (S) 401(m)(9) & Treas. alternative limit in the actual deferral percentage Reg. (S) 1.401(m)-2 test and the actual contribution percentage test. Plan (S) 6.07 Section amended to clarify calculation of excess Code (S) 401(k), 401(m) contributions and excess aggregate contributions. Plan (S) 12.11 Minimum distribution rules amended to provide that Code (S) 401(a)(9) distributions generally must commence by April 1 following the year in which the Member reaches age 70 1/2, even if the Member is still actively employed. Plan (S) 11.03 Hardship withdrawal provisions amended to provide Treas. Reg. (S) 1.401(k)-1(d) that Members may not withdraw post-1988 earnings on section 401(k) contributions. PROVISIONS ADDED OR AMENDED EFFECTIVE JANUARY 1, 1990 - ----------------------------------------------------- Plan Art. X Plan loan provisions amended to incorporate the 29 C.F.R. (S) 2550.408b-1 substantive rules in the final plan loan regulations. PROVISIONS ADDED OR AMENDED EFFECTIVE JANUARY 1, 1993 - ----------------------------------------------------- Plan (S) 12.12 New section added to provide for the direct rollover of Code (S) 401(a)(31) eligible rollover distributions from the Plan to an eligible retirement plan. PROVISIONS ADDED OR AMENDED EFFECTIVE AUGUST 5, 1993 - ---------------------------------------------------- Plan (S) 4.05(b) Definition of service amended to provide credit for family
95
29 C.F.R. (S) 825.215 and medical leave. PROVISIONS ADDED OR AMENDED EFFECTIVE JANUARY 1, 1994 - ----------------------------------------------------- Plan (S)(S) 1.01(o), 3.02 Definition of compensation amended to reflect the Code (S) 401(a)(17) reduction in the annual limit from $200,000 (indexed) to $150,000 (indexed). Plan (S)(S) 11.04, 12.02(b) Notice and consent provisions amended to provide that a IRS Notice 93-26 participant may elect to receive a distribution less than 30 days after he receives the applicable distribution notice. PROVISIONS ADDED OR AMENDED EFFECTIVE JUNE 1, 1994 - -------------------------------------------------- Plan (S) 7.03 Participant-directed investment provisions amended ERISA (S) 404(c) & to offer a wider range of investment options. 29 C.F.R. (S) 2550.404c-1 Plan (S) 7.04 Provision governing changes in investment elections ERISA (S) 404(c) & for future contributions amended to permit frequent 29 C.F.R. (S) 2550.404c-1 changes. Plan (S) 7.05 Provision governing transfer of funds between ERISA (S) 404(c) & available investment options amended to permit 29 C.F.R. (S) 2550.404c-1 frequent transfers. Plan (S) 11.03 Hardship withdrawal provisions for section 401(k) Treas. Reg. (S) 1.401(k)-1(d) & contributions amended to incorporate the new IRS Notice 88-127 regulatory safe harbors. PROVISIONS ADDED OR AMENDED EFFECTIVE FOR CALENDAR YEARS BEGINNING ON OR AFTER - ------------------------------------------------------------------------------ JANUARY 1, 1997 - --------------- Plan (S) 12.11 Minimum distribution requirements amended to Code (S) 401(a)(9) eliminate the requirement that distributions commence before an employee retires and make other related changes PROVISIONS ADDED OR AMENDED EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER - -------------------------------------------------------------------------- JANUARY 1, 1997 - --------------- Plan (S) 1.01(bb) Definition of highly compensated employee revised to Code (S) 414(q) reflect the amendments made by the Small Business Job
96
Protection Act of 1996. Plan (S)(S) 1.01(bb), 3.02 Family aggregation rules eliminated. Code (S)(S) 401(a)(17), 414(q) Plan (S) 6.07 Section amended to require allocation of excess Code (S) 401(k) contributions among highly compensated employees based on the amount of each employee's elective contributions. Plan (S) 6.07 Section amended to require allocation of excess Code (S) 401(m) aggregate contributions among highly compensated employees based on the amount of each employee's after-tax and matching contributions.
EX-21 4 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 THE WALT DISNEY COMPANY AND SUBSIDIARIES Name of subsidiary State of Incorporation --------------------------------------------------------------- ABC, Inc. New York ABC Holding Company Inc. Delaware American Broadcasting Companies, Inc. Delaware Buena Vista Home Video, Inc. California Buena Vista International, Inc. California Buena Vista Television California Disney Enterprises, Inc. Delaware Lake Buena Vista Communities, Inc. Delaware Miramax Film Corp. New York The Disney Channel California The Disney Store, Inc. California Walt Disney Pictures and Television California Walt Disney World Co. Delaware WCO Parent Corporation Delaware
EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF INCOME FOUND ON THE COMPANY'S FORM 10-K FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 U.S. DOLLARS 12-MOS SEP-30-1997 OCT-01-1997 SEP-30-1998 1 127 1,814 3,999 0 899 9,375 15,728 5,382 41,378 7,525 9,562 0 0 8,995 10,393 41,378 22,976 22,976 0 18,961 236 0 622 3,157 1,307 1,850 0 0 0 1,850 0.89 0.89
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