<PAGE>
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, 2000 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, 95-4545390
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 2,077,801,977 shares of Disney common stock outstanding and
45,101,691 shares of GO.com common stock outstanding as of May 11, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Reference
---------
Part I--Financial Information
<S> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 1
Part II--Other Information
Item 4. Submission of Matters to a Vote of Security Holders 2
Item 6. Exhibits 2
Signature 3
ANNEX I
DISNEY
------
Condensed Combined Financial Information
Condensed Combined Statements of Income I-1
Condensed Combined Balance Sheets I-2
Condensed Combined Statements of Cash Flows I-3
Notes to Condensed Combined Financial Statements I-4
Management's Discussion and Analysis of Financial Condition and Results of Operations I-7
ANNEX II
GO.COM
--------
Condensed Combined Financial Information
Condensed Combined Statements of Operations II-1
Condensed Combined Balance Sheets II-2
Condensed Combined Statements of Cash Flows II-3
Notes to Condensed Combined Financial Statements II-4
Management's Discussion and Analysis of Financial Condition and Results of Operations II-7
ANNEX III
THE WALT DISNEY COMPANY
-----------------------
Condensed Consolidated Financial Information
Condensed Consolidated Statements of Income III-1
Condensed Consolidated Balance Sheets III-2
Condensed Consolidated Statements of Cash Flows III-3
Notes to Condensed Consolidated Financial Statements III-4
Management's Discussion and Analysis of Financial Condition and Results of Operations III-7
Exhibits
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
As more fully discussed herein, on November 17, 1999 The Walt Disney
Company (the Company) completed its acquisition of the remaining interest in
Infoseek Corporation (Infoseek) that it did not already own via the creation and
issuance of a new class of common stock called GO.com common stock. GO.com
common stock is intended to reflect the performance of the Company's Internet
and direct marketing businesses including Infoseek (collectively, GO.com). Upon
issuance of GO.com common stock, the Company's existing common stock was
reclassified as Disney common stock, which is intended to reflect the
performance of the Company's businesses other than GO.com, plus a retained
interest in GO.com (collectively, Disney). As a result of the Infoseek
transaction and issuance of GO.com common stock, the Company now reports
consolidated financial information and separate financial information for Disney
and for GO.com. Prior to the Infoseek acquisition, the Company's Internet and
direct marketing businesses were referred to as "Disney's existing Internet
business" or "Internet and Direct Marketing."
ITEM 1. Financial Statements
For information required by Item 1, refer to:
"Disney Condensed Combined Financial Information" filed as part of this
document in Annex I and
"GO.com Condensed Combined Financial Information" filed as part of this
document in Annex II and
"The Walt Disney Company Condensed Consolidated Financial Information"
filed as part of this document in Annex III.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For information required by Item 2, refer to:
"Disney Management's Discussion and Analysis of Financial Condition and
Results of Operations" filed as part of this document in Annex I and
"GO.com Management's Discussion and Analysis of Financial Condition and
Results of Operations" filed as part of this document in Annex II and
"The Walt Disney Company Management's Discussion and Analysis of Financial
Condition and Results of Operations" filed as part of this document in
Annex III.
-1-
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders during
the Company's Annual Meeting of Shareholders held on February 22, 2000.
Description of Matter
Votes Cast For Authority Withheld
--------------------- -----------------------
1. Election of Directors
Reveta Bowers 1,676,737,096 80,114,384
Roy Disney 1,728,312,127 28,539,353
Ignacio Lozano, Jr. 1,726,344,031 30,507,449
George Mitchell 1,675,111,411 81,740,069
Gary Wilson 1,726,703,787 30,147,693
Judith L. Estrin 1,727,592,608 29,258,872
Sanford M. Litvack 1,727,319,487 29,531,993
Sidney Poitier 1,725,946,869 30,904,611
Robert A. M. Stern 1,683,572,548 73,278,932
Andrea Van de Kamp 1,726,636,620 30,214,860
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-votes
------------------- ------------------- ----------------- --------------
<S> <C> <C> <C> <C>
2. Ratification of PricewaterhouseCoopers
LLP as independent accountants 1,742,725,118 6,073,200 8,053,162 -
3. Stockholder proposal with respect to
management compensation 84,988,191 1,213,068,577 32,241,413 426,553,299
4. Stockholder proposal with respect to
election of directors 74,914,596 1,229,835,340 25,547,720 426,553,824
</TABLE>
ITEM 6. Exhibits
3. Amended and Restated By Laws of Registrant
10. Employment Agreement dated as of January 24, 2000 between Registrant and
Robert A. Iger.
27. Financial Data Schedule, filed electronically.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WALT DISNEY COMPANY
-------------------------------
(Registrant)
By: /s/ THOMAS O. STAGGS
-----------------------------------------------------
(Thomas O. Staggs, Senior Executive Vice President and
Chief Financial Officer)
May 15, 2000
Burbank, California
-3-
<PAGE>
ANNEX I
[LOGO OF THE WALT DISNEY COMPANY]
DISNEY
CONDENSED COMBINED FINANCIAL INFORMATION
<PAGE>
DISNEY
CONDENSED COMBINED STATEMENTS OF INCOME
In millions, except per share data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 6,206 $ 5,475 $ 13,036 $ 11,996
Costs and expenses (5,251) (4,615) (10,845) (9,986)
Amortization of intangible assets (111) (107) (222) (215)
Gain on sale of Fairchild -- -- 243 --
------- ------- ------- -------
Operating income 844 753 2,212 1,795
Corporate and other activities (36) (64) (31) (85)
Net interest expense (122) (172) (317) (335)
-------- ------- ------- -------
Income before income taxes, minority interests and
retained interest in GO.com 686 517 1,864 1,375
Income taxes (286) (206) (915) (572)
Minority interests (31) (21) (62) (43)
-------- ------- ------- -------
Income before retained interest in GO.com 369 290 887 760
Net (loss) income related to retained interest in
GO.com/(1)/ (208) (64) (370) 88
------- -------- ------- -------
Net income $ 161 $ 226 $ 517 $ 848
======= ======= ======= =======
Earnings per share:
Diluted $ 0.08 $ 0.11 $ 0.25 $ 0.41
======= ======= ======= =======
Basic $ 0.08 $ 0.11 $ 0.25 $ 0.41
======= ======= ======= =======
Average number of common and common equivalent
shares outstanding:
Diluted 2,103 2,089 2,092 2,083
======= ======= ======= =======
Basic 2,069 2,054 2,067 2,052
======= ======= ======= =======
</TABLE>
- -------------
(1) Net (loss) income related to retained interest in GO.com includes 100% of
GO.com's losses through November 17, 1999, and approximately 72%
thereafter.
See Notes to Condensed Combined Financial Statements
I-1
<PAGE>
DISNEY
CONDENSED COMBINED BALANCE SHEETS
In millions (unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
----------------- -------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 856 $ 408
Receivables 3,917 3,615
Inventories 706 752
Film and television costs 4,001 4,071
Deferred income taxes 595 598
Other assets 733 666
--------- --------
Total current assets 10,808 10,110
Loan receivable from GO.com -- 19
Film and television costs 2,534 2,489
Investments 1,997 1,929
Retained interest in GO.com 1,495 371
Theme parks, resorts and other property, at cost
Attractions, buildings and equipment 16,029 15,815
Accumulated depreciation (6,585) (6,201)
--------- --------
9,444 9,614
Projects in progress 1,767 1,266
Land 481 425
--------- --------
11,692 11,305
Intangible assets, net 15,045 15,631
Other assets 1,282 1,509
--------- --------
$ 44,853 $ 43,363
========= ========
LIABILITIES AND GROUP EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 4,988 $ 4,497
Current portion of borrowings 2,829 2,387
Unearned royalties and other advances 870 698
--------- --------
Total current liabilities 8,687 7,582
Loan payable to GO.com 36 --
Borrowings 7,706 9,187
Deferred income taxes 2,576 2,602
Other long term liabilities, unearned royalties and other advances 2,717 2,711
Minority interests 370 306
Group equity 22,761 20,975
--------- --------
$ 44,853 $ 43,363
========= ========
</TABLE>
See Notes to Condensed Combined Financial Statements
I-2
<PAGE>
DISNEY
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
In millions (unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------------
2000 1999
--------- --------
<S> <C> <C>
NET INCOME $ 517 $ 848
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 1,518 1,287
Depreciation 443 404
Amortization of intangible assets 222 215
Gain on sale of Fairchild (243) --
Minority interests 62 43
Retained interest in GO.com 370 (88)
Other (17) (14)
CHANGES IN ASSETS AND LIABILITIES 456 (151)
------- -------
2,811 1,696
------- -------
CASH PROVIDED BY OPERATIONS 3,328 2,544
------- -------
INVESTING ACTIVITIES
Dispositions 688 --
Film and television costs (1,303) (1,625)
Investments in theme parks, resorts and other property (914) (728)
Investment in Euro Disney (91) --
Acquisitions (net of cash acquired) -- (159)
Other 84 2
------- -------
(1,536) (2,510)
------- -------
FINANCING ACTIVITIES
Commercial paper borrowings, net (263) 134
Other borrowings 985 1,318
Reduction of borrowings (1,770) (751)
Capital contributions to GO.com (22) (144)
Borrowings from GO.com 8 --
Dividends (434) --
Repurchases of Disney common stock (115) (19)
Exercise of stock options and other 267 99
------- -------
(1,344) 637
------- -------
Increase in cash and cash equivalents 448 671
Cash and cash equivalents, beginning of period 408 119
------- -------
Cash and cash equivalents, end of period $ 856 $ 790
======= =======
</TABLE>
See Notes to Condensed Combined Financial Statements
I-3
<PAGE>
DISNEY
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. These condensed combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by 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 combined financial statements. Operating results for the quarter and
six months are not necessarily indicative of the results that may be expected
for the year ending September 30, 2000. Certain reclassifications have been made
in the fiscal 1999 financial statements to conform to the fiscal 2000
presentation. For further information, refer to the consolidated financial
statements and footnotes thereto for the Company included in its Annual Report
on Form 10-K for the year ended September 30, 1999, as well as the combined
financial statements and footnotes thereto for Disney for the year ended
September 30, 1998, included in the joint proxy statement/prospectus of The Walt
Disney Company and Infoseek Corporation, filed on Form S-4 dated September 30,
1999.
2. In November 1998, the Company acquired a 43% interest in Infoseek
Corporation (Infoseek) in a transaction that, among other things, provided for
the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by
Infoseek. The Company recognized a $345 million non-cash gain on that
transaction.
On November 17, 1999, stockholders of the Company and Infoseek approved the
Company's acquisition of the remaining interest in Infoseek that the Company did
not already own.
The acquisition was effected by the creation and issuance of a new class of
common stock, called GO.com common stock, in exchange for outstanding Infoseek
shares, at an exchange rate of 1.15 shares of GO.com for each Infoseek share.
Upon consummation of the acquisition, the Company combined its Internet and
direct marketing businesses with Infoseek to create a single Internet and direct
marketing business called GO.com.
Disney retains an interest of approximately 71% in GO.com at March 31,
2000. Effective November 18, 1999, shares of the Company's existing common stock
were reclassified as Disney common stock, to track the financial performance of
the Company's businesses other than GO.com, plus Disney's retained interest in
GO.com.
The acquisition has been accounted for as a purchase, and the acquisition
cost of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over the
fair value of Infoseek's net assets, has been allocated to intangible assets,
including goodwill of $1.9 billion, and is being amortized over two to nine
years. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry. Disney's interest in Infoseek intangible assets is included
in the retained interest in GO.com in the condensed combined balance sheet.
In November 1999, the Company sold Fairchild Publications, which it had
acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain
of $243 million.
I-4
<PAGE>
DISNEY
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
Disney's combined results of operations have incorporated Infoseek's
activity from November 18, 1999 and the activity of Fairchild Publications
through the date of its disposal. The unaudited pro forma information below
presents combined results of operations as if the Infoseek acquisition and the
disposition of Fairchild Publications had occurred at the beginning of fiscal
1999. The unaudited pro forma information is not necessarily indicative of
results of operations had the Infoseek acquisition and the disposition of
Fairchild Publications occurred at the beginning of fiscal 1999, nor is it
necessarily indicative of future results.
Six Months Ended March 31,
-------------------------
2000 1999
------- -------
(unaudited; in millions, except per share data)
Revenues $13,022 $11,907
Net income 482 411
Diluted earnings per share $ 0.23 $ 0.20
Pro forma amounts for the six month periods exclude the impact of purchased
in-process research and development expenditures of $23 million and $117 million
in 2000 and 1999, respectively, the gain on the sale of Fairchild Publications
in fiscal 2000 and the Starwave gain in fiscal 1999.
3. During the six months, Disney repaid $1.8 billion of term debt, which
matured during the period, and reduced its commercial paper borrowings by $263
million. These repayments were partially funded by proceeds of $985 million from
various financing arrangements having effective interest rates ranging from
5.96% to 6.32% and maturities in fiscal 2002 through 2015.
4. During 1998, the Company's Board of Directors decided to move to an annual,
rather than quarterly, dividend policy to reduce costs and simplify payments to
stockholders. During the first quarter of fiscal 2000, the Company paid a
dividend of $434 million ($0.21 per share) applicable to fiscal 1999.
5. Diluted earnings per share amounts are calculated using the treasury stock
method and are based upon the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation in periods in which they would have an anti-
dilutive effect. The difference between basic and diluted earnings per share is
solely attributable to stock options, which are considered anti-dilutive when
option exercise prices exceed the weighted average market price per share of
common stock during the period. For the three months ended March 31, 2000 and
1999, options for 12 million and 17 million shares, respectively, were excluded
from the diluted earnings per share calculation. For the six-month periods,
options for 32 million and 22 million shares, respectively, were excluded.
6. During the six months, a subsidiary of the Company repurchased 3.8 million
shares of Disney common stock for approximately $115 million. Under its share
repurchase program, the Company is authorized to purchase up to an additional
395 million shares. The Company evaluates share repurchase decisions on an
ongoing basis, taking into account borrowing capacity, management's target
capital structure, and other investment opportunities.
I-5
<PAGE>
DISNEY
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
7. Comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------- -----------------------------------
(unaudited, in millions) 2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 161 $ 226 $ 517 $ 848
Cumulative translation and other adjustments, net
of tax 12 (3) 8 (11)
----- ----- ----- -----
Comprehensive income $ 173 $ 223 $ 525 $ 837
===== ===== ===== =====
</TABLE>
8. The operating segments reported below are the segments of Disney for which
separate financial information is available and for which operating income or
loss amounts are evaluated regularly by executive management in deciding how to
allocate resources and in assessing performance.
During the first quarter of the current year, Disney completed the merger of
television production activities of the Walt Disney Studios with those of the
ABC Television Network. Accordingly, television production activities formerly
reported in Studio Entertainment are now reported in the Media Networks segment.
All prior-year amounts have been restated to reflect the current presentation.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------ ------------------------------------
(unaudited, in millions) 2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Media Networks $2,380 $1,825 $ 5,117 $ 4,133
------ ------ ------- -------
Studio Entertainment
Third parties 1,631 1,579 3,206 3,332
Intersegment 25 16 49 36
------ ------ ------- -------
1,656 1,595 3,255 3,368
------ ------ ------- -------
Theme Parks & Resorts 1,571 1,414 3,148 2,856
------ ------ ------- -------
Consumer Products
Third parties 624 657 1,565 1,675
Intersegment (25) (16) (49) (36)
------ ------ ------- -------
599 641 1,516 1,639
------ ------ ------- -------
$6,206 $5,475 $13,036 $11,996
====== ====== ======= =======
Operating income:
Media Networks $ 537 $ 364 $ 1,179 $ 735
Studio Entertainment 3 96 26 239
Theme Parks & Resorts 330 311 693 654
Consumer Products 85 89 293 382
Amortization of intangible assets (111) (107) (222) (215)
------ ------ ------- -------
844 753 1,969 1,795
Gain on sale of Fairchild -- -- 243 --
------ ------ ------- -------
$ 844 $ 753 $ 2,212 $ 1,795
====== ====== ======= =======
</TABLE>
I-6
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEASONALITY
Disney's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter and six months ended March
31, 2000 for each business segment, and for Disney as a whole, are not
necessarily indicative of results to be expected for the full year.
Media Networks revenues are influenced by advertiser demand and the
seasonal nature of programming, and generally peak in the spring and fall.
Studio Entertainment revenues fluctuate based upon the timing of theatrical
motion picture and home video releases. Release dates for theatrical and home
video products are determined by several factors, including timing of vacation
and holiday periods and competition in the market.
Theme Parks and Resorts revenues fluctuate with changes in theme park
attendance and resort occupancy resulting from the seasonal nature of vacation
travel. Peak attendance and resort occupancy generally occur during the summer
months when school vacations occur and during early-winter and spring holiday
periods.
Consumer Products revenues are influenced by seasonal consumer purchasing
behavior and the timing of animated theatrical releases.
RESULTS OF OPERATIONS
On November 4, 1999, the Company sold Fairchild Publications, which was
acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999
stockholders of the Company and Infoseek approved the Company's acquisition of
the remaining interest in Infoseek that the Company did not already own. As more
fully discussed in Note 2 to the Condensed Combined Financial Statements, the
acquisition resulted in the creation of GO.com, which comprises all of Disney
and Infoseek's Internet businesses, as well as Disney's direct marketing
operations. The Company now separately reports operating results for GO.com and
Disney, which comprises the Company's businesses other than GO.com, plus
Disney's retained interest of approximately 71%, as of March 31, 2000, in
GO.com.
To enhance comparability, certain information for the current six months
and prior-year periods is presented on a pro forma basis, which assumes that
these events had occurred at the beginning of fiscal 1999. The pro forma results
are not necessarily indicative of the combined results that would have occurred
had these events actually occurred at the beginning of fiscal 1999, nor are they
necessarily indicative of future results.
Pro forma net loss related to Disney's retained interest in GO.com excludes
the impact of GO.com purchased in-process research and development expenditures
of $23 million and $117 million for the six months ended March 31, 2000 and
1999, respectively.
I-7
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Combined Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(unaudited; in millions, except per share data)
Revenues $ 6,206 $ 5,426 14 % $ 5,475
Costs and expenses (5,251) (4,576) (15)% (4,615)
Amortization of intangible assets (111) (106) (5)% (107)
------- ------ -------
Operating income 844 744 13 % 753
Corporate and other activities (36) (64) 44 % (64)
Net interest expense (122) (171) 29 % (172)
------- ------ -------
Income before income taxes, minority
interests and retained interest in GO.com 686 509 35 % 517
Income taxes (286) (207) (38)% (206)
Minority interests (31) (21) (48)% (21)
------- ------ -------
Income before retained interest in GO.com 369 281 31 % 290
Net loss related to retained interest in GO.com (208) (184) (13)% (64)
------- ------ -------
Net income $ 161 $ 97 66 % $ 226
======= ======= ======
Earnings per share:
Diluted $ 0.08 $ 0.05 60 % $ 0.11
======= ======= ======
Basic $ 0.08 $ 0.05 60 % $ 0.11
======= ======= ======
Earnings per share excluding retained
interest in GO.com:
Diluted $ 0.18 $ 0.13 38 % $ 0.14
======= ======= ======
Basic $ 0.18 $ 0.14 29 % $ 0.14
======= ======= ======
Average number of common and common
equivalent shares outstanding:
Diluted 2,103 2,089 2,089
======= ======= ======
Basic 2,069 2,054 2,054
======= ======= ======
</TABLE>
Net income for the quarter increased 66%, or $64 million to $161 million
and diluted earnings per share increased 60% to $0.08, compared to prior-year
pro forma amounts, driven by increased operating income, lower net interest
expense and improved corporate and other activities, partially offset by
increased net loss related to the retained interest in GO.com and increased
minority interests. Excluding the retained interest in GO.com, net income and
diluted earnings per share increased 31% and 38% to $369 million and $0.18,
respectively. Increased operating income reflected higher Media Networks, Theme
Parks and Resorts and Consumer Products results, partially offset by lower
Studio Entertainment results. Lower net interest expense reflected gains from
the sale of investments and lower average debt balances in the current quarter,
partially offset by higher interest rates in the current quarter. Corporate and
other activities improved due to increased income from equity investments. The
increase in net loss related to the retained interest in GO.com reflected higher
costs and expenses at GO.com, driven by continued investment in Internet
operations and infrastructure, a non-cash charge of $31 million to reflect the
impairment of certain intangible assets and one-time employee retention payments
of $17 million required by the 1999 Infoseek acquisition agreement, partially
offset by Internet revenue growth.
I-8
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
As previously noted, the Company completed its acquisition of Infoseek
during the first quarter of the current fiscal year (see Note 2 to the Condensed
Combined Financial Statements). The acquisition resulted in a significant
increase in intangible assets at GO.com. Disney's retained interest in GO.com
reflects the impact of this amortization. Acquired intangible assets are being
amortized over periods ranging from two to nine years.
The impact of amortization related to the November 1998 and November 1999
acquisitions is expected to be $455 million for the remaining six months of
fiscal 2000, $707 million in 2001, $658 million in 2002, $92 million in 2003 and
$13 million over the remainder of the amortization period. The Company
determined the economic useful life of acquired goodwill by giving consideration
to the useful lives of Infoseek's identifiable intangible assets, including
developed technology, trademarks, user base, joint venture agreements and in-
place workforce. In addition, the Company considered the competitive environment
and the rapid pace of technological change in the Internet industry.
On an as-reported basis, net income decreased 29% or $65 million,
reflecting the items described above, as well as the consolidation of Infoseek
operations beginning November 18, 1999.
Combined Results - Six Months
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------------------------------------------------
Pro Forma As Reported
------------------------------------------- --------------------------------
2000 1999 % Change 2000 1999
--------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
(unaudited; in millions, except per share
data)
Revenues $ 13,022 $11,907 9 % $ 13,036 $11,996
Costs and expenses (10,832) (9,910) (9)% (10,845) (9,986)
Amortization of intangible assets (222) (213) (4)% (222) (215)
Gain on sale of Fairchild -- -- 243 --
-------- ------- -------- -------
Operating income 1,968 1,784 10 % 2,212 1,795
Corporate and other activities (29) (85) 66 % (31) (85)
Net interest expense (315) (334) 6 % (317) (335)
-------- ------- -------- -------
Income before income taxes, minority interests
and retained interest in GO.com 1,624 1,365 19 % 1,864 1,375
Income taxes (678) (559) (21)% (915) (572)
Minority interests (62) (43) (44)% (62) (43)
-------- ------- -------- -------
Income before retained interest in GO.com 884 763 16 % 887 760
Net (loss) income related to retained
interest in GO.com (402) (352) (14)% (370) 88
-------- ------- -------- -------
Net income $ 482 $ 411 17 % $ 517 $ 848
======== ======= ======== =======
Earnings per share:
Diluted $ 0.23 $ 0.20 15 % $ 0.25 $ 0.41
======== ======= ======== =======
Basic $ 0.23 $ 0.20 15 % $ 0.25 $ 0.41
======== ======= ======== =======
Earnings per share excluding retained
interest in GO.com:
Diluted $ 0.42 $ 0.37 14 % $ 0.42 $ 0.36
======== ======= ======== =======
Basic $ 0.43 $ 0.37 16 % $ 0.43 $ 0.37
======== ======= ======== =======
Average number of common and common
equivalent shares outstanding:
Diluted 2,092 2,083 2,092 2,083
======== ======= ======== =======
Basic 2,067 2,052 2,067 2,052
======== ======= ======== =======
</TABLE>
I-9
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On a pro forma basis, net income for the six months increased 17% to $482
million and diluted earnings per share increased 15% to $0.23, driven by
increased operating income, improved corporate and other activities and
decreased net interest expense, partially offset by increased net loss related
to the retained interest in GO.com and increased minority interests. Excluding
the retained interest in GO.com, net income and diluted earnings per share
increased 16% and 14% to $884 million and $0.42, respectively. Increased
operating income reflected higher Media Networks and Theme Parks and Resorts
results, partially offset by lower Studio Entertainment and Consumer Products
results. Corporate and other activities improved due to increased income from
equity investments. Lower net interest expense reflected gains from the sale of
investments and lower average debt balances in the current year, partially
offset by higher interest rates and charges related to certain financial
instruments in the current year. The increase in net loss related to the
retained interest in GO.com reflected higher costs and expenses at GO.com,
driven by continued investment in Internet operations and infrastructure, a non-
cash charge of $31 million to reflect the impairment of certain intangible
assets and one-time employee retention payments of $17 million, partially offset
by Internet revenue growth.
As noted above, the Company completed the sale of Fairchild Publications
during the six months. The sale resulted in a pre-tax gain of $243 million.
Income taxes on the transaction largely offset the pre-tax gain.
On an as-reported basis, net income decreased 39% or $331 million and
operating income increased 23% or $417 million. As-reported results reflect the
items discussed above, as well as the impact of the Infoseek acquisition on the
retained interest in GO.com and the sale of Fairchild Publications. Retained
interest in GO.com reflects a gain on the sale of Starwave of $345 million in
the prior-year period and Infoseek losses and incremental amortization of
acquired intangible assets in the current period. The higher effective tax rate
for the quarter reflects the income tax impact of the sale of Fairchild
Publications.
I-10
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Business Segment Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------------------------------------------
Pro Forma As Reported
2000 1999 %Change 1999
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
(unaudited, in millions)
Revenues:
Media Networks $2,380 $1,825 30 % $1,825
Studio Entertainment 1,656 1,595 4 % 1,595
Theme Parks & Resorts 1,571 1,414 11 % 1,414
Consumer Products 599 592 1 % 641
------ ------ ------
$6,206 $5,426 14 % $5,475
====== ====== ======
Operating income /(1)/:
Media Networks $ 537 $ 364 48 % $ 364
Studio Entertainment 3 96 (97)% 96
Theme Parks & Resorts 330 311 6 % 311
Consumer Products 85 79 8 % 89
Amortization of intangible assets (111) (106) (5)% (107)
------ ------ ------
$ 844 $ 744 13 % $ 753
====== ====== ======
(1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization
(EBITDA) is as follows:
<CAPTION>
Media Networks $ 572 $ 395 $ 395
Studio Entertainment 16 111 111
Theme Parks & Resorts 463 424 424
Consumer Products 109 110 120
------ ------ ------
$1,160 $1,040 $1,050
====== ====== ======
</TABLE>
Disney believes that segment EBITDA provides additional information useful
in analyzing the underlying business results. However, segment EBITDA is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating income.
Media Networks
The following table provides supplemental revenue and operating income
detail for the Media Networks segment:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------
2000 1999 % Change
----------------- ----------------- -----------------
<S> <C> <C> <C>
(unaudited, in millions)
Revenues:
Broadcasting $1,652 $1,225 35%
Cable Networks 728 600 21%
------ ------
$2,380 $1,825 30%
====== ======
Operating income:
Broadcasting $ 244 $ 136 79%
Cable Networks 293 228 29%
------ ------
$ 537 $ 364 48%
====== ======
</TABLE>
I-11
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Revenues increased 30%, or $555 million to $2.4 billion, driven by
increases of $427 million from Broadcasting and $128 million at the Cable
Networks. Increased Broadcasting revenues were driven by growth at the ABC
television network, the Company's owned television stations and the radio
networks and stations. Increases at the television network and owned television
stations were driven by the Super Bowl, a strong advertising market, the
continued success of Who Wants to Be a Millionaire and higher overall ratings on
network programming. The strong advertising market also resulted in growth at
the radio network and stations. Cable Network revenue growth was driven by
increased advertising revenues due to a strong advertising market, as well as
higher affiliate fees due to contractual rate adjustments and subscriber growth.
Operating income increased 48%, or $173 million to $537 million, reflecting
increased Broadcasting and Cable Network revenues, partially offset by higher
costs. Costs and expenses, which consist primarily of programming rights and
amortization, production costs, distribution and selling expenses and labor
costs, increased 26% or $382 million, driven by higher sports programming costs,
principally related to National Football League (NFL) and National Hockey League
(NHL) broadcasts. In addition, higher costs and expenses reflected increased
costs associated with a higher volume of network television production, as well
as start-up costs associated with the January launch of SoapNet and various
international Disney Channels.
The Company has investments in cable operations that are accounted for as
unconsolidated equity investments. The table below presents "Operating Income
from Cable Television Activities," which comprise the Cable Networks and the
Company's cable equity investments:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------
2000 1999 % Change
----------------- ----------------- -----------------
<S> <C> <C> <C>
(unaudited, in millions)
Operating income:
Cable Networks $ 293 $ 228 29 %
Equity Investments:
A&E, Lifetime and E! Entertainment Television 168 133 26 %
Other 33 (10) n/m
----- -----
Operating income from cable television activities 494 351 41 %
Partner share of operating income (169) (109) (55)%
----- -----
Disney share of operating income $ 325 $ 242 34 %
===== =====
</TABLE>
Note: Operating Income from Cable Television Activities presented in this
table represents 100% of the operating income of both the Company's owned
cable businesses and its cable equity investees. The Disney share of operating
income represents the Company's ownership interest in cable television
operating income. Cable Networks are reported in "Operating income" in the
Condensed Combined Statements of Income. Equity Investments are accounted for
under the equity method and the Company's proportionate share of the net
income of its cable equity investments is reported in "Corporate and other
activities" in the Condensed Combined Statements of Income. Disney believes
that Operating Income from Cable Television Activities provides additional
information useful in analyzing the underlying business results. However,
Operating Income from Cable Television Activities is a non-GAAP financial
metric and should be considered in addition to, not as a substitute for,
reported operating income.
Disney's share of Cable Television Operating Income increased 34%, or $83
million to $325 million, driven by growth at the Cable Networks and increased
advertising revenues at Lifetime Television, The History Channel and A&E
Television.
I-12
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Studio Entertainment
Revenues increased 4%, or $61 million to $1.7 billion, driven by growth of
$105 million in worldwide theatrical motion picture distribution, partially
offset by declines of $29 million in network television production and
distribution and $13 million in domestic home video. Growth in worldwide
theatrical motion picture distribution reflected the performance of Scream 3 and
a stronger animated film slate domestically and Toy Story 2, Tarzan and The
Sixth Sense internationally. The decline in network television production and
distribution reflected Home Improvement in the prior-year quarter. In domestic
home video, the success of Tarzan on VHS and DVD and The Sixth Sense on DVD
faced difficult comparisons to the combination of Mulan, The Waterboy and 101
Dalmatians in the prior-year quarter.
Operating income decreased 97%, or $93 million to $3 million, due to
declines in domestic home video, driven primarily by cost increases, and
domestic theatrical motion picture distribution, where cost increases exceeded
revenue gains. These declines were partially offset by improvements in
international theatrical motion picture distribution, where cost increases only
partially offset higher revenues. Costs and expenses, which consist primarily of
production cost amortization, distribution and selling expenses, participations
expense, product costs, labor and leasehold expenses, increased 10% or $154
million. Higher costs in domestic home video were driven by participations
expense for The Sixth Sense and higher distribution costs. Cost increases in
domestic theatrical motion picture distribution reflect higher production cost
amortization, write-downs on Mission to Mars and Cradle Will Rock and increased
promotional costs for Cider House Rules. Production cost amortization decreased
in network television production and distribution due to the production of Home
Improvement in the prior-year quarter and the distribution of more classic
animated titles in the current quarter, which have a lower amortization cost
relative to recent titles. Participations expense increased in international
theatrical motion picture distribution due to Toy Story 2.
Theme Parks and Resorts
Revenues increased 11%, or $157 million to $1.6 billion, driven by growth
of $90 million at the Walt Disney World Resort, reflecting increased guest
spending and record theme park attendance, $40 million at Disney Cruise Line,
reflecting a full quarter of operations from both cruise ships, the Disney Magic
and the Disney Wonder, compared to just the Disney Magic in the prior-year
quarter, and increased guest spending at Disneyland. Increased guest spending
and record attendance at the Walt Disney World Resort were driven by the ongoing
Millennium Celebration. At Disneyland, 45th Anniversary Celebration
merchandise sales and enhanced merchandise and food and beverage offerings
throughout the park contributed to higher guest spending.
Operating income increased 6%, or $19 million to $330 million, driven by
revenue growth at the Walt Disney World Resort, results at Disney Cruise Line
and higher guest spending at Disneyland. Costs and expenses, which consist
principally of labor, costs of merchandise, food and beverages sold,
depreciation, repairs and maintenance, entertainment and marketing and sale
expense, increased 13% or $138 million. Increased operating costs were driven by
the ongoing Millennium Celebration, Disney Cruise Line operations and higher
theme park attendance at the Walt Disney World Resort.
Consumer Products
Revenues increased 1%, or $7 million to $599 million, compared to prior-
year pro forma amounts, driven by growth of $11 million in worldwide merchandise
licensing and publishing, offset by declines of $4 million at the Disney Stores.
Merchandise licensing revenues reflected increases domestically, driven by the
timing of certain contractual annual minimum guarantee payments, partially
offset by continued licensing softness in Europe. Disney Store revenues
decreased due to lower comparative store sales, principally domestically.
I-13
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On an as-reported basis, revenues decreased 7% or $42 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Operating income increased 8%, or $6 million to $85 million, compared to
prior-year pro forma amounts, reflecting increases in domestic merchandise
licensing and Disney Interactive, partially offset by continued licensing
softness in Europe and lower comparative store sales at the Disney Stores,
principally domestically. Improvements at Disney Interactive were driven by the
success of the Who Wants to Be A Millionaire video game and the Toy Story 2
action game, as well as cost savings. Costs and expenses, which consist
primarily of labor, product costs, including product development costs,
distribution and selling expenses and leasehold expenses, were comparable to the
prior year quarter.
On an as-reported basis, operating income decreased 4% or $4 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
Business Segment Results - Six Months
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------------------------------------------------------------
Pro Forma As Reported
------------------------------------------------------ ---------------------------------
2000 1999 % Change 2000 1999
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
(unaudited, in millions)
Revenues:
Media Networks $ 5,117 $ 4,133 24 % $ 5,117 $ 4,133
Studio Entertainment 3,255 3,368 (3)% 3,255 3,368
Theme Parks & Resorts 3,148 2,856 10 % 3,148 2,856
Consumer Products 1,502 1,550 (3)% 1,516 1,639
------- ------- ------- -------
$13,022 $11,907 9 % $13,036 $11,996
======= ======= ======= =======
Operating income /(1)/:
Media Networks $ 1,179 $ 735 60 % $ 1,179 $ 735
Studio Entertainment 26 239 (89)% 26 239
Theme Parks & Resorts 693 654 6 % 693 654
Consumer Products 292 369 (21)% 293 382
Amortization of intangible assets (222) (213) (4)% (222) (215)
------- ------- ------- -------
1,968 1,784 10 % 1,969 1,795
Gain on sale of Fairchild -- -- -- 243 --
------- ------- ------- -------
$ 1,968 $ 1,784 10 % $ 2,212 $ 1,795
======= ======= ======= =======
(1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows:
Media Networks $1,248 $ 796 $ 1,248 $ 796
Studio Entertainment 54 269 54 269
Theme Parks & Resorts 965 887 965 887
Consumer Products 342 431 343 444
------ ------ ------- -------
$2,609 $2,383 $ 2,610 $ 2,396
====== ====== ======= =======
</TABLE>
Disney believes that segment EBITDA provides additional information useful
in analyzing the underlying business results. However, segment EBITDA is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating income.
I-14
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Media Networks
The following table provides supplemental revenue and operating income
detail for the Media Networks segment:
<TABLE>
<CAPTION>
Six Months Ended March 31,
-------------------------------------------------------------
2000 1999 % Change
----------------- ----------------- -----------------
<S> <C> <C> <C>
(unaudited, in millions)
Revenues:
Broadcasting $3,367 $2,740 23%
Cable Networks 1,750 1,393 26%
------ ------
$5,117 $4,133 24%
====== ======
Operating income:
Broadcasting $ 589 $ 284 107%
Cable Networks 590 451 31%
------ ------
$1,179 $ 735 60%
====== ======
</TABLE>
Revenues increased 24%, or $984 million to $5.1 billion, driven by
increases of $627 million from Broadcasting and $357 million at the Cable
Networks. Increased Broadcasting revenues were driven by growth at the ABC
television network, the Company's owned television stations and the radio
networks and stations. Increases at the television network and owned television
stations were driven by the Super Bowl, a strong advertising market, the
continued success of Who Wants to Be a Millionaire and higher overall ratings on
network programming, including Good Morning America. The strong advertising
market also resulted in growth at the radio network and stations. Cable Network
revenue growth was driven by increased advertising revenues due to a strong
advertising market, as well as higher affiliate fees due to contractual rate
adjustments and subscriber growth.
Operating income increased 60%, or $444 million to $1.2 billion, reflecting
increased Broadcasting and Cable Network revenues, partially offset by higher
costs. Costs and expenses increased 16% or $540 million, driven by higher sports
programming costs, principally related to NFL broadcasts. In addition, increased
costs associated with a higher volume of network television production, as well
as start-up costs associated with the January launch of SoapNet and various
international Disney Channels, contributed to increased costs and expenses.
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 NFL for the right to broadcast NFL football games on the ABC Television
Network and ESPN. The contract provides for total payments of approximately $9
billion over an eight-year period, and commenced with the 1998 season. Under the
terms of the contract, the NFL has the right to cancel the contract after five
years. The programming rights fees under the new contract are significantly
higher than those required by the previous contract and the fee increases exceed
the estimated revenue increases over the contract term. The higher fees under
the new contract reflect various factors, including increased competition for
sports programming rights and an increase in the number of games to be broadcast
by ESPN. Disney continues to pursue a variety of strategies, including marketing
efforts, to reduce the impact of the higher costs. The contract's impact on the
Disney's results over the remaining contract term is dependent upon a number of
factors, including the strength of advertising markets, effectiveness of
marketing efforts and the size of viewer audiences.
I-15
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The cost of the NFL contract is charged to expense based on the ratio of
each period's gross revenues to estimated total gross revenues over the non-
cancelable contract period. Estimates of total gross revenues can change
significantly and, accordingly, they are reviewed periodically and amortization
is adjusted if necessary. Such adjustments could have a material effect on
results of operations in future periods.
The Company has investments in cable operations that are accounted for as
unconsolidated equity investments. The table below presents "Operating Income
from Cable Television Activities," which comprise the Cable Networks and the
Company's cable equity investments:
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------------------------------
2000 1999 % Change
----------------- ----------------- -----------------
<S> <C> <C> <C>
(unaudited, in millions)
Operating income:
Cable Networks $ 590 $ 451 31 %
Equity Investments:
A&E, Lifetime and E! Entertainment Television 318 235 35 %
Other 51 7 n/m
----- -----
Operating Income from Cable Television Activities 959 693 38 %
Partner share of operating income (318) (209) (52)%
----- -----
Disney share of operating income $ 641 $ 484 32 %
===== =====
</TABLE>
Note: Operating Income from Cable Television Activities presented in this
table represents 100% of the operating income of both the Company's owned
cable businesses and its cable equity investees. The Disney share of
operating income represents the Company's ownership interest in cable
television operating income. Cable Networks are reported in "Operating
income" in the Condensed Combined Statements of Income. Equity Investments
are accounted for under the equity method and the Company's proportionate
share of the net income of its cable equity investments is reported in
"Corporate and other activities" in the Condensed Combined Statements of
Income.
Disney's share of cable television operating income increased 32%, or $157
million to $641 million, driven by growth at the Cable Networks and increased
advertising revenues at E! Entertainment Television, Lifetime Television and The
History Channel.
Studio Entertainment
Revenues decreased 3%, or $113 million to $3.3 billion, driven by declines
of $187 million in worldwide home video, $52 million in network television
production and distribution and $42 million in domestic theatrical motion
picture distribution, partially offset by growth of $156 million in
international theatrical motion picture distribution. Domestic home video
revenues reflected fewer unit sales in the current year, as the prior year
included the successful releases of Lion King II: Simba's Pride, Mulan, The
Waterboy and 101 Dalmatians. The decline in network television production and
distribution reflects the production of Home Improvement in the prior year. In
domestic theatrical motion picture distribution, the success of Toy Story 2 and
Scream 3 faced difficult comparisons to the prior year, which included The
Waterboy, A Bug's Life and Enemy of the State. Growth in international
theatrical motion picture distribution reflected the performance of Toy Story 2,
Tarzan and The Sixth Sense.
I-16
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Operating income decreased 89%, or $213 million to $26 million, due to
declines in worldwide home video and domestic theatrical motion picture
distribution, driven primarily by decreased revenues. These declines were
partially offset by improvements in international theatrical motion picture
distribution, where cost increases only partially offset higher revenues. Costs
and expenses increased 3% or $100 million. Cost increases in international
theatrical motion picture distribution reflected higher production cost
amortization and increased participations expense due to The Sixth Sense and Toy
Story 2. Production cost amortization decreased in network television
production and distribution, reflecting the production of Home Improvement in
the prior year, as well as the distribution of more classic animated titles in
the current year, which have a lower amortization cost relative to recent
titles.
Increases in production and participation costs are reflective of industry
trends: as competition for creative talent has increased, costs within the
industry have increased at a rate significantly higher than inflation.
Theme Parks and Resorts
Revenues increased 10%, or $292 million to $3.1 billion, driven by growth
of $179 million at the Walt Disney World Resort, reflecting increased guest
spending, increased occupied room nights and record theme park attendance, $68
million at Disney Cruise Line reflecting a full six months of operations from
both cruise ships, the Disney Magic and the Disney Wonder, compared to just the
Disney Magic in the prior year, and increased guest spending at Disneyland.
Increased guest spending and record attendance at the Walt Disney World Resort
were driven by the ongoing Millennium Celebration; and higher occupied room
nights reflected the opening of the All Star Movies Resort, which opened in the
second quarter of the prior year. At Disneyland, 45th Anniversary Celebration
merchandise sales and enhanced merchandise and food and beverage offerings
throughout the park contributed to higher guest spending.
Operating income increased 6%, or $39 million to $693 million, driven by
revenue growth at the Walt Disney World Resort, improved results at Disney
Cruise Line and higher guest spending at Disneyland. Costs and expenses
increased 11% or $253 million, driven by higher theme park attendance and the
ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise
Line operations.
Consumer Products
Pro forma revenues decreased 3%, or $48 million to $1.5 billion, driven by
declines of $74 million in worldwide merchandise licensing and publishing,
partially offset by growth of $17 million at Disney Interactive and $10 million
at the Disney Stores. Lower merchandise licensing and publishing revenues were
primarily attributable to declines domestically and in Europe. Disney
Interactive revenue increases were driven by the successful release of the Who
Wants to Be a Millionaire video game and the Toy Story 2 action game. Disney
Store revenues increased due to continued worldwide expansion, partially offset
by lower comparative store sales, principally domestically.
On an as-reported basis, revenues decreased 8% or $123 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Pro forma operating income decreased 21%, or $77 million to $292 million,
reflecting decreases in worldwide merchandise licensing, softer publishing
results domestically and in Europe, and decreases at the Disney Stores,
primarily domestically and in Japan, partially offset by increases at Disney
Interactive. Costs and expenses increased 2%, or $29 million, primarily at the
Disney Stores due to the addition of new stores and inventory liquidation
efforts.
I-17
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On an as-reported basis, operating income decreased 23% or $89 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
FINANCIAL CONDITION
For the six months ended March 31, 2000, cash provided by operations
increased $784 million to $3.3 billion, driven by higher amortization of
television broadcast rights relative to cash payments, decreased income tax
payments and higher film and television cost amortization.
During the six months, Disney invested $1.3 billion to develop, produce and
acquire rights to film and television properties, a decrease of $322 million,
primarily due to a $310 million payment related to the acquisition of a film
library in the prior year.
During the six months, Disney invested $914 million in theme parks, resorts
and other properties. These expenditures reflected continued expansion
activities related to Disney's California Adventure and certain resort
facilities at the Walt Disney World Resort.
During the six months, Disney invested $91 million in Euro Disney S.C.A. to
maintain its 39% ownership interest after a Euro Disney equity rights offering,
the proceeds of which will be used to fund construction of a new theme park.
Total commitments to purchase broadcast programming approximated $13.5
billion at March 31, 2000, including approximately $11.2 billion related to
sports programming rights, primarily NFL, College Football, Major League
Baseball and NHL. Substantially all of this amount is payable over the next six
years.
Disney expects the ABC Television Network, ESPN and the Company's
television and radio stations to continue to enter into programming commitments
to purchase the broadcast rights for various feature films, sports and other
programming.
During the six months, Disney repaid $1.8 billion of term debt, which
matured during the period, and reduced its commercial paper borrowings by $263
million. These repayments were partially funded by proceeds of $985 million from
various financing arrangements. Commercial paper borrowings outstanding as of
March 31, 2000 totaled $1.7 billion, with maturities of up to one year,
supported by bank facilities totaling $4.8 billion, which expire in one to five
years and allow for borrowings at various interest rates. Disney also has the
ability to borrow under a U.S. shelf registration statement and a euro medium-
term note program, which collectively permit the issuance of up to approximately
$4.6 billion of additional debt.
Disney acquires shares of its stock on an ongoing basis and is authorized
as of March 31, 2000 to purchase up to an additional 395 million shares. During
the six months, a subsidiary of Disney acquired approximately 3.8 million shares
of Disney common stock for approximately $115 million. Disney also used $434
million to fund dividend payments during the first quarter.
Disney believes that its financial condition is strong and that its cash,
other liquid assets, operating cash flows, access to equity capital markets and
borrowing capacity, taken together, provide adequate resources to fund ongoing
operating requirements and future capital expenditures related to the expansion
of existing businesses, including GO.com, and development of new projects.
I-18
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
OTHER MATTERS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB
101). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. Disney will
adopt SAB 101 no later than the first quarter of fiscal 2001 and is evaluating
the effect that such adoption may have on its combined results of operations and
financial position.
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; and
Internet or theme park and resort projects, are forward-looking statements
within the meaning of the Act. These statements are made on the basis of
management's views and assumptions, as of the time the statements are made,
regarding future events and business performance. There can be no assurance,
however, that management's expectations will necessarily come to pass.
Factors that may affect forward-looking statements. 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,
1999 under the heading "Factors that may affect forward-looking statements."
I-19
<PAGE>
ANNEX II
The [LOGO OF WALT DISNEY] Company
GO.com
CONDENSED COMBINED FINANCIAL INFORMATION
<PAGE>
GO.com
(The Internet and Direct Marketing businesses of The Walt Disney Company)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
In thousands, except per share data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------ ------------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 97,576 $ 41,567 $ 199,719 $ 118,153
Costs and expenses:
Cost of revenues (88,208) (31,382) (168,139) (77,014)
Sales and marketing (59,073) (16,698) (118,062) (41,374)
Other operating expenses (67,787) (9,719) (114,999) (17,993)
Depreciation (9,178) (1,898) (14,101) (3,572)
Amortization of intangible assets (233,168) -- (347,684) --
Gain on sale of Starwave -- -- -- 345,048
--------- --------- --------- ---------
Operating (loss) income (359,838) (18,130) (563,266) 323,248
Corporate and other activities (2,325) (4,176) (4,521) (10,118)
Equity in Infoseek loss -- (76,760) (40,575) (172,078)
Net interest expense (4,411) (2,107) (6,229) (3,232)
--------- --------- --------- ---------
(Loss) income before income taxes and minority
interests (366,574) (101,173) (614,591) 137,820
Income tax benefit (expense) 63,051 36,935 101,494 (50,405)
Minority interests 11,320 -- 18,428 252
--------- --------- --------- ---------
Net (loss) income $(292,203) $ (64,238) $(494,669) $ 87,667
========= ========= ========= =========
Net (loss) income attributed to:
Disney common stock/(1)/ $(208,274) $ (64,238) $(370,067) $ 87,667
========= ========= ========= =========
GO.com common stock $ (83,929) $ n/a $(124,602) $ n/a
========= ========= ========= =========
Loss per share attributed to GO.com:
Diluted and Basic $(1.88) $ n/a $ (2.83) $ n/a
========= ========= ========= =========
Average number of common and common equivalent
shares outstanding:
Diluted and Basic 44,547 n/a 44,021 n/a
========= ========= ========= =========
</TABLE>
________________
(1) Net (loss) income attributed to Disney common stock includes 100% of
GO.com's losses through November 17, 1999, and approximately 72% thereafter.
See Notes to Condensed Combined Financial Statements
II-1
<PAGE>
GO.com
(The Internet and Direct Marketing businesses of The Walt Disney Company)
CONDENSED COMBINED BALANCE SHEETS
In thousands (unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------- -------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,053 $ 5,530
Receivables (net of allowance for doubtful accounts of $16,608 and
$4,791) 62,429 17,763
Inventories 20,419 43,521
Deferred income taxes 39,265 8,993
Other assets 9,141 13,905
---------- --------
Total current assets 135,307 89,712
Loan receivable from Disney 35,621 --
Investments 40,796 505,210
Deferred income taxes 18,135 --
Property and equipment, at cost 163,057 53,509
Accumulated depreciation (74,085) (18,928)
---------- --------
88,972 34,581
Projects in progress -- 6,112
---------- --------
88,972 40,693
Intangible assets, net 1,957,017 64,389
Other assets 2,857 6,420
---------- --------
$2,278,705 $706,424
========== ========
LIABILITIES AND GROUP EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 128,796 $ 90,997
Current portion of borrowings 8,324 28,313
Unearned royalties and other advances 21,751 6,312
---------- --------
Total current liabilities 158,871 125,622
Loan payable to Disney -- 19,000
Borrowings -- 90,350
Deferred income taxes -- 58,396
Other long term liabilities, unearned royalties and other advances 6,013 --
Minority interests 23,613 42,041
Group equity 2,090,208 371,015
---------- --------
$2,278,705 $706,424
========== ========
</TABLE>
See Notes to Condensed Combined Financial Statements
II-2
<PAGE>
GO.com
(The Internet and Direct Marketing businesses of The Walt Disney Company)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
In thousands (unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-----------------------------------
2000 1999
----------- -----------
<S> <C> <C>
NET (LOSS) INCOME $(494,669) $ 87,667
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Depreciation 14,101 3,572
Amortization of intangibles 347,684 --
Charge for in-process research and development 23,322 --
Impairment charges 35,849 --
Gain on sale of Starwave (345,048)
Equity in Infoseek loss 40,575 172,078
Minority interests (18,428) (252)
Other 1,516 6,564
CHANGES IN ASSETS AND LIABILITIES 53,582 10,528
--------- ---------
498,201 (152,558)
--------- ---------
CASH PROVIDED BY (USED IN) OPERATIONS 3,532 (64,891)
--------- ---------
INVESTING ACTIVITIES
Investments in property and equipment (19,779) (9,354)
Acquisitions (net of cash acquired) 17,551 (70,013)
Purchases of investments (36,570) --
--------- ---------
(38,798) (79,367)
--------- ---------
FINANCING ACTIVITIES
Capital contributions from Disney, net 21,514 143,527
Borrowings 6,928 --
Reduction of borrowings (1,711) (6,950)
Stock options exercised 14,634
Reduction of borrowings from Disney, net (7,576) --
--------- ---------
33,789 136,577
--------- ---------
Decrease in cash and cash equivalents (1,477) (7,681)
Cash and cash equivalents, beginning of period 5,530 7,684
--------- ---------
Cash and cash equivalents, end of period $ 4,053 $ 3
========= =========
</TABLE>
See Notes to Condensed Combined Financial Statements
II-3
<PAGE>
GO.com
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. These condensed combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by 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 combined financial statements. Operating results for the quarter and
six months are not necessarily indicative of the results that may be expected
for the year ending September 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto for the Company included
in its Annual Report on Form 10-K for the year ended September 30, 1999 as well
as the combined financial statements and footnotes thereto for Disney's existing
Internet businesses (hereinafter referred to as GO.com) for the year ended
September 30, 1998, included in the joint proxy statement/prospectus of The Walt
Disney Company and Infoseek Corporation, filed on Form S-4 dated September 30,
1999 and the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999.
2. In November 1998, the Company acquired a 43% interest in Infoseek
Corporation (Infoseek) in a transaction that, among other things, provided for
the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by
Infoseek. The Company recognized a $345 million non-cash gain on that
transaction.
On November 17, 1999, stockholders of the Company and Infoseek approved the
Company's acquisition of the remaining interest in Infoseek that the Company did
not already own.
The acquisition was effected by the creation and issuance of a new class of
common stock, called GO.com common stock, in exchange for outstanding Infoseek
shares, at an exchange rate of 1.15 shares of GO.com for each Infoseek share.
Upon consummation of the acquisition, the Company combined its Internet and
direct marketing businesses with Infoseek to create a single Internet and direct
marketing business called GO.com.
Disney retains an interest of approximately 71% in GO.com at March 31,
2000. Effective November 18, 1999, shares of the Company's existing common stock
were reclassified as Disney common stock, to track the financial performance of
the Company's businesses other than GO.com, plus Disney's retained interest in
GO.com.
The acquisition has been accounted for as a purchase, and the acquisition
cost of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over the
fair value of Infoseek's net assets, has been allocated to intangible assets,
including goodwill of $1.9 billion, and is being amortized over two to nine
years. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry. During the quarter ended December 31, 1999, GO.com recorded
charges for purchased in-process research and development expenditures totaling
$23.3 million.
II-4
<PAGE>
GO.com
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
GO.com's combined results of operations have incorporated Infoseek's
activity on a consolidated basis since November 18, 1999. The unaudited pro
forma information below presents combined results of operations as if the
Infoseek acquisition had occurred at the beginning of fiscal 1999. The unaudited
pro forma information is not necessarily indicative of the results of operations
of the combined company had the Infoseek acquisition occurred at the beginning
of fiscal 1999, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------------------------
2000 1999
--------------------------------------------
<S> <C> <C>
(unaudited; in thousands, except per share data)
Revenues $ 223,188 $ 182,390
Net loss (561,612) (488,560)
Net loss attributed to GO.com common stock (159,947) (136,440)
Diluted and basic loss per share attributed to GO.com common stock $ (3.63) $ (3.19)
</TABLE>
Pro forma amounts for the six months exclude purchased in-process research
and development expenditures of $23.3 million and $116.2 million, in 2000 and
1999, respectively, and the Starwave gain in fiscal 1999.
3. Diluted and basic loss per share amounts for the six months reflect the
results of operations after November 17, 1999, the date the Company acquired the
remaining interest in Infoseek that it did not already own and first issued
GO.com common stock, through March 31, 2000. Diluted loss per share amounts are
calculated using the treasury stock method and are based upon the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are excluded from the computation in periods in
which they would have an anti-dilutive effect. The difference between basic and
diluted earnings per share is solely attributable to stock options, which are
considered anti-dilutive when option exercise prices exceed the weighted average
market price per share of common stock during the period. For the quarter and
six months ended March 31, 2000, all GO.com stock options were anti-dilutive
and, accordingly, options for 14.3 million and 12.4 million shares were excluded
from the loss per share calculation, respectively.
4. During the quarter, GO.com recorded a $30.8 million non-cash impairment
charge related to goodwill and other intangible assets for an Internet business.
Based upon a significant decrease in revenues relative to budget, GO.com
performed an impairment assessment in accordance with Statement of Financial
Accounting Standards No. 121 Accounting for the Impairment of Long-lived Assets
to Be Disposed Of, and accordingly, wrote the assets down to their fair value,
which was determined based upon projected discounted future cash flows.
5. In April 2000, the Company's Board of Directors approved a share repurchase
program for up to five million shares of GO.com common stock in the open market.
No shares have been repurchased under this program.
II-5
<PAGE>
GO.com
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
6. Comprehensive (loss) income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ------------------------
(unaudited, in thousands) 2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net (loss) income $(292,203) $(64,238) $(494,669) $87,667
Unrealized holding gain (loss), net 1,102 -- (1,444) --
--------- -------- --------- -------
Comprehensive (loss) income $(291,101) $(64,238) $(496,113) $87,667
========= ======== ========= =======
</TABLE>
7. The operating segments reported below are the segments of GO.com for which
separate financial information is available and for which operating income or
loss amounts are evaluated regularly by executive management in deciding how to
allocate resources and in assessing performance.
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
----------------------------- --------------------------
(unaudited, in thousands) 2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Internet:
Media $ 55,621 $ 9,375 $ 86,268 $ 18,766
Commerce 18,001 5,596 36,716 10,894
--------- -------- --------- --------
73,622 14,971 122,984 29,660
Direct Marketing 23,954 26,596 76,735 88,493
--------- -------- --------- --------
$ 97,576 $ 41,567 $ 199,719 $118,153
========= ======== ========= ========
Operating (loss) income:
Internet $(118,936) $(12,012) $(201,145) $(20,615)
Direct Marketing (7,734) (6,118) (14,437) (1,185)
--------- -------- --------- --------
(126,670) (18,130) (215,582) (21,800)
Amortization of intangible assets (233,168) -- (347,684) --
--------- -------- --------- --------
(359,838) (18,130) (563,266) (21,800)
Gain on sale of Starwave -- -- -- 345,048
--------- -------- --------- --------
$(359,838) $(18,130) $(563,266) $323,248
========= ======== ========= ========
</TABLE>
II-6
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEASONALITY
GO.com's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter and six months ended March
31, 2000 for each business segment, and for GO.com as a whole, are not
necessarily indicative of results to be expected for the full year.
Internet commerce and Direct Marketing revenues fluctuate with seasonal
consumer purchasing behavior, with a significant portion of annual revenues
generated in the first quarter.
Internet media revenues are influenced by advertiser demand and visitor
traffic.
RESULTS OF OPERATIONS
On November 17, 1999, the stockholders of the Company and Infoseek approved
the Company's acquisition of the remaining interest in Infoseek that the Company
did not already own. As more fully discussed in Note 2 to the Condensed Combined
Financial Statements, the acquisition resulted in the creation of GO.com, which
comprises all of Disney's Internet businesses and Infoseek, as well as Disney's
direct marketing operations. The Company now separately reports operating
results for GO.com and Disney, which comprises the Company's businesses other
than GO.com, plus Disney's retained interest of approximately 71% as of March
31, 2000, in GO.com.
GO.com's results of operations have incorporated Infoseek's activity since
the date of the acquisition. To enhance comparability, operating results for the
current six months and prior-year periods have been presented on a pro forma
basis, which assumes that the acquisition of the remaining interest in Infoseek
and subsequent creation of GO.com had occurred at the beginning of fiscal 1999.
The pro forma results are not necessarily indicative of the combined results
that would have occurred had the acquisition actually occurred at the beginning
of fiscal 1999, nor are they necessarily indicative of future results.
Pro forma operating loss for the six months excludes purchased in-process
research and development expenditures of $23.3 million and $72.6 million in 2000
and 1999, respectively, and the Starwave gain in fiscal 1999.
II-7
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Combined Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
---------- ---------- -------- -----------
<S> <C> <C> <C> <C>
(unaudited; in thousands, except per share data)
Revenues $ 97,576 $ 70,797 38 % $ 41,567
Cost of revenues (88,208) (51,130) (73)% (31,382)
Sales and marketing (59,073) (45,819) (29)% (16,698)
Other operating expenses (67,787) (21,152) (220)% (9,719)
Depreciation (9,178) (5,238) (75)% (1,898)
--------- --------- ---------
(126,670) (52,542) (141)% (18,130)
Amortization of intangible assets (233,168) (227,419) (3)% --
--------- --------- ---------
Operating loss (359,838) (279,961) (29)% (18,130)
Corporate and other activities (2,325) (1,742) (33)% (4,176)
Equity in Infoseek loss -- -- (76,760)
Net interest (expense) income (4,411) 1,915 (330)% (2,107)
--------- --------- ---------
Loss before income taxes and minority interests (366,574) (279,788) (31)% (101,173)
Income tax benefit 63,051 24,621 156 % 36,935
Minority interests 11,320 267 n/m --
--------- --------- ---------
Net loss $(292,203) $(254,900) (15)% $ (64,238)
========= ========= =========
Net loss attributed to:
Disney common stock $(208,274) $(183,714) (13)% $ (64,238)
========= ========= =========
GO.com common stock $ (83,929) $ (71,186) (18)% $ n/a
========= ========= =========
Loss per share attributed to GO.com common
stock:
Diluted and Basic $ (1.88) $ (1.66) (13)% $ n/a
========= ========= =========
Loss per share attributed to GO.com common
stock excluding amortization of intangibles /(1)/:
Diluted and Basic $ (0.47) $ (0.21) (124)% $ n/a
========= ========= =========
Average number of common and common equivalent
shares outstanding /(2)/:
Diluted and Basic 44,547 42,834 n/a
========= ========= =========
</TABLE>
(1) GO.com believes that loss per share excluding amortization of intangible
assets provides additional information useful in analyzing business
results. Loss per share excluding amortization of intangible assets is a
non-GAAP financial metric and should be considered in addition to, not as a
substitute for, reported loss per share.
(2) Total shares amount to 155,091 and 153,378 shares for 2000 and 1999,
respectively, including 110,544 shares attributable to Disney's retained
interest in GO.com.
Net loss, net loss attributable to GO.com common stock and diluted loss per
share for the quarter increased 15% to $292.2 million, 18% to $83.9 million and
13% to $1.88, respectively, compared to the prior-year pro forma amounts. These
increases were driven by increased operating losses in both the Internet and
Direct Marketing segments, including increased amortization of intangible assets
and an increase in net interest expense resulting from a non-cash charge to
reflect the impairment of an investment. Higher amortization of intangible
assets reflected incremental intangible assets associated with the acquisitions
of interests in Soccernet.com and toysmart.com in the third and fourth quarters
of fiscal 1999, respectively. These increases were partially offset by minority
interest adjustments and a higher effective tax benefit rate reflecting tax
benefits provided by losses from operations, which are larger relative to losses
attributable to goodwill amortization which generate no tax benefits.
II-8
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
As previously discussed, the Company completed its acquisition of Infoseek
during the quarter ended December 31, 1999 (see Note 2 to the Condensed Combined
Financial Statements). The acquisition resulted in a significant increase in
intangible assets. Intangible assets are being amortized over periods ranging
from two to nine years.
The impact of amortization related to the November 1998 and November 1999
acquisitions is expected to be $454.9 million for the remaining six months of
fiscal 2000, $707.0 million in 2001, $657.9 million in 2002, $91.6 million in
2003 and $13.4 million over the remainder of the amortization period. GO.com
determined the economic useful life of acquired goodwill by giving consideration
to the useful lives of Infoseek's identifiable intangible assets, including
developed technology, trademarks, user base, joint venture agreements and in-
place workforce. In addition, GO.com considered the competitive environment and
the rapid pace of technological change in the Internet industry.
On as-reported basis, net loss increased by $228.0 million. The as-reported
comparison reflects the items described above, as well as Infoseek losses and
the incremental amortization of intangible assets in the current quarter related
to the Infoseek acquisition, and equity in Infoseek losses in the prior-year
quarter.
II-9
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Combined Results - Six Months
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------------------------------------------------
Pro Forma As Reported
-------------------------------------------- ---------------------------
2000 1999 % Change 2000 1999
---------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
(unaudited; in thousands, except per
share data)
Revenues $ 223,188 $ 182,390 22% $ 199,719 $ 118,153
Cost of revenues (184,688) (112,266) (65)% (168,139) (77,014)
Sales and marketing (128,330) (101,875) (26)% (118,062) (41,374)
Other operating expenses (103,457) (38,651) (168)% (114,999) (17,993)
Depreciation (15,982) (10,298) (55)% (14,101) (3,572)
--------- --------- --------- ---------
(209,269) (80,700) (159)% (215,582) (21,800)
Amortization of intangible assets (466,337) (454,838) (3)% (347,684) --
Gain on sale of Starwave -- -- -- -- 345,048
--------- --------- --------- ---------
Operating (loss) income (675,606) (535,538) (26)% (563,266) 323,248
Corporate and other activities (4,130) (3,448) (20)% (4,521) (10,118)
Equity in Infoseek loss -- -- -- (40,575) (172,078)
Net interest (expense) income (4,801) 2,734 (276)% (6,229) (3,232)
--------- --------- --------- ---------
(Loss) income before income taxes and
minority interests (684,537) (536,252) (28)% (614,591) 137,820
Income tax benefit (expense) 104,486 47,190 121% 101,494 (50,405)
Minority interests 18,439 502 n/m 18,428 252
--------- --------- --------- ---------
Net (loss) income $(561,612) $(488,560) (15)% $(494,669) $ 87,667
========= ========= ========= =========
Net (loss) income attributed to:
Disney common stock $(401,665) $(352,120) (14)% $(370,067) $ 87,667
========= ========= ========= =========
GO.com common stock/(1)/ $(159,947) $(136,440) (17)% $(124,602) $ n/a
========= ========= ========= =========
Loss per share attributed to
GO.com/(1)/:
Diluted and Basic $ (3.63) $ (3.19) (14)% $ (2.83) $ n/a
========= ========= ========= =========
Loss per share attributed to GO.com
excluding amortization of
intangibles/(1)(2)/:
Diluted and Basic $ (0.77) $ (0.33) (133)% $ (0.71) $ n/a
========= ========= ========= =========
Average number of common and
common equivalent shares
outstanding/(3)/:
Diluted and Basic 44,021 42,834 44,021 n/a
========= ========= ========= =========
</TABLE>
(1) As-reported amounts reflect the period from November 18, 1999 (date of
issuance of GO.com common stock) through March 31, 2000.
(2) GO.com believes that loss per share excluding amortization of intangible
assets provides additional information useful in analyzing business results.
Loss per share excluding amortization of intangible assets is a non-GAAP
financial metric and should be considered in addition to, not as a
substitute for, reported loss per share.
(3) Total shares amount to 154,565 and 153,378 shares for 2000 and 1999,
respectively, including 110,544 shares attributable to Disney's retained
interest in GO.com.
II-10
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On a pro forma basis, net loss, net loss attributed to GO.com common stock
and diluted loss per share increased 15% to $561.6 million, 17% to $159.9
million and 14% to $3.63, respectively. These increases were driven by higher
operating losses in both the Internet and Direct Marketing segments, including
increased amortization of intangible assets and an increase in net interest
expense resulting from a non-cash charge to reflect the impairment of an
investment. Higher amortization of intangible assets reflects incremental
intangible assets associated with the acquisitions of interests in Soccernet.com
and toysmart.com. These increases were partially offset by minority interest
adjustments and a higher effective tax benefit rate reflecting tax benefits
provided by losses from operations, which are larger relative to losses
attributable to goodwill amortization which generate no tax benefits.
On an as-reported basis, net loss, net loss attributed to GO.com common
stock and diluted loss per share were $494.7 million, $124.6 million and $2.83,
respectively. As-reported results reflect the items described above, decreased
corporate and other activities due to a change in the manner of accounting for
Starwave and related businesses, the gain on the sale of Starwave in the first
quarter of fiscal 1999 and the consolidation of Infoseek's operations beginning
November 18, 1999.
Costs and expenses for the remainder of the year are expected to reflect
continued investment in infrastructure and new initiatives and incremental
marketing and sales expenditures.
Business Segment Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
------------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
(unaudited, in thousands)
Revenues:
Internet:
Media $ 55,621 $ 34,739 60 % $ 9,375
Commerce and other 18,001 9,462 90 % 5,596
--------- --------- --------
73,622 44,201 67 % 14,971
Direct Marketing 23,954 26,596 (10)% 26,596
--------- --------- --------
$ 97,576 $ 70,797 38 % $ 41,567
========= ========= ========
Operating loss: /(1)/
Internet $(118,936) $ (46,424) (156)% $(12,012)
Direct Marketing (7,734) (6,118) (26)% (6,118)
--------- --------- --------
(126,670) (52,542) (141)% (18,130)
Amortization of intangible assets (233,168) (227,419) (3)% -
--------- --------- --------
$(359,838) $(279,961) (29)% $(18,130)
========= ========= ========
</TABLE>
(1) Segment results exclude intangible asset amortization. Segment earnings
before interest, taxes, depreciation and amortization (EBITDA) is as
follows:
<TABLE>
<S> <C> <C> <C>
Internet $(110,628) $ (41,699) $(10,627)
Direct Marketing (6,864) (5,605) (5,605)
--------- -------- --------
$(117,492) $ (47,304) $(16,232)
========= ======== ========
</TABLE>
GO.com believes that segment EBITDA provides additional information useful
in analyzing the underlying business results. However, segment EBITDA is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating loss.
II-11
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Internet
Revenues increased 67%, or $29.4 million to $73.6 million compared to
prior-year pro forma amounts, driven by growth in both media and commerce
revenues. Media revenues, which consist primarily of advertising and sponsorship
agreements, licensing of site content and subscriptions from member-only sites
that provide subscribers with exclusive content and games, increased 60%, or
$20.9 million to $55.6 million, reflecting higher advertising and sponsorship
revenues driven by increased advertiser demand and higher online site traffic at
the ABC-branded Web sites, ESPN.com, the GO.com portal, Family.com and
Disney.com. Commerce revenues increased 90%, or $8.5 million to $18.0 million,
driven by increased sales at DisneyStore.com, growth in intranet search software
sales, operations at toysmart.com which was acquired during the fourth quarter
of fiscal 1999, and increased sales at DisneyTravel.com. Commerce revenue growth
reflected a 111% increase in the average number of monthly orders across
GO.com's commerce sites due to increased site traffic.
On an as-reported basis, revenues increased 392% or $58.7 million,
reflecting the items described above, as well as the operations of Infoseek,
which were consolidated into GO.com beginning November 18, 1999.
Operating loss increased 156%, or $72.5 million to $118.9 million compared
to prior-year pro forma amounts, reflecting higher costs and expenses, partially
offset by increased revenues. Costs and expenses, which consists primarily of
cost of revenues, sales and marketing, other operating expenses and
depreciation, increased 112%, or $101.9 million. Cost of revenues, which consist
primarily of employee compensation, third-party development and engineering
costs, hosting and delivery costs associated with GO.com's Web sites, and the
cost of commerce merchandise, increased primarily due to continued investment in
Web site operations and infrastructure, new product initiatives, continued
product development, and one-time employee retention payments of $7.9 million
required by the 1999 Infoseek acquisition agreement. Sales and marketing
expenses increased due to operations at toysmart.com, expanded promotion of
commerce businesses and one-time employee retention payments of $5.2 million,
partially offset by reduced marketing at the GO.com portal. Increased other
operating expenses were driven by a non-cash charge of $30.8 million to reflect
the impairment of certain intangible assets, continued infrastructure
investment, one-time employee retention payments of $4.2 million and operations
at toysmart.com.
On an as-reported basis, operating loss increased $106.9 million to $118.9
million, reflecting the items described above, as well as losses at Infoseek,
which was consolidated into GO.com beginning November 18, 1999.
Direct Marketing
Revenues decreased 10%, or $2.6 million to $24.0 million due principally to
lower catalog response rates. Lower revenues also reflected inventory
liquidation initiatives during the quarter.
Operating loss increased 26%, or $1.6 million to $7.7 million, reflecting a
10% decline in revenues partially offset by a decrease in costs and expenses.
Costs and expenses, which consist primarily of costs of goods sold reported as
cost of revenues, selling and marketing, other operating expenses and
depreciation decreased 3% or $1.0 million, principally due to lower cost of
revenues as a result of lower sales volumes.
II-12
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Business Segment Results - Six Months
<TABLE>
<CAPTION>
Six Months Ended March 31,
------------------------------------------------------------------------------------------------
Pro Forma As Reported
--------------------------------------------------------- ---------------------------------
2000 1999 % Change 2000 1999
--------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
(unaudited, in thousands)
Revenues:
Internet:
Media $ 108,026 $ 76,325 42 % $ 86,268 $ 18,766
Commerce and other 38,427 17,572 119 % 36,716 10,894
--------- --------- --------- --------
146,453 93,897 56 % 122,984 29,660
Direct Marketing 76,735 88,493 (13)% 76,735 88,493
--------- --------- --------- --------
$ 223,188 $ 182,390 22 % $ 199,719 $118,153
========= ========= ========= ========
Operating (loss) income: /(1)/
Internet $(194,832) $ (79,515) (145)% $(201,145) $(20,615)
Direct Marketing (14,437) (1,185) n/m (14,437) (1,185)
--------- --------- --------- --------
(209,269) (80,700) (159)% (215,582) (21,800)
Amortization of intangible assets (466,337) (454,838) (3)% (347,684) --
--------- --------- --------- ---------
(675,606) (535,538) (26)% (563,266) (21,800)
Gain on sale of Starwave -- -- -- 345,048
--------- --------- --------- --------
$(675,606) $(535,538) (26)% $(563,266) $323,248
========= ========= ========= ========
</TABLE>
(1) Segment results exclude intangible asset amortization. Segment EBITDA,
which also excludes depreciation, is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Internet $(180,672) $ (70,207) $(188,866) $(18,033)
Direct Marketing (12,615) (195) (12,615) (195)
--------- --------- --------- --------
$(193,287) $ (70,402) $(201,481) $(18,228)
========= ========= ========= ========
</TABLE>
GO.com believes that segment EBITDA provides additional information useful
in analyzing the underlying business results. However, segment EBITDA is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating loss.
Internet
Pro forma revenues increased 56%, or $52.6 million to $146.5 million,
reflecting growth in both media and commerce revenues. Media revenues increased
42%, or $31.7 million to $108.0 million, reflecting higher advertising and
sponsorship revenues driven by increased advertiser demand and higher online
site traffic at ESPN.com, certain ABC-branded sites, the GO.com portal,
Disney.com, and Family.com. Commerce revenues increased 119%, or $20.9 million
to $38.4 million, driven by strong holiday-season sales at the DisneyStore.com,
operations at toysmart.com, which was acquired during the fourth quarter of
1999, growth in intranet search software sales, and increased sales at
DisneyTravel.com. Commerce revenue growth reflected a 175% increase in the
average number of monthly orders across GO.com's commerce sites due to increased
site traffic.
On an as-reported basis, revenues increased 315%, or $93.3 million to
$123.0 million, reflecting the items described above, as well as the operations
of Infoseek, which were consolidated into GO.com beginning November 18, 1999.
Pro forma operating loss increased 145%, or $115.3 million to $194.8
million, reflecting higher costs and expenses which increased 97% or $167.9
million, partially offset by increased revenues. Cost of revenues increased
primarily due to continued investment in Web site operations and infrastructure,
new product initiatives, continued product development, operations at
toysmart.com and a one-time employee retention payment of $7.9 million
II-13
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
required by the 1999 Infoseek acquisition agreement. Sales and marketing
expenses increased due to operations at toysmart.com, expanded promotion of
commerce businesses, and one-time employee retention payments of $5.2 million,
partially offset by reduced marketing at the GO.com portal. Increased other
operating expenses were driven by a non-cash charge of $30.8 million to reflect
the impairment of goodwill and certain intangible assets, continued
infrastructure investment, one-time employee retention payments of $4.2 million
and operations at toysmart.com.
On an as-reported basis, operating loss increased $180.5 million to $201.1
million, reflecting the items described above, as well as losses at Infoseek,
which was consolidated into GO.com beginning November 18, 1999.
Direct Marketing
Revenues decreased 13%, or $11.8 million to $76.7 million due principally
to lower catalog response rates. Lower response rates reflected a higher
proportion of mailings targeting new customers during the six months. Lower
revenues also reflected inventory liquidation initiatives.
Operating loss increased $13.3 million to $14.4 million, compared to $1.2
million in the prior-year reflecting a 13% decline in revenues and a 2% or $1.5
million increase in costs and expenses. Cost of revenues declined due to lower
sales volumes, while sales and marketing increased due primarily to an increase
in the volume of catalogs mailed.
FINANCIAL CONDITION
GO.com's cash needs are funded by Disney and such funding is accounted for
as either a capital contribution from Disney (i.e., as an increase in GO.com's
group equity and Disney's retained interest in GO.com), or as a loan.
Disney may account for all cash transfers from Disney or GO.com to or for
the account of the other as inter-group loans, other than transfers in return
for assets or services rendered or transfers in respect of Disney's retained
interest that correspond to dividends paid on GO.com common stock. These loans
bear interest at the rate at which Disney could borrow such funds. The Company's
board of directors has discretion to determine, in the exercise of its business
judgment, that a given transfer or type of transfer should be accounted for as a
long-term loan, a capital contribution increasing Disney's retained interest in
GO.com or a return of capital reducing Disney's retained interest in GO.com. The
Company has agreed, however, that advances from Disney to GO.com up to $250.0
million on a cumulative basis will be accounted for as short-term or long-term
loans at interest rates at which Disney could borrow such funds and will not be
accounted for as capital contributions.
For the six months ended March 31, 2000, cash provided by operations of
$3.5 million was driven by tax benefits attributed to GO.com's operations,
partially offset by higher pre-tax losses before non-cash items.
From October 1, 1999 through the November 17, 1999 Infoseek acquisition,
GO.com received $21.5 million in capital contribution funding from Disney.
GO.com made payments to Disney during the six months ended March 31, 2000
totaling $7.6 million representing cash that was transferred to Disney pursuant
to Disney's treasury and cash management policies.
II-14
<PAGE>
GO.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
OTHER MATTERS
In April 2000, the Financial Accounting Standards Board Emerging Issues
Task Force issued EITF Issue No. 00-2 Accounting for Web Site Development Costs.
GO.com will adopt the consensus in the Issue in the fourth quarter of fiscal
2000, and is evaluating the effect that such adoption may have on its combined
results of operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB
101). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. GO.com will
adopt SAB 101 no later than the first quarter of fiscal 2001 and is evaluating
the effect that such adoption may have on its combined results of operations and
financial position.
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 GO.com.
GO.com and its representatives may from time to time make written or oral
statements that GO.com believes are "forward-looking," including statements
contained in this report and other filings with the Securities and Exchange
Commission and in reports to GO.com stockholders. GO.com believes that all
statements that express expectations and projections with respect to future
matters, including the launching or prospective development of new business
initiatives; and Internet projects, are forward-looking statements within the
meaning of the Act. These statements are made on the basis of management's views
and assumptions, as of the time the statements are made, regarding future events
and business performance. There can be no assurance, however, that management's
expectations will necessarily come to pass.
Factors that may affect forward-looking statements . A wide range of
factors could materially affect future developments and performance. A list of
such factors is set forth in the Company's Annual Report on Form 10-K for the
year ended September 30, 1999 under the heading "Factors that may affect
forward-looking statements."
II-15
<PAGE>
Annex III
The [LOGO OF WALT DISNEY] Company
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
<PAGE>
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------ ------------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 6,303 $ 5,516 $ 13,235 $ 12,113
Costs and expenses (5,475) (4,674) (11,260) (10,125)
Amortization of intangible assets (344) (107) (570) (215)
Gain on sale of Fairchild -- -- 243 --
Gain on sale of Starwave -- -- -- 345
------- ------- -------- --------
Operating income 484 735 1,648 2,118
Corporate and other activities (38) (70) (35) (108)
Equity in Infoseek loss -- (75) (41) (159)
Net interest expense (126) (174) (323) (338)
------- ------- -------- --------
Income before income taxes and minority interests 320 416 1,249 1,513
Income taxes (223) (169) (813) (622)
Minority interests (20) (21) (44) (43)
------- ------- -------- --------
Net income $ 77 $ 226 $ 392 $ 848
======= ======= ======== ========
Earnings (loss) attributed to:
Disney common stock/(1)/ $ 161 $ 226 $ 517 $ 848
GO.com common stock (84) -- (125) --
------- ------- -------- --------
$ 77 $ 226 $ 392 $ 848
======= ======= ======== ========
Earnings (loss) per share attributed to:
Disney/(1)/
Diluted $ 0.08 $ 0.11 $ 0.25 $ 0.41
======= ======= ======== ========
Basic $ 0.08 $ 0.11 $ 0.25 $ 0.41
======= ======= ======== ========
GO.com (basic and diluted) $ (1.88) n/a $ (2.83) n/a
======= ======= ======== ========
Average number of common and common equivalent
shares outstanding:
Disney
Diluted 2,103 2,089 2,092 2,083
======= ======= ======== ========
Basic 2,069 2,054 2,067 2,052
======= ======= ======== ========
GO.com (basic and diluted) 45 n/a 44 n/a
======= ======= ======== ========
</TABLE>
________________
(1) Including Disney's retained interest in GO.com. Disney's retained interest
in GO.com reflects 100% of GO.com's losses through November 17, 1999, and
approximately 72% thereafter.
See Notes to Condensed Consolidated Financial Statements
III-1
<PAGE>
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
In millions, except share data
<TABLE>
March 31, September 30,
2000 1999
-----------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 860 $ 414
Receivables 3,979 3,633
Inventories 727 796
Film and television costs 4,001 4,071
Deferred income taxes 635 607
Other assets 742 679
------- -------
Total current assets 10,944 10,200
Film and television costs 2,534 2,489
Investments 2,037 2,434
Theme parks, resorts and other property, at cost
Attractions, buildings and equipment 16,192 15,869
Accumulated depreciation (6,659) (6,220)
------- -------
9,533 9,649
Projects in progress 1,767 1,272
Land 481 425
------- -------
11,781 11,346
Intangible assets, net 17,002 15,695
Other assets 1,285 1,515
------- -------
$45,583 $43,679
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 5,117 $ 4,588
Current portion of borrowings 2,837 2,415
Unearned royalties and other advances 892 704
------- -------
Total current liabilities 8,846 7,707
Borrowings 7,706 9,278
Deferred income taxes 2,558 2,660
Other long term liabilities, unearned royalties and other advances 2,723 2,711
Minority interests 394 348
Stockholders' Equity
Preferred stock, $.01 par value
Authorized--100 million shares, Issued--None
Common Stock
Common stock--Disney, $.01 par value
Authorized--3.6 billion, Issued--2.1 billion 9,574 9,324
Common stock--GO.com, $.01 par value
Authorized--1.0 billion, Issued--45.0 million 2,177 --
Retained earnings 12,239 12,281
Cumulative translation and other (19) (25)
------- -------
23,971 21,580
Treasury stock, at cost, 29 million shares (605) (605)
Shares held by TWDC Stock Compensation Fund II, at
cost--0.4 million shares (10) --
------- -------
23,356 20,975
------- -------
$45,583 $43,679
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
III-2
<PAGE>
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions (unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------------
<S> <C> <C>
2000 1999
-------- --------
NET INCOME $ 392 $ 848
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 1,518 1,287
Depreciation 457 408
Amortization of intangibles 570 215
Gain on sale of Fairchild (243) --
Gain on sale of Starwave -- (345)
Minority interests 44 43
Equity in Infoseek loss 41 159
Other 42 5
CHANGES IN ASSETS AND LIABILITIES 510 (141)
-------- --------
2,939 1,631
-------- --------
CASH PROVIDED BY OPERATIONS 3,331 2,479
-------- --------
INVESTING ACTIVITIES
Dispositions 688 --
Film and television costs (1,303) (1,625)
Investments in theme parks, resorts and other property (934) (737)
Investment in Euro Disney (91) --
Acquisitions (net of cash acquired) 18 (230)
Other 47 2
-------- --------
(1,575) (2,590)
-------- --------
FINANCING ACTIVITIES
Commercial paper borrowings, net (263) 134
Other borrowings 992 1,318
Reduction of borrowings (1,772) (758)
Dividends (434) --
Repurchases of Disney common stock (115) (19)
Exercise of stock options and other 282 99
-------- --------
(1,310) 774
-------- --------
Increase in cash and cash equivalents 446 663
Cash and cash equivalents, beginning of period 414 127
-------- --------
Cash and cash equivalents, end of period $ 860 $ 790
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
III-3
<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 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. In December 1999, DVD Financing,
Inc. (DFI), a subsidiary of Disney Vacation Development, Inc. and an indirect
subsidiary of the Company, completed a receivables sale transaction. In
connection with this sale, DFI prepares separate financial statements, although
its separate assets and liabilities are also consolidated in these financial
statements. Operating results for the quarter and six months are not necessarily
indicative of the results that may be expected for the year ending September 30,
2000. Certain reclassifications have been made in the fiscal 1999 financial
statements to conform to the fiscal 2000 presentation. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended September 30, 1999.
2. In November 1998, the Company acquired a 43% interest in Infoseek
Corporation (Infoseek) in a transaction that, among other things, provided for
the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by
Infoseek. The Company recognized a $345 million non-cash gain on that
transaction.
On November 17, 1999, stockholders of the Company and Infoseek approved the
Company's acquisition of the remaining interest in Infoseek that the Company did
not already own.
The acquisition was effected by the creation and issuance of a new class of
common stock, called GO.com common stock, in exchange for outstanding Infoseek
shares, at an exchange rate of 1.15 shares of GO.com for each Infoseek share.
Upon consummation of the acquisition, the Company combined its Internet and
direct marketing businesses with Infoseek to create a single Internet and direct
marketing business called GO.com.
Disney retains an interest of approximately 71% in GO.com at March 31,
2000. Effective November 18, 1999, shares of the Company's existing common stock
were reclassified as Disney common stock, to track the financial performance of
the Company's businesses other than GO.com, plus Disney's retained interest in
GO.com.
The acquisition has been accounted for as a purchase, and the acquisition
cost of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over the
fair value of Infoseek's net assets, has been allocated to intangible assets,
including goodwill of $1.9 billion, and is being amortized over two to nine
years. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry.
In November 1999, the Company sold Fairchild Publications which it had
acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain
of $243 million.
The Company's consolidated results of operations have incorporated
Infoseek's activity, on a consolidated basis, from November 18, 1999 and the
activity of Fairchild Publications through the date of its disposal. The
unaudited pro forma information below presents combined results of operations as
if the Infoseek acquisition and the disposition of Fairchild Publications had
occurred at the beginning of fiscal 1999. The unaudited pro forma information is
not necessarily indicative of results of operations had the Infoseek acquisition
and the disposition of Fairchild Publications occurred at the beginning of
fiscal 1999, nor is it necessarily indicative of future results.
III-4
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
(unaudited; in millions, except per share data)
Revenues $ 13,245 $ 12,089
Net income 323 274
Diluted earnings (loss) per share
Disney $ 0.23 $ 0.20
GO.com $ (3.63) $ (3.19)
</TABLE>
Pro forma amounts for the six-month periods exclude purchased in-process
research and development expenditures of $23 million and $117 million in 2000
and 1999, respectively, the gain on the sale of Fairchild Publications in fiscal
2000 and the Starwave gain in fiscal 1999.
3. During the six months, the Company repaid $1.8 billion of term debt, which
matured during the period, and reduced its commercial paper borrowings by $263
million. These repayments were partially funded by proceeds of $992 million from
various financing arrangements having effective interest rates ranging from
5.96% to 6.32% and maturities in fiscal 2002 through 2015.
4. During 1998, the Company's Board of Directors decided to move to an annual,
rather than quarterly, dividend policy to reduce costs and simplify payments to
stockholders. During the first quarter of fiscal 2000, the Company paid a
dividend of $434 million ($0.21 per share) applicable to fiscal 1999.
5. Diluted earnings per share amounts are calculated using the treasury stock
method and are based upon the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation in periods in which they would have an anti-
dilutive effect. The difference between basic and diluted earnings per share is
solely attributable to stock options, which are considered anti-dilutive when
option exercise prices exceed the weighted average market price per share of
common stock during the period. For the three months ended March 31, 2000 and
1999, options for 12 million and 17 million shares, respectively, were excluded
from the Disney diluted earnings per share calculation. For the six-month
periods, options for 32 million and 22 million shares, respectively, were
excluded. For the quarter and six months ended March 31, 2000, all GO.com stock
options were anti-dilutive and, accordingly, options for 14 million and 12
million shares, respectively, were excluded from the GO.com earnings per share
calculation.
Net loss per share attributed to GO.com reflects the results of operations
after November 17, 1999, the date the Company acquired the remaining interest in
Infoseek that it did not already own and first issued GO.com common stock.
6. During the six months, a subsidiary of the Company repurchased 3.8 million
shares of Disney common stock for approximately $115 million. Under its share
repurchase program, the Company is authorized to purchase up to an additional
395 million shares. The Company evaluates share repurchase decisions on an
ongoing basis, taking into account borrowing capacity, management's target
capital structure, and other investment opportunities.
In April of the current year, the Company's Board of Directors also
approved a share repurchase program for up to five million shares of GO.com
common stock in the open market. No shares have been repurchased under this
program.
III-5
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------- ----------------------------------
(unaudited, in millions) 2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income $ 77 $ 226 $ 392 $ 848
Cumulative translation and other adjustments, net of
tax 13 (3) 6 (11)
----- ----- ----- -----
Comprehensive income $ 90 $ 223 $ 398 $ 837
===== ===== ===== =====
</TABLE>
8. The operating segments reported below are the segments of the Company for
which separate financial information is available and for which operating income
or loss amounts are evaluated regularly by executive management in deciding how
to allocate resources and in assessing performance.
During the first quarter of the current year, the Company completed the
merger of television production activities of the Walt Disney Studios with those
of the ABC Television Network. Accordingly, television production activities
formerly reported in Studio Entertainment are now reported in the Media Networks
segment. All prior-year amounts have been restated to reflect the current
presentation.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- ---------------------------
(unaudited, in millions) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Media Networks $2,380 $1,825 $ 5,117 $ 4,133
-------- ------ ------- -------
Studio Entertainment
Third parties 1,631 1,579 3,206 3,332
Intersegment 25 16 49 36
-------- ------ ------- --------
1,656 1,595 3,255 3,368
-------- ------ ------- --------
Theme Parks & Resorts 1,571 1,414 3,148 2,856
-------- ------ ------- --------
Consumer Products
Third parties 624 657 1,565 1,675
Intersegment (25) (16) (49) (36)
-------- ------ ------- --------
599 641 1,516 1,639
-------- ------ ------- --------
GO.com 97 41 199 117
-------- ------ ------- --------
$6,303 $5,516 $13,235 $ 12,113
======== ====== ======= ========
Operating income (loss):
Media Networks $ 537 $ 364 $ 1,179 $ 735
Studio Entertainment 3 96 26 239
Theme Parks & Resorts 330 311 693 654
Consumer Products 85 89 293 382
GO.com (127) (18) (216) (22)
Amortization of intangible assets (344) (107) (570) (215)
-------- ------ ------- --------
484 735 1,405 1,773
Gain on sale of Fairchild -- -- 243 --
Gain on sale of Starwave -- -- -- 345
-------- ------ ------- --------
$ 484 $ 735 $ 1,648 $ 2,118
======== ====== ======= ========
</TABLE>
III-6
<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, 2000 for each business segment, and for the Company as a whole, are not
necessarily indicative of results to be expected for the full year.
Media Networks revenues are influenced by advertiser demand and the
seasonal nature of programming, and generally peak in the spring and fall.
Studio Entertainment revenues fluctuate based upon the timing of theatrical
motion picture and home video releases. Release dates for theatrical and home
video products are determined by several factors, including timing of vacation
and holiday periods and competition in the market.
Theme Parks and Resorts revenues fluctuate with changes in theme park
attendance and resort occupancy resulting from the seasonal nature of vacation
travel. Peak attendance and resort occupancy generally occur during the summer
months when school vacations occur and during early-winter and spring holiday
periods.
Consumer Products revenues are influenced by seasonal consumer purchasing
behavior and the timing of animated theatrical releases.
GO.com revenues for the Direct Marketing and Internet commerce businesses
fluctuate as a result of seasonal consumer purchasing behavior, with a
significant portion of annual revenues generated in the first quarter. Internet
media revenues are influenced by advertiser demand and visitor traffic.
RESULTS OF OPERATIONS
On November 4, 1999, the Company sold Fairchild Publications, which was
acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999,
stockholders of the Company and Infoseek approved the Company's acquisition of
the remaining interest in Infoseek that the Company did not already own. To
enhance comparability, certain information for the current six months and prior-
year periods is presented on a pro forma basis, which assumes that these events
had occurred at the beginning of fiscal 1999. The pro forma results are not
necessarily indicative of the consolidated results that would have occurred had
these events actually occurred at the beginning of fiscal 1999, nor are they
necessarily indicative of future results.
Pro forma operating income excludes purchased in-process research and
development expenditures of $23 million and $73 million for the six months ended
March 31, 2000 and 1999, respectively.
III-7
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Consolidated Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
------------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
(unaudited, in millions)
Revenues $ 6,303 $ 5,496 15 % $ 5,516
Costs and expenses (5,475) (4,698) (17)% (4,674)
Amortization of intangible assets (344) (333) (3)% (107)
------- ------- -------
Operating income 484 465 4 % 735
Corporate and other activities (38) (66) 42 % (70)
Equity in Infoseek loss -- -- (75)
Net interest expense (126) (169) 25 % (174)
------- ------- -------
Income before income taxes and minority
interests 320 230 39 % 416
Income taxes (223) (183) (22)% (169)
Minority interests (20) (21) 5 % (21)
------- ------- -------
Net income $ 77 $ 26 n/m $ 226
======= ======= =======
</TABLE>
Net income for the quarter increased to $77 million compared to prior-year
pro forma net income of $26 million, driven by decreased net interest expense,
improvements in corporate and other activities and higher operating income.
Lower net interest expense reflected gains from the sale of investments and
lower average debt balances in the current quarter, partially offset by higher
interest rates in the current quarter. Corporate and other activities improved
due to increased income from equity investments. Increased operating income
reflected higher Media Networks, Theme Parks and Resorts and Consumer Products
results, partially offset by lower Studio Entertainment and GO.com results and
increased amortization of intangible assets.
As previously noted, the Company completed its acquisition of Infoseek
during the first quarter (see Note 2 to the Condensed Consolidated Financial
Statements). The acquisition resulted in a significant increase in intangible
assets. Intangible assets are being amortized over periods ranging from two to
nine years.
The impact of amortization related to the November 1998 and November 1999
acquisitions is expected to be $455 million for the remaining six months of
fiscal 2000, $707 million in 2001, $658 million in 2002, $92 million in 2003 and
$13 million over the remainder of the amortization period. The Company
determined the economic useful life of acquired goodwill by giving consideration
to the useful lives of Infoseek's identifiable intangible assets, including
developed technology, trademarks, user base, joint venture agreements and in-
place workforce. In addition, the Company considered the competitive environment
and the rapid pace of technological change in the Internet industry.
On an as-reported basis, net income decreased from $226 million to $77
million. The as-reported comparison reflects the items described above, as well
as Infoseek losses and the incremental amortization of intangible assets related
to the Infoseek acquisition in the current quarter, and equity in Infoseek
losses in the prior-year quarter. The higher effective tax rate for the current
quarter reflects the impact of incremental non-deductible amortization of
intangible assets related to the Infoseek acquisition.
III-8
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Consolidated Results - Six Months
<TABLE>
<CAPTION>
Six Months Ended March 31,
-------------------------------------------------------------------------------
Pro Forma As Reported
----------------------------------------- -----------------------------
2000 1999 % Change 2000 1999
-------- -------- ------------ --------- --------
(unaudited, in millions)
<S> <C> <C> <C> <C> <C>
Revenues $ 13,245 $ 12,089 10 % $ 13,235 $ 12,113
Costs and expenses (11,265) (10,173) (11)% (11,260) (10,125)
Amortization of intangible assets (688) (667) (3)% (570) (215)
Gain on sale of Fairchild -- -- -- 243 --
Gain on sale of Starwave -- -- -- -- 345
-------- -------- -------- --------
Operating income 1,292 1,249 3 % 1,648 2,118
Corporate and other activities (33) (89) 63 % (35) (108)
Equity in Infoseek loss -- -- -- (41) (159)
Net interest expense (319) (331) 4 % (323) (338)
-------- -------- -------- --------
Income before income taxes and minority
interests 940 829 13 % 1,249 1,513
Income taxes (573) (512) (12)% (813) (622)
Minority interests (44) (43) (2)% (44) (43)
-------- -------- -------- --------
Net income $ 323 $ 274 18 % $ 392 $ 848
======== ======== ======== ========
</TABLE>
On a pro forma basis, net income for the six months increased 18%, or $49
million to $323 million, driven by improvements in corporate and other
activities, higher operating income and decreased net interest expense.
Corporate and other activities improved due to increased income from equity
investments. Increased operating income reflected higher Media Networks and
Theme Parks and Resorts results, partially offset by lower Studio Entertainment,
Consumer Products and GO.com results and increased amortization of intangible
assets. Lower net interest expense reflected gains from the sale of investments
and lower average debt balances in the current period, partially offset by
higher interest rates and charges related to certain financial instruments in
the current period.
As noted above, the Company completed the sale of Fairchild Publications
during the first quarter. The sale resulted in a pre-tax gain of $243 million.
Income taxes on the transaction largely offset the pre-tax gain.
On an as-reported basis, net income decreased 54% or $456 million and
operating income decreased 22% or $470 million. The as-reported results reflect
the items described above, as well as the impact of the sale of Fairchild
Publications and equity in Infoseek loss in the current six months and the gain
on the sale of Starwave and higher Infoseek equity losses in the prior-year
period. The prior-year equity in Infoseek loss includes a charge for purchased
in-process research and development expenditures of $44 million. Current-period
as-reported operating income and net income also reflect higher Infoseek losses
and increased amortization of intangible assets resulting from the Infoseek
acquisition and a $23 million charge for purchased in-process research and
development expenditures. The higher effective tax rate for the current six
months reflects the income tax impact of the sale of Fairchild Publications and
the impact of higher non-deductible amortization of intangible assets.
III-9
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Business Segment Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
------ --------- ---------- -----------
(unaudited, in millions)
<S> <C> <C> <C> <C>
Revenues:
Media Networks $2,380 $1,825 30 % $1,825
Studio Entertainment 1,656 1,595 4 % 1,595
Theme Parks & Resorts 1,571 1,414 11 % 1,414
Consumer Products 599 592 1 % 641
GO.com 97 70 39 % 41
------ ------ ------
$6,303 $5,496 15 % $5,516
====== ====== ======
Operating income (loss): /(1)/
Media Networks $ 537 $ 364 48 % $ 364
Studio Entertainment 3 96 (97)% 96
Theme Parks & Resorts 330 311 6 % 311
Consumer Products 85 79 8 % 89
GO.com (127) (52) n/m (18)
Amortization of intangible assets (344) (333) (3)% (107)
------ ------ ------
$ 484 $ 465 4 % $ 735
====== ====== ======
</TABLE>
(1) Segment results exclude intangible asset amortization. Segment earnings
before interest, taxes, depreciation and amortization (EBITDA) is as follows:
<TABLE>
<S> <C> <C> <C>
Media Networks $ 572 $ 395 $ 395
Studio Entertainment 16 111 111
Theme Parks & Resorts 463 424 424
Consumer Products 109 110 120
GO.com (117) (47) (16)
------ ------ ------
$1,043 $ 993 $1,034
====== ====== ======
</TABLE>
The Company believes that segment EBITDA provides additional information
useful in analyzing the underlying business results. However, segment EBITDA is
a non-GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating income.
Media Networks
The following table provides supplemental revenue and operating income
detail for the Media Networks segment:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------
2000 1999 % Change
------- ------ ----------
(unaudited, in millions)
<S> <C> <C> <C>
Revenues:
Broadcasting $1,652 $1,225 35%
Cable Networks 728 600 21%
------ ------
$2,380 $1,825 30%
====== ======
Operating income:
Broadcasting $ 244 $ 136 79%
Cable Networks 293 228 29%
------ ------
$ 537 $ 364 48%
====== ======
</TABLE>
III-10
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Revenues increased 30%, or $555 million to $2.4 billion, driven by
increases of $427 million from Broadcasting and $128 million at the Cable
Networks. Increased Broadcasting revenues were driven by growth at the ABC
television network, the Company's owned television stations and the radio
networks and stations. Increases at the television network and owned television
stations were driven by the Super Bowl, a strong advertising market, the
continued success of Who Wants to Be a Millionaire and higher overall ratings on
network programming. The strong advertising market also resulted in growth at
the radio network and stations. Cable Network revenue growth was driven by
increased advertising revenues due to a strong advertising market, as well as
higher affiliate fees due to contractual rate adjustments and subscriber growth.
Operating income increased 48%, or $173 million to $537 million, reflecting
increased Broadcasting and Cable Network revenues, partially offset by higher
costs. Costs and expenses, which consist primarily of programming rights and
amortization, production costs, distribution and selling expenses and labor
costs, increased 26% or $382 million, driven by higher sports programming costs,
principally related to National Football League (NFL) and National Hockey League
(NHL) broadcasts. In addition, higher costs and expenses reflected increased
costs associated with a higher volume of network television production, as well
as start-up costs associated with the January launch of SoapNet and various
international Disney Channels.
The Company has investments in cable operations that are accounted for as
unconsolidated equity investments. The table below presents "Operating Income
from Cable Television Activities," which comprise the Cable Networks and the
Company's cable equity investments:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
2000 1999 % Change
-------- ------- ------------
(unaudited, in millions)
<S> <C> <C> <C>
Operating income:
Cable Networks $ 293 $ 228 29 %
Equity Investments:
A&E, Lifetime and E! Entertainment Television 168 133 26 %
Other 33 (10) n/m
----- -----
Operating Income from Cable Television Activities 494 351 41 %
Partner share of operating income (169) (109) (55)%
----- -----
Company share of operating income $ 325 $ 242 34 %
===== =====
</TABLE>
Note: Operating Income from Cable Television Activities presented in this
table represents 100% of the operating income of both the Company's owned cable
businesses and its cable equity investees. The Company's share of operating
income represents the Company's ownership interest in cable television operating
income. Cable Networks are reported in "Operating income" in the Condensed
Consolidated Statements of Income. Equity Investments are accounted for under
the equity method and the Company's proportionate share of the net income of its
cable equity investments is reported in "Corporate and other activities" in the
Condensed Consolidated Statements of Income. The Company believes that Operating
Income from Cable Television Activities provides additional information useful
in analyzing the underlying business results. However, Operating Income from
Cable Television Activities is a non-GAAP financial metric and should be
considered in addition to, not as a substitute for, reported operating income.
III-11
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The Company's share of Cable Television Operating Income increased 34%, or
$83 million to $325 million, driven by growth at the Cable Networks and
increased advertising revenues at Lifetime Television, The History Channel and
A&E Television.
Studio Entertainment
Revenues increased 4%, or $61 million to $1.7 billion, driven by growth of
$105 million in worldwide theatrical motion picture distribution, partially
offset by declines of $29 million in network television production and
distribution and $13 million in domestic home video. Growth in worldwide
theatrical motion picture distribution reflected the performance of Scream 3 and
a stronger animated film slate domestically and Toy Story 2, Tarzan and The
Sixth Sense internationally. The decline in network television production and
distribution reflected Home Improvement in the prior-year quarter. In domestic
home video, the success of Tarzan on VHS and DVD and The Sixth Sense on DVD
faced difficult comparisons to the combination of Mulan, The Waterboy and 101
Dalmatians in the prior-year quarter.
Operating income decreased 97%, or $93 million to $3 million, due to
declines in domestic home video, driven primarily by cost increases, and
domestic theatrical motion picture distribution, where cost increases exceeded
revenue gains. These declines were partially offset by improvements in
international theatrical motion picture distribution, where cost increases only
partially offset higher revenues. Costs and expenses, which consist primarily of
production cost amortization, distribution and selling expenses, participations
expense, product costs, labor and leasehold expenses, increased 10% or $154
million. Higher costs in domestic home video were driven by participations
expense for The Sixth Sense and higher distribution costs. Cost increases in
domestic theatrical motion picture distribution reflected higher production cost
amortization, write-downs on Mission to Mars and Cradle Will Rock and increased
promotional costs for Cider House Rules. Production cost amortization decreased
in network television production and distribution due to the production of Home
Improvement in the prior-year quarter and the distribution of more classic
animated titles in the current quarter, which have a lower amortization cost
relative to recent titles. Participations expense increased in international
theatrical motion picture distribution due to Toy Story 2.
Theme Parks and Resorts
Revenues increased 11%, or $157 million to $1.6 billion, driven by growth
of $90 million at the Walt Disney World Resort, reflecting increased guest
spending and record theme park attendance, $40 million at Disney Cruise Line,
reflecting a full quarter of operations from both cruise ships, the Disney Magic
and the Disney Wonder, compared to just the Disney Magic in the prior-year
quarter, and increased guest spending at Disneyland. Increased guest spending
and record attendance at the Walt Disney World Resort were driven by the ongoing
Millennium Celebration. At Disneyland, 45th Anniversary Celebration
merchandise sales and enhanced merchandise and food and beverage offerings
throughout the park contributed to higher guest spending.
Operating income increased 6%, or $19 million to $330 million, driven by
revenue growth at the Walt Disney World Resort, results at Disney Cruise Line
and higher guest spending at Disneyland. Costs and expenses, which consist
principally of labor, costs of merchandise, food and beverages sold,
depreciation, repairs and maintenance, entertainment and marketing and sale
expense, increased 13% or $138 million. Increased operating costs were driven by
the ongoing Millennium Celebration, Disney Cruise Line operations and higher
theme park attendance at the Walt Disney World Resort.
III-12
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Consumer Products
Revenues increased 1%, or $7 million to $599 million, compared to prior-
year pro forma amounts, driven by growth of $11 million in worldwide merchandise
licensing and publishing, offset by declines of $4 million at the Disney Stores.
Merchandise licensing revenues reflected increases domestically, driven by the
timing of certain contractual annual minimum guarantee payments, partially
offset by continued licensing softness in Europe. Disney Store revenues
decreased due to lower comparative store sales, principally domestically.
On an as-reported basis, revenues decreased 7% or $42 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Operating income increased 8%, or $6 million to $85 million, compared to
prior-year pro forma amounts, reflecting increases in domestic merchandise
licensing and Disney Interactive, partially offset by continued licensing
softness in Europe and lower comparative store sales at the Disney Stores,
principally domestically. Improvements at Disney Interactive were driven by the
success of the Who Wants to Be A Millionaire video game and the Toy Story 2
action game, as well as cost savings. Costs and expenses, which consist
primarily of labor, product costs, including product development costs,
distribution and selling expenses and leasehold expenses, were comparable to the
prior year quarter.
On an as-reported basis, operating income decreased 4% or $4 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
GO.com
Revenues increased 39%, or $27 million to $97 million, compared to prior
year pro forma amounts, driven by an increase of $30 million in Internet
revenues, partially offset by a $3 million decrease in Direct Marketing
revenues. Internet revenue growth was driven by increased advertising and
sponsorship revenues reflecting increased advertiser demand and online site
traffic, sales growth at DisneyStore.com, higher intranet software sales,
operations at toysmart.com, which was acquired in the fourth quarter of fiscal
1999, and increased sales at DisneyTravel.com. Lower Direct Marketing revenues
were due principally to lower catalog response rates and inventory liquidation
efforts.
On an as-reported basis, revenues increased 137% or $56 million, reflecting
the items described above, as well as the operations of Infoseek, which was
consolidated into GO.com beginning November 18, 1999.
Operating loss increased $75 million to $127 million, compared to prior-
year pro forma amounts, reflecting increased costs and expenses, partially
offset by higher Internet revenues. Costs and expenses, which consist primarily
of cost of revenues, sales and marketing costs, other operating expenses and
depreciation expense increased 84% or $102 million. Higher costs and expenses
were driven by continued investment in Internet operations and infrastructure,
new product initiatives, a non-cash charge of $31 million to reflect the
impairment of certain intangible assets, one-time employee retention payments of
$17 million required by the 1999 Infoseek acquisition agreement and operations
at toysmart.com, which was acquired in the fourth quarter of fiscal 1999.
On an as-reported basis, operating loss increased $109 million to $127
million, reflecting the items described above, as well as losses at Infoseek,
which was consolidated into GO.com beginning November 18, 1999.
III-13
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Business Segment Results - Six Months
<TABLE>
<CAPTION>
Six Months Ended March 31,
-----------------------------------------------------------------------------------
Pro Forma As Reported
------------------------------------------- -------------------------------
2000 1999 % Change 2000 1999
---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
(unaudited, in millions)
Revenues:
Media Networks $ 5,117 $ 4,133 24 % $ 5,117 $ 4,133
Studio Entertainment 3,255 3,368 (3)% 3,255 3,368
Theme Parks & Resorts 3,148 2,856 10 % 3,148 2,856
Consumer Products 1,502 1,550 (3)% 1,516 1,639
GO.com 223 182 23 % 199 117
------- ------- ------- -------
$13,245 $12,089 10 % $13,235 $12,113
======= ======= ======= =======
Operating income (loss): /(1)/
Media Networks $ 1,179 $ 735 60 % $ 1,179 $ 735
Studio Entertainment 26 239 (89)% 26 239
Theme Parks & Resorts 693 654 6 % 693 654
Consumer Products 292 369 (21)% 293 382
GO.com (210) (81) n/m (216) (22)
Amortization of intangible assets (688) (667) (3)% (570) (215)
------- ------- ------- -------
1,292 1,249 3 % 1,405 1,773
Gain on sale of Fairchild -- -- -- 243 --
Gain on sale of Starwave -- -- -- -- 345
------- ------- ------- -------
$ 1,292 $ 1,249 3 % $ 1,648 $ 2,118
======= ======= ======= =======
(1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows:
Media Networks $ 1,248 $ 796 $ 1,248 $ 796
Studio Entertainment 54 269 54 269
Theme Parks & Resorts 965 887 965 887
Consumer Products 342 431 343 444
GO.com (193) (70) (201) (18)
------- ------- ------- -------
$ 2,416 $ 2,313 $ 2,409 $ 2,378
======= ======= ======= =======
</TABLE>
The Company believes that segment EBITDA provides additional information
useful in analyzing the underlying business results. However, segment EBITDA is
a non-GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating income.
III-14
<PAGE>
PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Media Networks
The following table provides supplemental revenue and operating income
detail for the Media Networks segment:
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------
2000 1999 % Change
----------- ---------- -----------
<S> <C> <C> <C>
(unaudited, in millions)
Revenues:
Broadcasting $3,367 $2,740 23 %
Cable Networks 1,750 1,393 26 %
------ ------
$5,117 $4,133 24 %
====== ======
Operating income:
Broadcasting $ 589 $ 284 107 %
Cable Networks 590 451 31 %
------ ------
$1,179 $ 735 60 %
====== ======
</TABLE>
Revenues increased 24%, or $984 million to $5.1 billion, driven by
increases of $627 million from Broadcasting and $357 million at the Cable
Networks. Increased Broadcasting revenues were driven by growth at the ABC
television network, the Company's owned television stations and the radio
networks and stations. Increases at the television network and owned television
stations were driven by the Super Bowl, a strong advertising market, the
continued success of Who Wants to Be a Millionaire and higher overall ratings on
network programming, including Good Morning America. The strong advertising
market also resulted in growth at the radio network and stations. Cable Network
revenue growth was driven by increased advertising revenues due to a strong
advertising market, as well as higher affiliate fees due to contractual rate
adjustments and subscriber growth.
Operating income increased 60%, or $444 million to $1.2 billion, reflecting
increased Broadcasting and Cable Network revenues, partially offset by higher
costs. Costs and expenses increased 16% or $540 million, driven by higher sports
programming costs, principally related to NFL broadcasts. In addition, increased
costs associated with a higher volume of network television production, as well
as start-up costs associated with the January launch of SoapNet and various
international Disney Channels, contributed to increased costs and expenses.
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 NFL for the right to broadcast NFL football games on the ABC Television
Network and ESPN. The contract provides for total payments of approximately $9
billion over an eight-year period, and commenced with the 1998 season. Under the
terms of the contract, the NFL has the right to cancel the contract after five
years. The programming rights fees under the new contract are significantly
higher than those required by the previous contract and the fee increases exceed
the estimated revenue increases over the contract term. The higher fees under
the new contract reflect various factors, including increased competition for
sports programming rights and an increase in the number of games to be broadcast
by ESPN. The Company continues to pursue a variety of strategies, including
marketing efforts, to reduce the impact of the higher costs. The contract's
impact on the Company's results over the remaining contract term is dependent
upon a number of factors, including the strength of advertising markets,
effectiveness of marketing efforts and the size of viewer audiences.
III-15
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The cost of the NFL contract is charged to expense based on the ratio of
each period's gross revenues to estimated total gross revenues over the non-
cancelable contract period. Estimates of total gross revenues can change
significantly and, accordingly, they are reviewed periodically and amortization
is adjusted if necessary. Such adjustments could have a material effect on
results of operations in future periods.
The Company has investments in cable operations that are accounted for as
unconsolidated equity investments. The table below presents "Operating Income
from Cable Television Activities," which comprise the Cable Networks and the
Company's cable equity investments:
<TABLE>
<CAPTION>
Six Months Ended March 31,
----------------------------------------
2000 1999 % Change
-------- -------- ------------
(unaudited, in millions)
<S> <C> <C> <C>
Operating income:
Cable Networks $ 590 $ 451 31 %
Equity Investments:
A&E, Lifetime and E! Entertainment Television 318 235 35 %
Other 51 7 n/m
----- -----
Operating Income from Cable Television Activities 959 693 38 %
Partner share of operating income (318) (209) (52)%
----- -----
Company share of operating income $ 641 $ 484 32 %
===== =====
</TABLE>
Note: Operating Income from Cable Television Activities presented in this
table represents 100% of the operating income of both the Company's owned
cable businesses and its cable equity investees. The Company's share of
operating income represents the Company's ownership interest in cable
television operating income. Cable Networks are reported in "Operating
income" in the Condensed Consolidated Statements of Income. Equity
Investments are accounted for under the equity method and the Company's
proportionate share of the net income of its cable equity investments is
reported in "Corporate and other activities" in the Condensed Consolidated
Statements of Income.
The Company's share of cable television operating income increased 32%, or
$157 million to $641 million, driven by growth at the Cable Networks and
increased advertising revenues at E! Entertainment Television, Lifetime
Television and The History Channel.
Studio Entertainment
Revenues decreased 3%, or $113 million to $3.3 billion, driven by declines
of $187 million in worldwide home video, $52 million in network television
production and distribution and $42 million in domestic theatrical motion
picture distribution, partially offset by growth of $156 million in
international theatrical motion picture distribution. Domestic home video
revenues reflected fewer unit sales in the current year, as the prior year
included the successful releases of Lion King II: Simba's Pride, Mulan, The
Waterboy and 101 Dalmatians. The decline in network television production and
distribution reflects the production of Home Improvement in the prior year. In
domestic theatrical motion picture distribution, the success of Toy Story 2 and
Scream 3 faced difficult comparisons to the prior year, which included The
Waterboy, A Bug's Life and Enemy of the State. Growth in international
theatrical motion picture distribution reflected the performance of Toy Story 2,
Tarzan and The Sixth Sense.
III-16
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Operating income decreased 89%, or $213 million to $26 million, due to
declines in worldwide home video and domestic theatrical motion picture
distribution, driven primarily by decreased revenues. These declines were
partially offset by improvements in international theatrical motion picture
distribution, where cost increases only partially offset higher revenues. Costs
and expenses increased 3% or $100 million. Cost increases in international
theatrical motion picture distribution reflected higher production cost
amortization and increased participations expense due to The Sixth Sense and Toy
Story 2. Production cost amortization decreased in network television
production and distribution, reflecting the production of Home Improvement in
the prior year, as well as the distribution of more classic animated titles in
the current year, which have a lower amortization cost relative to recent
titles.
Increases in production and participation costs are reflective of industry
trends: as competition for creative talent has increased, costs within the
industry have increased at a rate significantly higher than inflation.
Theme Parks and Resorts
Revenues increased 10%, or $292 million to $3.1 billion, driven by growth
of $179 million at the Walt Disney World Resort, reflecting increased guest
spending, increased occupied room nights and record theme park attendance, $68
million at Disney Cruise Line reflecting a full six months of operations from
both cruise ships, the Disney Magic and the Disney Wonder, compared to just the
Disney Magic in the prior year, and increased guest spending at Disneyland.
Increased guest spending and record attendance at the Walt Disney World Resort
were driven by the ongoing Millennium Celebration; and higher occupied room
nights reflected the opening of the All Star Movies Resort, which opened in the
second quarter of the prior year. At Disneyland, 45th Anniversary Celebration
merchandise sales and enhanced merchandise and food and beverage offerings
throughout the park contributed to higher guest spending.
Operating income increased 6%, or $39 million to $693 million, driven by
revenue growth at the Walt Disney World Resort, improved results at Disney
Cruise Line and higher guest spending at Disneyland. Costs and expenses
increased 11% or $253 million, driven by higher theme park attendance and the
ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise
Line operations.
Consumer Products
Pro forma revenues decreased 3%, or $48 million to $1.5 billion, driven by
declines of $74 million in worldwide merchandise licensing and publishing,
partially offset by growth of $17 million at Disney Interactive and $10 million
at the Disney Stores. Lower merchandise licensing and publishing revenues were
primarily attributable to declines domestically and in Europe. Disney
Interactive revenue increases were driven by the successful release of the Who
Wants to Be a Millionaire video game and the Toy Story 2 action game. Disney
Store revenues increased due to continued worldwide expansion, partially offset
by lower comparative store sales, principally domestically.
On an as-reported basis, revenues decreased 8% or $123 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Pro forma operating income decreased 21%, or $77 million to $292 million,
reflecting decreases in worldwide merchandise licensing, softer publishing
results domestically and in Europe, and decreases at the Disney Stores,
primarily domestically and in Japan, partially offset by increases at Disney
Interactive. Costs and expenses increased 2% or $29 million, primarily at the
Disney Stores due to the addition of new stores and inventory liquidation
efforts.
III-17
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On an as-reported basis, operating income decreased 23% or $89 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
GO.com
Pro forma revenues increased 23%, or $41 million to $223 million, driven by
an increase of $53 million in Internet revenues, partially offset by a $12
million decrease in Direct Marketing revenues. Internet revenue growth reflected
increased advertising and sponsorship revenues driven by increased advertiser
demand and online site traffic, strong holiday-season sales at DisneyStore.com,
operations at toysmart.com, which was acquired in the fourth quarter of fiscal
1999, higher intranet software sales and increased sales at DisneyTravel.com.
Lower Direct Marketing revenues were due principally to lower catalog response
rates and inventory liquidation efforts.
On an as-reported basis, revenues increased 70% or $82 million, reflecting
the items described above, as well as the operations of Infoseek, which was
consolidated into GO.com beginning November 18, 1999.
Pro forma operating loss increased $129 million to $210 million, reflecting
increased costs and expenses, partially offset by higher Internet revenues.
Costs and expenses increased 65% or $170 million driven by continued investment
in Internet operations and infrastructure, new product initiatives, a non-cash
charge of $31 million to reflect the impairment of certain intangible assets,
one-time employee retention payments of $17 million required by the 1999
Infoseek acquisition agreement and operations at toysmart.com, which was
acquired in the fourth quarter of fiscal 1999.
On an as-reported basis, operating loss increased $194 million to $216
million, reflecting the items described above, as well as losses from Infoseek,
which was consolidated into GO.com beginning November 18, 1999.
Costs and expenses for the remainder of the year are expected to reflect
continued investment in infrastructure and new initiatives and incremental
marketing and sales expenditures.
FINANCIAL CONDITION
For the six months ended March 31, 2000, cash provided by operations
increased $852 million to $3.3 billion, driven by higher amortization of
television broadcast rights relative to cash payments, decreased income tax
payments and higher film and television cost amortization.
During the six months, the Company invested $1.3 billion to develop,
produce and acquire rights to film and television properties, a decrease of $322
million, primarily due to a $310 million payment related to the acquisition of a
film library in the prior year.
During the six months, the Company invested $934 million in theme parks,
resorts and other properties. These expenditures reflected continued expansion
activities related to Disney's California Adventure and certain resort
facilities at the Walt Disney World Resort.
During the six months, the Company invested $91 million in Euro Disney
S.C.A. to maintain its 39% ownership interest after a Euro Disney equity rights
offering, the proceeds of which will be used to fund construction of a new theme
park.
Total commitments to purchase broadcast programming approximated $13.5
billion at March 31, 2000, including approximately $11.2 billion related to
sports programming rights, primarily NFL, College Football, Major League
Baseball and NHL. Substantially all of this amount is payable over the next six
years.
III-18
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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 repaid $1.8 billion of term debt, which
matured during the period, and reduced its commercial paper borrowings by $263
million. These repayments were partially funded by proceeds of $992 million from
various financing arrangements. Commercial paper borrowings outstanding as of
March 31, 2000 totaled $1.7 billion, with maturities of up to one year,
supported by bank facilities totaling $4.8 billion, which expire in one to five
years and allow for borrowings at various interest rates. The Company also has
the ability to borrow under a U.S. shelf registration statement and a euro
medium-term note program, which collectively permit the issuance of up to
approximately $4.6 billion of additional debt.
The Company acquires shares of its stock on an ongoing basis and is
authorized as of March 31, 2000 to purchase up to an additional 395 million
shares. During the six months, a subsidiary of the Company acquired
approximately 3.8 million shares of Disney common stock for approximately $115
million. The Company also used $434 million to fund dividend payments during the
first quarter.
The Company believes that its financial condition is strong and that its
cash, other liquid assets, operating cash flows, access to equity capital
markets and borrowing capacity, taken together, provide adequate resources to
fund ongoing operating requirements and future capital expenditures related to
the expansion of existing businesses and development of new projects.
OTHER MATTERS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB
101). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 no later than the first quarter of fiscal 2001 and is
evaluating the effect that such adoption may have on its consolidated results of
operations and financial position.
III-19
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
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; and
Internet or theme park and resort projects, are forward-looking statements
within the meaning of the Act. These statements are made on the basis of
management's views and assumptions, as of the time the statements are made,
regarding future events and business performance. There can be no assurance,
however, that management's expectations will necessarily come to pass.
Factors that may affect forward-looking statements. 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,
1999 under the heading "Factors that may affect forward-looking statements."
III-20
<PAGE>
EXHIBIT 3
AMENDED BYLAWS
OF
THE WALT DISNEY COMPANY
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the
--------- -----------------
Corporation shall be in the City of Wilmington, County of New Castle, Delaware.
Section 2. Principal Place of Business. The principal place of
--------- ---------------------------
business of the Corporation is hereby fixed and located at 500 South Buena Vista
Street, Burbank, California 91521.
Section 3. Other Offices. The Corporation may also have offices at
--------- -------------
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of the stockholders for the
--------- -----------------
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors (and in the case of a special
meeting, by the Board of Directors or the person calling the special meeting as
authorized by Section 3 of this Article II) and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
-1-
<PAGE>
Section 2. Annual Meetings. The Annual Meetings of Stockholders
--------- ---------------
shall be held on such date and at such time and place as may be fixed by the
Board of Directors and stated in the notice of the meeting, for the purpose of
electing directors and for the transaction of such other business as is properly
brought before the meeting in accordance with these Bylaws.
Section 3. Special Meetings. Special meetings of stockholders, for
--------- ----------------
any purpose or purposes, may be called by the Board of Directors, the Chairman
of the Board of Directors, or the President. Special meetings of stockholders
may not be called by any other person or persons. Written notice of a special
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called shall be given not less than 10 nor
more than 60 days before the date of the meeting to each stockholder entitled to
vote at such meeting, and only such business as is stated in such notice shall
be acted upon thereat.
Section 4. Quorum. Except as may be otherwise provided by law or by
--------- ------
the Certificate of Incorporation, the holders of a majority in voting power of
the capital stock issued and outstanding and entitled to vote thereat, present
in person or represented by proxy, shall constitute a quorum at all meetings of
the stockholders for the transaction of business. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, a
minority of the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the Certificate
--------- ------
of Incorporation or these Bylaws, (i) at all meetings of stockholders for the
election of directors, a plurality of votes cast shall be sufficient to elect,
and (ii) any other question brought before any meeting of stockholders shall be
decided by the vote of the holders of a majority in voting power of the stock
represented and entitled to vote thereon. Unless otherwise provided in the
Certificate of Incorporation, each stockholder represented at a meeting of
stockholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such stockholder. The Board of
Directors, in its discretion, or the officer of the Corporation presiding at a
meeting of stockholders, in his discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
Section 6. Organization.
--------- ------------
(a) All meetings of the stockholders shall be presided over by
the Chairman of the Board of Directors or, if he is not present, by the Vice
Chairman of the Board of Directors, and if he is not present, by such officer or
director as is designated by the Board of
-2-
<PAGE>
Directors. The Secretary of the Corporation or, if he is not present, any
Assistant Secretary or other person designated by the presiding officer shall
act as secretary of the meeting.
(b) The date and time of the opening and the closing of the
polls for each matter upon which the stockholders will vote at a meeting shall
be announced at the meeting by the person presiding over the meeting. The Board
of Directors may adopt by resolution such rules and regulations for the conduct
of the meeting of stockholders as it shall deem appropriate. Except to the
extent inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of stockholders shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following (i) the establishment of an agenda or
order of business for the meeting; (ii) rules and procedures for maintaining
order at the meeting and the safety of those present; (iii) limitations on
attendance at or participation in the meeting to stockholders of record of the
Corporation, their duly authorized and constituted proxies or such other persons
as the chairman of the meeting shall determine; (iv) restrictions on entry to
the meeting after the time fixed for the commencement thereof; and (v)
limitations on the time allotted to questions or comments by participants.
Unless and to the extent determined by the Board of Directors or the chairman of
the meeting, meetings of stockholders shall not be required to be held in
accordance with the rules of parliamentary procedure.
Section 7. List of Stockholders Entitled to Vote. The officer of
--------- -------------------------------------
the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least 10 days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall
--------- ------------
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 7 of this Article II or the books of
the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 9. Inspectors of Election. Before any meeting of
--------- ----------------------
stockholders, the Board of Directors shall appoint one or more inspectors to act
at the meeting and make a written report thereof. The Board of Directors may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
-3-
<PAGE>
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability.
The inspectors shall:
(a) ascertain the number of shares outstanding and the voting
power of each,
(b) determine the shares represented at the meeting and the
validity of proxies and ballots,
(c) count all votes and ballots,
(d) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination made by the
inspectors, and
(e) certify their determination of the number of shares
represented at the meeting, and their count of all votes and ballots.
The inspectors may appoint or retain other persons or entities to assist
the inspectors in the performance of the duties of the inspectors. In
determining the validity and counting of proxies and ballots, the inspectors
shall act in accordance with applicable law.
Section 10. Notice of Stockholder Business and Nominations.
---------- ----------------------------------------------
(a) Annual Meetings of Stockholders.
-------------------------------
(1) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders only (a)
pursuant to the Corporation's notice of meeting (or any supplement thereto), (b)
by or at the direction of the Board of Directors or (c) by any stockholder of
the Corporation who was a stockholder of record of the Corporation at the time
the notice provided for in this Section 10 is delivered to the Secretary of the
Corporation, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 10.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(a)(1) of this Section 10, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation and any such proposed business
other than the nomination of persons for election to the Board of Directors must
constitute a proper matter for stockholder action. To be timely, a stockholder's
-4-
<PAGE>
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the ninetieth day nor
earlier than the close of business on the one hundred twentieth day prior to the
first anniversary of the preceding year's annual meeting (provided, however,
that in the event that the date of the annual meeting is more than thirty days
before or more than seventy days after such anniversary date, notice by the
stockholder must be so delivered not earlier than the close of business on the
one hundred twentieth day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such meeting is
first made by the Corporation). In no event shall the public announcement of an
adjournment or postponement of an annual meeting commence a new time period (or
extend any time period) for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth: (a) as to each person whom the
stockholder proposes to nominate for election as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (and
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the text of the proposal or
business (including the text of any resolutions proposed for consideration and
in the event that such business includes a proposal to amend the Bylaws of the
Corporation, the language of the proposed amendment), the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner, (ii) the class and number of shares of capital stock of
the Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner, (iii) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and or by proxy at the meeting to propose such business or nomination, and (iv)
a representation whether the stockholder or the beneficial owner, if any,
intends or is part of a group which intends (a) to deliver a proxy statement
and/or form of proxy to holders of at least the percentage of the Corporation's
outstanding capital stock required to approve or adopt the proposal or elect the
nominee and/or (b) otherwise to solicit proxies from stockholders in support of
such proposal or nomination. The Corporation may require any proposed nominee to
furnish such other information as it may reasonably require to determine the
eligibility of such proposed nominee to serve as a director of the Corporation.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 10 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation at an
annual meeting is increased and there is no public announcement by the
Corporation naming the nominees for the additional directorships at least one
hundred days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 10 shall also be
considered timely, but only with
-5-
<PAGE>
respect to nominees for the additional directorships, if it shall be delivered
to the Secretary at the principal executive offices of the Corporation not later
than the close of business on the tenth day following the day on which such
public announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (1) by or at the direction of the Board of
Directors of (2) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time the notice provided for
in this Section 10 is delivered to the Secretary of the Corporation, who is
entitled to vote at the meeting and upon such election and who complies with the
notice procedures set forth in this Section 10. In the event the Corporation
calls a special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder entitled to vote in
such election of directors may nominate a person or persons (as the case may be)
for election to such position(s) as specified in the Corporation's notice of
meeting, if the stockholder's notice required by paragraph (a)(2) of this
Section 10 shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the one
hundred twentieth day prior to such special meeting and not later than the close
of business on the later of the ninetieth day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period (or extend any time period) for the giving of a stockholder's
notice as described above.
(c) General. (1) Only such persons who are nominated in accordance
-------
with the procedures set forth in this Section 10 shall be eligible to be elected
at an annual or special meeting of stockholders of the Corporation to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 10. Except as otherwise provided by law, the chairman
of the meeting shall have the power and duty (a) to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this Section 10 (including whether the stockholder or beneficial owner, if any,
on whose behalf the nomination or proposal is made solicited (or is part of a
group which solicited) or did not so solicit, as the case may be, proxies in
support of such stockholder's nominee or proposal in compliance with such
stockholder's representation as required by clause (a)(2)(c)(iv) of this Section
10) and (b) if any proposed nomination or business was not so made or proposed
in compliance with this Section 10 to declare that such nomination shall be
disregarded or that such proposed business shall not be transacted.
-6-
<PAGE>
(2) For purposes of this Section 10, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 10,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 10. Nothing in this Section 10 shall be deemed to affect
any rights (a) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(b) of the holders of any series of Preferred Stock to elect directors pursuant
to any applicable provisions of the Certificate of Incorporation.
ARTICLE III
DIRECTORS
---------
Section 1. Number and Election of Directors. Subject to the rights,
--------- --------------------------------
if any, of holders of preferred stock of the Corporation to elect directors of
the Corporation, the Board of Directors shall consist of not less than nine nor
more than 21 members with the exact number of directors to be determined from
time to time solely by resolution duly adopted by the Board of Directors.
Directors shall be elected by a plurality of the votes cast at Annual Meetings
of stockholders, and each director so elected shall hold office as provided by
Article FIFTH of the Certificate of Incorporation. Directors need not be
stockholders.
Section 2. Resignation of Directors. Any director may resign at any
--------- ------------------------
time effective upon giving written notice to the Corporation, unless the notice
specifies a later time for the effectiveness of such resignation.
Section 3. Vacancies. Any vacancy on the Board of Directors,
--------- ---------
howsoever resulting, may be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director. Any
director elected to fill a vacancy shall hold office for a term as specified in
Article FIFTH of the Certificate of Incorporation.
Section 4. Duties and Powers. The business of the Corporation shall
--------- -----------------
be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
Bylaws directed or required to be exercised or done by the stockholders.
Section 5. Meetings. The Board of Directors of the Corporation may
--------- --------
hold meetings, both regular and special, either within or without the State of
Delaware. Regular
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<PAGE>
meetings of the Board of Directors may be held without notice at such time and
at such place as may from time to time be determined by the Board of Directors.
Special meetings of the Board of Directors may be called by the Chairman of the
Board of Directors, the President, or by a majority of the Board of Directors.
Notice thereof, stating the place, date and hour of the meeting, shall be given
to each director either by mail not less than four days before the date of the
meeting, or personally or by telephone, telegram, telex or similar means of
communication on 12 hours notice, or on such shorter notice as the person or
persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 6. Quorum; Action of Board of Directors. Except as may be
--------- ------------------------------------
otherwise specifically provided by law, the Certificate of Incorporation or
these Bylaws, at all meetings of the Board of Directors, a majority of the
entire Board of Directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section 7. Action by Written Consent. Any action required or
--------- -------------------------
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee.
Section 8. Meetings by Means of Conference Telephone. Members of
--------- -----------------------------------------
the Board of Directors of the Corporation, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 8 shall
constitute presence in person at such meeting.
Section 9. Committees. The Board of Directors may, by resolution
--------- ----------
passed by a majority of the whole Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent allowed by law
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and
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<PAGE>
affairs of the Corporation. The Board of Directors shall have the power to
prescribe the manner in which proceedings of any such committee shall be
conducted. In the absence of any such prescription, such committee shall have
the power to prescribe the manner in which its proceedings shall be conducted.
Unless the Board of Directors or such committee shall otherwise provide, regular
and special meetings and other actions of any such committee shall be governed
by the provisions of this Article III applicable to meetings and actions of the
Board of Directors. Each committee shall keep regular minutes and report to the
Board of Directors when required.
Section 10. Fees and Compensation. Directors and members of
---------- ---------------------
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the Board of
Directors.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen
--------- -------
by the Board of Directors and shall be a Chairman of the Board of Directors (who
must be a director), a President, a Secretary and a Treasurer. The Board of
Directors, in its sole discretion, may also choose a Vice Chairman of the Board
of Directors (who must be a director), one or more Executive Vice Presidents,
Senior Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation or
these Bylaws.
Section 2. Election. The Board of Directors at its first meeting
--------- --------
held after each Annual Meeting of stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time solely
by the Board of Directors, which determination may be by resolution of the Board
of Directors or in any bylaw provision duly adopted or approved by the Board of
Directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the Board of Directors with or without cause. Any vacancy occurring in
any office of the Corporation may be filled only by the Board of Directors.
Section 3. Chairman of the Board of Directors. The Chairman of the
--------- ----------------------------------
Board of Directors shall be the Chief Executive Officer of the Corporation,
shall preside at all meetings of the Board of Directors and of stockholders and
shall, subject to the provisions of the Bylaws and the control of the Board of
Directors, have general and active management, direction, and supervision over
the business of the Corporation and over its officers. He shall perform all
duties incident to the office of chief executive and such other duties as from
time to time may be
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<PAGE>
assigned to him by the Board of Directors. He shall have the right to delegate
any of his powers to any other officer or employee.
Section 4. President. The President shall report and be responsible
--------- ---------
to the Chairman of the Board. The President shall have such powers and perform
such duties as from time to time may be assigned or delegated to him by the
Board of Directors or are incident to the office or President.
During the absence, disability, or at the request of the Chairman of
the Board of Directors, the President shall perform the duties and exercise the
powers of the Chairman of the Board of Directors. In the absence or disability
of both the President and the Chairman of the Board of Directors, the person
designated by the Board of Directors shall perform the duties and exercise the
powers of the President, and unless otherwise determined by the Board, the
duties and powers of the Chairman.
Section 5. Executive Vice Presidents. The Executive Vice Presidents
--------- -------------------------
shall have such powers and perform such duties as from time to time may be
prescribed for them respectively by the Board of Directors or are incident to
the office of Executive Vice President.
Section 6. Senior Vice Presidents. The Senior Vice Presidents shall
--------- ----------------------
have such powers and perform such duties as from time to time may be prescribed
for them respectively by the Board of Directors or are incident to the office of
Senior Vice President.
Section 7. Vice Presidents. The Vice Presidents shall have such
--------- ---------------
powers and perform such duties as from time to time may be prescribed for them
respectively by the Board of Directors or are incident to the office of Vice
President.
Section 8. Secretary. The Secretary shall keep or cause to be kept,
--------- ---------
at the principal executive office or such other place as the Board of Directors
may order, a book of minutes of all meetings of stockholders, the Board of
Directors and its committees, with the time and place of holding, whether
regular or special, and if special, how authorized, the notice thereof given,
the names of those present at Board of Directors and committee meetings, the
number of shares present or represented at stockholders' meetings, and the
proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of
the Bylaws of the Corporation at the principal executive office or business
office of the Corporation.
The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the Corporation's transfer agent or
registrar, if one be appointed, a stock register, or a duplicate stock register,
showing the names of the stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
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The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors and any committees thereof
required by these Bylaws or by law to be given, shall keep the seal of the
Corporation in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors.
Section 9. Treasurer. The Treasurer shall have the custody of the
--------- ---------
corporate funds and securities of the Corporation and shall keep and maintain,
or cause to be kept and maintained, adequate and correct accounts of the
properties and business transactions of the Corporation, and shall send or cause
to be sent to the stockholders of the Corporation such financial statements and
reports as are by law or these Bylaws required to be sent to them.
The Treasurer shall deposit all moneys and valuables in the name and
to the credit of the Corporation with such depositaries as may be designated by
the Board of Directors. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and directors, whenever they request it, an account of all
transactions and of the financial condition of the Corporation, and shall have
such other powers and perform such other duties as may be prescribed by the
Board of Directors.
Section 10. Other Officers. Such other officers or assistant
---------- --------------
officers as the Board of Directors may choose shall perform such duties and have
such powers as from time to time may be assigned to them by the Board of
Directors. The Board of Directors may delegate to any other officer of the
Corporation the power to choose such other officers and to prescribe their
respective duties and powers.
Section 11. Execution of Contracts and Other Documents. Each officer
---------- ------------------------------------------
of the Corporation may execute, affix the corporate seal and/or deliver, in the
name and on behalf of the Corporation, deeds, mortgages, notes, bonds,
contracts, agreements, powers of attorney, guarantees, settlements, releases,
evidences of indebtedness, conveyances, or any other document or instrument
which is authorized by the Board of Directors or is required to be executed in
the ordinary course of business, except in cases where the execution, affixation
of the corporate seal and/or delivery thereof shall be expressly and exclusively
delegated by the Board of Directors to some other officer or agent of the
Corporation.
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the
--------- --------------------
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman or Vice Chairman of the Board of Directors, the
President or any Executive Vice President, Senior Vice President or Vice
President and (ii) by the Treasurer or an Assistant Treasurer or the
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<PAGE>
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation.
Section 2. Signatures. Where a certificate is countersigned by (i)
--------- ----------
a transfer agent or (ii) a registrar, any other signature on the certificate may
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a
--------- -----------------
new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Transfers of shares of capital stock of the
--------- ---------
Corporation shall be made only on the stock record of the Corporation by the
holder of record thereof or by his attorney thereunto authorized by the power of
attorney duly executed and filed with the Secretary of the Corporation or the
transfer agent thereof, and only on surrender of the certificate or certificates
representing such shares, properly endorsed or accompanied by a duly executed
stock transfer power. The Board of Directors may make such additional rules and
regulations as it may deem expedient concerning the issue and transfer of
certificates representing shares of the capital stock of the Corporation.
Section 5. Record Date.
--------- -----------
(a) In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than 60 days nor less than 10 days before the date
of such meeting, nor more than 60 days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
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<PAGE>
(b) Notwithstanding Section 5(a) of Article V of these Bylaws,
the record date for determining stockholders entitled to express consent to
corporate action in writing without a meeting shall be as fixed by the Board of
Directors or as otherwise established under this Section 5(b). Any person
seeking to have the stockholders authorize or take corporate action by written
consent without a meeting shall, by written notice addressed to the Secretary
and delivered to the Corporation, request that a record date be fixed for such
purpose. The Board of Directors may fix a record date for such purpose which
shall be no more than 10 days after the date upon which the resolution fixing
the record date is adopted by the Board and shall not precede the date such
resolution is adopted. If the Board of Directors fails within 10 days after the
Corporation receives such notice to fix a record date for such purpose, the
record date shall be the day on which the first written consent is delivered to
the Corporation in the manner described in Section 5(c) below unless prior
action by the Board of Directors is required under the General Corporation Law
of the State of Delaware, in which event the record date shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action.
(c) Every written consent purporting to take or authorizing the
taking of corporate action and/or related revocations (each such written consent
and related revocation is referred to in this Section 5(c) of Article V of the
Bylaws as a "Consent") shall bear the date of signature of each stockholder who
signs the Consent, and no Consent shall be effective to take the corporate
action referred to therein unless, within 60 days of the earliest dated Consent
delivered in the manner required by this Section 5(c), Consents signed by a
sufficient number of stockholders to take such action are so delivered to the
Corporation.
A Consent shall be delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery to the
Corporation's registered office shall be made by hand or by certified or
registered mail, return receipt requested.
In the event of the delivery to the Corporation of a Consent, the
Secretary of the Corporation shall provide for the safe-keeping of such Consent
and shall promptly conduct such ministerial review of the sufficiency of the
Consents and of the validity of the action to be taken by stockholder consent as
he deems necessary or appropriate, including, without limitation, whether the
holders of a number of shares having the requisite voting power to authorize or
take the action specified in the Consent have given consent; provided, however,
that if the corporate action to which the Consent relates is the removal or
replacement of one or more members of the Board of Directors, the Secretary of
the Corporation shall promptly designate two persons, who shall not be members
of the Board of Directors, to serve as inspectors with respect to such Consent
and such inspectors shall discharge the functions of the Secretary of the
Corporation under this Section 5(c). If after such investigation the Secretary
or the inspectors (as the case may be) shall determine that the Consent is valid
and that the action therein specified has been validly authorized, that fact
shall forthwith be certified on the records of the Corporation kept for
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<PAGE>
the purpose of recording the proceedings of meetings of stockholders, and the
Consent shall be filed in such records, at which time the Consent shall become
effective as stockholder action. In conducting the investigation required by
this Section 5(c), the Secretary or the inspectors (as the case may be) may, at
the expense of the Corporation, retain special legal counsel and any other
necessary or appropriate professional advisors, and such other personnel as they
may deem necessary or appropriate to assist them, and shall be fully protected
in relying in good faith upon the opinion of such counsel or advisors.
Section 6. Beneficial Owners. The Corporation shall be entitled to
--------- -----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law, the
--------- -------
Certificate of Incorporation or these Bylaws, to be given to any director or
stockholder, such notice may be given by mail, addressed to such director or
stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Written notice
may also be given personally or by telegram, telex, cable or facsimile
transmission followed, if required by law, by deposit in the United States mail,
with postage prepaid.
Section 2. Waivers of Notice. Whenever any notice is required by
--------- -----------------
law, the Certificate of Incorporation or these Bylaws, to be given to any
director or stockholder, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Disbursements. All checks or demands for money and notes
--------- -------------
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
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<PAGE>
Section 2. Fiscal Year. The fiscal year of the Corporation shall be
--------- -----------
fixed by resolution of the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
--------- ------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chairman of the Board of Directors or
the President or any other officer or officers authorized by the Board of
Directors, the Chairman of the Board of Directors or the President, and any such
officer may, in the name of and on behalf of the Corporation, vote, represent
and exercise on behalf of the Corporation all rights incident to any and all
shares of any other corporation or corporations standing in the name of the
Corporation and take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any corporation
in which the Corporation may own securities and at any such meeting shall
possess and may exercise any and all rights and power incident to the ownership
of such securities and which, as the owner thereof, the Corporation might have
exercised and possessed if present. The Board of Directors may, by resolution,
from time to time confer like powers upon any other person or persons.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. General. The Corporation shall indemnify to the full
--------- -------
extent authorized or permitted by law (as now or hereafter in effect) any person
made, or threatened to be made, a defendant or witness to any action, suit or
proceeding (whether civil or criminal or otherwise) by reason of the fact that
he, his testator or intestate, is or was a director or officer of the
Corporation or by reason of the fact that such director or officer, at the
request of the Corporation, is or was serving any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, in
any capacity. Nothing contained herein shall affect any rights to
indemnification to which employees other than directors and officers may be
entitled by law. No amendment or repeal of this Section 1 shall apply to or
have any effect on any right to indemnification provided hereunder with respect
to any acts or omissions occurring prior to such amendment or repeal.
Section 2. Further Assurance. In furtherance and not in limitation
--------- -----------------
of the powers conferred by statute:
(a) the Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as
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<PAGE>
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of law; and
(b) the Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter into
contracts providing indemnification to the full extent authorized or permitted
by law and including as part thereof provisions with respect to any or all of
the foregoing to ensure the payment of such amounts as may become necessary to
effect indemnification as provided therein, or elsewhere.
ARTICLE IX
AMENDMENTS
----------
Section 1. General. These Bylaws may be altered, amended or
--------- -------
repealed, in whole or in part, or new Bylaws may be adopted by either the
holders of 66-2/3% of the outstanding capital stock entitled to vote thereon or
by the Board of Directors.
ARTICLE X
EMERGENCY PROVISIONS
--------------------
Section 1. General. The provisions of this Article X shall be
--------- -------
operative only during a national emergency declared by the President of the
United States or the person performing the President's functions, or in the
event of a nuclear, atomic or other attack on the United States or a disaster
making it impossible or impracticable for the Corporation to conduct its
business without recourse to the provisions of this Article X. Said provisions
in such event shall override all other Bylaws of the Corporation in conflict
with any provisions of this Article X, and shall remain operative so long as it
remains impossible or impracticable to continue the business of the Corporation
otherwise, but thereafter shall be inoperative; provided that all actions taken
in good faith pursuant to such provisions shall thereafter remain in full force
and effect unless and until revoked by action taken pursuant to the provisions
of the Bylaws other than those contained in this Article X.
Section 2. Unavailable Directors. All directors of the Corporation
--------- ---------------------
who are not available to perform their duties as directors by reason of physical
or mental incapacity or for any other reason or who are unwilling to perform
their duties or whose whereabouts are unknown shall automatically cease to be
directors, with like effect as if such persons had resigned as directors, so
long as such unavailability continues.
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<PAGE>
Section 3. Authorized Number of Directors. The authorized number of
--------- ------------------------------
directors shall be the number of directors remaining after eliminating those who
have ceased to be directors pursuant to Section 2 of this Article X, or the
minimum number required by law, whichever number is greater.
Section 4. Quorum. The number of directors necessary to constitute
--------- ------
a quorum shall be one-third of the authorized number of directors as specified
in Section 3 of this Article X, or such other minimum number as, pursuant to the
law or lawful decree then in force, it is possible for the Bylaws of a
Corporation to specify.
Section 5. Creation of Emergency Committee. In the event the number
--------- -------------------------------
of directors remaining after eliminating those who have ceased to be directors
pursuant to Section 2 of this Article X is less than the minimum number of
authorized directors required by law, then until the appointment of additional
directors to make up such required minimum, all the powers and authorities which
the Board of Directors could by law delegate including all powers and
authorities which the Board of Directors could delegate to a committee, shall be
automatically vested in an emergency committee, and the emergency committee
shall thereafter manage the affairs of the Corporation pursuant to such powers
and authorities and shall have all other powers and authorities as may by law or
lawful decree be conferred on any person or body of persons during a period of
emergency.
Section 6. Constitution of Emergency Committee. The emergency
--------- -----------------------------------
committee shall consist of all the directors remaining after eliminating those
who have ceased to be directors pursuant to Section 2 of this Article X,
provided that such remaining directors are not less than three in number. In
the event such remaining directors are less than three in number, the emergency
committee shall consist of three persons, who shall be the remaining director or
directors and either one or two officers or employees of the Corporation, as the
remaining director or directors may in writing designate. If there is no
remaining director, the emergency committee shall consist of the three most
senior officers of the Corporation who are available to serve, and if and to the
extent that officers are not available, the most senior employees of the
Corporation. Seniority shall be determined in accordance with any designation
of seniority in the minutes of the proceedings of the Board, and in the absence
of such designation, shall be determined by rate of remuneration. In the event
that there are no remaining directors and no officers or employees of the
Corporation available, the emergency committee shall consist of three persons
designated in writing by the stockholder owning the largest number of shares of
record as of the date of the last record date.
Section 7. Powers of Emergency Committee. The emergency committee,
--------- -----------------------------
once appointed, shall govern its own procedures and shall have power to increase
the number of members thereof beyond the original number, and in the event of a
vacancy or vacancies therein, arising at any time, the remaining member or
members of the emergency committee shall have the power to fill such vacancy or
vacancies. In the event at any time after its appointment all members of the
emergency committee shall die or resign or become unavailable to act for any
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<PAGE>
reason whatsoever, a new emergency committee shall be appointed in accordance
with the foregoing provisions of this Article X.
Section 8. Directors Becoming Available. Any person who has ceased
--------- ----------------------------
to be a director pursuant to the provisions of Section 2 of this Article X and
who thereafter becomes available to serve as a director shall automatically
become a member of the emergency committee.
Section 9. Election of Board of Directors. The emergency committee
--------- ------------------------------
shall, as soon after its appointment as is practicable, take all requisite
action to secure the election of a board of directors, and upon such election
all the powers and authorities of the emergency committee shall cease.
Section 10. Termination of Emergency Committee. In the event, after
---------- ----------------------------------
the appointment of an emergency committee, a sufficient number of persons who
ceased to be directors pursuant to Section 2 of this Article X become available
to serve as directors, so that if they had not ceased to be directors as
aforesaid, there would be enough directors to constitute the minimum number of
directors required by law, then all such persons shall automatically be deemed
to be reappointed as directors and the powers and authorities of the emergency
committee shall be at an end.
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EXHIBIT 10
EMPLOYMENT AGREEMENT DATED AS OF JANUARY 24, 2000
BETWEEN THE WALT DISNEY COMPANY
AND ROBERT A. IGER
AGREEMENT (the "Agreement") made as of January 24, 2000 by and between THE
WALT DISNEY COMPANY ("Disney") and ROBERT A. IGER ("Executive").
In consideration of the mutual covenants contained herein, Executive and
Disney hereby agree as follows:
1. Term
----
The initial term of Executive's employment hereunder shall commence on and
as of January 24, 2000, and shall expire on the fourth anniversary thereof
(i.e., January 24, 2004) unless earlier terminated as hereinafter provided.
----
2. Salary
------
In full consideration for all rights and services provided by Executive
hereunder, Executive shall receive an annual salary of $1,500,000, of which
$1,000,000 shall be payable in accordance with Employer's then prevailing
payroll policy, and $500,000 of which shall be deferred and shall be paid,
together with interest thereon (which interest shall accrue at the rate of the
applicable federal rate for mid-term treasuries (currently 6.8% compounded
annually), which rate shall be reset annually on the basis of the rate in effect
for March for each year during which the deferral shall be in effect), by Disney
to Executive upon a date which shall be not less than thirty days after the date
Executive shall no longer be subject to the provisions of Section 162(m) of the
Internal Revenue Code. Executive's salary shall be subject to annual review by
Disney for increase.
3. Bonus
-----
Bonus compensation for Executive shall be subject to the discretion of the
Executive Performance Subcommittee of the Board of Directors of Disney in
accordance with Disney's Annual Bonus Performance Plan for Executive Officers
(or any successor plan thereto).
4. Special Payment
---------------
<PAGE>
As an inducement for Executive to enter into this Agreement and in
discharge of all obligations of Disney and/or any of its affiliated entities to
provide compensation (other than previously granted stock options) to Executive
pursuant to any prior arrangements between Executive and Disney and/or any
affiliated entity thereof, Disney shall pay to Executive, within ten business
days of the execution hereof by both parties, the amount of $2,200,000.
5. Stock Options
-------------
All stock options heretofore granted to Executive shall be subject to the
following: All shares issuable upon exercise of any such options shall be
registered on Form S-8 or any successor form or other applicable form under the
Securities Act of 1933 and Disney shall, subject to the provisions of the plan,
seek to keep such registration effective at all required times. For the purpose
of such options, a termination of Executive's employment shall not be deemed to
be for "cause" unless such termination constitutes termination for "good cause"
as defined in Paragraph 10(a)(iii) below.
6. Title
-----
Executive shall be employed hereunder in the position of President and
Chief Operating Officer of Disney and shall report to the Chief Executive
Officer of Disney. In addition, Disney agrees to nominate Executive for
election to its board of directors as a member of the management slate at each
annual meeting of stockholders during the term of his employment hereunder or,
if there shall at any time be director classes, at each such meeting at which
Executive's director class comes up for election. Executive agrees to serve on
the board if elected.
7. Duties
------
Executive shall devote substantially all of his business time to personally
and diligently performing on an exclusive basis such duties, which services
shall not be inconsistent with his position as President and Chief Operating
Officer of Disney, as are assigned to him from time to time by the Chief
Executive Officer of Disney, and any other duties accepted or undertaken by
Executive.
8. Expenses
--------
Executive shall be expected to incur various business expenses customarily
incurred by persons holding like positions, including but not limited to
traveling, entertainment and similar expenses, all of which are to be incurred
by Executive for the benefit of Disney. Subject to Disney's policy regarding
the reimbursement and non-reimbursement of all such expenses, Employer shall
reimburse Executive for such expenses from time to time, at Executive's request,
and Executive shall account to Employer for such expenses.
2
<PAGE>
9. Benefits
--------
(a) Except as otherwise specifically provided hereunder, Executive shall
be entitled to receive and participate in all employee welfare benefit plans
generally made available to the highest level of senior executives of Disney,
including, without limitation, participation in Disney's medical, dental, life
insurance and disability benefit plans, in accordance with the normal policies
and practices of Disney.
(b) Executive shall be provided with an automobile in accordance with
Disney's standard automobile policy.
(c) In addition, Disney will provide Executive with such other perquisites
as may be made generally available to the highest level of senior executives of
Disney.
10. Termination by Disney
---------------------
(a) Disney shall have the right to terminate this Agreement, including the
term of Executive's employment under this Agreement, under the following
circumstances:
(i) Upon the death of Executive.
(ii) Upon notice from Disney to Executive in the event of a
total and permanent disability which has incapacitated him from performing his
duties for six consecutive months as determined in good faith by the Board of
Directors of Disney.
(iii) For good cause upon written notice from the Disney.
Termination by Disney of Executive's employment for "good cause" as used in this
Agreement shall be limited to willful gross neglect or malfeasance by Executive
in the performance of his duties or the unilateral resignation by Executive as
an employee of Disney without the prior written consent of Disney.
(b) If this Agreement is terminated pursuant to Paragraph 10(a) above,
Executive's rights and Disney's obligations hereunder shall forthwith terminate
except as expressly provided in this Agreement.
(c) If this Agreement is terminated pursuant to Paragraph 10(a)(i) or (ii)
hereof, Executive or his estate shall, in addition to the payments and benefits
referred to in Paragraph 9(d), be entitled to receive one hundred percent (100%)
of his annual salary (including deferred salary) for an additional 12 months,
seventy-five percent (75%) of such salary for 12 months thereafter, and fifty
percent (50%) of such salary for the next 12 months. In addition, all of
Executive's stock options shall accelerate and become immediately exercisable
for the period specified in the relevant stock option agreements (which shall be
18 months from date of death or disability, but not beyond the originally
scheduled term of the option in the case of the option granted on
3
<PAGE>
February 9, 1996, and 18 months from date of death and 12 months from date of
disability with respect to all other options, but not beyond the originally
scheduled term of such options), and Executive or his estate shall be paid a pro
rata bonus for the year in which death or termination for disability occurred
which will be calculated on the basis of an assumed bonus for the full year
equal to the greater of $1,000,000 or the annual bonus received by Executive for
the prior fiscal year of Disney. Executive or his estate shall also be entitled
to other benefits in accordance with and subject to the terms of the relevant
plans and programs of Disney applicable to Executive at the time of his death or
disability.
(d) If this Agreement is terminated pursuant to Paragraph 10(a)(iii),
Disney shall have no obligation to Executive hereunder, except to (i) pay any
amounts unconditionally accrued under any pension or benefit plans of Disney or
any of its affiliates companies in accordance with the terms thereof, (ii) pay
amounts earned, unconditionally accrued or owing to Executive but not yet paid,
including, without limitation, any salary (including deferred salary plus
accrued interest thereon) earned through the date of termination, and (iii)
provide other benefits unconditionally accrued and vested on the date of
termination, if any, in accordance with applicable plans and programs of Disney
or any of its affiliated companies.
(e) Whenever compensation is payable to Executive hereunder during a time
when he is partially or totally disabled and such disability (except for the
provisions hereof) would entitle him to disability income or to base salary
continuation payments from Disney according to the terms of any plan now or
hereafter provided by Disney or any subsidiaries thereof or according to any
Disney policy in effect at the time of such disability, the compensation payable
to him hereunder shall be inclusive of any such disability income or base salary
continuation and shall not be in addition thereto. If disability income is
payable directly to Executive by an insurance company under an insurance policy
paid for by Disney or any subsidiaries thereof, the amounts paid to him by said
insurance company shall be considered to be part of the payments to be made by
Disney to him pursuant to this Paragraph 10, and shall not be in addition
thereto.
11. Termination by Executive
------------------------
Executive shall have the right to terminate this Agreement, including his
employment under this Agreement, upon at least 30 days' notice to Disney given
within 60 days following the occurrence of any of the following events without
his consent, provided that Disney shall have 30 days after the date such notice
has been given to Disney in which to cure the conduct specified in such notice:
(i) a reduction in Executive's compensation rights hereunder
(salary or stock options), other than as permitted hereunder or, in the case of
stock options, under the applicable stock option plan or related rules, or
material reduction of any employee benefit or perquisite provided by Disney
(other than as part of an across-
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the-board reduction in such employee benefit or perquisite generally applicable
to all senior executives of Disney;
(ii) the failure to continue Executive in his position as provided
in Paragraph 6 hereof, removal of him from such position or failure to nominate
him for election to Disney's board of directors as provided in Paragraph 6
hereof;
(iii) a material diminution in Executive's duties under Paragraph 7,
the assignment to Executive of duties which are materially inconsistent with
such duties, or a change in the reporting relationship of Executive so that he
no longer reports as provided in Paragraph 6 above;
(iv) the relocation of Executive's principal office to a location
more than 50 miles from Manhattan or more than 50 miles outside of the greater
Los Angeles area.
With respect to subparagraph (iii) above, Executive's duties and
responsibilities shall not be deemed materially reduced for purposes hereof
solely by virtue of the fact that Disney is (or substantially all of its assets
are) sold to, or is combined with, another entity provided that (a) Executive
shall continue to have the same duties, responsibilities and authority with
respect to Disney's business (including but not limited to entertainment and
recreation, parks and resorts, broadcasting, cable, direct broadcast satellite,
filmed entertainment, consumer products, music and the internet) as he had
immediately prior to the time of such sale or combination and (b) Executive
shall continue to report directly to the chief executive officer and/or board of
directors of the entity that represents all or substantially all of the
continued businesses of Disney or any of its affiliated companies.
12. Consequences of Breach by Disney
--------------------------------
If this Agreement is terminated pursuant to Paragraph 11 hereof, or if
Disney shall terminate Executive's employment under this Agreement in any other
way that is a breach of this Agreement by Disney, Executive shall be entitled to
the following, which he acknowledges to be fair and reasonable, as his sole and
exclusive remedy, in lieu of all other remedies at law or in equity, for any
such termination:
(i) salary (including deferred salary and interest accrued thereon)
through the date of termination;
(ii) salary (including deferred salary and accrued interest
thereon), at the annualized rate in effect immediately prior to the date of
termination of Executive's employment (or in the event a reduction in base
salary is the basis for a termination pursuant to Paragraph 11 above, then the
base salary in effect immediately prior to such reduction), for the balance of
the originally scheduled term of this Agreement;
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(iii) annual bonus for the year in which termination occurs based on
an assumed bonus equal to the greater of $1,000,000 or the annual bonus received
by Executive for the prior fiscal year of Disney, payable in a single
installment promptly after his termination;
(iv) the right to exercise all stock options in full for the period
provided in the relevant stock option agreement (which shall be twelve months in
the case of the stock option granted to Executive on February 9, 1996, and three
months for all other options granted to Executive, but in all cases not beyond
the originally scheduled term of the relevant option); provided, however, that
-------- -------
notwithstanding the foregoing, no stock options which may at any time hereafter
be granted to Executive shall be included or taken into account in the
calculation of the payments provided for in Paragraph 18 hereof unless such
inclusion or taking into account is expressly provided for in the stock option
agreement(s) evidencing any such future grant(s);
(v) any amounts earned, unconditionally accrued or owing to
Executive but not yet paid; and
(vi) other benefits in accordance with applicable plans and programs
of Employer.
13. Services Unique
---------------
Executive recognizes that Executive's services hereunder are of a special,
unique, unusual, extraordinary and intellectual character giving them a peculiar
value, the loss of which cannot be reasonably or adequately compensated for in
damages, and in the event of a breach of this Agreement by Executive
(particularly, but without limitation, with respect to the provisions hereof
relating to the exclusivity of Executive's services and the provisions of
Paragraph 14 hereof), Employer shall, in addition to all other remedies
available to it, be entitled to equitable relief by way of injunction and any
other legal or equitable remedies.
14. Protection of Employer's Interests
----------------------------------
(a) During the term of Executive's employment by Disney, Executive will
not compete in any manner, directly or indirectly, whether as a principal,
employee, agent or owner, with Disney or any affiliate thereof, except that the
foregoing will not prevent Executive from holding at any time less than 2% of
the outstanding capital stock of any company whose stock is publicly traded.
(b) To the extent permitted by law, all rights worldwide with respect to
any and all intellectual or other property of any nature produced, created or
suggested by Executive during the term of Executive's employment with Disney or
any affiliated Company or resulting from Executive's services shall be deemed to
be a work made for
6
<PAGE>
hire and shall be the sole and exclusive property of Disney. Executive agrees to
execute, acknowledge and deliver to Disney at Disney's request, such further
documents as Disney finds appropriate to evidence Disney's and/or any affiliated
company's rights in such property. Any confidential and/or proprietary
information of Disney or any affiliate thereof shall not be used by Executive or
disclosed or made available by Executive to any person except (i) as required in
the course of Executive's employment or (ii) when required to do so by a court
of law, by any governmental agency having supervisory authority over the
business of Disney or by any administrative or legislative body (including a
committee thereof) with apparent jurisdiction to order him to divulge, disclose
or make accessible such information, it being understood that Executive will
promptly notify Disney of such requirement so that Disney may seek to obtain a
protective order. Upon expiration or earlier termination of the term of
Executive's employment, Executive shall return to Disney all such information
that exists in written or other physical form (and all copies thereof) under
Executive's control. Without limiting the generality of the foregoing, Executive
acknowledges signing and delivering to Disney, The Walt Disney Company and
Associated Companies Confidentiality Agreement and The Walt Disney Company and
Associated Companies Statement of Policy Regarding Conflicts of Interest and
Business Ethics and Questionnaire Regarding Compliance and Executive agrees that
all terms and conditions contained therein, and all of Executive's obligations
and commitments provided for therein, shall be deemed, and hereby are,
incorporated into this Agreement as if set forth in full herein. The provisions
of this paragraph shall survive the expiration or earlier termination of this
Agreement.
15. Arbitration
-----------
(a) Any dispute regarding any of the terms and conditions of this Agreement
(a "Dispute") between Executive and Disney shall be settled by arbitration in
the Los Angeles and, except as herein specifically stated, in accordance with
the Commercial Arbitration Rules of the American Arbitration Association (the
"AAA Rules") then in effect, subject to the provisions of this Agreement. Any
judgment upon the determination reached by the arbitrators may be entered in any
court having jurisdiction of the subject matter thereof. The parties hereby
submit to the in personam jurisdiction of the courts of the State of California
--------
for purposes of confirming any such determination and entering judgment in
respect thereof.
(b) Any such arbitration shall be conducted before a panel of three
arbitrators, who shall be compensated for their services at a rate to be
determined by the parties or by the American Arbitration Association in the
event the parties are not able to agree upon their rate of compensation.
(c) Within five calendar days of notice by a party seeking arbitration
under this provision, the party requesting arbitration shall appoint one person
as arbitrator, and within ten calendar days thereafter the other party shall
appoint the second arbitrator. Within ten business days after the appointment
of the second arbitrator, the
7
<PAGE>
two arbitrators so chosen shall mutually agree upon the selection of the third
impartial and neutral arbitrator, who (i) shall possess demonstrable knowledge
and experience in the entertainment industry and (ii) shall have had no dealings
with either party during the preceding 5 years.
(d) In the event the chosen arbitrators cannot agree upon the selection of
the third arbitrator, the AAA Rules for the selection of such an arbitrator
shall be followed, except the selection shall be from such persons as are
described in the immediately preceding subparagraph (c). If the other party
shall fail to designate the second arbitrator, the sole arbitrator appointed
shall have the power to appoint, in his sole discretion, both the second and
third arbitrators. If a party fails to appoint a successor to its appointed
arbitrator within ten business days of the death, resignation or other
incapacity of such arbitrator, the remaining two arbitrators shall appoint such
successor. The majority decision of the arbitrators will be final and
conclusive upon the parties hereto.
(e) Each party hereby agrees to pay one-half of the compensation to be paid
to the arbitrators in any such arbitration and one-half of the costs of
transcripts and other expenses of the arbitration proceedings and all of his or
its own attorney's fees and other expenses; provided, however, that if Executive
is the prevailing party in any arbitration, he shall be entitled to apply to the
arbitrators for an award to be paid by Disney of his reasonable attorneys' fees
and costs, arbitrators' fees and costs and all other costs of arbitration and if
the arbitrators shall conclude that Disney's position in such arbitration was
unreasonable, the arbitrators may, in their discretion, make an award to
Executive of any part or all of such fees and costs, provided further that
Disney shall have the right to contest any such application and the amount of
any such award.
(f) All testimony of witnesses at any arbitration proceeding held pursuant
to these provisions shall be taken under oath, and the rules of evidence of the
State of New York and judicial interpretations thereunder shall be strictly
followed. The actual arbitration hearing or hearings shall be transcribed by a
reporter.
(g) The parties shall be entitled to conduct discovery proceedings in
accordance with the California Code of Civil Procedure, and the rules of
evidence of the California Evidence Code shall apply.
(h) The arbitrators chosen in accordance with these provisions shall not
have the power to alter, amend or otherwise affect the terms of these
arbitration provisions or the other provisions of this Agreement.
(i) Except as herein specifically provided, arbitration shall be the sole
and exclusive remedy of the parties for a Dispute.
16. FCC Provision
-------------
8
<PAGE>
Executive acknowledges that Executive has been provided by Disney with a
copy of Section 508 of the Federal Communications Act of 1934, as amended,
relating in part to receiving or paying consideration for product identification
in television programs, that Executive is familiar with the provisions thereof
and that Executive will fully comply therewith during the term of this
Agreement. Without limiting the foregoing, however, and whether or not Section
508 is applicable to his activities, Executive agrees that Executive will not,
without Employer's prior written consent, accept any compensation or gift, from
any person, firm or corporation (other than Employer or its affiliates) where
such compensation or gift is, or may appear to be, in consideration of
Executive's acting in a particular manner in relation to the business of such
person, firm or corporation with Employer or any affiliate thereof.
17. No Conflict with Prior Agreements; Due Authorization
----------------------------------------------------
Executive represents to Disney that neither Executive's commencement of
employment hereunder nor the performance of Executive's duties hereunder
conflicts with any contractual commitment on Executive's part to any third party
or violates or interferes with any rights of any third party. Disney represents
to Executive that it is fully authorized and empowered by action of the its
Board of Directors to enter into this Agreement and that performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or other entity.
18. Certain Payments
----------------
The parties believe that the payments to Executive hereunder do not
constitute "Excess Parachute Payments" under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"). Notwithstanding such belief, if
any payment or benefit under this Agreement is determined to be an "Excess
Parachute Payment" the Employer shall pay Executive an additional amount ("Tax
Payment") such that (x) the excess of all Excess Parachute Payments (including
payments under this sentence) over the sum of excise tax thereon under Section
4999 of the Code and income tax thereon under Subtitle A of the Code and under
applicable state law is equal to (y) the excess of all Excess Parachute Payments
(excluding payments under this sentence) over income tax thereon under Subtitle
A of the Code and under applicable state law.
19. Post-Termination Obligations
----------------------------
After the expiration or earlier termination of Executive's employment
hereunder for any reason whatsoever, Executive shall not either alone or
jointly, with or on behalf of others, either directly or indirectly, whether as
principal, partner, agent, shareholder, director, employee, consultant or
otherwise, at any time during a period of two years following such expiration or
termination, offer employment to, or solicit the employment or engagement of, or
otherwise entice away from the employment of Disney or any affiliated entity,
either for Executive's own account or for any other person, firm or
9
<PAGE>
company, any person who is employed by Disney or any such affiliated entity,
whether or not such person would commit any breach of his contract of employment
by reason of his leaving the service of Disney or any affiliated entity.
20. Entire Agreement; Amendments; Waiver, Etc.
-----------------------------------------
(a) This Agreement supersedes all prior or contemporaneous agreements and
statements, whether written or oral, concerning the terms of Executive's
employment, and no amendment or modification of this Agreement shall be
effective unless set forth in a writing signed by Disney and Executive. No
waiver by either party of any breach by the other party of any provision or
condition of this Agreement shall be deemed a waiver of any similar or
dissimilar provision or condition at the same or any prior or subsequent time.
Any waiver must be in writing and signed by Executive or Disney, as the case may
be.
(b) Nothing herein contained shall be construed so as to require the
commission of any act contrary to law, and wherever there is any conflict
between any provision of this Agreement and any present or future statute, law,
ordinance or regulation, the latter shall prevail, but in such event the
provision of this Agreement affected shall be curtailed and limited only to the
extent necessary to bring it within legal requirements. Without limiting the
generality of the foregoing, in the event any compensation or other monies
payable hereunder shall be in excess of the amount permitted by any statute,
law, ordinance, regulation or wage guideline which may be in affect at any time
or from time to time, payment of the maximum amount then allowed thereby shall
constitute full compliance by Disney with the payment requirements of this
Agreement.
(c) This Agreement and all rights hereunder are personal to Executive and
shall not be assignable; provided, however, that all of Executive's rights
-------- -------
accrued hereunder following his death shall inure to the benefit of his widow,
personal representatives or designees or other legal representatives, as the
case may be. Disney may assign its rights under this Agreement to any successor
by merger, purchase, consolidation or otherwise, provided that such successor
assumes all of the liabilities, obligations and duties of Disney under this
Agreement, either contractually or as a matter of law.
(d) The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement or Executive's employment hereunder to
the extent necessary to the intended preservation of such rights and
obligations.
(e) This Agreement shall be governed by and construed in accordance with
the laws of the State of California without reference to principles of conflict
of laws.
10
<PAGE>
(f) All payments required to be made to Executive hereunder, whether
during the term of his employment hereunder or otherwise, shall be subject to
all applicable federal, state and local tax withholding laws.
21. Indemnification
---------------
Indemnification shall be provided to Executive pursuant to an agreement
substantially equivalent to Disney's standard form of indemnification for senior
officers, a copy of which has been previously provided to Executive.
22. Notices
-------
All notices that either party is required or may desire to give the other
shall be in writing and given either personally or by depositing the same in the
United States mail addressed to the party to be given notice as follows:
To Employer: 500 South Buena Vista Street
Burbank, California 91521
Attn: Chairman and Chief Executive Officer
To Executive: 500 South Buena Vista Street
Burbank, California 91521
Attn: Robert A. Iger
Either party may by written notice designate a different address for giving of
notices. The date of mailing of any such notices shall be deemed to be the date
on which such notice is given.
23. Headings
--------
The headings set forth herein are included solely for the purpose of
identification and shall not be used for the purpose of construing the meaning
of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE WALT DISNEY COMPANY
By: /s/ Michael D. Eisner /s/ Robert A. Iger
--------------------------- ------------------
Title: Robert A. Iger
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 860
<SECURITIES> 0
<RECEIVABLES> 36,546
<ALLOWANCES> 0
<INVENTORY> 727
<CURRENT-ASSETS> 10,944
<PP&E> 18,440
<DEPRECIATION> (6,659)
<TOTAL-ASSETS> 45,583
<CURRENT-LIABILITIES> 8,846
<BONDS> 7,706
0
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<COMMON> 11,751
<OTHER-SE> 11,605
<TOTAL-LIABILITY-AND-EQUITY> 45,583
<SALES> 0
<TOTAL-REVENUES> 13,235
<CGS> 0
<TOTAL-COSTS> 11,587
<OTHER-EXPENSES> 120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323
<INCOME-PRETAX> 1,205
<INCOME-TAX> 813
<INCOME-CONTINUING> 392
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<NET-INCOME> 392
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