<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 June 30, 2000 Commission File Number 1-11605
[LOGO OF THE WALT DISNEY COMPANY]
[CAPTION]
<TABLE>
Incorporated in Delaware I.R.S. Employer Identification No.
<S> <C>
500 South Buena Vista Street, Burbank, California 91521 95-4545390
(818) 560-1000
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
___
There were 2,084,607,043 shares of Disney common stock outstanding and
45,241,022 shares of Walt Disney Internet Group common stock outstanding as of
August 10, 2000.
<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 6. Exhibits 2
Signature 3
ANNEX I
DISNEY
-------
Condensed Combined Financial Information
Condensed Combined Statements of Income I-1
Condensed Combined Balance Sheets I-2
Condensed Combined Statements of Cash Flows I-3
Notes to Condensed Combined Financial Statements I-4
Management's Discussion and Analysis of Financial Condition and Results of Operations I-8
ANNEX II
WALT DISNEY INTERNET GROUP
--------------------------
Condensed Combined Financial Information
Condensed Combined Statements of Operations II-1
Condensed Combined Balance Sheets II-2
Condensed Combined Statements of Cash Flows II-3
Notes to Condensed Combined Financial Statements II-4
Management's Discussion and Analysis of Financial Condition and Results of Operations II-7
ANNEX III
THE WALT DISNEY COMPANY
------------------------
Condensed Consolidated Financial Information
Condensed Consolidated Statements of Income III-1
Condensed Consolidated Balance Sheets III-2
Condensed Consolidated Statements of Cash Flows III-3
Notes to Condensed Consolidated Financial Statements III-4
Management's Discussion and Analysis of Financial Condition and Results of Operations III-8
Exhibits
</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."
Effective August 2, 2000, GO.com adopted a new name, Walt Disney Internet
Group (Internet Group). The Internet Group's common stock continues to trade on
the New York Stock Exchange under the new name, with a new ticker symbol, "DIG."
ITEM 1. Financial Statements
For information required by Item 1, refer to:
"Disney Condensed Combined Financial Information" filed as part of this
document in Annex I and
"Walt Disney Internet Group Condensed Combined Financial Information" filed as
part of this document in Annex II and
"The Walt Disney Company Condensed Consolidated Financial Information" filed
as part of this document in Annex III.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For information required by Item 2, refer to:
"Disney Management's Discussion and Analysis of Financial Condition and
Results of Operations" filed as part of this document in Annex I and
"Walt Disney Internet Group Management's Discussion and Analysis of Financial
Condition and Results of Operations" filed as part of this document in Annex
II and
"The Walt Disney Company Management's Discussion and Analysis of Financial
Condition and Results of Operations" filed as part of this document in Annex
III.
-1-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits
10(a). Amended and Restated Employment Agreement dated June 29, 2000, between
Registrant and Michael D. Eisner
10(b). Amendment, dated June 26, 2000 to Registrant's Stock Incentive Plans.
27. Financial Data Schedule, filed electronically.
-2-
<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: THOMAS O. STAGGS
-----------------------------------
(Thomas O. Staggs, Senior Executive
Vice President and Chief Financial
Officer)
August 14, 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 Nine Months Ended
June 30, June 30,
--------------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Revenues $5,964 $5,489 $19,000 $17,485
Costs and expenses 4,681 4,391 15,526 14,377
Amortization of intangible assets 109 117 331 332
Gain on sale of Fairchild -- -- 243 --
------ ------ ------- -------
Operating income 1,174 981 3,386 2,776
Corporate and other activities 1 (27) (30) (112)
Gain on sale of Eurosport 93 -- 93 --
Net interest expense (124) (164) (441) (499)
------ ------ ------- -------
Income before income taxes, minority interests and
retained interest in the Internet Group 1,144 790 3,008 2,165
Income taxes (468) (333) (1,383) (905)
Minority interests (43) (26) (105) (69)
------ ------ ------- -------
Income before retained interest in the Internet
Group 633 431 1,520 1,191
Net (loss) income related to retained interest in
the Internet Group (193) (63) (563) 24
------ ------ ------- -------
Net income $ 440 $ 368 $ 957 $ 1,215
====== ====== ======= =======
Earnings per share:
Diluted $ 0.21 $ 0.18 $ 0.46 $ 0.58
====== ====== ======= =======
Basic $ 0.21 $ 0.18 $ 0.46 $ 0.59
====== ====== ======= =======
Average number of common and common equivalent
shares outstanding:
Diluted 2,115 2,086 2,100 2,084
====== ====== ======= =======
Basic 2,078 2,059 2,070 2,054
====== ====== ======= =======
</TABLE>
See Notes to Condensed Combined Financial Statements
I-1
<PAGE>
DISNEY
CONDENSED COMBINED BALANCE SHEETS
In millions (unaudited)
<TABLE>
June 30, September 30,
2000 1999
-------------------- --------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 685 $ 408
Receivables 3,748 3,615
Inventories 635 752
Film and television costs 3,794 4,071
Deferred income taxes 581 598
Other assets 676 666
------- -------
Total current assets 10,119 10,110
Loan receivable from the Internet Group 51 19
Film and television costs 2,612 2,489
Investments 2,021 1,929
Retained interest in the Internet Group 1,286 371
Parks, resorts and other property, at cost
Attractions, buildings and equipment 16,059 15,815
Accumulated depreciation (6,732) (6,201)
------- -------
9,327 9,614
Projects in progress 2,043 1,266
Land 487 425
------- -------
11,857 11,305
Intangible assets, net 14,885 15,631
Other assets 1,288 1,509
------- -------
$44,119 $43,363
======= =======
LIABILITIES AND GROUP EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 4,494 $ 4,497
Current portion of borrowings 2,481 2,387
Unearned royalties and other advances 765 698
------- -------
Total current liabilities 7,740 7,582
Borrowings 7,249 9,187
Deferred income taxes 2,872 2,602
Other long term liabilities, unearned royalties and other advances 2,623 2,711
Minority interests 334 306
Group equity 23,301 20,975
------- -------
$44,119 $43,363
======= =======
</TABLE>
See Notes to Condensed Combined Financial Statements
I-2
<PAGE>
DISNEY
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
In millions (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
NET INCOME $ 957 $ 1,215
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 2,061 1,819
Depreciation 696 633
Amortization of intangible assets 331 332
Gain on sale of Fairchild (243) -
Gain on sale of Eurosport (93) -
Minority interests 105 69
Retained interest in the Internet Group 563 (24)
Other (34) 18
CHANGES IN ASSETS AND LIABILITIES 552 390
------- -------
3,938 3,237
------- -------
CASH PROVIDED BY OPERATIONS 4,895 4,452
------- -------
INVESTING ACTIVITIES
Dispositions 842 -
Film and television costs (1,989) (2,277)
Investments in parks, resorts and other property (1,340) (1,515)
Investment in Euro Disney (91) -
Acquisitions (net of cash acquired) - (218)
Other 134 41
------- -------
(2,444) (3,969)
------- -------
FINANCING ACTIVITIES
Commercial paper borrowings, net (538) 294
Other borrowings 1,084 1,625
Reduction of borrowings (2,398) (1,661)
Capital contributions to the Internet Group (22) (147)
Loans to the Internet Group (79) -
Dividends (434) -
Repurchases of Disney common stock (115) (19)
Exercise of stock options and other 328 157
------- -------
(2,174) 249
------- -------
Increase in cash and cash equivalents 277 732
Cash and cash equivalents, beginning of period 408 119
------- -------
Cash and cash equivalents, end of period $ 685 $ 851
======= =======
</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 (GAAP) for interim
financial information and the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been reflected in these condensed
combined financial statements. Operating results for the quarter and nine months
are not necessarily indicative of the results that may be expected for the year
ending September 30, 2000. Certain reclassifications have been made in the
fiscal 1999 financial statements to conform to the fiscal 2000 presentation. For
further information, refer to the consolidated financial statements and
footnotes thereto for the Company included in its Annual Report on Form 10-K for
the year ended September 30, 1999, as well as the combined financial statements
and footnotes thereto for Disney for the year ended September 30, 1998, included
in the joint proxy statement/prospectus of The Walt Disney Company and Infoseek
Corporation, filed on Form S-4 dated September 30, 1999.
2. In November 1998, the Company acquired a 43% interest in Infoseek
Corporation (Infoseek) in a transaction that, among other things, provided for
the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by
Infoseek. The Company recognized a $345 million non-cash pre-tax gain on that
transaction.
On November 17, 1999, stockholders of the Company and Infoseek approved the
Company's acquisition of the remaining interest in Infoseek that the Company did
not already own.
The acquisition was effected by the creation and issuance of a new class of
common stock, called GO.com common stock, in exchange for outstanding Infoseek
shares, at an exchange rate of 1.15 shares of GO.com common stock for each
Infoseek share. Upon consummation of the acquisition, the Company combined its
Internet and direct marketing businesses with Infoseek to create a single
Internet and direct marketing business called GO.com. On August 2, 2000, the
Internet and direct marketing business was renamed Walt Disney Internet Group
(hereinafter referred to as the Internet Group).
The acquisition has been accounted for as a purchase, and the acquisition cost
of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over the
fair value of Infoseek's net assets, has been allocated to intangible assets,
including goodwill of $1.9 billion, and is being amortized over two to nine
years. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry. Disney's interest in Infoseek intangible assets is included
in the retained interest in the Internet Group in the condensed combined balance
sheets.
Disney retains an interest of approximately 71% in the Internet Group at June
30, 2000. Effective November 18, 1999, shares of the Company's existing common
stock were reclassified as Disney common stock, to track the financial
performance of the Company's businesses other than the Internet Group, plus
Disney's retained interest in the Internet Group.
In November 1999, the Company sold Fairchild Publications, which it had
acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain
of $243 million.
In June 2000, the Company sold its 33% interest in Eurosport, a European
sports cable service, for $155 million. The sale resulted in a pre-tax gain of
$93 million.
I-4
<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.
<TABLE>
<CAPTION>
Nine Months Ended June 30,
----------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
(unaudited; in millions, except per share data)
Revenues $ 18,986 $ 17,359
Net income 914 657
Diluted earnings per share $ 0.44 $ 0.32
</TABLE>
Pro forma amounts for the nine-month periods exclude the impact of purchased
in-process research and development expenditures of $23 million and $117 million
in 2000 and 1999, respectively, the gain on the sale of Fairchild Publications
in fiscal 2000 and the Starwave gain in fiscal 1999.
3. During the nine months, Disney repaid $2.4 billion of term debt, which
matured during the period, and reduced its commercial paper borrowings by $538
million. These repayments were partially funded by proceeds of $1.1 billion from
various financing arrangements having effective interest rates ranging from
5.50% to 6.81% and maturities in fiscal 2002 through 2015.
4. During 1998, the Company's Board of Directors decided to move to an annual,
rather than quarterly, dividend policy to reduce costs and simplify payments to
stockholders. During the first quarter of fiscal 2000, the Company paid a
dividend of $434 million ($0.21 per share) applicable to fiscal 1999.
5. Diluted earnings per share amounts are calculated using the treasury stock
method and are based upon the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation in periods in which they would have an anti-
dilutive effect. The difference between basic and diluted earnings per share is
solely attributable to stock options, which are considered anti-dilutive when
the option exercise prices exceed the weighted average market price per share of
common stock during the period. For the three months ended June 30, 2000 and
1999, options for 3 million and 36 million shares, respectively, were excluded
from the diluted earnings per share calculation. For the nine-month periods,
options for 22 million and 26 million shares, respectively, were excluded.
6. During the nine months, a subsidiary of the Company repurchased 3.8 million
shares of Disney common stock for approximately $115 million. Under its share
repurchase program, the Company is authorized to purchase up to an additional
395 million shares. The Company evaluates share repurchase decisions on an
ongoing basis, taking into account borrowing capacity, management's target
capital structure, and other investment opportunities.
I-5
<PAGE>
DISNEY
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
7. Comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
(unaudited, in millions)
Net income $ 440 $ 368 $ 957 $1,215
Cumulative translation and other adjustments, net of
tax 11 (5) 19 (16)
----- ----- ----- ------
Comprehensive income $ 451 $ 363 $ 976 $1,199
===== ===== ===== ======
</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 Nine Months Ended
June 30, June 30,
-------------------------------------- --------------------------------
(unaudited, in millions) 2000 1999 2000 1999
---------------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Media Networks $2,270 $1,886 $ 7,420 $ 6,041
------ ------ ------- ------
Studio Entertainment
Third parties 1,228 1,258 4,434 4,590
Intersegment 15 11 64 47
------ ------ ------- -------
1,243 1,269 4,498 4,637
------ ------ ------- -------
Parks & Resorts 1,940 1,720 5,088 4,576
------ ------ ------- -------
Consumer Products
Third parties 526 625 2,058 2,278
Intersegment (15) (11) (64) (47)
------ ------ ------- -------
511 614 1,994 2,231
------ ------ ------- -------
$5,964 $5,489 $19,000 $17,485
====== ====== ======= =======
Operating income:
Media Networks $ 662 $ 485 $ 1,838 $ 1,216
Studio Entertainment (3) (1) 23 238
Parks & Resorts 565 497 1,258 1,151
Consumer Products 59 117 355 503
Amortization of intangible assets (109) (117) (331) (332)
------ ------ ------- -------
1,174 981 3,143 2,776
Gain on sale of Fairchild -- -- 243 --
------ ------ ------- -------
$1,174 $ 981 $ 3,386 $ 2,776
====== ====== ======= =======
</TABLE>
I-6
<PAGE>
DISNEY
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
9. In July 2000, the Internet Group sold Ultraseek Corp., a subsidiary that
provides intranet search software, which it had acquired as part of its
acquisitions of Infoseek. Proceeds from the sale consisted of shares of common
stock of the purchaser, Inktomi Corp., a publicly held company, and
approximately $4 million in cash. The transaction will be recorded in the fourth
quarter.
10. On August 11, 2000, a jury returned a verdict against the Company in the
amount of $240 million in a civil lawsuit in a Florida trial court in Orlando.
The lawsuit asserted that the company misappropriated the concept for its Wide
World of Sports complex at the Walt Disney World Resort. Based on the jury's
findings, the court has discretion, upon a motion by the Plaintiff, to add to
the verdict an amount up to double the amount thereof. The Company intends to
challenge the verdict in the trial court and, if necessary, on appeal and
believes that there are substantial grounds for complete reversal or reduction
of the verdict. Management believes that it is not currently possible to
estimate the impact, if any, that the ultimate resolution of this matter will
have on the Company's results of operations, financial position or cash flow.
I-7
<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 nine months ended June 30, 2000 for
each business segment, and for Disney as a whole, are not necessarily indicative
of results to be expected for the full year.
Media Networks revenues are influenced by advertiser demand and the seasonal
nature of programming, and generally peak in the spring and fall.
Studio Entertainment revenues fluctuate based upon the timing of theatrical
motion picture and home video releases. Release dates for theatrical and home
video products are determined by several factors, including timing of vacation
and holiday periods and competition in the market.
Parks & Resorts revenues fluctuate with changes in theme park attendance and
resort occupancy resulting from the seasonal nature of vacation travel. Peak
attendance and resort occupancy generally occur during the summer months when
school vacations occur and during early-winter and spring holiday periods.
Consumer Products revenues are influenced by seasonal consumer purchasing
behavior and the timing of animated theatrical releases.
RESULTS OF OPERATIONS
On November 4, 1999, the Company sold Fairchild Publications, which was
acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999,
stockholders of the Company and Infoseek approved the Company's acquisition of
the remaining interest in Infoseek that the Company did not already own. As more
fully discussed in Note 2 to the Condensed Combined Financial Statements, the
acquisition resulted in the creation of the Internet Group, which comprises all
of Disney's Internet businesses and Infoseek, as well as Disney's direct
marketing operations. The Company now separately reports operating results for
the Internet Group and Disney, which comprises the Company's businesses other
than the Internet Group, plus Disney's retained interest of approximately 71%,
as of June 30, 2000, in the Internet Group.
To enhance comparability, certain information for the current nine months and
prior-year periods is presented on a pro forma basis, which assumes that these
events had occurred at the beginning of fiscal 1999. The pro forma results are
not necessarily indicative of the combined results that would have occurred had
these events actually occurred at the beginning of fiscal 1999, nor are they
necessarily indicative of future results.
Pro forma net loss related to Disney's retained interest in the Internet Group
excludes the impact of the Internet Group purchased in-process research and
development expenditures of $23 million and $117 million for the nine months
ended June 30, 2000 and 1999, respectively.
I-8
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Combined Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
(unaudited; in millions, except per share data)
Revenues $5,964 $5,452 9 % $5,489
Costs and expenses 4,681 4,357 (7)% 4,391
Amortization of intangible assets 109 116 6 % 117
------ ------ ------
Operating income 1,174 979 20 % 981
Corporate and other activities 1 (27) n/m (27)
Gain on sale of Eurosport 93 - n/m -
Net interest expense (124) (162) 23 % (164)
------ ------ ------
Income before income taxes, minority
interests and retained interest in the Internet
Group 1,144 790 45 % 790
Income taxes (468) (337) (39)% (333)
Minority interests (43) (26) (65)% (26)
------ ------ ------
Income before retained interest in the
Internet Group 633 427 48 % 431
Net loss related to retained interest in
the Internet Group /(1)/ (193) (181) (7)% (63)
------ ------ ------
Net income $ 440 $ 246 79 % $ 368
====== ====== ======
Earnings per share:
Diluted $ 0.21 $ 0.12 75 % $ 0.18
====== ====== ======
Basic $ 0.21 $ 0.12 75 % $ 0.18
====== ====== ======
Earnings per share excluding retained
interest in the Internet Group:
Diluted $ 0.30 $ 0.20 50 % $ 0.21
====== ====== ======
Basic $ 0.30 $ 0.21 43 % $ 0.21
====== ====== ======
Average number of common and common
equivalent shares outstanding:
Diluted 2,115 2,086 2,086
====== ====== ======
Basic 2,078 2,059 2,059
====== ====== ======
(1) Amounts include non-cash amortization
of intangible assets as follows: $ 164 $ 164 $ 62
====== ====== ======
</TABLE>
Net income for the quarter increased 79%, or $194 million, to $440 million,
and diluted earnings per share increased 75% to $0.21, compared to prior-year
pro forma amounts, driven by increased operating income, the gain on the sale of
Eurosport, lower net interest expense and improved Corporate and other
activities, partially offset by increased minority interests and increased net
loss related to the retained interest in the Internet Group. Excluding the
retained interest in the Internet Group, net income and diluted earnings per
share increased 48% and 50% to $633 million and $0.30, respectively. Increased
operating income reflected higher Media Networks and Parks & Resorts results,
partially offset by lower Consumer Products results. Lower net interest expense
reflected lower average debt balances, partially offset by higher interest
rates. Lower average debt balances were driven by reductions of debt, which were
funded by increased cash flow. Corporate and other activities improved due to
increased income from equity investments. Higher minority interests reflected
the minority share of the Eurosport gain. The increase in net loss related to
the retained interest in the Internet Group reflects higher costs and expenses
at the Internet Group, driven by continued investment in Internet operations and
infrastructure, new Web site technology, development of new product initiatives
and growth of existing Web site product offerings, partially offset by Internet
revenue growth.
I-9
<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 quarter ended December 31, 1999 (see Note 2 to the Condensed Combined
Financial Statements). The acquisition resulted in a significant increase in
intangible assets at the Internet Group. Disney's retained interest in the
Internet Group reflects the impact of amortization of these assets. Acquired
intangible assets are being amortized over periods ranging from two to nine
years.
The impact of amortization related to the November 1998 and November 1999
Infoseek acquisitions, after the impact of the Ultraseek sale (see Note 9 to the
Condensed Combined Financial Statements) is expected to be $212 million for the
remaining three months of fiscal 2000, $641 million in 2001, $595 million in
2002, $84 million in 2003 and $13 million over the remainder of the amortization
period. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry.
On an as-reported basis, net income increased 20% or $72 million, reflecting
the items described above, as well as the consolidation of Infoseek operations
beginning November 18, 1999.
Combined Results - Nine Months
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------------------------------------------------------------------
Pro Forma As Reported
------------------------------------------------ ----------------------------------
2000 1999 % Change 2000 1999
------------- ------------ -------------- ------------- -----------------
<S> <C> <C> <C> <C>
(unaudited; in millions, except per share
data)
Revenues $18,986 $17,359 9 % $19,000 $17,485
Costs and expenses 15,513 14,267 (9)% 15,526 14,377
Amortization of intangible assets 331 329 (1)% 331 332
Gain on sale of Fairchild -- -- n/m 243 --
------- ------- ------- -------
Operating income 3,142 2,763 14 % 3,386 2,776
Corporate and other activities (28) (112) 75 % (30) (112)
Gain on sale of Eurosport 93 n/m 93 --
Net interest expense (439) (496) 11 % (441) (499)
------- ------- ------- -------
Income before income taxes, minority interests
and retained interest in the Internet Group 2,768 2,155 28 % 3,008 2,165
Income taxes (1,146) (896) (28)% (1,383) (905)
Minority interests (105) (69) (52)% (105) (69)
------- ------- ------- -------
Income before retained interest in the
Internet Group 1,517 1,190 27 % 1,520 1,191
Net (loss) income related to retained
interest in the Internet Group /(1)/ (603) (533) (13)% (563) 24
------- ------- ------- -------
Net income $ 914 $ 657 39 % $ 957 $ 1,215
======= ======= ======= =======
Earnings per share:
Diluted $ 0.44 $ 0.32 38 % $ 0.46 $ 0.58
======= ======= ======= =======
Basic $ 0.44 $ 0.32 38 % $ 0.46 $ 0.59
======= ======= ======= =======
Earnings per share excluding retained interest
in the Internet Group:
Diluted $ 0.72 $ 0.57 26 % $ 0.72 $ 0.57
======= ======= ======= =======
Basic $ 0.73 $ 0.58 26 % $ 0.73 $ 0.58
======= ======= ======= =======
Average number of common and common
equivalent shares outstanding:
Diluted 2,100 2,084 2,100 2,084
======= ======= ======= =======
Basic 2,070 2,054 2,070 2,054
======= ======= ======= =======
/(1)/ Amounts include non-cash amortization of
intangible assets as follow: $ 497 $ 492 $ 436 $ 165
======= ======= ======= =======
</TABLE>
I-10
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On a pro forma basis, net income for the nine months increased 39%, or $257
million, to $914 million, and diluted earnings per share increased 38% to $0.44,
driven by increased operating income, the gain on the sale of Eurosport,
improved Corporate and other activities and decreased net interest expense,
partially offset by increased net loss related to the retained interest in the
Internet Group and increased minority interests. Excluding the retained interest
in the Internet Group, net income and diluted earnings per share increased 27%
and 26% to $1.5 billion and $0.72, respectively. Increased operating income
reflected higher Media Networks and Parks & Resorts results, partially offset by
lower Studio Entertainment and Consumer Products results. Corporate and other
activities improved due to increased income from equity investments. Lower net
interest expense reflected gains from the sale of investments and lower average
debt balances, partially offset by higher interest rates and charges related to
certain financial instruments. Lower average debt balances were driven by
reductions of debt, which were funded by increased cash flow. The increase in
net loss related to the retained interest in the Internet Group reflects higher
costs and expenses at the Internet Group, driven by continued investment in
Internet operations and infrastructure, new Web site technology, development of
new product initiatives and growth of existing Web site product offerings, a
non-cash charge of $31 million to reflect the impairment of certain intangible
assets and one-time employee retention bonus payments of $17 million, partially
offset by Internet revenue growth.
As noted above, the Company completed the sale of Fairchild Publications
during the nine months. The sale resulted in a pre-tax gain of $243 million.
Income taxes on the transaction largely offset the pre-tax gain.
On an as-reported basis, net income decreased 21% or $258 million and
operating income increased 22% or $610 million. As-reported results reflect the
items discussed above, as well as the impact of the Infoseek acquisition on the
retained interest in the Internet Group and the sale of Fairchild Publications.
The retained interest in the Internet Group reflects a gain on the sale of
Starwave of $345 million in the prior-year period and Infoseek losses and
incremental amortization of acquired intangible assets in the current period.
The higher effective tax rate for the current nine months reflects the income
tax impact of the sale of Fairchild Publications.
I-11
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Business Segment Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
(unaudited, in millions)
Revenues:
Media Networks $2,270 $1,886 20 % $1,886
Studio Entertainment 1,243 1,269 (2)% 1,269
Parks & Resorts 1,940 1,720 13 % 1,720
Consumer Products 511 577 (11)% 614
------ ------ ------
$5,964 $5,452 9 % $5,489
====== ====== ======
Operating income /(1)/:
Media Networks $ 662 $ 485 36 % $ 485
Studio Entertainment (3) (1) n/m (1)
Parks & Resorts 565 497 14 % 497
Consumer Products 59 114 (48)% 117
Amortization of intangible assets (109) (116) 6 % (117)
------ ------ ------
$1,174 $ 979 20 % $ 981
====== ====== ======
</TABLE>
(1) Segment results exclude intangible asset amortization. Segment earnings
before interest, taxes, depreciation and amortization (EBITDA) are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Media Networks $ 697 $ 521 $ 521
Studio Entertainment 9 14 14
Parks & Resorts 731 631 631
Consumer Products 89 152 156
------ ------ ------
$1,526 $1,318 $1,322
====== ====== ======
</TABLE>
Management believes that segment EBITDA provides additional information useful
in analyzing the underlying business results. However, segment EBITDA is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating income.
Media Networks
The following table provides supplemental revenue and operating income detail
for the Media Networks segment:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------------
2000 1999 % Change
---- ---- ------
<S> <C> <C> <C>
(unaudited, in millions)
Revenues:
Broadcasting $1,509 $1,215 24 %
Cable Networks 761 671 13 %
------ ------ ------
$2,270 $1,886 20 %
====== ======
Operating income:
Broadcasting $ 421 $ 209 101 %
Cable Networks 241 276 (13)%
------ ------
$ 662 $ 485 36 %
====== ======
</TABLE>
Revenues increased 20%, or $384 million, to $2.3 billion, driven by increases
of $294 million from Broadcasting and $90 million at the Cable Networks.
Broadcasting revenues were driven by growth at the ABC television network and
the Company's owned television stations. Increases at the television network and
owned television stations were driven by the continued success of Who Wants to
Be a Millionaire, a strong advertising market and higher overall ratings on
network programming. The television stations also benefited from higher spot
advertising rates driven by ABC placing first in the May and February sweeps.
The strong advertising market also drove improvements at the radio stations.
Cable Networks revenue growth was driven by increased advertising and affiliate
revenues due to a strong advertising market and subscriber growth.
Operating income increased 36%, or $177 million, to $662 million, reflecting
increased Broadcasting and Cable Networks revenues, partially offset by higher
costs. Costs and expenses, which consist primarily of programming rights and
amortization, production costs, distribution and selling expenses and labor
costs, increased 15% or $207 million, driven by higher sports programming costs,
at the Cable Networks, principally related to National Hockey League (NHL) and
Major League Baseball broadcasts. In addition, higher costs and expenses
reflected start-up costs associated with the January launch of SoapNet and
various international Disney Channels.
I-12
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The Company has investments in cable operations that are accounted for as
unconsolidated equity investments. The table below presents "Operating income
from cable television activities," which comprise the Cable Networks and the
Company's cable equity investments:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------
2000 1999 % Change
----------- --------- ---------
<S> <C> <C> <C>
(unaudited, in millions)
Operating income:
Cable Networks $ 241 $ 276 (13)%
Equity investments:
A&E, Lifetime and E! Entertainment Television 183 147 24 %
Other /(1)/ 124 26 n/m
----- -----
Operating income from cable television activities 548 449 22 %
Partner share of operating income (169) (154) (10)%
----- -----
Disney share of operating income $ 379 $ 295 28 %
===== =====
</TABLE>
/(1)/ Includes a gain of $93 million from the sale of Eurosport during the
current quarter
Note: Operating income from cable television activities presented in this
table represents 100% of the operating income of both the Company's owned cable
businesses and its cable equity investees. The Disney share of operating income
represents the Company's ownership interest in cable television operating
income. Cable Networks are reported in "Operating income" in the Condensed
Combined Statements of Income. Equity Investments are accounted for under the
equity method and the Company's proportionate share of the net income of its
cable equity investments is reported in "Corporate and other activities" in the
Condensed Combined Statements of Income. Management believes that operating
income from cable television activities provides additional information useful
in analyzing the underlying business results. However, operating income from
cable television activities is a non-GAAP financial metric and should be
considered in addition to, not as a substitute for, reported operating income.
Disney's share of cable television operating Income increased 28%, or $84
million to $379 million, driven by the gain on the sale of Eurosport and
increased advertising revenues at Lifetime Television, The History Channel,
A&E Television and E! Entertainment Television, partially offset by decreases at
the Cable Networks.
Studio Entertainment
Revenues decreased 2%, or $26 million, to $1.2 billion, driven by declines of
$82 million in worldwide home video and $82 million in network television
production and distribution, partially offset by growth of $67 million in
domestic theatrical motion picture distribution and $34 million in stage plays
and music. In worldwide home video, the successful performance of Tarzan and
other Gold Collection titles on VHS and DVD and The Sixth Sense on DVD faced
difficult comparisons to the prior-year quarter, which included A Bug's Life and
Lion King II: Simba's Pride. The decline in network television production and
distribution revenue reflected the production of Home Improvement in the prior-
year quarter, partially offset by strong performances of 101 Dalmatians and Air
Force One in international markets. Growth in domestic theatrical motion picture
distribution reflected the performances of Dinosaur, Gone in 60 Seconds and
Shanghai Noon in the current quarter compared to Tarzan in the prior-year
quarter. Growth in stage play revenues was driven by the performance of The
Lion King, Beauty and the Beast and Aida in the current quarter and music
revenues reflected sales of the Mission: Impossible 2 soundtrack.
I-13
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Operating losses increased to $3 million, due to declines in domestic
theatrical motion picture distribution, where cost increases exceeded revenue
gains, partially offset by growth in network television production and
distribution and worldwide home video, where cost decreases exceeded revenue
declines, and stage plays. Costs and expenses, which consist primarily of
production cost amortization, distribution and selling expenses, participations
expense, product costs, labor and leasehold expenses, decreased 2% or $24
million. Lower costs and expenses reflected decreases at network television
production and distribution and domestic home video, partially offset by
increases at domestic theatrical motion picture distribution. Production cost
amortization decreased at network television production and distribution due to
the production of Home Improvement and pilot programs in the prior-year quarter
and the distribution of more classic animated titles in the current year, which
have a lower amortization cost relative to recent titles. Domestic home video
distribution, selling and participation costs decreased due to a reduction in
videotape unit sales and significant participation payments made to Pixar on A
Bug's Life in the prior-year quarter. Cost increases in domestic theatrical
motion picture distribution reflected increased distribution expenses for
Dinosaur, Gone in 60 Seconds and Shanghai Noon and higher production cost
amortization in the current quarter.
Parks & Resorts
Revenues increased 13%, or $220 million, to $1.9 billion, driven by growth of
$133 million at the Walt Disney World Resort, reflecting increased guest
spending and record theme park attendance; $21 million at Disney Cruise Line,
reflecting a full quarter of operations from both cruise ships, the Disney Magic
and the Disney Wonder, compared to just the Disney Magic in the prior-year
quarter; and $11 million at Disneyland, reflecting increased attendance.
Increased guest spending and record attendance at the Walt Disney World Resort
were driven by the ongoing Millennium Celebration. Higher attendance at
Disneyland was driven by the 45th Anniversary Celebration and the strength of
the Annual Pass program.
Operating income increased 14%, or $68 million, to $565 million, driven by
revenue growth at the Walt Disney World Resort and Disneyland, partially offset
by higher costs and expenses. Costs and expenses, which consist principally of
labor, costs of merchandise, food and beverages sold, depreciation, repairs and
maintenance, entertainment and marketing and sales expense, increased 12% or
$152 million. Increased operating costs were driven by higher theme park
attendance, the ongoing Millennium Celebration at the Walt Disney World Resort
and Disney Cruise Line operations.
Consumer Products
Revenues decreased 11%, or $66 million, to $511 million, compared to prior-
year pro forma amounts, driven by a decline of $56 million in worldwide
merchandise licensing and publishing and $8 million at the Disney Stores,
partially offset by growth of $8 million at Disney Interactive. Merchandise
licensing revenues reflected continued worldwide softness. Publishing revenues
reflected declines primarily in North America and Europe. Disney Store revenues
decreased due to lower comparative store sales, principally domestically,
partially offset by improved comparative store sales in certain European
markets. Disney Interactive revenues increased due to the success of the Who
Wants to Be a Millionaire video games and Pooh learning titles.
On an as-reported basis, revenues decreased 17% or $103 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Operating income decreased 48%, or $55 million, to $59 million, compared to
prior-year pro forma amounts, reflecting declines in worldwide merchandise
licensing, partially offset by improvements at the Disney Store, driven by
improvements in North America, due to cost reductions, and in certain European
markets, and also at Disney Interactive. Costs and expenses, which consist
primarily of labor; product costs, including product development costs;
distribution and selling expenses; and leasehold expenses, decreased 2% or $11
million, driven by the Disney Stores domestically due to better product mix and
labor cost savings, partially offset by higher advertising and international
infrastructure costs.
I-14
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On an as-reported basis, operating income decreased 50% or $58 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
Business Segment Results - Nine Months
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------------------------------------
Pro Forma As Reported
-------------------------------- ------------------
2000 1999 % Change 2000 1999
------- ------- -------- ------- -------
(unaudited, in millions)
<S> <C> <C> <C> <C> <C>
Revenues:
Media Networks $ 7,420 $ 6,041 23 % $ 7,420 $ 6,041
Studio Entertainment 4,498 4,637 (3)% 4,498 4,637
Parks & Resorts 5,088 4,576 11 % 5,088 4,576
Consumer Products 1,980 2,105 (6)% 1,994 2,231
------- ------- ------- -------
$18,986 $17,359 9 % $19,000 $17,485
======= ======= ======= =======
Operating income /(1)/:
Media Networks $ 1,838 $ 1,216 51 % $ 1,838 $ 1,216
Studio Entertainment 23 238 (90)% 23 238
Parks & Resorts 1,258 1,151 9 % 1,258 1,151
Consumer Products 354 487 (27)% 355 503
Amortization of intangible assets (331) (329) (1)% (331) (332)
------- ------- ------- -------
3,142 2,763 14 % 3,143 2,776
Gain on sale of Fairchild -- -- n/m 243 --
------- ------- ------- -------
$ 3,142 $ 2,763 14 % $ 3,386 $ 2,776
======= ======= ======= =======
</TABLE>
(1) Segment results exclude intangible asset amortization. Segment EBITDA,
which also excludes depreciation, is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Media Networks $ 1,942 $ 1,313 $ 1,942 $ 1,313
Studio Entertainment 63 283 63 283
Parks & Resorts 1,696 1,518 1,696 1,518
Consumer Products 434 587 435 604
------- ------- ------- -------
$ 4,135 $ 3,701 $ 4,136 $ 3,718
======= ======= ======= =======
</TABLE>
I-15
<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>
Nine Months Ended June 30,
---------------------------------------------------------
2000 1999 % Change
--------------- -------------- ----------------
<S> <C> <C> <C>
(unaudited, in millions)
Revenues:
Broadcasting $4,876 $3,955 23%
Cable Networks 2,544 2,086 22%
------ ------
$7,420 $6,041 23%
====== ======
Operating income:
Broadcasting $1,008 $ 495 104%
Cable Networks 830 721 15%
------ ------
$1,838 $1,216 51%
====== ======
</TABLE>
Revenues increased 23%, or $1.4 billion, to $7.4 billion, driven by increases
of $921 million from Broadcasting and $458 million at the Cable Networks.
Increased Broadcasting revenues were driven by growth at the ABC television
network and the Company's owned television stations. Increases at the television
network and owned television stations were driven by a strong advertising
market, the continued success of Who Wants to Be a Millionaire and higher
overall ratings on network programming, including Good Morning America. The
television stations also benefited from higher spot advertising rates driven by
ABC placing first in the May and February sweeps. Cable Networks revenue growth
was driven by increased advertising revenues due to a strong advertising market,
as well as higher affiliate fees due to contractual rate adjustments and
subscriber growth.
Operating income increased 51%, or $622 million, to $1.8 billion, reflecting
increased Broadcasting and Cable Network revenues, partially offset by higher
costs. Costs and expenses increased 16% or $757 million, driven by higher sports
programming costs, principally related to National Football League (NFL) and NHL
broadcasts. In addition, start-up costs associated with the January launch of
SoapNet and various international Disney Channels contributed to increased costs
and expenses.
During the second quarter of 1998, the Company entered into a new agreement
with the NFL for the right to broadcast NFL football games on the ABC Television
Network and ESPN. The contract provides for total payments of approximately $9
billion over an eight-year period, and commenced with the 1998 season. Under the
terms of the contract, the NFL has the right to cancel the contract after five
years. The programming rights fees under the new contract are significantly
higher than those required by the previous contract and the fee increases exceed
the estimated revenue increases over the contract term. The higher fees under
the new contract reflect various factors, including increased competition for
sports programming rights and an increase in the number of games to be broadcast
by ESPN. Disney continues to pursue a variety of strategies, including marketing
efforts, to reduce the impact of the higher costs. The contract's impact on
Disney's results over the remaining contract term is dependent upon a number of
factors, including the strength of advertising markets, effectiveness of
marketing efforts and the size of viewer audiences.
I-16
<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>
Nine Months Ended June 30,
----------------------------
2000 1999 % Change
------ ------ --------
<S> <C> <C> <C>
(unaudited, in millions)
Operating income:
Cable Networks $ 830 $ 721 15 %
Equity investments:
A&E, Lifetime and E! Entertainment Television 501 382 31 %
Other /(1)/ 175 33 n/m
------ ------
Operating income from cable television activities 1,506 1,136 33 %
Partner share of operating income (487) (363) (34)%
------ ------
Disney share of operating income $1,019 $ 773 32 %
====== ======
</TABLE>
/(1)/ Includes a gain of $93 million from the sale of Eurosport during the
current quarter
Note: Operating income from cable television activities presented in this
table represents 100% of the operating income of both the Company's owned cable
businesses and its cable equity investees. The Disney share of operating income
represents the Company's ownership interest in cable television operating
income. Cable Networks are reported in "Operating income" in the Condensed
Combined Statements of Income. Equity investments are accounted for under the
equity method and the Company's proportionate share of the net income of its
cable equity investments is reported in "Corporate and other activities" in the
Condensed Combined Statements of Income.
Disney's share of cable television operating income increased 32%, or $246
million, to $1.0 billion, driven by increased advertising revenues at Lifetime
Television, The History Channel, E! Entertainment Television and A&E Television;
growth at the Cable Networks; and the gain on the sale of Eurosport.
Studio Entertainment
Revenues decreased 3%, or $139 million, to $4.5 billion, driven by declines of
$269 million in worldwide home video and $133 million in network television
production and distribution, partially offset by growth of $191 million in
worldwide theatrical motion picture distribution and $57 million in stage plays.
Worldwide home video revenues reflected fewer unit sales in the current year, as
the prior year included the successful releases of Lion King II: Simba's Pride,
Mulan, Armageddon and A Bug's Life. The decline in network television
production and distribution reflects the production of Home Improvement in the
prior year. Growth in worldwide theatrical motion picture distribution
reflected the performance of Toy Story 2, Tarzan, The Sixth Sense and Dinosaur.
Growth in stage play revenues was driven by the performances of The Lion King,
Beauty and the Beast and Aida.
I-17
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Operating income decreased 90%, or $215 million to $23 million, due to revenue
declines in worldwide home video and declines in domestic theatrical motion
picture distribution, where cost increases exceeded revenue gains. These
declines were partially offset by improvements in international theatrical
motion picture distribution. Costs and expenses increased 2% or $76 million.
Cost increases in worldwide theatrical motion picture distribution reflected
higher production cost amortization and increased participation costs due to The
Sixth Sense and Toy Story 2. Stage play operating and production cost
amortization expenses increased due to The Lion King and Aida. Production cost
amortization decreased in network television production and distribution,
reflecting the production of Home Improvement in the prior year and the
distribution of more classic animated titles in the current year. Worldwide home
video distribution and selling costs and production cost amortization decreased
due to a reduction in videotape unit sales compared to the prior year.
Increases in production and participation costs are also reflective of
industry trends: as competition for creative talent has increased, costs within
the industry have increased at a rate significantly higher than inflation.
Parks & Resorts
Revenues increased 11%, or $512 million, to $5.1 billion, driven by growth of
$293 million at the Walt Disney World Resort, reflecting increased guest
spending, record theme park attendance and record occupied room nights; $89
million at Disney Cruise Line, reflecting a full nine months of operations from
both cruise ships, the Disney Magic and the Disney Wonder, compared to just the
Disney Magic in the prior year; and $13 million at Disneyland, reflecting
increased guest spending. Increased guest spending and record attendance at the
Walt Disney World Resort were driven by the ongoing Millennium Celebration and
higher occupied room nights reflecting the opening of the All Star Movies
Resort, which opened in the second quarter of the prior year. At Disneyland,
increased attendance and guest spending were driven by the 45th Anniversary
Celebration, enhanced merchandise and food and beverage offerings throughout the
park and the strength of the Annual Pass program.
Operating income increased 9%, or $107 million, to $1.3 billion, driven by
revenue growth at the Walt Disney World Resort, improved results at Disney
Cruise Line and higher guest spending at Disneyland. Costs and expenses
increased 12% or $405 million, driven by higher theme park attendance and the
ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise
Line operations.
Consumer Products
Pro forma revenues decreased 6%, or $125 million, to $2.0 billion, driven by
declines of $140 million in worldwide merchandise licensing and publishing,
partially offset by an increase of $25 million at Disney Interactive. Lower
merchandise licensing and publishing revenues were primarily attributable to
declines domestically and in Europe. Disney Interactive revenues increased due
to the success of the Who Wants to Be a Millionaire video games, Pooh learning
titles and the Toy Story 2 action game.
On an as-reported basis, revenues decreased 11% or $237 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Pro forma operating income decreased 27%, or $133 million, to $354 million,
driven by declines in worldwide merchandise licensing and softer publishing
results domestically and in Europe, partially offset by an increase at Disney
Interactive. Costs and expenses were comparable to the prior year.
On an as-reported basis, operating income decreased 29% or $148 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
I-18
<PAGE>
DISNEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
FINANCIAL CONDITION
For the nine months ended June 30, 2000, cash provided by operations increased
$443 million to $4.9 billion, driven by increased income excluding the Internet
Group, higher amortization of television broadcast rights relative to cash
payments and increased amortization of film and television costs, partially
offset by higher income tax payments due to certain payments attributable to the
prior fiscal year.
During the nine months, Disney invested $2.0 billion to develop, produce and
acquire rights to film and television properties, a decrease of $288 million.
The decrease was primarily due to a $310 million payment related to the
acquisition of a film library in the prior year.
During the nine months, Disney invested $1.3 billion in parks, resorts and
other properties. These expenditures reflected continued expansion activities
related to Disney's California Adventure and certain resort facilities at the
Walt Disney World Resort. The decrease of $175 million from the prior year
reflects the final payment for the second cruise ship, the Disney Wonder, in the
prior year, partially offset by increased spending on Disney's California
Adventure in the current year.
During the nine months, Disney invested $91 million in Euro Disney S.C.A. to
maintain its 39% ownership interest after a Euro Disney equity rights offering,
the proceeds of which will be used to fund construction of a new theme park.
Total commitments to purchase broadcast programming approximated $13.5 billion
at June 30, 2000, including approximately $11.0 billion related to sports
programming rights, primarily NFL, College Football, Major League Baseball and
NHL. Substantially all of this amount is payable over the next six years.
Disney expects the ABC Television Network, ESPN and the Company's television
and radio stations to continue to enter into programming commitments to purchase
the broadcast rights for various feature films, sports and other programming.
During the nine months, Disney repaid $2.4 billion of term debt, which matured
during the period, and reduced its commercial paper borrowings by $538 million.
These repayments were partially funded by proceeds of $1.1 billion from various
financing arrangements. Commercial paper borrowings outstanding as of June 30,
2000 totaled $1.4 billion, with maturities of up to one year, supported by bank
facilities totaling $4.8 billion, which expire in one to five years and allow
for borrowings at various interest rates. Disney also has the ability to borrow
under a U.S. shelf registration statement and a euro medium-term note program,
which collectively permit the issuance of up to approximately $4.8 billion of
additional debt.
Disney is authorized as of June 30, 2000 to purchase up to 395 million shares
of Disney common stock. During the nine months, a subsidiary of Disney acquired
approximately 3.8 million shares of Disney common stock for approximately $115
million. Disney also used $434 million to fund dividend payments during the
first quarter.
Disney believes that its financial condition is strong and that its cash,
other liquid assets, operating cash flows, access to equity capital markets and
borrowing capacity, taken together, provide adequate resources to fund ongoing
operating requirements and future capital expenditures related to the expansion
of existing businesses, including the Internet Group, and development of new
projects.
I-19
<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 is
evaluating the effect that adoption may have on its combined results of
operations and financial position and will reflect such effect, if any, during
fiscal 2001.
In June 2000, the American Institute of Certified Public Accountants issued
Statement of Position 00-2 Accounting by Producers or Distributors of Films (SOP
00-2). SOP 00-2 changes the accounting standards for costs to produce and
distribute film and television properties. Disney expects to adopt the new
standard effective October 1, 2000, and is evaluating the effect that such
adoption may have on its combined results of operations and financial position.
On August 11, 2000, a jury returned a verdict against the Company in the
amount of $240 million in a civil lawsuit in a Florida trial court in Orlando.
The lawsuit asserted that the company misappropriated the concept for its Wide
World of Sports complex at the Walt Disney World Resort. Based on the Jury's
findings, the court has discretion, upon a motion by the Plaintiff, to add to
the verdict an amount up to double the amount thereof. The Company intends to
challenge the verdict in the trial court and, if necessary, on appeal and
believes that there are substantial grounds for complete reversal or reduction
of the verdict. Management believes that it is not currently possible to
estimate the impact, if any, that the ultimate resolution of this matter will
have on the Company's results of operations, financial position or cash flow.
I-20
<PAGE>
ANNEX II
[LOGO OF THE WALT DISNEY COMPANY]
WALT DISNEY INTERNET GROUP
CONDENSED COMBINED FINANCIAL INFORMATION
<PAGE>
WALT DISNEY INTERNET GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
In thousands, except per share data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -------------------------
2000 1999 2000 1999
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 86,346 $ 41,645 $ 286,065 $ 159,798
Costs and expenses:
Cost of revenues 81,050 34,423 249,189 111,437
Sales and marketing 51,529 17,307 169,591 58,681
Other operating expenses 27,862 8,931 142,861 26,924
Depreciation 9,131 1,914 23,232 5,486
Amortization of intangible assets 230,710 -- 578,394 --
Gain on sale of Starwave -- -- -- 345,048
--------- -------- --------- ---------
Operating (loss) income (313,936) (20,930) (877,202) 302,318
Corporate and other activities (1,875) (3,325) (6,396) (13,443)
Equity in Infoseek loss -- (73,512) (40,575) (245,590)
Net interest expense (217) (2,139) (6,446) (5,371)
--------- -------- --------- ---------
(Loss) income before income taxes and minority
interests (316,028) (99,906) (930,619) 37,914
Income tax benefit (expense) 42,752 36,472 144,246 (13,933)
Minority interests 1,108 -- 19,536 252
--------- -------- --------- ---------
Net (loss) income $(272,168) $(63,434) $(766,837) $ 24,233
========= ======== ========= =========
Net (loss) income attributed to:
Disney common stock/(1)/ $(193,228) $(63,434) $(563,252) $ 24,233
========= ======== ========= =========
Internet Group common stock $ (78,940) $ n/a $(203,585) $ n/a
========= ======== ========= =========
Loss per share attributed to the Internet Group:
Diluted and Basic $ (1.75) $ n/a $(4.58) $ n/a
========= ======== ========= =========
Average number of common and common equivalent
shares outstanding:
Diluted and Basic 45,160 n/a 44,469 n/a
========= ======== ========= =========
</TABLE>
(1) Net (loss) income attributed to Disney common stock includes 100% of the
Internet Group's losses through November 17, 1999, and approximately 71%
thereafter.
See Notes to Condensed Combined Financial Statements
II-1
<PAGE>
WALT DISNEY INTERNET GROUP
CONDENSED COMBINED BALANCE SHEETS
In thousands (unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,589 $ 5,530
Receivables (net of allowance for doubtful
accounts of $17,166 and $4,791) 51,962 17,763
Inventories 19,198 43,521
Deferred income taxes 27,762 8,993
Other assets 10,649 13,905
---------- --------
Total current assets 114,160 89,712
Investments 59,472 505,210
Property and equipment, at cost 166,350 53,509
Accumulated depreciation (81,184) (18,928)
---------- --------
85,166 34,581
Projects in progress -- 6,112
---------- --------
85,166 40,693
Intangible assets, net 1,730,959 64,389
Deferred income taxes 18,135 --
Other assets 4,543 6,420
---------- --------
$2,012,435 $706,424
========== ========
LIABILITIES AND GROUP EQUITY
Current Liabilities
Accounts and taxes payable and other
accrued liabilities $ 123,567 $ 90,997
Current portion of borrowings -- 28,313
Unearned royalties and other advances 21,388 6,312
---------- --------
Total current liabilities 144,955 125,622
Loan payable to Disney 50,900 19,000
Borrowings -- 90,350
Deferred income taxes -- 58,396
Other long term liabilities, unearned royalties
and other advances 5,574 --
Minority interests -- 42,041
Group equity 1,811,006 371,015
---------- --------
$2,012,435 $706,424
========== ========
</TABLE>
See Notes to Condensed Combined Financial Statements
II-2
<PAGE>
WALT DISNEY INTERNET GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
In thousands (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
NET (LOSS) INCOME $(766,837) $ 24,233
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Depreciation 23,232 5,486
Amortization of intangibles 578,394 --
Charge for in-process research and development 23,322 --
Impairment charges 35,849 --
Gain on sale of Starwave -- (345,048)
Equity in Infoseek loss 40,575 245,590
Minority interests (19,536) (252)
Other 1,606 8,015
CHANGES IN ASSETS AND LIABILITIES 61,249 2,971
--------- ---------
744,691 (83,238)
--------- ---------
CASH USED IN OPERATIONS (22,146) (59,005)
--------- ---------
INVESTING ACTIVITIES
Investments in property and equipment (29,094) (11,655)
Acquisitions (net of cash acquired) 2,362 (70,013)
Purchases of investments (73,301) --
--------- ---------
(100,033) (81,668)
--------- ---------
FINANCING ACTIVITIES
Capital contributions from Disney, net 21,514 146,892
Borrowings 7,214 --
Reduction of borrowings (2,594) (13,900)
Stock options exercised 16,366 --
Borrowings from Disney, net 78,738 --
--------- ---------
121,238 132,992
--------- ---------
Decrease in cash and cash equivalents (941) (7,681)
Cash and cash equivalents, beginning of period 5,530 7,684
--------- ---------
Cash and cash equivalents, end of period $ 4,589 $ 3
========= =========
</TABLE>
See Notes to Condensed Combined Financial Statements
II-3
<PAGE>
WALT DISNEY INTERNET GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. These condensed combined financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been reflected in these condensed
combined financial statements. Operating results for the quarter and nine months
are not necessarily indicative of the results that may be expected for the year
ending September 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto for the Company included in its
Annual Report on Form 10-K for the year ended September 30, 1999 as well as the
combined financial statements and footnotes thereto for Disney's existing
Internet and direct marketing businesses (known as GO.com) for the year ended
September 30, 1998, included in the joint proxy statement/prospectus of The Walt
Disney Company and Infoseek Corporation, filed on Form S-4 dated September 30,
1999 and the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999.
2. In November 1998, the Company acquired a 43% interest in Infoseek
Corporation (Infoseek) in a transaction that, among other things, provided for
the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by
Infoseek. The Company recognized a $345 million non-cash pre-tax gain on that
transaction.
On November 17, 1999, stockholders of the Company and Infoseek approved the
Company's acquisition of the remaining interest in Infoseek that the Company did
not already own.
The acquisition was effected by the creation and issuance of a new class of
common stock, called GO.com common stock, in exchange for outstanding Infoseek
shares, at an exchange rate of 1.15 shares of GO.com common stock for each
Infoseek share. Upon consummation of the acquisition, the Company combined its
Internet and direct marketing businesses with Infoseek to create a single
Internet and direct marketing business called GO.com. On August 2, 2000, the
Internet and direct marketing business was renamed Walt Disney Internet Group
(hereinafter referred to as the Internet Group).
The acquisition has been accounted for as a purchase, and the acquisition cost
of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over the
fair value of Infoseek's net assets, has been allocated to intangible assets,
including goodwill of $1.9 billion, and is being amortized over two to nine
years. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry. During the quarter ended December 31, 1999, the Internet
Group recorded charges for purchased in-process research and development
expenditures totaling $23.3 million, which are reported in other operating
expenses in the condensed combined statements of operations.
Disney retains an interest of approximately 71% in the Internet Group at June
30, 2000. Effective November 18, 1999, shares of the Company's existing common
stock were reclassified as Disney common stock, to track the financial
performance of the Company's businesses other than the Internet Group, plus
Disney's retained interest in the Internet Group.
II-4
<PAGE>
WALT DISNEY INTERNET GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
The Internet Group's combined results of operations have incorporated
Infoseek's activity on a consolidated basis since November 18, 1999. The
unaudited pro forma information below presents combined results of operations as
if the Infoseek acquisition had occurred at the beginning of fiscal 1999. The
unaudited pro forma information is not necessarily indicative of the results of
operations of the combined group had the Infoseek acquisition occurred at the
beginning of fiscal 1999, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------
2000 1999
-------------------------
(unaudited; in thousands, except per share data)
<S> <C> <C>
Revenues $ 309,534 $ 260,576
Net loss (844,942) (740,099)
Net loss attributed to Internet Group common stock (242,388) (206,687)
Diluted and basic loss per share attributed to Internet
Group common stock $ (5.45) $ (4.83)
</TABLE>
Pro forma amounts for the nine-month periods exclude purchased in-process
research and development expenditures of $23.3 million and $116.2 million, in
2000 and 1999, respectively, and the Starwave gain in fiscal 1999.
3. Diluted and basic loss per share amounts for the nine months reflect the
results of operations after November 17, 1999, the date the Company acquired the
remaining interest in Infoseek that it did not already own and first issued the
Internet Group common stock, through June 30, 2000. Diluted loss per share
amounts are calculated using the treasury stock method and are based upon the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares are excluded from the computation in
periods in which they would have an anti-dilutive effect. The difference between
basic and diluted earnings per share is solely attributable to stock options,
which are considered anti-dilutive when option exercise prices exceed the
weighted average market price per share of common stock during the period. For
the quarter and nine months ended June 30, 2000, all Internet Group stock
options were anti-dilutive and, accordingly, options for 25.8 million and 16.9
million shares, respectively, were excluded from the loss per share calculation.
4. As a result of toysmart.com's bankruptcy filing, the Internet Group has
changed its method of accounting for toysmart.com from the consolidation method
to the cost method, effective June 9, 2000. The Internet Group's investment in
toysmart.com as of June 30, 2000 was not significant.
5. On June 30, 2000, the Internet Group acquired the remaining 40% interest in
Soccernet.com that it did not already own. The acquisition has been accounted
for as a purchase. The excess of the purchase price over the fair value of the
net assets acquired was $15.2 million and has been recorded as goodwill, which
is being amortized over its estimated useful life.
6. During the quarter ended March 31, 2000, the Internet Group recorded a
$30.8 million non-cash impairment charge, which is reported in Other operating
expenses, related to goodwill and other intangible assets for an Internet
business. Based upon a significant decrease in revenues relative to budget, the
Internet Group performed an impairment assessment in accordance with Statement
of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-
lived Assets to Be Disposed Of, and accordingly, wrote the assets down to their
fair value, which was determined based upon projected discounted future cash
flows.
7. In April 2000, the Company's Board of Directors approved a share repurchase
program for up to five million shares of Internet Group common stock in the open
market. No shares have been repurchased under this program.
II-5
<PAGE>
WALT DISNEY INTERNET GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
8. Comprehensive (loss) income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- --------------------
(unaudited, in thousands) 2000 1999 2000 1999
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Net (loss) income $(272,168) $(63,434) $(766,837) $24,233
Unrealized holding loss, net (10,885) -- (12,329) --
--------- -------- --------- -------
Comprehensive (loss) income $(283,053) $(63,434) $(779,166) $24,233
========= ======== ========= =======
</TABLE>
9. The Internet and Direct Marketing segments reported below are the operating
segments of the Internet Group for which separate financial information is
available and for which operating income or loss amounts are evaluated regularly
by executive management in deciding how to allocate resources and in assessing
performance.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ---------------------
(unaudited, in thousands) 2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Internet
Media $ 51,606 $ 7,848 $ 137,874 $ 26,614
Commerce 17,855 5,656 54,571 16,550
--------- -------- --------- --------
69,461 13,504 192,445 43,164
Direct Marketing 16,885 28,141 93,620 116,634
--------- -------- --------- --------
$ 86,346 $ 41,645 $ 286,065 $159,798
========= ======== ========= ========
Operating (loss) income:
Internet $ (76,801) $(15,086) $(277,946) $(35,701)
Direct Marketing (6,425) (5,844) (20,862) (7,029)
--------- -------- --------- --------
(83,226) (20,930) (298,808) (42,730)
Amortization of intangible
assets 230,710 -- 578,394 --
--------- -------- --------- --------
(313,936) (20,930) (877,202) (42,730)
Gain on sale of Starwave -- -- -- 345,048
--------- -------- --------- --------
$(313,936) $(20,930) $(877,202) $302,318
========= ======== ========= ========
</TABLE>
10. In July 2000, the Internet Group sold Ultraseek Corp., a subsidiary that
provides intranet search software, which it had acquired as part of its
acquisitions of Infoseek. Proceeds from the sale consisted of shares of common
stock of the purchaser, Inktomi Corp., a publicly held company, and
approximately $4 million in cash. The transaction will be recorded in the fourth
quarter.
II-6
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEASONALITY
The Internet Group's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter and nine months ended June
30, 2000 for each business segment, and for the Internet Group as a whole, are
not necessarily indicative of results to be expected for the full year.
Internet commerce and Direct Marketing revenues fluctuate with seasonal
consumer purchasing behavior, with a significant portion of annual revenues
generated in the first quarter.
Internet media revenues are influenced by advertiser demand and visitor
traffic.
RESULTS OF OPERATIONS
On November 17, 1999, the stockholders of the Company and Infoseek approved
the Company's acquisition of the remaining interest in Infoseek that the Company
did not already own. As more fully discussed in Note 2 to the Condensed Combined
Financial Statements, the acquisition resulted in the creation of the Internet
Group, which comprises all of Disney's Internet businesses and Infoseek, as well
as Disney's direct marketing operations. The Company now separately reports
operating results for the Internet Group and Disney, which comprises the
Company's businesses other than the Internet Group, plus Disney's retained
interest of approximately 71% as of June 30, 2000, in the Internet Group.
The Internet Group's results of operations have incorporated Infoseek's
activity since the date of the acquisition. To enhance comparability, operating
results for the current nine months and prior-year periods have been presented
on a pro forma basis, which assumes that the acquisition of the remaining
interest in Infoseek and subsequent creation of the Internet Group had occurred
at the beginning of fiscal 1999. The pro forma results are not necessarily
indicative of the combined results that would have occurred had the acquisition
actually occurred at the beginning of fiscal 1999, nor are they necessarily
indicative of future results.
Pro forma operating loss for the nine months excludes purchased in-process
research and development expenditures of $23.3 million and $72.6 million in 2000
and 1999, respectively, and the Starwave gain in fiscal 1999.
II-7
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Combined Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
--------- --------- -------- -----------
(unaudited; in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 86,346 $ 78,186 10 % $ 41,645
Cost of revenues 81,050 56,303 (44)% 34,423
Sales and marketing 51,529 47,722 (8)% 17,307
Other operating expenses 27,862 15,714 (77)% 8,931
Depreciation 9,131 6,606 (38)% 1,914
--------- --------- --------
(83,226) (48,159) (20,930)
Amortization of intangible assets 230,710 227,419 (1)% --
--------- --------- --------
Operating loss (313,936) (275,578) (14)% (20,930)
Corporate and other activities (1,875) (1,787) (5)% (3,325)
Equity in Infoseek loss -- -- -- (73,512)
Net interest (expense) income (217) 1,472 (115)% (2,139)
--------- --------- --------
Loss before income taxes and minority interests (316,028) (275,893) (15)% (99,906)
Income tax benefit 42,752 24,279 76 % 36,472
Minority interests 1,108 75 n/m --
--------- --------- --------
Net loss $(272,168) $(251,539) (8)% $(63,434)
========= ========= ========
Net loss attributed to:
Disney common stock $(193,228) $(181,292) (7)% $(63,434)
========= ========= ========
Internet Group common stock $ (78,940) $ (70,247) (12)% $ n/a
========= ========= ========
Loss per share attributed to Internet Group
common stock:
Diluted and Basic $ (1.75) $ (1.64) (7)% $ n/a
========= ========= ========
Loss per share attributed to Internet Group
common stock excluding amortization of
intangibles /(1)/:
Diluted and Basic $ (0.34) $ (0.20) (70)% $ n/a
========= ========= ========
Average number of common and
common equivalent shares outstanding /(2)/:
Diluted and Basic 45,160 42,834 n/a
========= ========= ========
</TABLE>
(1) Management believes that loss per share excluding amortization of
intangible assets provides additional information useful in analyzing
business results. Loss per share excluding amortization of intangible
assets is a non-GAAP financial metric and should be considered in addition
to, not as a substitute for, reported loss per share.
(2) Total shares amount to 155,704 and 153,378 shares for 2000 and 1999,
respectively, including 110,544 shares attributable to Disney's retained
interest in the Internet Group.
II-8
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Net loss, net loss attributable to Internet Group common stock and diluted
loss per share for the quarter increased 8% to $272.2 million, 12% to $78.9
million and 7% to $1.75, respectively, compared to prior-year pro forma amounts.
These increases were driven by increased operating losses in both the Internet
and Direct Marketing segments, including increased amortization of intangible
assets. Higher amortization of intangible assets reflected incremental
intangible assets associated with the acquisition of an interest in
Soccernet.com in the third quarter of fiscal 1999. These increases were
partially offset by a higher effective tax benefit rate reflecting tax benefits
provided by losses from operations, which were larger relative to losses
attributable to goodwill amortization which generate no tax benefits.
As previously discussed, the Company completed its acquisition of Infoseek
during the quarter ended December 31, 1999 (see Note 2 to the Condensed Combined
Financial Statements). The acquisition resulted in a significant increase in
intangible assets. Intangible assets are being amortized over periods ranging
from two to nine years.
The impact of amortization related to the November 1998 and November 1999
Infoseek acquisitions, after the impact of the Ultraseek sale (see Note 10 to
the Condensed Combined Financial Statements), is expected to be $212.1 million
for the remaining three months of fiscal 2000, $641.4 million in 2001, $594.9
million in 2002, $83.5 million in 2003 and $13.4 million over the remainder of
the amortization period. The Internet Group determined the economic useful life
of acquired goodwill by giving consideration to the useful lives of Infoseek's
identifiable intangible assets, including developed technology, trademarks, user
base, joint venture agreements and in-place workforce. In addition, the Internet
Group considered the competitive environment and the rapid pace of technological
change in the Internet industry.
On an as-reported basis, net loss increased by $208.7 million. The as-reported
comparison reflects the items described above, as well as the consolidation of
Infoseek operations beginning November 18, 1999, the incremental amortization of
intangible assets in the current quarter related to the Infoseek acquisition,
and equity in Infoseek losses in the prior-year quarter.
II-9
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Combined Results - Nine Months
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------------------------------------------------------
Pro Forma As Reported
------------------------------------------ --------------------------
2000 1999 % Change 2000 1999
------------------------------------------ --------------------------
(unaudited; in thousands, except per
share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 309,534 $ 260,576 19 % $ 286,065 $ 159,798
Cost of revenues 265,738 168,569 (58)% 249,189 111,437
Sales and marketing 179,859 149,597 (20)% 169,591 58,681
Other operating expenses 131,319 54,365 (142)% 142,861 26,924
Depreciation 25,113 16,904 (49)% 23,232 5,486
----------- --------- --------- ---------
(292,495) (128,859) (127)% (298,808) (42,730)
Amortization of intangible assets 697,047 682,257 (2)% 578,394 --
Gain on sale of Starwave -- -- -- -- 345,048
----------- --------- --------- ---------
Operating (loss) income (989,542) (811,116) (22)% (877,202) 302,318
Corporate and other activities (6,005) (5,235) (15)% (6,396) (13,443)
Equity in Infoseek loss -- -- -- (40,575) (245,590)
Net interest (expense) income (5,018) 4,206 (219)% (6,446) (5,371)
----------- --------- --------- ---------
(Loss) income before income taxes
and minority interests (1,000,565) (812,145) (23)% (930,619) 37,914
Income tax benefit (expense) 136,076 71,469 90 % 144,246 (13,933)
Minority interests 19,547 577 n/m 19,536 252
----------- --------- --------- ---------
Net (loss) income $ (844,942) $(740,099) (14)% $(766,837) $ 24,233
=========== ========= ========= =========
Net (loss) income attributed to:
Disney common stock $ (602,554) $(533,412) (13)% $(563,252) $ 24,233
=========== ========= ========= =========
Internet Group common stock/(1)/ $ (242,388) $(206,687) (17)% $(203,585) $ n/a
=========== ========= ========= =========
Loss per share attributed to Internet
Group common stock /(1)/:
Diluted and Basic $(5.45) $(4.83) (13)% $(4.58) $ n/a
=========== ========= ========= =========
Loss per share attributed to Internet
Group common stock excluding
amortization of intangibles /(1)(2)/:
Diluted and Basic $(1.11) $(0.53) (109)% $(1.05) $ n/a
=========== ========= ========= =========
Average number of common and common
equivalent shares outstanding/(3)/:
Diluted and Basic 44,469 42,834 44,469 n/a
=========== ========= ========= =========
</TABLE>
(1) As-reported amounts reflect the period from November 18, 1999 (date of
issuance of Internet Group common stock) through June 30, 2000.
(2) The Internet Group believes that loss per share excluding amortization of
intangible assets provides additional information useful in analyzing
business results. Loss per share excluding amortization of intangible assets
is a non-GAAP financial metric and should be considered in addition to, not
as a substitute for, reported loss per share.
(3) Total shares amount to 155,013 and 153,378 shares for 2000 and 1999,
respectively, including 110,544 shares attributable to Disney's retained
interest in the Internet Group.
II-10
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On a pro forma basis, net loss, net loss attributed to Internet Group common
stock and diluted loss per share increased 14% to $844.9 million, 17% to $242.4
million and 13% to $5.45, respectively. These increases were driven by higher
operating losses in both the Internet and Direct Marketing segments, including
increased amortization of intangible assets. Higher amortization of intangible
assets reflects incremental intangible assets associated with the acquisitions
of interests in Soccernet.com and toysmart.com in the third and fourth quarters
of fiscal 1999, respectively. These increases were partially offset by minority
interest adjustments and a higher effective tax benefit rate reflecting tax
benefits provided by losses from operations, which were larger relative to
losses attributable to goodwill amortization which generate no tax benefits.
On an as-reported basis, net loss, net loss attributed to Internet Group
common stock and diluted loss per share were $766.8 million, $203.6 million and
$4.58, respectively. As-reported results reflect the items described above, as
well as the incremental amortization of intangible assets related to the
Infoseek acquisition, the consolidation of Infoseek's operations beginning
November 18, 1999, the gain on the sale of Starwave in the first quarter of
fiscal 1999 and decreased corporate and other activities due to a change in the
manner of accounting for Starwave and related businesses.
Costs and expenses for the remainder of the year are expected to reflect
continued investment in Web site technology and infrastructure, new product
initiatives and incremental marketing and sales expenditures. The Internet Group
has begun participating in the traditional television network up-front
marketplace and has sold approximately $30 million in Internet advertising which
it expects to fulfill and recognize as revenue during fiscal 2001.
Business Segment Results - Quarter
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
--------- --------- -------- -----------
(unaudited, in thousands)
<S> <C> <C> <C> <C>
Revenues:
Internet
Media $ 51,606 $ 40,901 26 % $ 7,848
Commerce and other 17,855 9,144 95 % 5,656
--------- --------- --------
69,461 50,045 39 % 13,504
Direct Marketing 16,885 28,141 (40)% 28,141
--------- --------- --------
$ 86,346 $ 78,186 10 % $ 41,645
========= ========= ========
Operating loss: /(1)/
Internet $ (76,801) $ (42,315) (81)% $(15,086)
Direct Marketing (6,425) (5,844) (10)% (5,844)
--------- --------- --------
(83,226) (48,159) (73)% (20,930)
Amortization of intangible assets 230,710 227,419 (1)% --
--------- --------- --------
$(313,936) $(275,578) (14)% $(20,930)
========= ========= ========
</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 $ (68,512) $ (36,594) $(14,057)
Direct Marketing (5,583) (4,959) (4,959)
--------- --------- --------
$ (74,095) $ (41,553) $(19,016)
========= ========= ========
</TABLE>
Management believes that segment EBITDA provides additional information useful
in analyzing the underlying business results. However, segment EBITDA is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating loss.
II-11
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Internet
Revenues increased 39%, or $19.4 million, to $69.5 million compared to prior-
year pro forma amounts, driven by growth in media and commerce revenues. Media
revenues, which consist primarily of advertising and sponsorship agreements,
licensing of site content and subscriptions from member-only sites that provide
subscribers with exclusive content and games, increased 26%, or $10.7 million,
to $51.6 million, reflecting higher advertising and sponsorship revenues driven
by increased advertiser demand and higher online site traffic at the ABC-branded
Web sites (ABC.com and ABCNEWS.com), Family.com, Disney.com and ESPN.com.
Commerce revenues increased 95%, or $8.7 million, to $17.9 million, driven by
growth in Ultraseek's intranet search software sales and increased sales at
DisneyStore.com and DisneyTravel.com. Commerce revenue growth reflected an 89%
increase over the prior-year quarter in the total number of orders per month, as
well as an increase in average order size across the Internet Group's commerce
sites.
On an as-reported basis, revenues increased 414% or $56.0 million, reflecting
the items described above, as well as the operations of Infoseek, which were
consolidated into the Internet Group beginning November 18, 1999.
Operating loss increased 81%, or $34.5 million, to $76.8 million compared to
prior-year pro forma amounts, reflecting higher costs and expenses, partially
offset by increased revenues. Costs and expenses, which consist primarily of
cost of revenues, sales and marketing, other operating expenses and
depreciation, increased 58% or $53.9 million. Cost of revenues, which consist
primarily of employee compensation, third-party development and engineering
costs, hosting and delivery costs associated with the Internet Group's Web
sites, and the cost of commerce merchandise, increased primarily due to
continued investment in Web site technology and infrastructure, new product
initiatives, enhancements to existing Web sites and the ongoing redesign of the
GO.com Web site. Sales and marketing expenses increased due to expanded
promotion of commerce businesses, partially offset by decreases at the GO.com
Web site. Sales and marketing related to the GO.com Web site were reduced as the
Internet Group reevaluated the positioning of the GO.com Web site. Increased
other operating expenses were driven by continued infrastructure investment
primarily related to the redesign and enhancement of the GO.com Web site.
On an as-reported basis, operating loss increased $61.7 million to $76.8
million, reflecting the items described above, as well as losses at Infoseek,
which was consolidated into the Internet Group beginning November 18, 1999.
Direct Marketing
Revenues decreased 40%, or $11.3 million, to $16.9 million due principally to
planned reductions in catalog circulation, fewer product offerings and lower
catalog response rates due to changes in the Company's merchandising strategy
and customer migration to the Internet Group's online business.
Operating loss increased 10%, or $0.6 million to $6.4 million, reflecting a
40% decline in revenues, partially offset by a decrease in costs and expenses.
Costs and expenses, which consist primarily of costs of goods sold reported as
cost of revenues, selling and marketing, other operating expenses and
depreciation, decreased 31% or $10.7 million, principally due to lower cost of
revenues as a result of lower sales volumes.
II-12
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Business Segment Results - Nine Months
<TABLE>
<CAPTION>
Nine Months Ended June 30,
----------------------------------------------------------
Pro Forma As Reported
--------------------------------- ---------------------
2000 1999 % Change 2000 1999
--------- --------- -------- --------- --------
(unaudited, in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Internet
Media $ 159,632 $ 117,226 36 % $ 137,874 $ 26,614
Commerce and other 56,282 26,716 111 % 54,571 16,550
--------- --------- --------- --------
215,914 143,942 50 % 192,445 43,164
Direct Marketing 93,620 116,634 (20)% 93,620 116,634
--------- --------- --------- --------
$ 309,534 $ 260,576 19 % $ 286,065 $159,798
========= ========= ========= ========
Operating (loss) income: /(1)/
Internet $(271,633) $(121,830) (123)% $(277,946) $(35,701)
Direct Marketing (20,862) (7,029) (197)% (20,862) (7,029)
--------- --------- --------- --------
(292,495) (128,859) (127)% (298,808) (42,730)
Amortization of intangible assets 697,047 682,257 (2)% 578,394 --
--------- --------- --------- --------
(989,542) (811,116) (22)% (877,202) (42,730)
Gain on sale of Starwave -- -- -- -- 345,048
--------- --------- --------- --------
$(989,542) $(811,116) (22)% $(877,202) $302,318
========= ========= ========= ========
</TABLE>
/(1)/ Segment results exclude intangible asset amortization. Segment EBITDA,
which also excludes depreciation, is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Internet $(249,184) $(106,801) $(257,378) $(32,090)
Direct Marketing (18,198) (5,154) (18,198) (5,154)
--------- --------- --------- --------
$(267,382) $(111,955) $(275,576) $(37,244)
========= ========= ========= ========
</TABLE>
Internet
Pro forma revenues increased 50%, or $72.0 million to $215.9 million,
reflecting growth in both media and commerce revenues. Media revenues increased
36%, or $42.4 million to $159.6 million, reflecting higher advertising and
sponsorship revenues driven by increased advertiser demand and higher online
site traffic at the ABC-branded Web sites, ESPN.com, GO.com, Disney.com and
Family.com. Commerce revenues increased 111%, or $29.6 million, to $56.3
million, driven by strong sales at the DisneyStore.com, operations at
toysmart.com, which was acquired during the fourth quarter of 1999, and growth
in Ultraseek's intranet search software sales. Commerce revenue growth reflected
a 148% increase over the prior-year period in the total number of orders per
month, as well as an increase in average order size across the Internet Group's
commerce sites.
On an as-reported basis, revenues increased 346%, or $149.3 million to $192.4
million, reflecting the items described above, as well as the operations of
Infoseek, which were consolidated into the Internet Group beginning November 18,
1999.
II-13
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Pro forma operating loss increased 123%, or $149.8 million, to $271.6 million,
reflecting higher costs and expenses which increased 83%, or $221.8 million,
partially offset by increased revenues. Cost of revenues increased primarily due
to continued investment in Web site technology and infrastructure, new product
initiatives, enhancements to existing Web sites, ongoing redesign of the GO.com
Web site, operations at toysmart.com and a one-time employee retention payment
of $7.9 million required by the 1999 Infoseek acquisition agreement. Sales and
marketing expenses increased primarily due to operations at toysmart.com,
expanded promotion of commerce businesses and one-time employee retention
payments of $5.2 million, partially offset by reduced marketing at the GO.com
Web site. Increased other operating expenses were driven by a non-cash charge of
$30.8 million to reflect the impairment of goodwill and certain intangible
assets, continued infrastructure investment, operations at toysmart.com and one-
time employee retention payments of $4.2 million.
On an as-reported basis, operating loss increased $242.2 million to $277.9
million, reflecting the items described above, as well as losses at Infoseek,
which was consolidated into the Internet Group beginning November 18, 1999.
Direct Marketing
Revenues decreased 20%, or $23.0 million, to $93.6 million, due principally to
planned reductions in catalog circulation, fewer product offerings and lower
catalog response rates. Lower response rates reflected a higher proportion of
mailings targeting new customers during the nine months. Lower revenues also
reflected inventory liquidation initiatives.
Operating loss increased $13.8 million to $20.9 million, compared to $7.0
million in the prior year, reflecting a 20% decline in revenues. Cost of
revenues declined due to the lower sales volumes.
FINANCIAL CONDITION
The Internet Group's cash needs are funded by Disney and such funding is
accounted for as either a capital contribution from Disney (i.e., as an increase
in the Internet Group's group equity and Disney's retained interest in the
Internet Group), or as a loan.
Disney may account for all cash transfers from Disney or the Internet Group to
or for the account of the other as inter-group loans, other than transfers in
return for assets or services rendered or transfers in respect of Disney's
retained interest that correspond to dividends paid on Internet Group common
stock. These loans bear interest at the rate at which Disney could borrow such
funds. The Company's board of directors has discretion to determine, in the
exercise of its business judgment, that a given transfer or type of transfer
should be accounted for as a long-term loan, a capital contribution increasing
Disney's retained interest in the Internet Group or a return of capital reducing
Disney's retained interest in the Internet Group. The Company has agreed,
however, that advances from Disney to the Internet Group up to $250.0 million on
a cumulative basis will be accounted for as short-term or long-term loans at
interest rates at which Disney could borrow such funds and will not be accounted
for as capital contributions.
For the nine months ended June 30, 2000, cash used by operations of $22.1
million was driven by higher pre-tax losses before non-cash items, partially
offset by tax benefits attributed to the Internet Group's operations, an
increase in accounts payable outstanding and a reduction in inventory levels.
The Internet Group has strategically invested in Internet-related companies.
Total investment purchases were $73.3 million for the nine months ended June 30,
2000.
From October 1, 1999 through the November 17, 1999 Infoseek acquisition, the
Internet Group received $21.5 million in capital contribution funding from
Disney.
II-14
<PAGE>
WALT DISNEY INTERNET GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The Internet Group's net borrowings from Disney during the nine months ended
June 30, 2000, totaled $78.7 million and represent advances from Disney to be
accounted for as a loan.
OTHER MATTERS
In April 2000, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF Issue No. 00-2 Accounting for Web Site Development Costs. The
Internet Group will adopt the consensus in the Issue in the fourth quarter of
fiscal 2000, and is evaluating the effect that such adoption may have on its
combined results of operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB
101). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. Disney is
evaluating the effect that adoption may have on its combined results of
operations and financial position and will reflect such effect, if any, during
fiscal 2001.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of the Internet
Group. The Internet Group and its representatives may from time to time make
written or oral statements that the Internet Group believes are "forward-
looking," including statements contained in this report and other filings with
the Securities and Exchange Commission and in reports to the Internet Group
stockholders. The Internet Group believes that all statements that express
expectations and projections with respect to future matters, including the
launching or prospective development of new business initiatives and Internet
projects, are forward-looking statements within the meaning of the Act. These
statements are made on the basis of management's views and assumptions, as of
the time the statements are made, regarding future events and business
performance. There can be no assurance, however, that management's expectations
will necessarily come to pass.
Factors that may affect forward-looking statements. A wide range of factors
could materially affect future developments and performance. A list of such
factors is set forth in the Company's Annual Report on Form 10-K for the year
ended September 30, 1999 under the heading "Factors that may affect forward-
looking statements."
II-15
<PAGE>
Annex III
[LOGO OF WALT DISNEY]
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 Nine Months Ended
June 30, June 30,
----------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $6,051 $5,531 $19,286 $17,644
Costs and expenses 4,851 4,454 16,111 14,579
Amortization of intangible assets 340 117 910 332
Gain on sale of Fairchild -- -- 243 --
Gain on sale of Starwave -- -- -- 345
------ ------ ------- -------
Operating income 860 960 2,508 3,078
Corporate and other activities (1) (17) (36) (125)
Gain on sale of Eurosport 93 -- 93 --
Equity in Infoseek loss -- (87) (41) (246)
Net interest expense (124) (166) (447) (504)
------ ------ ------- -------
Income before income taxes and minority interests 828 690 2,077 2,203
Income taxes (425) (296) (1,238) (919)
Minority interests (42) (26) (86) (69)
------ ------ ------- -------
Net income $ 361 $ 368 $ 753 $ 1,215
====== ====== ======= =======
Earnings (loss) attributed to:
Disney common stock/(1)/ $ 440 $ 368 $ 957 $ 1,215
Internet Group common stock (79) -- (204) --
------ ------ ------- -------
$ 361 $ 368 $ 753 $ 1,215
====== ====== ======= =======
Earnings (loss) per share attributed to:
Disney/(1)/
Diluted $0.21 $0.18 $0.46 $0.58
====== ====== ======= =======
Basic $0.21 $0.18 $0.46 $0.59
====== ====== ======= =======
Internet Group (basic and diluted) $(1.75) n/a $(4.58) n/a
====== ====== ======= =======
Average number of common and common equivalent
shares outstanding:
Disney
Diluted 2,115 2,086 2,100 2,084
====== ====== ======= =======
Basic 2,078 2,059 2,070 2,054
====== ====== ======= =======
Internet Group (basic and diluted) 45 n/a 44 n/a
====== ====== ======= =======
</TABLE>
-------------
(1) Including Disney's retained interest in the Internet Group. Disney's
retained interest in the Internet Group reflects 100% of Internet Group
losses through November 17, 1999, and approximately 71% thereafter.
See Notes to Condensed Consolidated Financial Statements
III-1
<PAGE>
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
In millions, except share data
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 690 $ 414
Receivables 3,800 3,633
Inventories 654 796
Film and television costs 3,794 4,071
Deferred income taxes 609 607
Other assets 687 679
------- -------
Total current assets 10,234 10,200
Film and television costs 2,612 2,489
Investments 2,080 2,434
Parks, resorts and other property, at cost
Attractions, buildings and equipment 16,225 15,869
Accumulated depreciation (6,813) (6,220)
------- -------
9,412 9,649
Projects in progress 2,043 1,272
Land 487 425
------- -------
11,942 11,346
Intangible assets, net 16,616 15,695
Other assets 1,293 1,515
------- -------
$44,777 $43,679
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 4,618 $ 4,588
Current portion of borrowings 2,481 2,415
Unearned royalties and other advances 786 704
------- -------
Total current liabilities 7,885 7,707
Borrowings 7,249 9,278
Deferred income taxes 2,854 2,660
Other long term liabilities, unearned royalties and other advances 2,629 2,711
Minority interests 334 348
Stockholders' Equity
Preferred stock, $.01 par value
Authorized--100 million shares, Issued--None
Common Stock
Common stock--Disney, $.01 par value
Authorized--3.6 billion, Issued--2.1 billion 9,672 9,324
Common stock--Internet Group, $.01 par value
Authorized--1.0 billion, Issued--45.2 million 2,181 --
Retained earnings 12,600 12,281
Cumulative translation and other (19) (25)
------- -------
24,434 21,580
Treasury stock, at cost, 29 million shares (605) (605)
Shares held by TWDC Stock Compensation Fund II, at
cost--0.1 million shares (3) --
------- -------
23,826 20,975
------- -------
$44,777 $43,679
======= =======
</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>
Nine Months Ended June 30,
-------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
NET INCOME $ 753 $ 1,215
OPERATING ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs 2,061 1,819
Depreciation 719 638
Amortization of intangibles 910 332
Gain on sale of Fairchild (243) --
Gain on sale of Eurosport (93) --
Gain on sale of Starwave -- (345)
Minority interests 86 69
Equity in Infoseek loss 41 246
Other 26 26
CHANGES IN ASSETS AND LIABILITIES 613 393
------- -------
4,120 3,178
------- -------
CASH PROVIDED BY OPERATIONS 4,873 4,393
------- -------
INVESTING ACTIVITIES
Dispositions 909 --
Film and television costs (1,989) (2,277)
Investments in parks, resorts and other property (1,369) (1,526)
Investment in Euro Disney (91) --
Acquisitions (net of cash acquired) 2 (288)
Other (6) 40
------- -------
(2,544) (4,051)
------- -------
FINANCING ACTIVITIES
Commercial paper borrowings, net (538) 294
Other borrowings 1,091 1,625
Reduction of borrowings (2,401) (1,675)
Dividends (434) --
Repurchases of Disney common stock (115) (19)
Exercise of stock options and other 344 157
------- -------
(2,053) 382
------- -------
Increase in cash and cash equivalents 276 724
Cash and cash equivalents, beginning of period 414 127
------- -------
Cash and cash equivalents, end of period $ 690 $ 851
======= =======
</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 (GAAP) for interim
financial information and the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been reflected in these condensed
consolidated financial statements. In December 1999, DVD Financing, Inc. (DFI),
a subsidiary of Disney Vacation Development, Inc. and an indirect subsidiary of
the Company, completed a receivables sale transaction. In connection with this
sale, DFI prepares separate financial statements, although its separate assets
and liabilities are also consolidated in these financial statements. Operating
results for the quarter and nine months are not necessarily indicative of the
results that may be expected for the year ending September 30, 2000. Certain
reclassifications have been made in the fiscal 1999 financial statements to
conform to the fiscal 2000 presentation. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1999.
2. In November 1998, the Company acquired a 43% interest in Infoseek
Corporation (Infoseek) in a transaction that, among other things, provided for
the acquisition of the Company's subsidiary, Starwave Corporation (Starwave), by
Infoseek. The Company recognized a $345 million non-cash pre-tax gain on that
transaction.
On November 17, 1999, stockholders of the Company and Infoseek approved the
Company's acquisition of the remaining interest in Infoseek that the Company did
not already own.
The acquisition was effected by the creation and issuance of a new class of
common stock, called GO.com common stock, in exchange for outstanding Infoseek
shares, at an exchange rate of 1.15 shares of GO.com common stock for each
Infoseek share. Upon consummation of the acquisition, the Company combined its
Internet and direct marketing businesses with Infoseek to create a single
Internet and direct marketing business called GO.com. On August 2, 2000, the
Internet and direct marketing business was renamed Walt Disney Internet Group
(hereinafter referred to as the Internet Group).
The acquisition has been accounted for as a purchase, and the acquisition
cost of $2.1 billion has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. Assets acquired
totaled $130 million and liabilities assumed were $46 million. A total of
approximately $2.0 billion, representing the excess of acquisition cost over the
fair value of Infoseek's net assets, has been allocated to intangible assets,
including goodwill of $1.9 billion, and is being amortized over two to nine
years. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry.
Disney retains an interest of approximately 71% in the Internet Group at
June 30, 2000. Effective November 18, 1999, shares of the Company's existing
common stock were reclassified as Disney common stock, to track the financial
performance of the Company's businesses other than the Internet Group, plus
Disney's retained interest in the Internet Group.
In November 1999, the Company sold Fairchild Publications which it had
acquired as part of the 1996 acquisition of ABC, Inc., generating a pre-tax gain
of $243 million.
In June 2000, the Company sold its 33% interest in Eurosport, a European
sports cable service, for $155 million. The sale resulted in a pre-tax gain of
$93 million.
III-4
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's consolidated results of operations have incorporated Infoseek's
activity, on a consolidated basis, from November 18, 1999 and the activity of
Fairchild Publications through the date of its disposal. The unaudited pro forma
information below presents combined results of operations as if the Infoseek
acquisition and the disposition of Fairchild Publications had occurred at the
beginning of fiscal 1999. The unaudited pro forma information is not necessarily
indicative of results of operations had the Infoseek acquisition and the
disposition of Fairchild Publications occurred at the beginning of fiscal 1999,
nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------------
2000 1999
--------------- ---------------
(unaudited; in millions, except per share data)
<S> <C> <C>
Revenues $19,296 $17,619
Net income 672 450
Diluted earnings (loss) per share
Disney $ 0.44 $ 0.32
Internet Group $ (5.45) $ (4.83)
</TABLE>
Pro forma amounts for the nine-month periods exclude purchased in-process
research and development expenditures of $23 million and $117 million in 2000
and 1999, respectively, the gain on the sale of Fairchild Publications in fiscal
2000 and the Starwave gain in fiscal 1999.
3. During the nine months, the Company repaid $2.4 billion of term debt, which
matured during the period, and reduced its commercial paper borrowings by $538
million. These repayments were partially funded by proceeds of $1.1 billion from
various financing arrangements having effective interest rates ranging from
5.50% to 6.81% and maturities in fiscal 2002 through 2015.
4. During 1998, the Company's Board of Directors decided to move to an annual,
rather than quarterly, dividend policy to reduce costs and simplify payments to
stockholders. During the first quarter of fiscal 2000, the Company paid a
dividend of $434 million ($0.21 per share) applicable to fiscal 1999.
5. Diluted earnings per share amounts are calculated using the treasury stock
method and are based upon the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation in periods in which they would have an anti-
dilutive effect. The difference between basic and diluted earnings per share is
solely attributable to stock options, which are considered anti-dilutive when
the option exercise prices exceed the weighted average market price per share of
common stock during the period. For the three months ended June 30, 2000 and
1999, options for 3 million and 36 million shares, respectively, were excluded
from the Disney diluted earnings per share calculation. For the nine-month
periods, options for 22 million and 26 million shares, respectively, were
excluded. For the quarter and nine months ended June 30, 2000, all Internet
Group stock options were anti-dilutive and, accordingly, options for 26 million
and 17 million shares, respectively, were excluded from the Internet Group loss
per share calculation.
Net loss per share attributed to the Internet Group reflects the results of
operations after November 17, 1999, the date the Company acquired the remaining
interest in Infoseek that it did not already own and first issued Internet Group
common stock.
6. During the nine months, a subsidiary of the Company repurchased 3.8 million
shares of Disney common stock for approximately $115 million. Under its share
repurchase program, the Company is authorized to purchase up to an additional
395 million shares. The Company evaluates share repurchase decisions on an
ongoing basis, taking into account borrowing capacity, management's target
capital structure, and other investment opportunities.
III-5
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 2000, the Company's Board of Directors approved a share repurchase
program for up to five million shares of Internet Group common stock in the open
market. No shares have been repurchased under this program.
7. Comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------- ------------------------------------
(unaudited, in millions) 2000 1999 2000 1999
------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 361 $ 368 $ 753 $1,215
Cumulative translation and other adjustments, net of
tax -- (5) 6 (16)
----- ----- ----- ------
Comprehensive income $ 361 $ 363 $ 759 $1,199
===== ===== ===== ======
</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 Nine Months Ended
June 30, June 30,
--------------------------------------- ---------------------------------------
(unaudited, in millions) 2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Media Networks $2,270 $1,886 $ 7,420 $ 6,041
------ ------ ------- -------
Studio Entertainment
Third parties 1,228 1,258 4,434 4,590
Intersegment 15 11 64 47
------ ------ ------- -------
1,243 1,269 4,498 4,637
------ ------ ------- -------
Parks & Resorts 1,940 1,720 5,088 4,576
------ ------ ------- -------
Consumer Products
Third parties 526 625 2,058 2,278
Intersegment (15) (11) (64) (47)
------ ------ ------- -------
511 614 1,994 2,231
------ ------ ------- -------
Internet Group 87 42 286 159
------ ------ ------- -------
$6,051 $5,531 $19,286 $17,644
====== ====== ======= =======
Operating income (loss):
Media Networks $ 662 $ 485 $ 1,838 $ 1,216
Studio Entertainment (3) (1) 23 238
Parks & Resorts 565 497 1,258 1,151
Consumer Products 59 117 355 503
Internet Group (83) (21) (299) (43)
Amortization of intangible assets (340) (117) (910) (332)
------ ------ ------- -------
860 960 2,265 2,733
Gain on sale of Fairchild -- -- 243 --
Gain on sale of Starwave -- -- -- 345
------ ------ ------- -------
$ 860 $ 960 $ 2,508 $ 3,078
====== ====== ======= =======
</TABLE>
III-6
<PAGE>
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. In July 2000, the Internet Group sold Ultraseek Corp., a subsidiary that
provides intranet search software, which it had acquired as part of its
acquisitions of Infoseek. Proceeds from the sale consisted of shares of common
stock of the purchaser, Inktomi Corp., a publicly held company, and
approximately $4 million in cash. The transaction will be recorded in the fourth
quarter.
10. On August 11, 2000, a jury returned a verdict against the Company in the
amount of $240 million in a civil lawsuit in a Florida trial court in Orlando.
The lawsuit asserted that the company misappropriated the concept for its Wide
World of Sports complex at the Walt Disney World Resort. Based on the Jury's
findings, the court has discretion, upon a motion by the Plaintiff, to add to
the verdict an amount up to double the amount thereof. The Company intends to
challenge the verdict in the trial court and, if necessary, on appeal and
believes that there are substantial grounds for complete reversal or reduction
of the verdict. Management believes that it is not currently possible to
estimate the impact, if any, that the ultimate resolution of this matter will
have on the Company's results of operations, financial position or cash flow.
III-7
<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 nine months ended June
30, 2000 for each business segment, and for the Company as a whole, are not
necessarily indicative of results to be expected for the full year.
Media Networks revenues are influenced by advertiser demand and the seasonal
nature of programming, and generally peak in the spring and fall.
Studio Entertainment revenues fluctuate based upon the timing of theatrical
motion picture and home video releases. Release dates for theatrical and home
video products are determined by several factors, including timing of vacation
and holiday periods and competition in the market.
Parks and Resorts revenues fluctuate with changes in theme park attendance and
resort occupancy resulting from the seasonal nature of vacation travel. Peak
attendance and resort occupancy generally occur during the summer months when
school vacations occur and during early-winter and spring holiday periods.
Consumer Products revenues are influenced by seasonal consumer purchasing
behavior and the timing of animated theatrical releases.
Internet Group revenues for the Internet commerce and Direct Marketing
businesses fluctuate as a result of seasonal consumer purchasing behavior, with
a significant portion of annual revenues generated in the first quarter.
Internet media revenues are influenced by advertiser demand and visitor traffic.
RESULTS OF OPERATIONS
On November 4, 1999, the Company sold Fairchild Publications, which was
acquired with its 1996 acquisition of ABC, Inc. On November 17, 1999,
stockholders of the Company and Infoseek approved the Company's acquisition of
the remaining interest in Infoseek that the Company did not already own.
To enhance comparability, certain information for the current nine months and
prior-year periods is presented on a pro forma basis, which assumes that these
events had occurred at the beginning of fiscal 1999. The pro forma results are
not necessarily indicative of the consolidated results that would have occurred
had these events actually occurred at the beginning of fiscal 1999, nor are they
necessarily indicative of future results.
Pro forma operating income excludes purchased in-process research and
development expenditures of $23 million and $73 million for the nine months
ended June 30, 2000 and 1999, respectively.
III-8
<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 June 30,
--------------------------------------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
------------------ -------------------- -------------------- --------------------
(unaudited, in millions)
<S> <C> <C> <C> <C>
Revenues $6,051 $5,530 9 % $5,531
Costs and expenses 4,851 4,483 (8)% 4,454
Amortization of intangible assets 340 344 1 % 117
------ ------ ------
Operating income 860 703 22 % 960
Corporate and other activities (1) (28) 96 % (17)
Gain on sale of Eurosport 93 -- n/m
Equity in Infoseek loss -- -- n/m (87)
Net interest expense (124) (161) 23 % (166)
------ ------ ------
Income before income taxes and minority
interests 828 514 61 % 690
Income taxes (425) (313) (36)% (296)
Minority interests (42) (25) (68)% (26)
------ ------ ------
Net income $ 361 $ 176 105 % $ 368
====== ====== ======
</TABLE>
Net income for the quarter increased to $361 million compared to prior-year
pro forma net income of $176 million, driven by increased operating income, the
gain on the sale of Eurosport, decreased net interest expense and improvements
in Corporate and other activities, partially offset by increased minority
interests. Increased operating income reflected higher Media Networks and Parks
& Resorts results, partially offset by lower Consumer Products and Internet
Group results. Lower net interest expense reflected lower average debt
balances, partially offset by higher interest rates. Lower average debt balances
were driven by reductions of debt, which were funded by increased cash flow.
Corporate and other activities improved due to increased income from equity
investments.
As previously discussed, the Company completed its acquisition of Infoseek
during the quarter ended December 31, 1999 (see Note 2 to the Condensed
Consolidated Financial Statements). The acquisition resulted in a significant
increase in intangible assets. Intangible assets are being amortized over
periods ranging from two to nine years.
The impact of amortization related to the November 1998 and November 1999
Infoseek acquisitions, after the impact of the Ultraseek sale (see Note 9 to the
Condensed Combined Financial Statements), is expected to be $212 million for the
remaining three months of fiscal 2000, $641 million in 2001, $595 million in
2002, $84 million in 2003 and $13 million over the remainder of the amortization
period. The Company determined the economic useful life of acquired goodwill by
giving consideration to the useful lives of Infoseek's identifiable intangible
assets, including developed technology, trademarks, user base, joint venture
agreements and in-place workforce. In addition, the Company considered the
competitive environment and the rapid pace of technological change in the
Internet industry.
On an as-reported basis, net income decreased from $368 million to $361
million. The as-reported comparison reflects the items described above, as well
as the consolidation of Infoseek operations beginning November 18, 1999, the
incremental amortization of intangible assets in the current quarter related to
the Infoseek acquisition, and equity in Infoseek losses in the prior-year
quarter. The higher effective tax rate for the current quarter reflects the
impact of incremental non-deductible amortization of intangible assets related
to the Infoseek acquisition.
III-9
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Consolidated Results - Nine Months
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-----------------------------------------------------------------------------------------
Pro Forma As Reported
--------------------------------------------------------- ------------------------------
2000 1999 % Change 2000 1999
------------- --------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
(unaudited, in millions)
Revenues $19,296 $17,619 10 % $19,286 $17,644
Costs and expenses 16,116 14,656 (10)% 16,111 14,579
Amortization of intangible assets 1,028 1,011 (2)% 910 332
Gain on sale of Fairchild -- -- n/m 243 --
Gain on sale of Starwave -- -- n/m -- 345
------- ------- ------- -------
Operating income 2,152 1,952 10 % 2,508 3,078
Corporate and other activities (34) (117) 71 % (36) (125)
Gain on sale of Eurosport 93 -- n/m 93 --
Equity in Infoseek loss -- -- n/m (41) (246)
Net interest expense (443) (492) 10 % (447) (504)
------- ------- ------- -------
Income before income taxes and minority
interests 1,768 1,343 32 % 2,077 2,203
Income taxes (1,010) (825) (22)% (1,238) (919)
Minority interests (86) (68) (26)% (86) (69)
------- ------- ------- -------
Net income $ 672 $ 450 49 % $ 753 $ 1,215
======= ======= ======= =======
</TABLE>
On a pro forma basis, net income for the nine months increased 49% to $672
million, driven by higher operating income, the gain on the sale of Eurosport,
improvements in Corporate and other activities and decreased net interest
expense, partially offset by increased minority interests. Increased operating
income reflected higher Media Networks and Parks & Resorts results, partially
offset by lower Studio Entertainment, Consumer Products and Internet Group
results and increased amortization of intangible assets. Corporate and other
activities improved due to increased income from equity investments. Lower net
interest expense reflected gains from the sale of investments and lower average
debt balances, partially offset by higher interest rates and charges related to
certain financial instruments. Lower average debt balances were driven by
reductions of debt, which were funded by increased cash flow.
As noted above, the Company completed the sale of Fairchild Publications
during the first quarter. The sale resulted in a pre-tax gain of $243 million.
Income taxes on the transaction largely offset the pre-tax gain.
On an as-reported basis, net income decreased 38% or $462 million and
operating income decreased 19% or $570 million. The as-reported results reflect
the items described above, as well as the impact of the sale of Fairchild
Publications and equity in Infoseek loss in the current nine months and the gain
on the sale of Starwave and higher Infoseek equity losses in the prior-year
period. The prior-year equity in Infoseek loss includes a charge for purchased
in-process research and development expenditures of $44 million. Current-period
as-reported operating income and net income also reflect increased amortization
of intangible assets resulting from the Infoseek acquisition and a $23 million
charge for purchased in-process research and development expenditures. The
higher effective tax rate for the current nine months reflects the income tax
impact of the sale of Fairchild Publications and the impact of higher non-
deductible amortization of intangible assets.
III-10
<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 June 30,
-------------------------------------------------------------------------------------
Pro Forma As Reported
2000 1999 % Change 1999
-------------------- ---------------- ------------------ --------------------
(unaudited, in millions)
<S> <C> <C> <C> <C>
Revenues:
Media Networks $2,270 $1,886 20 % $1,886
Studio Entertainment 1,243 1,269 (2)% 1,269
Parks & Resorts 1,940 1,720 13 % 1,720
Consumer Products 511 577 (11)% 614
Internet Group 87 78 12 % 42
------ ------ ------
$6,051 $5,530 9 % $5,531
====== ====== ======
Operating income (loss): /(1)/
Media Networks $ 662 $ 485 36 % $ 485
Studio Entertainment (3) (1) n/m (1)
Parks & Resorts 565 497 14 % 497
Consumer Products 59 114 (48)% 117
Internet Group (83) (48) (73)% (21)
Amortization of intangible assets (340) (344) 1 % (117)
------ ------ ------
$ 860 $ 703 22 % $ 960
====== ====== ======
(1) Segment results exclude intangible asset amortization. Segment earnings before interest, taxes, depreciation and amortization
(EBITDA) is as follows:
Media Networks $ 697 $ 521 $ 521
Studio Entertainment 9 14 14
Parks & Resorts 731 631 631
Consumer Products 89 152 156
Internet Group (74) (42) (19)
------ ------ ------
$1,452 $1,276 $1,303
====== ====== ======
</TABLE>
Management believes that segment EBITDA provides additional information useful
in analyzing the underlying business results. However, segment EBITDA is a non-
GAAP financial metric and should be considered in addition to, not as a
substitute for, reported operating income.
Media Networks
The following table provides supplemental revenue and operating income detail
for the Media Networks segment:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------------------------------
2000 1999 % Change
------------------ ------------------ ------------------
(unaudited, in millions)
<S> <C> <C> <C>
Revenues:
Broadcasting $1,509 $1,215 24 %
Cable Networks 761 671 13 %
------ ------
$2,270 $1,886 20 %
====== ======
Operating income:
Broadcasting $ 421 $ 209 101 %
Cable Networks 241 276 (13)%
------ ------
$ 662 $ 485 36 %
====== ======
</TABLE>
III-11
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Revenues increased 20%, or $384 million, to $2.3 billion, driven by increases
of $294 million from Broadcasting and $90 million at the Cable Networks.
Broadcasting revenues were driven by growth at the ABC television network and
the Company's owned television stations. Increases at the television network and
owned television stations were driven by the continued success of Who Wants to
Be a Millionaire, a strong advertising market and higher overall ratings on
network programming. The television stations also benefited from higher spot
advertising rates driven by ABC placing first in the May and February sweeps.
The strong advertising market also drove improvements at the radio stations.
Cable Networks revenue growth was driven by increased advertising and affiliate
revenues due to a strong advertising market and subscriber growth.
Operating income increased 36%, or $177 million to $662 million, reflecting
increased Broadcasting and Cable Networks revenues, partially offset by higher
costs. Costs and expenses, which consist primarily of programming rights and
amortization, production costs, distribution and selling expenses and labor
costs, increased 15% or $207 million, driven by higher sports programming costs
at the Cable Networks, principally related to National Hockey League (NHL) and
Major League Baseball broadcasts. In addition, higher costs at the Cable
Networks and expenses reflected start-up costs associated with the January
launch of SoapNet and various international Disney Channels.
The Company has investments in cable operations that are accounted for as
unconsolidated equity investments. The table below presents "Operating income
from cable television activities," which comprise the Cable Networks and the
Company's cable equity investments:
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------------
2000 1999 % Change
------------------ ------------------ ------------------
(unaudited, in millions)
<S> <C> <C> <C>
Operating income:
Cable Networks $ 241 $ 276 (13)%
Equity investments:
A&E, Lifetime and E! Entertainment Television 183 147 24 %
Other (1) 124 26 n/m
----- -----
Operating income from cable television activities 548 449 22 %
Partner share of operating income (169) (154) (10)%
----- -----
Company share of operating income $ 379 $ 295 28 %
===== =====
</TABLE>
(1) Includes a gain of $93 million from the sale of Eurosport during the current
quarter
Note: Operating income from cable television activities presented in this
table represents 100% of the operating income of both the Company's owned cable
businesses and its cable equity investees. The Company's share of operating
income represents the Company's ownership interest in cable television operating
income. Cable Networks are reported in "Operating income" in the Condensed
Consolidated Statements of Income. Equity investments are accounted for under
the equity method and the Company's proportionate share of the net income of its
cable equity investments is reported in "Corporate and other activities" in the
Condensed Consolidated Statements of Income. Management believes that operating
income from cable television activities provides additional information useful
in analyzing the underlying business results. However, operating income from
cable television activities is a non-GAAP financial metric and should be
considered in addition to, not as a substitute for, reported operating income.
The Company's share of cable television operating income increased 28%, or $84
million to $379 million, driven by the gain on the sale of Eurosport and
increased advertising revenues at Lifetime Television, The History Channel, A&E
Television and E! Entertainment Television, partially offset by decreases at the
Cable Networks.
III-12
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Studio Entertainment
Revenues decreased 2%, or $26 million, to $1.2 billion, driven by declines of
$82 million in worldwide home video and $82 million in network television
production and distribution, partially offset by growth of $67 million in
domestic theatrical motion picture distribution and $34 million in stage plays
and music. In worldwide home video, the successful performance of Tarzan and
other Gold Collection titles on VHS and DVD and The Sixth Sense on DVD faced
difficult comparisons to the prior-year quarter, which included A Bug's Life and
Lion King II: Simba's Pride. The decline in network television production and
distribution revenue reflected the production of Home Improvement in the prior-
year quarter, partially offset by strong performances of 101 Dalmatians and Air
Force One in international markets. Growth in domestic theatrical motion
picture distribution reflected the performances of Dinosaur, Gone in 60 Seconds
and Shanghai Noon in the current quarter compared to Tarzan in the prior-year
quarter. Growth in stage play revenues was driven by the performance of The
Lion King, Beauty and the Beast and Aida in the current quarter and music
revenues reflected sales of the Mission: Impossible 2 soundtrack.
Operating losses increased to $3 million, due to declines in domestic
theatrical motion picture distribution, where cost increases exceeded revenue
gains, partially offset by growth in network television production and
distribution and worldwide home video, where cost decreases exceeded revenue
declines, and stage plays. Costs and expenses, which consist primarily of
production cost amortization, distribution and selling expenses, participations
expense, product costs, labor and leasehold expenses, decreased 2% or $24
million. Lower costs and expenses reflected decreases at network television
production and distribution and domestic home video, partially offset by
increases at domestic theatrical motion picture distribution. Production cost
amortization decreased in network television production and distribution due to
the production of Home Improvement and pilot programs in the prior-year quarter
and the distribution of more classic animated titles in the current year, which
have a lower amortization cost relative to recent titles. Domestic home video
distribution, selling and participation costs decreased due to a reduction in
videotape unit sales and significant participation payments made to Pixar on A
Bug's Life in the prior-year quarter. Cost increases in domestic theatrical
motion picture distribution reflected increased distribution expenses for
Dinosaur, Gone in 60 Seconds and Shanghai Noon and higher production cost
amortization in the current quarter.
Parks & Resorts
Revenues increased 13%, or $220 million, to $1.9 billion, driven by growth of
$133 million at the Walt Disney World Resort, reflecting increased guest
spending and record theme park attendance; $21 million at Disney Cruise Line,
reflecting a full quarter of operations from both cruise ships, the Disney Magic
and the Disney Wonder, compared to just the Disney Magic in the prior-year
quarter; and $11 million at Disneyland, reflecting increased attendance.
Increased guest spending and record attendance at the Walt Disney World Resort
were driven by the ongoing Millennium Celebration. Higher attendance at
Disneyland was driven by the 45th Anniversary Celebration and the strength of
the Annual Pass program.
Operating income increased 14%, or $68 million, to $565 million, driven by
revenue growth at the Walt Disney World Resort and Disneyland, partially offset
by higher costs and expenses. Costs and expenses, which consist principally of
labor, costs of merchandise, food and beverages sold, depreciation, repairs and
maintenance, entertainment and marketing and sales expense, increased 12% or
$152 million. Increased operating costs were driven by higher theme park
attendance, the ongoing Millennium Celebration at the Walt Disney World Resort
and Disney Cruise Line operations.
III-13
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Consumer Products
Revenues decreased 11%, or $66 million, to $511 million, compared to prior-
year pro forma amounts, driven by a decline of $56 million in worldwide
merchandise licensing and publishing and $8 million at the Disney Stores,
partially offset by growth of $8 million at Disney Interactive. Merchandise
licensing revenues reflected continued worldwide softness. Publishing revenues
reflected declines primarily in North America and Europe. Disney Store revenues
decreased due to lower comparative store sales, principally domestically,
partially offset by improved comparative store sales in certain European
markets. Disney Interactive revenues increased due to the success of the Who
Wants to Be a Millionaire video games and Pooh learning titles.
On an as-reported basis, revenues decreased 17% or $103 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Operating income decreased 48%, or $55 million, to $59 million, compared to
prior-year pro forma amounts, reflecting declines in worldwide merchandise
licensing, partially offset by improvements at the Disney Store, driven by
improvements in North America, due to cost reductions, and in certain European
markets, and also at Disney Interactive. Costs and expenses, which consist
primarily of labor; product costs, including product development costs;
distribution and selling expenses; and leasehold expenses, decreased 2% or $11
million, driven by the Disney Stores domestically due to better product mix and
labor cost savings, partially offset by higher advertising and international
infrastructure costs.
On an as-reported basis, operating income decreased 50% or $58 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
Internet Group
Revenues increased 12%, or $9 million to $87 million, compared to prior-year
pro forma amounts, driven by an increase of $20 million in Internet revenues,
partially offset by a $11 million decrease in direct marketing revenues.
Internet revenue growth was driven by increased advertising and sponsorship
revenues reflecting increased advertiser demand and online site traffic, higher
intranet software sales and sales growth at DisneyStore.com and
DisneyTravel.com. Lower direct marketing revenues were due principally to
planned reductions in catalog circulation, fewer product offerings and lower
catalog response rates due to changes in the Company's merchandising strategy
and customer migration to the Internet Group's online business.
On an as-reported basis, revenues increased 107% or $45 million, reflecting
the items described above, as well as the operations of Infoseek, which were
consolidated into the Internet Group beginning November 18, 1999.
Operating loss increased $35 million to $83 million, compared to prior-year
pro forma amounts, reflecting increased costs and expenses, partially offset by
higher Internet revenues. Costs and expenses, which consist primarily of cost of
revenues, sales and marketing costs, other operating expenses and depreciation
expense increased 35% or $44 million. Higher costs and expenses were driven by
continued investment in Web site technology and infrastructure, new product
initiatives, enhancements to existing Web sites and the ongoing redesign of the
GO.com Web site.
On an as-reported basis, operating loss increased $62 million to $83 million,
reflecting the items described above, as well as losses at Infoseek, which was
consolidated into the Internet Group beginning November 18, 1999.
III-14
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Business Segment Results - Nine Months
<TABLE>
<CAPTION>
Nine Months Ended June 30,
----------------------------------------------------------------------------------------
Pro Forma As Reported
----------------------------------------------------- -------------------------------
2000 1999 % Change 2000 1999
------------- --------------- --------------- --------------- --------------
(unaudited, in millions)
<S> <C> <C> <C> <C> <C>
Revenues:
Media Networks $ 7,420 $ 6,041 23 % $ 7,420 $ 6,041
Studio Entertainment 4,498 4,637 (3)% 4,498 4,637
Parks & Resorts 5,088 4,576 11 % 5,088 4,576
Consumer Products 1,980 2,105 (6)% 1,994 2,231
Internet Group 310 260 19 % 286 159
------- ------- ------- -------
$19,296 $17,619 10 % $19,286 $17,644
======= ======= ======= =======
Operating income (loss): /(1)/
Media Networks $ 1,838 $ 1,216 51 % $ 1,838 $ 1,216
Studio Entertainment 23 238 (90)% 23 238
Parks & Resorts 1,258 1,151 9 % 1,258 1,151
Consumer Products 354 487 (27)% 355 503
Internet Group (293) (129) (127)% (299) (43)
Amortization of intangible assets (1,028) (1,011) (2)% (910) (332)
------- ------- ------- -------
2,152 1,952 10 % 2,265 2,733
Gain on sale of Fairchild -- -- n/m 243 --
Gain on sale of Starwave -- -- n/m -- 345
------- ------- ------- -------
$ 2,152 $ 1,952 10 % $ 2,508 $ 3,078
======= ======= ======= =======
(1) Segment results exclude intangible asset amortization. Segment EBITDA, which also excludes depreciation, is as follows:
Media Networks $ 1,942 $ 1,313 $ 1,942 $ 1,313
Studio Entertainment 63 283 63 283
Parks & Resorts 1,696 1,518 1,696 1,518
Consumer Products 434 587 435 604
Internet Group (267) (112) (276) (37)
------- ------- ------- -------
$ 3,868 $ 3,589 $ 3,860 $ 3,681
======= ======= ======= =======
</TABLE>
III-15
<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>
Nine Months Ended June 30,
-------------------------------------------------
2000 1999 % Change
--------- -------- ----------
(unaudited, in millions)
<S> <C> <C> <C>
Revenues:
Broadcasting $4,876 $3,955 23 %
Cable Networks 2,544 2,086 22 %
------ ------
$7,420 $6,041 23 %
====== ======
Operating income:
Broadcasting $1,008 $ 495 104 %
Cable Networks 830 721 15 %
------ ------
$1,838 $1,216 51 %
====== ======
</TABLE>
Revenues increased 23%, or $1.4 billion, to $7.4 billion, driven by increases
of $921 million from Broadcasting and $458 million at the Cable Networks.
Increased Broadcasting revenues were driven by growth at the ABC television
network and the Company's owned television stations. Increases at the television
network and owned television stations were driven by a strong advertising
market, the continued success of Who Wants to Be a Millionaire and higher
overall ratings on network programming, including Good Morning America. The
television stations also benefited from higher spot advertising rates driven by
ABC placing first in the May and February sweeps. Cable Networks revenue growth
was driven by increased advertising revenues due to a strong advertising market,
as well as higher affiliate fees due to contractual rate adjustments and
subscriber growth.
Operating income increased 51%, or $622 million, to $1.8 billion, reflecting
increased Broadcasting and Cable Network revenues, partially offset by higher
costs. Costs and expenses increased 16% or $757 million, driven by higher sports
programming costs, principally related to National Football League (NFL) and NHL
broadcasts. In addition, start-up costs associated with the January launch of
SoapNet and various international Disney Channels contributed to increased costs
and expenses.
During the second quarter of 1998, the Company entered into a new agreement
with the NFL for the right to broadcast NFL football games on the ABC Television
Network and ESPN. The contract provides for total payments of approximately $9
billion over an eight-year period, and commenced with the 1998 season. Under the
terms of the contract, the NFL has the right to cancel the contract after five
years. The programming rights fees under the new contract are significantly
higher than those required by the previous contract and the fee increases exceed
the estimated revenue increases over the contract term. The higher fees under
the new contract reflect various factors, including increased competition for
sports programming rights and an increase in the number of games to be broadcast
by ESPN. The Company continues to pursue a variety of strategies, including
marketing efforts, to reduce the impact of the higher costs. The contract's
impact on the Company's results over the remaining contract term is dependent
upon a number of factors, including the strength of advertising markets,
effectiveness of marketing efforts and the size of viewer audiences.
III-16
<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>
Nine Months Ended June 30,
--------------------------------------------------
2000 1999 % Change
---------- ---------- ----------
(unaudited, in millions)
<S> <C> <C> <C>
Operating income:
Cable Networks $ 830 $ 721 15 %
Equity Investments:
A&E, Lifetime and E! Entertainment Television 501 382 31 %
Other (1) 175 33 n/m
------ ------
Operating income from cable television activities 1,506 1,136 33 %
Partner share of operating income (487) (363) (34)%
------ ------
Company share of operating income $1,019 $ 773 32 %
====== ======
</TABLE>
(1) Includes a gain of $93 million from the sale of Eurosport during the current
quarter
Note: Operating income from cable television activities presented in this
table represents 100% of the operating income of both the Company's owned cable
businesses and its cable equity investees. The Company share of operating income
represents the Company's ownership interest in cable television operating
income. Cable Networks are reported in "Operating income" in the Condensed
Consolidated Statements of Income. Equity Investments are accounted for under
the equity method and the Company's proportionate share of the net income of its
cable equity investments is reported in "Corporate and other activities" in the
Condensed Consolidated Statements of Income.
The Company's share of cable television operating income increased 32%, or
$246 million, to $1.0 billion, driven by increased advertising revenues at
Lifetime Television, The History Channel, E! Entertainment Television and A&E
Television; growth at the Cable Networks; and the gain on the sale of Eurosport.
Studio Entertainment
Revenues decreased 3%, or $139 million, to $4.5 billion, driven by declines of
$269 million in worldwide home video and $133 million in network television
production and distribution, partially offset by growth of $191 million in
worldwide theatrical motion picture distribution and $57 million in stage plays.
Worldwide home video revenues reflected fewer unit sales in the current year, as
the prior year included the successful releases of Lion King II: Simba's Pride,
Mulan, Armageddon and A Bug's Life. The decline in network television
production and distribution reflects the production of Home Improvement in the
prior year. Growth in worldwide theatrical motion picture distribution
reflected the performance of Toy Story 2, Tarzan, The Sixth Sense and Dinosaur.
Growth in stage play revenues was driven by the performances of The Lion King,
Beauty and the Beast and Aida.
III-17
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Operating income decreased 90%, or $215 million to $23 million, due to revenue
declines in worldwide home video and declines in domestic theatrical motion
picture distribution, where cost increases exceeded revenue gains. These
declines were partially offset by improvements in international theatrical
motion picture distribution. Costs and expenses increased 2% or $76 million.
Cost increases in worldwide theatrical motion picture distribution reflected
higher production cost amortization and increased participation costs due to The
Sixth Sense and Toy Story 2. Stage play operating and production cost
amortization expenses increased due to The Lion King and Aida. Production cost
amortization decreased in network television production and distribution,
reflecting the production of Home Improvement in the prior year and the
distribution of more classic animated titles in the current year. Worldwide home
video distribution and selling costs and production cost amortization decreased
due to a reduction in videotape unit sales compared to the prior year.
Increases in production and participation costs also are reflective of
industry trends: as competition for creative talent has increased, costs within
the industry have increased at a rate significantly higher than inflation.
Parks & Resorts
Revenues increased 11%, or $512 million, to $5.1 billion, driven by growth of
$293 million at the Walt Disney World Resort, reflecting increased guest
spending, record theme park attendance and record occupied room nights; $89
million at Disney Cruise Line, reflecting a full nine months of operations from
both cruise ships, the Disney Magic and the Disney Wonder, compared to just the
Disney Magic in the prior year; and $13 million at Disneyland, reflecting
increased guest spending. Increased guest spending and record attendance at the
Walt Disney World Resort were driven by the ongoing Millennium Celebration and
higher occupied room nights reflecting the opening of the All Star Movies
Resort, which opened in the second quarter of the prior year. At Disneyland,
increased attendance and guest spending were driven by the 45th Anniversary
Celebration, enhanced merchandise and food and beverage offerings throughout the
park and the strength of the Annual Pass program.
Operating income increased 9%, or $107 million, to $1.3 billion, driven by
revenue growth at the Walt Disney World Resort, improved results at Disney
Cruise Line and higher guest spending at Disneyland. Costs and expenses
increased 12% or $405 million, driven by higher theme park attendance and the
ongoing Millennium Celebration at the Walt Disney World Resort and Disney Cruise
Line operations.
Consumer Products
Pro forma revenues decreased 6%, or $125 million, to $2.0 billion, driven by
declines of $140 million in worldwide merchandise licensing and publishing,
partially offset by an increase of $25 million at Disney Interactive. Lower
merchandise licensing and publishing revenues were primarily attributable to
declines domestically and in Europe. Disney Interactive revenues increased due
to the success of the Who Wants to Be a Millionaire video games, Pooh learning
titles and the Toy Story 2 action game.
On an as-reported basis, revenues decreased 11% or $237 million, reflecting
the items described above, as well as the impact of the disposition of Fairchild
Publications in the first quarter of the current year.
Pro forma operating income decreased 27%, or $133 million, to $354 million,
driven by declines in worldwide merchandise licensing and softer publishing
results domestically and in Europe, partially offset by an increase at Disney
Interactive. Costs and expenses were comparable to the prior year.
On an as-reported basis, operating income decreased 29% or $148 million,
reflecting the items described above, as well as the impact of the disposition
of Fairchild Publications in the first quarter of the current year.
III-18
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Internet Group
Pro forma revenues increased 19%, or $50 million to $310 million, driven by an
increase of $72 million in Internet revenues, partially offset by a $22 million
decrease in direct marketing revenues. Internet revenue growth reflected
increased advertising and sponsorship revenues driven by increased advertiser
demand and online site traffic, sales growth at DisneyStore.com, operations at
toysmart.com, which was acquired in the fourth quarter of fiscal 1999, and
higher intranet software sales. Lower direct marketing revenues were due
principally to planned reductions in catalog circulation, fewer product
offerings and lower catalog response rates due to changes in the Company's
merchandising strategy and inventory liquidation initiatives.
On an as-reported basis, revenues increased 80% or $127 million, reflecting
the items described above, as well as the operations of Infoseek, which were
consolidated into the Internet Group beginning November 18, 1999.
Pro forma operating loss increased $164 million to $293 million, reflecting
increased costs and expenses, partially offset by higher Internet revenues.
Costs and expenses increased 55% or $214 million driven by continued investment
in Web site technology and infrastructure, new product initiatives, enhancements
to existing Web sites, a non-cash charge of $31 million to reflect the
impairment of certain intangible assets, one-time employee retention payments of
$17 million required by the 1999 Infoseek acquisition agreement and operations
at toysmart.com, which was acquired in the fourth quarter of fiscal 1999.
On an as-reported basis, operating loss increased $256 million to $299
million, reflecting the items described above, as well as losses from Infoseek,
which was consolidated into the Internet Group beginning November 18, 1999.
Costs and expenses for the remainder of the year are expected to reflect
continued investment in Web site technology and infrastructure, new product
initiatives and incremental marketing and sales expenditures. The Internet Group
has begun participating in the traditional television network up-front
marketplace and has sold approximately $30 million in Internet advertising which
it expects to fulfill and recognize as revenue during fiscal 2001.
FINANCIAL CONDITION
For the nine months ended June 30, 2000, cash provided by operations increased
$480 million to $4.9 billion, driven by increased net income excluding
amortization of intangible assets, higher amortization of television broadcast
rights relative to cash payments and increased amortization of film and
television costs, partially offset by higher income tax payments due to certain
payments attributable to the prior fiscal year.
During the nine months, the Company invested $2.0 billion to develop, produce
and acquire rights to film and television properties, a decrease of $288
million. The decrease was primarily due to a $310 million payment related to the
acquisition of a film library in the prior year.
During the nine months, the Company invested $1.4 billion in parks, resorts
and other properties. These expenditures reflected continued expansion
activities related to Disney's California Adventure and certain resort
facilities at the Walt Disney World Resort. The decrease of $157 million from
the prior year reflects the final payment for the second cruise ship, the Disney
Wonder, in the prior year, partially offset by increased spending on Disney's
California Adventure in the current year.
During the nine months, the Company invested $91 million in Euro Disney S.C.A.
to maintain its 39% ownership interest after a Euro Disney equity rights
offering, the proceeds of which will be used to fund construction of a new theme
park.
III-19
<PAGE>
THE WALT DISNEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Total commitments to purchase broadcast programming approximated $13.5 billion
at June 30, 2000, including approximately $11.0 billion related to sports
programming rights, primarily NFL, College Football, Major League Baseball and
NHL. Substantially all of this amount is payable over the next six years.
The Company expects the ABC Television Network, ESPN and the Company's
television and radio stations to continue to enter into programming commitments
to purchase the broadcast rights for various feature films, sports and other
programming.
During the nine months, the Company repaid $2.4 billion of term debt, which
matured during the period, and reduced its commercial paper borrowings by $538
million. These repayments were partially funded by proceeds of $1.1 billion from
various financing arrangements. Commercial paper borrowings outstanding as of
June 30, 2000 totaled $1.4 billion, with maturities of up to one year, supported
by bank facilities totaling $4.8 billion, which expire in one to five years and
allow for borrowings at various interest rates. The Company also has the ability
to borrow under a U.S. shelf registration statement and a euro medium-term note
program, which collectively permit the issuance of up to approximately $4.8
billion of additional debt.
The Company is authorized as of June 30, 2000 to purchase up to 395 million
shares of Disney common stock. During the nine months, a subsidiary of the
Company acquired approximately 3.8 million shares of Disney common stock for
approximately $115 million. The Company also used $434 million to fund dividend
payments during the first quarter.
The Company believes that its financial condition is strong and that its cash,
other liquid assets, operating cash flows, access to equity capital markets and
borrowing capacity, taken together, provide adequate resources to fund ongoing
operating requirements and future capital expenditures related to the expansion
of existing businesses and development of new projects.
OTHER MATTERS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB
101). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. Disney is
evaluating the effect that adoption may have on its combined results of
operations and financial position and will reflect such effect, if any, during
fiscal 2001.
In June 2000, the American Institute of Certified Public Accountants issued
Statement of Position 00-2 Accounting by Producers or Distributors of Films (SOP
00-2). SOP 00-2 changes the accounting standards for costs to produce and
distribute films and television properties. The Company expects to adopt the
new standard effective October 1, 2000, and is evaluating the effect that such
adoption may have on its combined results of operations and financial position.
On August 11, 2000, a jury returned a verdict against the Company in the
amount of $240 million in a civil lawsuit in a Florida trial court in Orlando.
The lawsuit asserted that the company misappropriated the concept for its Wide
World of Sports complex at the Walt Disney World Resort. Based on the jury's
findings, the court has discretion, upon a motion by the Plaintiff, to add to
the verdict an amount up to double the amount thereof. The Company intends to
challenge the verdict in the trial court and, if necessary, on appeal and
believes that there are substantial grounds for complete reversal or reduction
of the verdict. Management believes that it is not currently possible to
estimate the impact, if any, that the ultimate resolution of this matter will
have on the Company's results of operations, financial position or cash flow.
III-20
