UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999 Commission File Number 1-11605
The Walt Disney Company
Incorporated in Delaware I.R.S. Employer Identification
No. 95-4545390
500 South Buena Vista Street, Burbank, California 91521
(818) 560-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
There were 2,059,309,922 shares of common stock outstanding as of May 11, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share data (unaudited)
[CAPTION]
<TABLE>
<S> <C> <C>
Three Months Six Months Ended
Ended
March 31 March 31
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- ---------
Revenues $5,510 $5,242 $12,099 $11,581
Costs and expenses (4,781) (4,393) (10,340) (9,240)
Gain on sale of Starwave - - 345 -
-------- -------- -------- ---------
Operating income 729 849 2,104 2,341
Corporate and other activities (85) (48) (137) (126)
Equity in Infoseek loss (75) - (159) -
Net interest expense (174) (150) (338) (284)
-------- -------- -------- ---------
Income before income taxes 395 651 1,470 1,931
Income taxes (169) (267) (622) (792)
-------- -------- -------- ---------
Net income $ 226 $ 384 $ 848 $1,139
======== ======== ======== =========
Earnings per share
Diluted $ 0.11 $ 0.18 $ 0.41 $ 0.55
======== ======== ======== =========
Basic $ 0.11 $ 0.19 $ 0.41 $ 0.56
======== ======== ======== =========
Average number of common and
common equivalent shares outstanding
Diluted 2,089 2,079 2,083 2,073
======== ======== ======== =========
Basic 2,054 2,037 2,052 2,028
======== ======== ======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
In millions, except share data
[CAPTION]
<TABLE>
<S> <C> <C>
March 31, September 30,
1999 1998
----------- ----------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 790 $ 127
Receivables 4,036 3,999
Inventories 850 899
Film and television costs 3,381 3,223
Deferred income taxes 455 463
Other assets 814 664
----- ------
Total current assets 10,326 9,375
Film and television costs 2,575 2,506
Investments 2,549 1,814
Theme parks, resorts and other property,
at cost
Attractions, buildings and equipment 14,775 14,037
Accumulated depreciation (5,769) (5,382)
------ ------
9,006 8,655
Projects in progress 1,361 1,280
Land 414 411
---- ----
10,781 10,346
Intangible assets, net 15,800 15,769
Other assets 1,443 1,568
----- -----
$ 43,474 $41,378
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable and other $ 4,210 $ 4,767
accrued liabilities
Current portion of borrowings 2,017 2,123
Unearned royalties and other advances 893 635
----- -----
Total current liabilities 7,120 7,525
Borrowings 10,523 9,562
Deferred income taxes 2,804 2,488
Other long term liabilities, unearned 2,672 2,415
royalties and other advances
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 9,145 8,995
Retained earnings 11,829 10,981
Cumulative translation and other (6) 13
------ -----
20,968 19,989
Treasury stock, at cost, 29 million shares (605) (593)
Shares held by TWDC Stock Compensation
Fund, at cost - (8) (8)
---- ----
0.3 million and 0.4 million shares
20,355 19,388
------ ------
$ 43,474 $ 41,378
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions (unaudited)
[CAPTION]
<TABLE>
<S> <C> <C>
Six Months Ended
March 31
--------------------------
1999 1998
---------- ----------
NET INCOME $ 848 $ 1,139
------- --------
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 1,287 1,159
Depreciation 408 373
Amortization of intangibles 215 213
Gain on sale of Starwave (345) -
Other 164 (26)
CHANGES IN Assets and Liabilities (98) (321)
------- --------
1,631 1,398
------- --------
CASH PROVIDED BY OPERATIONS 2,479 2,537
------- --------
INVESTING ACTIVITIES
Film and television costs (1,625) (1,683)
Investments in theme parks, resorts and (737) (864)
other property
Acquisitions (net of cash acquired) (230) (183)
Other 2 175
------- --------
-------
(2,590) (2,555)
------- --------
FINANCING ACTIVITIES
Commercial paper borrowings, net 134 456
Other borrowings 1,318 995
Reduction of borrowings (758) (1,050)
Dividends - (197)
Repurchases of common stock (19) -
Other 99 94
------- --------
774 298
------- --------
Increase in Cash and Cash Equivalents 663 280
Cash and Cash Equivalents, Beginning of Period 127 317
------- --------
Cash and Cash Equivalents, End of Period $ 790 $ 597
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. These condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation
have been reflected in these condensed consolidated financial statements.
Operating results for the quarter are not necessarily indicative of the
results that may be expected for the year ending September 30, 1999. Certain
reclassifications have been made in the fiscal 1998 financial statements to
conform to the fiscal 1999 presentation. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1998.
2. During the six months, the Company received net proceeds of approximately
$134 million from commercial paper activity and an additional $1.3 billion
through other financing arrangements having effective interest rates ranging
from 4.75% to 5.29% and maturities in fiscal 2000 through 2039. Some of this
debt is denominated in foreign currencies, which the Company has converted
into U.S. dollar-denominated LIBOR-based variable rate debt by entering into
cross-currency swaps.
3. In April 1997, the Company purchased a significant equity stake in Starwave
Corporation ("Starwave"), an internet technology company. In connection with
the acquisition, the Company was granted an option to purchase substantially
all the remaining shares of Starwave, which the Company exercised during the
quarter ended June 30, 1998. Thereafter, the accounts of Starwave were
included in the Company's consolidated financial statements.
On June 18, 1998, the Company reached an agreement for the acquisition of
Starwave by Infoseek Corporation ("Infoseek"), a publicly held internet
search company, the purchase of additional shares of Infoseek common stock
for $70 million and the purchase of warrants for $139 million, enabling it,
under certain circumstances, to achieve a majority stake in Infoseek. These
warrants vest over a three-year period and expire in five years. On November
18, 1998, the shareholders of both Infoseek and Starwave approved the
acquisition. As a result of the acquisition and the Company's purchase of
additional shares of Infoseek common stock pursuant to the merger agreement,
the Company owns approximately 43% of Infoseek's outstanding common stock.
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Upon completion of this transaction, the Company recognized a non-cash gain
of $345 million. The gain reflected the market value of the Infoseek shares
received under a partial sale accounting model. As a result of its investment
in Infoseek, the Company recorded intangible assets of $460 million,
including $421 million of goodwill, which are being amortized over an
estimated useful life of two years. The Company determined the economic
useful life of the acquired goodwill by giving consideration to the useful
lives of Infoseek's identifiable intangible assets, consisting of developed
technology, trademarks and in-place workforce. In addition, the Company
considered the competitive environment and the rapid pace of technological
change in the internet industry.
The Company accounts for its investment in Infoseek under the equity method
of accounting. For the quarter and six months ended March 31, 1999, the
Company recorded $60 million and $90 million of amortization related to
intangible assets, respectively. During the first quarter, the Company
recorded a charge of $44 million for purchased in-process research and
development expenditures. The amortization of intangible assets and the
charge for research and development expenditures have been reflected in
"Equity in Infoseek loss" in the Company's Condensed Consolidated Statements
of Income. As of March 31, 1999, the Company's recorded investment in
Infoseek was $644 million. The quoted market value of the Company's Infoseek
shares at March 31, 1999 was approximately $1.9 billion.
4. Dividends per share for the quarter and six months ended March 31, 1998 were
$0.05 and $0.09, respectively. On September 29, 1998, the Company's Board of
Directors adopted a policy of considering the declaration and payment of
dividends on an annual, rather than a quarterly basis, to reduce costs and
simplify payments to stockholders. Accordingly, there were no dividend
payments for the six month period ended March 31, 1999.
5. Diluted earnings per share amounts are calculated using the treasury stock
method and are based upon the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation in periods in which they would have an
anti-dilutive effect. The difference between basic and diluted earnings per
share for the Company is solely attributable to stock options, which are
considered anti-dilutive when option exercise prices exceed the weighted
average market price per share of common stock during the period. For the
quarters ended March 31, 1999 and 1998, options for 17 million and 6 million
shares, respectively, were excluded from the diluted earnings per share
calculation. For the six-month periods, options for 22 million and 9 million
shares, respectively, were excluded.
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. In the first quarter, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. This statement requires
that the Company present comprehensive income, a measure that reflects all
nonowner changes in equity, in addition to net income. Comprehensive income
(loss) for the periods ended March 31, 1999 and 1998 is as follows (in
millions):
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- ---------- ---------- ----------
Cumulative translation and other
adjustments, net of tax$ (3) $ 18 $(11) $ 12
Net income 226 384 848 1,139
---- ---- --- -----
Comprehensive income $223 $ 402 $837 $1,151
=== ==== === =====
</TABLE>
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations
SEASONALITY
The Company's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter and six months ended March
31, 1999 for each business segment, and for the Company as a whole, are not
necessarily indicative of results to be expected for the full year.
Creative Content revenues fluctuate based upon the timing of theatrical
motion picture and home video releases and seasonal consumer purchasing
behavior. Release dates for theatrical and home video products are determined by
several factors, including timing of vacation and holiday periods and
competition in the market.
Broadcasting revenues are influenced by advertiser demand and the seasonal
nature of programming, and generally peak in the spring and fall.
Theme Parks and Resorts revenues fluctuate with changes in theme 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.
RESULTS OF OPERATIONS
Consolidated Results - Quarter
[CAPTION]
For the Quarter Ended March 31,
(unaudited; in millions, except per share data)
<TABLE>
<S> <C> <C> <C>
1999 1998 % Change
Revenues $5,510 $5,242 5%
Costs and expenses (4,781) (4,393) (9)%
------- -------
Operating income 729 849 (14)%
Corporate and other (85) (48) (77)%
activities
Equity in Infoseek loss (75) - n/m
Net interest expense (174) (150) (16)%
------ -------
Income before income taxes 395 651 (39)%
Income taxes (169) (267) 37%
------ -------
Net income $ 226 $ 384 (41)%
=== ===
Earnings per share
Diluted $ 0.11 $ 0.18 (39)%
==== =====
Basic $ 0.11 $ 0.19 (42)%
==== =====
Amortization of
intangible assets included
in operating income $ 107 $ 107
</TABLE>
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Net income and diluted earnings per share for the quarter decreased 41%
and 39% to $226 million and $0.11, respectively. These results were driven by a
decline in operating income, an increase in net interest expense, equity in
Infoseek's loss, which includes amortization of intangible assets of $60
million, and higher net expense associated with corporate and other activities.
Excluding the impact of Infoseek, net income and earnings per share were $269
million and $0.13, respectively. Decreased operating income reflected
significantly lower results from Creative Content, partially offset by
improvements from Theme Parks and Resorts and Broadcasting. The increase in net
expense associated with corporate and other activities reflected a one-time $38
million gain on the sale of the Company's investment in Scandinavian Broadcast
System in the prior year quarter, offset by improved results from the Company's
equity investments, including Euro Disney, A&E Television and Lifetime
Television in the current period. Net interest expense increased due to gains
from sales of investments in the prior year and higher average debt balances in
the current quarter.
Consolidated Results - Six Months
[CAPTION]
For the Six Months Ended March 31,
(unaudited; in millions, except per share data)
<TABLE>
<S> <C> <C> <C>
1999 1998 % Change
Revenues $12,099 $11,581 4%
Costs and expenses (10,340) (9,240) (12)%
Gain on sale of Stawave 345 - n/m
------ ------
Operating income 2,104 2,341 (10)%
Corporate and other activities (137) (126) (9)%
Equity in Infoseek loss (159) - n/m
Net interest expense (338) (284) (19)%
Income before income taxes 1,470 1,931 (24)%
taxes
Income taxes (622) (792) 21%
---- ----
Net income $ 848 $ 1,139 (26)%
===
Earnings per share
Diluted $ 0.41 $ 0.55 (25)%
==== =====
Basic $ 0.41 $ 0.56 (27)%
==== =====
Amortization of intangible assets
included in operating income $ 215 $ 213
=== ===
</TABLE>
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Net income and diluted earnings per share decreased 26% and 25% to $848
million and $0.41, respectively. These results were driven by a decrease in
operating income, equity in Infoseek's loss, which includes amortization of
intangible assets of $90 million and a $44 million charge for purchased
in-process research and development expenditures, and increases in net interest
expense and net expense associated with corporate and other activities,
partially offset by the gain on the sale of Starwave, as discussed below.
Excluding the impact of Infoseek, operating income, net income and earnings per
share were $1.8 billion, $739 million and $0.36, respectively. Decreased
operating income reflected significantly lower results from Creative Content and
Broadcasting activities, partially offset by improvements from Theme Parks and
Resorts. Net interest expense increased due to gains from sales of investments
in the prior year and higher average debt balances in the current year. Net
expense associated with corporate and other activities reflected a one-time gain
on the sale of the Company's investment in Scandinavian Broadcast System in the
prior period, partially offset by improved results from the Company's equity
investments, including Euro Disney, A&E Television and Lifetime Television in
the current period.
While the Company expects operating results to improve somewhat during the
second half of the year compared to the prior year, these improvements are not
expected to overcome the declines experienced in the first six months of the
year. As a result, the Company is in the process of taking a number of steps,
including an across-the-board assessment of its cost structure, to address the
situation.
On November 18, 1998, the Company completed its acquisition of a 43%
equity interest in Infoseek, an internet search company (discussed more fully in
footnote 3 to the financial statements). In that transaction, Infoseek exchanged
shares of its common stock for the Company's interest in Starwave Corporation,
an internet technology company. As a result of the exchange of its Starwave
investment, the Company recognized a non-cash gain of $345 million. Also during
the six months, the Company recorded $90 million of amortization related to
goodwill and other identifiable intangible assets and a charge of $44 million
for purchased in-process research and development expenditures, which have been
reflected in "Equity in Infoseek loss" on the Company's Condensed Consolidated
Statements of Income. Acquired intangible assets are being amortized over a
period of two years. The impact of such charges is expected to be $120 million
for the remaining six months of 1999, $240 million in 2000 and $39 million in
2001.
The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, consisting of developed technology, trademarks and in-place workforce.
In addition, the company considered the competitive environment and the rapid
pace of technological change in the internet industry. <PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Business Segment Results - Quarter
[CAPTION]
<TABLE>
<S> <C> <C> <C>
For the Quarter Ended March 31,
(unaudited; in millions)
-----------------------------------
1999 1998 %Change
Revenues:
Creative Content $2,393 $2,409 (1)%
Broadcasting 1,709 1,589 8%
Theme Parks & Resorts 1,408 1,244 13%
----- -----
Total $5,510 $5,242 5%
===== =====
Operating Income: (1)
Creative Content $ 163 $ 339 (52)%
Broadcasting 261 239 9%
Theme Parks & Resorts 305 271 13%
--- ---
Total $ 729 $ 849 (14)%
=== ===
<PAGE>
(1) Includes depreciation and amortization (excluding film costs) of:
Creative Content $ 50 $ 50
Broadcasting 138 135
Theme Parks & Resorts 113 104
$ 301 $ 289
=== ===
</TABLE>
Creative Content
Revenues decreased 1% or $16 million to $2.4 billion, driven by declines
of $154 million in domestic home video, $76 million in worldwide character
merchandise licensing and $16 million in the Disney Stores domestically,
partially offset by growth of $141 million in worldwide theatrical motion
picture distribution, $51 million in international home video and $16 million in
international television distribution. The decline in domestic home video
revenues reflected fewer unit sales, despite the successful release of Mulan,
which faced difficult comparisons to the combined revenue from The Little
Mermaid and Peter Pan in the prior year quarter. Softness in worldwide character
merchandise licensing revenues was primarily attributable to lower activity
domestically, as sales of merchandise associated with this year's film and
television programming fell short of prior year performance, and continued
economic weakness abroad. Lower revenues in the Disney Stores resulted from a
decline in comparative store sales domestically. Growth in worldwide theatrical
motion picture distribution revenues was primarily attributable to the box
office successes of A Bug's Life, Enemy of the State and Armageddon
internationally and A Civil Action domestically. Improved international home
video revenues were driven by the successful release of The Lion King II:
Simba's Pride. Growth in international television distribution revenue reflected
increased activity, primarily in Europe.
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Operating income decreased 52% or $176 million to $163 million, reflecting
declines in domestic home video, worldwide character merchandise licensing and
The Disney Stores domestically. These decreases were partially offset by
increased results in worldwide theatrical motion picture distribution,
international home video and international television distribution. Costs and
expenses, which consist primarily of production cost amortization, distribution
and selling expenses, participations, product cost, labor and occupancy,
increased 8% or $160 million. Increases in production cost amortization and
selling expenses, primarily due to an increase in the proportion of recent
titles versus classic animated library titles in the current quarter compared
to the prior year quarter, contributed to the decline in domestic home video
results. Improved results in worldwide theatrical motion picture
distribution, international home video and international television
distribution were partially offset by higher distribution costs and production
cost amortization.
Broadcasting
Revenues increased 8% or $120 million to $1.7 billion, driven by growth of
$59 million at ESPN and the Disney Channel, $48 million at the television
network and $23 million at the radio network and stations. Revenue growth at
ESPN was driven by increased advertising revenues and subscriber growth, and
increases at the Disney Channel were due to subscriber growth and international
expansion. Despite the continuing decline in viewership at all major networks,
revenues at the television network increased due to strength in the primetime
national advertising market. Increases at the radio network and stations were
driven by strength in local advertising markets.
Operating income increased 9% or $22 million to $261 million, reflecting
increased revenues at the cable, television and radio networks as well as at the
radio stations, partially offset by ongoing softness in local television station
advertising revenues and higher programming costs. Costs and expenses, which
consist primarily of programming rights and amortization, production costs,
distribution and selling expenses and labor costs, increased 7% or $98 million,
driven by higher cost television network and cable programming.
Theme Parks and Resorts
Revenues increased 13% or $164 million to $1.4 billion, driven by growth
of $94 million at the Walt Disney World Resort, due primarily to record theme
park attendance and increased guest spending, and $42 million from the Disney
Cruise Line, which launched in the fourth quarter of the prior year. Record
attendance at the Walt Disney World Resort was driven by the new theme park,
Disney's Animal Kingdom.
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Operating income increased $34 million or 13% to $305 million, resulting
primarily from record theme park attendance at the Walt Disney World Resort and
a full quarter of operations at the 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 $130 million or 13%. Increased operating costs were
driven by higher theme park attendance and Disney Cruise Line operations.
[CAPTION]
Business Segment Results - Six Months
<TABLE>
<S> <C> <C> <C>
For the Six Months Ended March 31,
(unaudited; in millions)
-----------------------------------
1999 1998 %Change
---- ----
Revenues:
Creative Content $5,334 $5,424 (2)%
Broadcasting 3,923 3,653 7%
Theme Parks & Resorts 2,842 2,504 13%
----- -----
Total $12,099 $11,581 4%
====== ======
Operating Income: (1)
Creative Content $ 593 $1,039 (43)%
Broadcasting 526 744 (29)%
Theme Parks & Resorts 640 558 15%
---- ---
1,759 2,341 (25)%
Gain on Sale of Starwave 345 - n/m
----- -----
Total $2,104 $ 2,341 (10)%
===== =====
<PAGE>
(1) Includes depreciation and amortization (excluding film costs) of:
Creative Content $ 101 $ 102
Broadcasting 275 269
Theme Parks & Resorts 233 202
$ 609 $ 573
=== ===
</TABLE>
Creative Content
Revenues decreased 2% or $90 million to $5.3 billion, driven by declines
of $256 million in domestic home video, $90 million in worldwide character
merchandise licensing, and $33 million in the Disney Stores, primarily in the
domestic market, partially offset by growth of $252 million in worldwide
theatrical motion picture distribution. In domestic home video, The Lion King
II: Simba's Pride and Mulan, while successful, faced difficult comparisons to
the combined results of The Little Mermaid, Hercules, Peter Pan and the
live-action release of George of the Jungle in the prior year. Lower character
merchandise licensing revenues were primarily attributable to declines in
domestic activity and continued economic weakness abroad. Lower revenues from
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
the Disney Stores reflected a decline in comparative store sales domestically.
Growth in worldwide theatrical motion picture distribution revenues was
primarily attributable to the box office successes of The Waterboy, A Bug's Life
and Enemy of the State domestically and A Bug's Life and Armageddon
internationally.
Operating income decreased 43% or $446 million to $593 million, reflecting
declines in home video, primarily domestically, worldwide character merchandise
licensing and the Disney Stores domestically. These decreases were partially
offset by improved results in worldwide theatrical motion picture distribution.
Costs and expenses increased 8% or $356 million. Increases in production cost
amortization and selling expenses, primarily due to an increase in the
proportion of recent titles versus classic animated library titles in the
current period, contributed to the decline in home video results. The impact
from fewer library releases is expected to continue, as there are no
additional library releases planned for the remainder of the year. The
improved results in worldwide theatrical motion picture distribution
were partially offset by higher distribution costs and production and
participation cost amortization. Increases in production cost amortization are
reflective of industry trends; as competition for creative talent has increased,
costs within the industry have increased at a rate significantly higher than
inflation.
Broadcasting
Revenues increased 7% or $270 million to $3.9 billion, driven by growth of
$213 million at ESPN and the Disney Channel, $42 million at the television
network and $38 million at the radio network and stations. Revenue growth at
ESPN was driven by increased advertising revenues and subscriber growth as well
as additional NFL games under the 1998 NFL contract. Increases at the Disney
Channel were due to subscriber growth and international expansion. Television
network revenues grew as a result of strength in the primetime national
advertising market, while growth at the radio network and stations was driven by
strength in local advertising markets. Notwithstanding the growth in revenues in
the national television advertising market, 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.
Operating income decreased 29% or $218 million to $526 million, reflecting
increased programming costs at the television network and ESPN, partially offset
by revenue increases at the cable, television and radio networks and radio
stations. Costs and expenses increased 17% or $488 million, driven by higher NFL
and other programming costs at the television network and ESPN. In addition,
higher program
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
amortization at the television network reflected a reduction in
benefits from the ABC acquisition.
The programming rights fees under the 1998 NFL 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 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.
Theme Parks and Resorts
Revenues increased 13% or $338 million to $2.8 billion, driven by growth
of $169 million at the Walt Disney World Resort, due primarily to record theme
park attendance and increased guest spending, and $93 million from the Disney
Cruise Line, which launched in the fourth quarter of the prior year. Revenues
also increased $35 million due to record attendance at Disneyland. Record
attendance at the Walt Disney World Resort was driven by the new theme park,
Disney's Animal Kingdom. Record attendance at Disneyland was due in part to a
successful Christmas holiday program during the first quarter.
Operating income increased $82 million or 15% to $640 million, resulting
primarily from record theme park attendance at both the Walt Disney World Resort
and Disneyland and a full period of operations at the Disney Cruise Line. Costs
and expenses increased $256 million or 13%. Increased operating costs were
driven by higher theme park attendance and Disney Cruise Line operations.
Financial Condition
For the six months ended March 31, 1999, cash provided by operations
decreased $58 million to $2.5 billion, driven by decreased net income, partially
offset by lower tax payments, due to timing, and higher film and television
amortization.
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
During the six months, the Company invested $1.3 billion to develop,
produce and acquire rights to film and television properties and $310 million in
connection with a prior year agreement to acquire a film library.
During the six months, the Company invested $737 million in theme parks,
resorts and other properties. These expenditures reflected continued expansion
activities related to Disney's California Adventure, Disney's Animal Kingdom,
Disney Cruise Line and certain resort facilities at the Walt Disney World
Resort.
Total commitments to purchase broadcast programming approximated $13.1
billion at March 31, 1999, including approximately $8 billion related to NFL
programming. Substantially all of this amount is payable over the next six
years.
The Company expects the ABC Television Network, ESPN and the Company's
television and radio stations to continue to enter into programming commitments
to purchase the broadcast rights for various feature films, sports and other
programming.
During the six months, the Company received approximately $134 million
from net commercial paper activity and $1.3 billion from other financing
arrangements. Commercial paper borrowings outstanding as of March 31, 1999
totaled $2.5 billion, with maturities of up to one year, supported by bank
facilities totaling $4.5 billion, which expire in one to three years and allow
for borrowings at various interest rates. The Company also has the ability to
borrow under a U.S. shelf registration statement and a euro medium-term note
program, which collectively permit the issuance of up to approximately $4.5
billion of additional debt.
The Company believes that its financial condition is strong and that its
cash, other liquid assets, operating cash flows, access to equity capital
markets and borrowing capacity, taken together, provide adequate resources to
fund ongoing operating requirements and future capital expenditures related to
the expansion of existing businesses and development of new projects.
Other Matters
During the quarter, the Company continued its efforts to minimize the risk
of 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. The Company's overall plan to address the Y2K
problem is described more fully in its 1998 Annual Report on Form 10-K, and the
following is an update of the information included therein.
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
IT Systems. Remediation efforts (including testing and certification)
continued with respect to the Company's previously identified "critical" and
"important" business ("information technology" or "IT") systems. The Company
continues to expect that the bulk of these systems will be tested and certified
as Y2K compliant by July 31, 1999, although remediation of a small number of
critical or important business systems may not be completed until October 1999.
Non-IT Systems. The Company has completed its inventory of third-party and
internal embedded, or "non-IT" systems. Company representatives continue to meet
with vendors of equipment used in the Company's theme parks, hotels and owned
office buildings and with property managers of important leased properties
worldwide to ensure that the equipment is Y2K compliant. Testing for these
embedded systems is expected to be completed by July 31, 1999. Additionally,
testing plans are being developed and some vendor validation has occurred for
other key embedded systems, such as satellite transmission, broadcast and cruise
line navigation and propulsion systems. Testing for some of these systems will
require taking them off-line for varying periods, which may cause temporary
interruptions in particular business operations, although such interruptions are
not expected to materially impact operations. In appropriate cases, the Company
will be relying upon vendors' laboratory testing and certification documents to
validate that the related systems are Y2K compliant. Where the Company does not
have adequate assurance that remediation efforts by third parties are on
schedule, contingency plans are being developed to minimize potential disruption
from embedded system failures. Validation efforts are expected to continue
through October 1999.
Business Partners. The Company continued testing its online interfaces to
many businesses that provide services and products to the Company, but the
Company anticipates that many of these third parties will not be prepared to
conduct online systems tests with the Company's systems until the Fall of 1999.
This will put a significant burden on the Company's IT staff to complete all
testing in a timely fashion. Where appropriate, manual or other semi-automated
workarounds are being considered.
Contingency Planning. Contingency planning has also continued at all
business units under the leadership of the Company's Y2K task force. These plans
are intended to provide guidance and alternatives for unexpected failures of
internal systems, as well as external failures (such as electricity,
communications and transportation) that may impede any business unit's ability
to operate normally. Plans also provide for staffing of crisis management teams;
identification of methods for ensuring prioritization of remedial efforts;
storage of emergency inventories, and the development of plans for business
resumption in the event of extended disruptions. <PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Costs. Total anticipated expenditures related to the Y2K project
remain on target at approximately $261 million, of which approximately
$142 million is expected to be capitalized.
Based upon its efforts to date, the Company continues to believe 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. At this time, the Company continues to believe that the
most likely "worst-case" scenario involves potential disruptions in areas in
which the Company's operations must rely on 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.
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 the Company believes 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. The Company
believes that all statements that express expectations and projections with
respect to future matters, including the launching or prospective development of
new business initiatives; anticipated motion picture or television releases;
internet or theme park and resort projects; Y2K remediation efforts, 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.
<PAGE>
The Walt Disney Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Factors that may affect forward-looking statements. For an enterprise as
large and complex as the Company, a wide range of factors could materially
affect future developments and performance. A list of such factors is set forth
in the Company's Annual Report on Form 10-K for the year ended September 30,
1998 under the heading "Factors that may affect forward-looking statements."
<PAGE>
PART II. OTHER INFORMATION
THE WALT DISNEY COMPANY
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders during the
Company's Annual Meeting of Stockholders held February 23, 1999.
Description of Matter
[CAPTION]
<TABLE>
<S> <C> <C>
Votes Cast For Authority Withheld
1. Election of directors
Judith L. Estrin 1,734,676,782 22,132,174
Sanford M. Litvack 1,734,603,541 22,205,415
Sidney Poitier 1,733,433,653 23,375,303
Robert A.M. Stern 1,734,350,781 22,458,175
Andrea Van de Kamp 1,733,589,317 23,219,639
</TABLE>
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C>
Votes Cast Broker
For Against Abstentions Non-votes
------------ ----------- ------------ ----------
2. Ratification of 1,706,645,736 43,671,217 6,492,003 -
PricewaterhouseCoopers
LLP as independent
accountants
3. Stockholder 84,549,897 1,204,387,715 23,650,885 444,220,499
proposal with
respect to year 2000
4. Stockholder 101,992,772 1,120,603,787 89,985,043 444,227,354
proposal with
respect to contract
supplier standards
5. Stockholder 502,444,149 785,315,976 24,820,246 444,228,585
proposal with
respect to future
adoption of a
shareholder rights
plan
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
THE WALT DISNEY COMPANY
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Letter agreement, dated December 29, 1998, between the
Company and Michael D. Eisner
(b) Reports on Form 8-K
None
<PAGE>
THE WALT DISNEY COMPANY
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WALT DISNEY COMPANY
(Registrant)
By /s/ Thomas O. Staggs
Thomas O. Staggs
Executive Vice President and
Chief Financial Officer
May 17, 1999
Burbank, California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the condensed
consolidated balance sheet and condensed consolidated statement of income found
in the Company's form 10-Q for the six months ended March 31, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 790
<SECURITIES> 0
<RECEIVABLES> 4,036
<ALLOWANCES> 0
<INVENTORY> 850
<CURRENT-ASSETS> 10,326
<PP&E> 16,550
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<TOTAL-ASSETS> 43,474
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<BONDS> 12,540
0
0
<COMMON> 9,145
<OTHER-SE> 11,210
<TOTAL-LIABILITY-AND-EQUITY> 43,474
<SALES> 0
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</TABLE>
