UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the Fiscal Year Ended September 30, 2004
Securities Registered Pursuant to
Section 12(b) of the Act:
Incorporated in Delaware
500 South Buena Vista Street, Burbank, California 91521
(818) 560-1000
I.R.S. Employer Identification No.
95-4545390
Name of Each Exchange
Title of Each Class
on Which Registered
Common Stock, $.01 par value
New York Stock Exchange
Pacific Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ü No
Documents Incorporated by Reference
Certain information required for Part III of this report is incorporated herein by reference to the proxy statement for the 2005 annual meeting of the Companys shareholders.
THE WALT DISNEY COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
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Executive Officers of the Company | 23 | |||||||
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PART III | ||||||||
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PART IV | ||||||||
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SIGNATURES | 62 | |||||||
Consolidated Financial Information The Walt Disney Company | 64 | |||||||
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EX-32.B |
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PART I
ITEM 1. Business
The Walt Disney Company, together with its
subsidiaries, is a diversified worldwide entertainment company
with operations in four business segments: Media Networks, Parks
and Resorts, Studio Entertainment and Consumer Products. For
convenience, the terms Company and we
are used to refer collectively to the parent company and the
subsidiaries through which our various businesses are actually
conducted.
Information on revenues, operating income,
identifiable assets and supplemental revenue of the
Companys business segments and by geographical area
appears in Note 1 to the Consolidated Financial Statements
included in Item 8 hereof. The Company employed
approximately 129,000 people as of September 30, 2004.
MEDIA NETWORKS
The Media Networks segment is comprised of
television broadcast, radio and cable operations. The television
broadcast businesses include the ABC Television Network as well
as ten owned stations. Radio operations consist of the ABC Radio
Networks and 71 owned stations. Cable operations consist
primarily of the ESPN and Disney Channel Networks.
Domestic Broadcast Television
Networks
Generally, the television network produces its
own programs or acquires broadcast rights from other producers
and rights holders for network programming, and pays varying
amounts of compensation to affiliated stations for broadcasting
the programs and commercial announcements included therein.
Network operations derives substantially all of its revenues
from the sale to advertisers of time in network programs for
commercial announcements. The ability to sell time for
commercial announcements and the rates received are primarily
dependent on the size and nature of the audience that the
network can deliver to the advertiser as well as overall
advertiser demand for time on network broadcasts.
Domestic Broadcast Television
Stations
-1-
Markets, frequencies and other station details
are as follows:
Cable/Satellite Networks and International
Broadcast Operations
Generally, the cable networks produce their own
programs or acquire programming rights from other producers and
rights holders for network programming. Cable operations derive
substantially all of their revenues from affiliate fees charged
to cable service providers and/or the sale to advertisers of
time in network programs for commercial announcements. The
amounts that we can charge for our cable services are largely
dependent on competition and the quality and quantity of
programming that we can provide. The ability to sell time for
commercial announcements and the rates received are primarily
dependent on the size and nature of the audience that the
network can deliver to the advertiser as well as overall
advertiser demand.
Cable properties, the Companys ownership
percentage and subscribers as of September 30, 2004 are set
forth in the following table:
-2-
The Company has various other international
investments in broadcast and cable properties in addition to
those listed in the above table.
ESPN.
ESPN, Inc.
operates five domestic television sports networks: ESPN, ESPN2,
ESPN Classic, ESPNEWS (which is a stand-alone network or a
wraparound service for some regional sports networks) and ESPN
Deportes (a Spanish language network launched in January 2004).
ESPN also operates a high-definition television simulcast
service, ESPN HD. ESPN, Inc. owns, has equity interests in,
or has distribution agreements with 29 international
networks, reaching households in more than 190 countries
and territories. In addition, ESPN holds a 50% equity interest
in ESPN STAR Sports, which delivers sports programming
throughout most of Asia, a 70% equity interest in ESPN Classic
Europe, LLC., which delivers classic sports programming
throughout Europe, and a 29.92% equity interest in CTV Specialty
Television, Inc., which owns The Sports Network, Le Réseau
des Sports, ESPN Classic Canada, the NHL Network and Discovery
Canada, among other media properties in Canada.
ESPN also operates several other brand
extensions, including ESPN.com, an Internet sports content
provider; ESPN Regional Television; ESPN Radio, which is
distributed through the ABC Radio Networks; ESPN The Magazine;
BASS, the largest fishing organization in the world; ESPN
Enterprises, which develops branded licensing opportunities, and
the ESPN Zone sports-themed dining and entertainment facilities
which are included in the Parks and Resorts segment. ESPN also
provides content for newer technologies such as broadband,
wireless, and video-on-demand.
Disney Channel.
Disney Channel is a cable and
satellite television service. Shows developed for initial
exhibition on Disney Channel include comedy series such as the
live-action series
Thats So Raven
and
Phil of
the Future;
animated programming including
Brandy &
Mr. Whiskers
and
Dave the Barbarian,
both
produced by Walt Disney Television Animation; and educational
preschool series like
Higglytown Heroes, JoJos Circus
for the channels Playhouse Disney programming block,
as well as projects for its popular Disney Channel Original
Movie franchise. The balance of the programming consists of
products acquired from third parties and products from our owned
theatrical film and television programming library.
Disney Channel also reaches outside of the United
States of America via its international operations. Programming
on these operations consists primarily of the Companys
theatrical film and television programming library, products
acquired from third parties and locally produced programming. We
continue to explore the development of Disney Channel in other
countries around the world.
-3-
International Disney Channels, and launch dates
are set forth in the following table:
Toon Disney.
Toon
Disney which was launched in 1998, is intended to appeal to
children and features an array of family-friendly, predominantly
animated programming from the Disney library and is the
primetime home of JETIX. This year, Toon Disney added several
new series in the JETIX block including
Spider-Man, Power
Rangers DinoThunder, Beyblade VForce, Digimon
and the
original animated series
Super Robot Monkey Team Hyperforce
Go!
, produced by Walt Disney Television Animation.
SOAPnet.
SOAPnet was
launched in January 2000 and offers a wide variety of soap opera
and related programming 24 hours a day, seven days a week.
SOAPnets primetime schedule features same-day repeat
telecasts of the top-rated daytime series including
All My
Children, Days of our Lives, One Life To Live
and
General
Hospital
. In addition, the network provides inside access to
stars and storylines with original programs, including the
Emmy-nominated one-hour talk show,
Soap Talk
and the
biography show
Soapography
. SOAPnet also offers primetime
classics including
Melrose Place,
-4-
ABC Family.
In
October 2001, the Company acquired Fox Family Worldwide, Inc.,
which was renamed ABC Family Worldwide, Inc. ABC Family operates
the ABC Family Channel, a television programming service, JETIX
Europe (formerly known as Fox Kids Europe), and JETIX Latin
America (formerly known as Fox Kids Latin America.) ABC Family
Channel programming consists of product acquired from third
parties and the ABC Television Network and products from our
owned theatrical film library along with original programming.
Original programming includes romantic comedy movies, reality
series, scripted half-hour comedies, entertainment specials and
action series.
A&E.
The A&E
Television Networks are television programming services devoted
to cultural and entertainment programming. The networks include
A&E, A&E International, The History Channel, History
International, a network that provides viewers with a window
into non-U.S. perspectives, and The Biography Channel, launched
in 1998, which is dedicated to exploration of the lives of
exceptional people.
Lifetime.
Lifetime
Entertainment Services owns Lifetime Television, which is
devoted to womens lifestyle programming. During 1998,
Lifetime launched the Lifetime Movie Network, a 24-hour channel.
Lifetime Real Women is Lifetime Televisions other sister
channel.
E! Entertainment.
E!
Entertainment Television is a television programming service
focused on the entertainment world. E! Entertainment Television
also launched Style, in 1998, a 24-hour television service
devoted to style, beauty and home design.
The Companys share of the financial results
of A&E, Lifetime, E! Entertainment as well as other
broadcast and cable equity investments is reported under the
heading Equity in the income of investees in the
Companys Consolidated Statements of Income.
Television Production and
Distribution
Under the Walt Disney Television and Buena Vista
Television labels the Company develops and produces animated
childrens television programming for distribution to
global broadcasters, including Disney Channel, the ABC
Television Network, and other cable broadcasters.
The fall 2004 season on Disney Channel sees the
return of
Disneys Kim Possible
and
Disneys
Lilo & Stitch
with new episodes. Upcoming Disney Channel
series premieres include
Disneys American Dragon: Jake
Long
in early 2005. The 2004/2005 ABC Saturday morning
television season returns under the name ABC Kids. ABC Kids is a
line-up of animated and live-action series that include,
Lizzie McGuire, Power Rangers, The Proud Family,
Disneys Lilo and Stitch, Thats So Raven,
Disneys Fillmore, Disneys Kim Possible
as well
as
Phil of the Future
.
-5-
The Company also licenses its animated television
properties in a number of foreign television markets. In
addition, we syndicate certain of our television programs
abroad, including The Disney Club, a weekly series produced for
foreign markets.
The Company also produces original television
movies for
The Wonderful World of Disney,
which the ABC
network airs on Saturday evenings.
We also produce a variety of primetime specials
for exhibition on network television, as well as live-action
syndicated programming, which includes
Live! with Regis and
Kelly
and
The Tony Danza Show,
daily talk shows,
Ebert & Roeper,
a weekly motion picture review
program, and game shows, such as
Who Wants to Be a
Millionaire
.
Domestic Broadcast Radio Networks and
Stations
Of the Companys 41 owned radio
stations located in the top 20 U.S. advertising markets, 23
carry predominantly locally originated music and talk
programming, 13 carry the Radio Disney format and four carry the
ESPN Radio format. Of the Companys 30 radio stations
in the non-top-20 markets, 27 carry the Radio Disney
format. Our radio stations reach 16 million people weekly
in the top 20 United States advertising markets.
The business model for the Radio Networks is
substantially the same as the ABC Television Network.
Markets, frequencies and other station details
are as follows:
-6-
-7-
Internet
ABC.com is the official Web site of the ABC
Television Network, while ABCNEWS.com draws on the knowledge and
expertise of ABC News correspondents throughout the world.
ABCNEWS.com offers subscription broadband services that provide
on-demand access to leading ABC News shows, such as
World
News Tonight with Peter Jennings
and
Nightline,
through alliances with AOL Broadband, Comcast and Real
Networks.
Disney.com is a centralized Disney web site which
integrates many of the Companys Disney-branded Internet
sites including sites for the Disney Channel, The Disney Store
Online, Walt Disney Parks and Resorts, and Walt Disney Pictures.
Enhanced TV provides interactive television
programming and advertising services during ABC telecasts, such
as
Monday Night Football.
ESPN.com delivers comprehensive sports news,
information and video to millions of fans each month. ESPN.com
averages 16 million users per month.
Competition
The Companys television and radio stations
compete with other television and radio stations, cable and
satellite programming services, videocassettes, DVDs and other
advertising media such as newspapers, magazines, billboards and
the Internet. Competition occurs primarily in individual market
areas. A television or radio station in one market generally
does not compete directly with stations in other market areas.
-8-
The growth in the cable/satellite industrys
share of viewers has resulted in increased competitive pressures
for advertising revenues. The Companys cable/satellite
networks also face competition for carriage by cable and
satellite service operators and distributors. The Companys
contractual agreements with cable and satellite operators are
renewed or renegotiated from time to time in the ordinary course
of business. Consolidation and other market conditions in the
cable and satellite distribution industry and other factors may
adversely affect the Companys ability to obtain and
maintain contractual terms for the distribution of its various
cable and satellite programming services that are as favorable
as those currently in place.
The Companys Media Networks segment also
competes for the acquisition of sports and other programming.
The market for programming is very competitive, particularly the
markets for sports programming. The Company currently has sports
rights agreements with the four major professional sports
organizations NFL, NBA, MLB and NHL as
well as for other sporting events, including, the College
Football Bowl Championship Series, various college football and
basketball conferences, the PGA Tour, and the Indy Racing League
including the Indianapolis 500. The current agreement with
the NFL expires after the telecast of the 2006 Pro Bowl.
Events of this kind for which the Company secures
rights from third parties are an integral part of our
programming strategy and, when combined with news and
information and original programming, enable us to deliver a
full complement of sports assets to our fans, advertisers and
distributors.
Federal Regulation
-9-
In July 2003, the FCC adopted revised limits on
television and radio station ownership. The rules adopted in
this order generally would relax existing ownership restrictions
and would permit entities to own more television and radio
stations in some markets, but would also eliminate the 50%
discount for calculating households reached by UHF television
stations operated by the top four broadcast television networks
(including ABC). The effectiveness of the new rules, however,
was stayed by a federal court order, and the FCC has been
ordered to review the rules. As a result, most of the revised
rules adopted by the FCC in July 2003 are not in effect.
Although it is possible that the FCC may implement more liberal
media ownership rules than those currently in effect (other than
those governed by statute), we cannot predict whether the
revised rules will be implemented and if so, when such rules
will become effective.
-10-
The foregoing is a brief summary of certain
provisions of the Communications Act and other legislation and
of specific FCC rules and policies. This summary focuses on
provisions material to our business. Reference should be made to
the Communications Act, other legislation, FCC rules and public
notices and rulings of the FCC for further information
concerning the nature and extent of the FCCs regulatory
authority.
FCC laws and regulations are subject to change,
and the Company generally cannot predict whether new
legislation, court action or regulations, or a change in the
extent of application or enforcement of current laws and
regulations, would have an adverse impact on our operations.
PARKS AND RESORTS
The Company owns and operates the Walt Disney
World Resort and Disney Cruise Line in Florida, the Disneyland
Resort in California, ESPN Zone facilities in several states and
The Mighty Ducks of Anaheim. The Company manages and has
ownership interests in the Disneyland Resort Paris in France
(also referred to as Euro Disney) and Hong Kong Disneyland,
which is under construction and scheduled to open in fiscal
2005. The Companys ownership interests in Disneyland
Resort Paris and Hong Kong Disneyland are 41% and 43%,
respectively. The Company adopted Financial Accounting Standards
Board (FASB) Interpretation No. 46R
Consolidation of
Variable Interest Entities
(FIN 46R) in fiscal 2004 and as a
result, consolidated the balance sheets of Euro Disney and Hong
Kong Disneyland as of March 31, 2004, and the income and
cash flow statements beginning April 1, 2004 (see Notes 2
and 4 to the Consolidated Financial Statements for further
discussion). The Company also licenses the operations of the
Tokyo Disney Resort in Japan. The Companys Walt Disney
Imagineering unit designs and develops new theme park concepts
and attractions as well as resort properties.
The businesses in the Parks and Resorts segment
generate revenues predominately from the sale of admissions to
the theme parks, room nights at the hotel and rentals at the
resort properties. Costs consist primarily of the fixed cost
base for physical properties and base level staffing necessary
to operate the theme park and resort properties. In addition to
the fixed cost base, there is a variable cost component that
increases or decreases with the volume of business.
Walt Disney World Resort
The entire Walt Disney World Resort is marketed
through a variety of national, international and local
advertising and promotional activities. Several attractions in
each of the theme parks are sponsored by corporate participants.
Magic
Kingdom
The Magic Kingdom,
which opened in 1971, consists of seven themed lands: Main
Street USA, Adventureland, Fantasyland, Frontierland, Liberty
Square, Mickeys Toontown Fair
-11-
Epcot
Epcot, which opened in 1982, consists of two major themed areas:
Future World and World Showcase. Future World dramatizes certain
historical developments and addresses the challenges facing the
world today through major pavilions devoted to showcasing
science and technology improvements, communication, energy,
transportation, using your imagination, life and health, nature
and food production, the ocean environment, and space. World
Showcase presents a community of nations focusing on the
culture, traditions and accomplishments of people around the
world. Countries represented with pavilions include the United
States, Canada, China, France, Germany, Italy, Japan, Mexico,
Morocco, Norway and the United Kingdom. Both areas feature
themed rides and attractions, restaurants and merchandise shops.
Disney-MGM
Studios
The Disney-MGM
Studios, which opened in 1989, consists of a theme park, a radio
studio and a film and television production facility. The park
centers on Hollywood as it was during the 1930s and
1940s and provides various attractions, themed food
service and merchandise facilities. The production facility
consists of three sound stages, merchandise shops and a back lot
area and currently hosts both feature film and television
productions. Disney-MGM Studios also features
Fantasmic
!,
a nighttime entertainment spectacular.
Disneys Animal
Kingdom
Disneys
Animal Kingdom, which opened in 1998, consists of a 145-foot
Tree of Life centerpiece surrounded by six themed areas:
Dinoland U.S.A., Africa, Rafikis Planet Watch, Asia,
Discovery Island and Camp Minnie Mickey. Each themed
area contains adventure attractions, entertainment shows,
restaurants and merchandise shops. The park features more than
300 species of mammals, birds, reptiles and amphibians and 4,000
varieties of trees and plants on more than 500 acres of land.
Resort
Facilities
As of
September 30, 2004, the Company owned and operated 17
resort hotels at the Walt Disney World Resort, with a total of
approximately 22,000 rooms and 318,000 square feet of conference
meeting space. In addition, Disneys Fort Wilderness
camping and recreational area offers approximately 800 campsites.
The Disney Vacation Club (DVC) offers
ownership interests in 7 resort facilities, located at the Walt
Disney World Resort, as well as in Vero Beach, Florida, and
Hilton Head Island, South Carolina. Available units at each
facility are offered for sale under a vacation ownership plan
and are operated as rental property until the units are sold.
Disneys Saratoga Spring Resort & Spa in Orlando,
Florida opened its first phase of vacation ownership properties
in May 2004. Upon the completion of Saratoga Springs, the Walt
Disney World Resort will have nearly 2,100 vacation ownership
units.
Recreational amenities and activities available
at the Walt Disney World Resort include five championship golf
courses, miniature golf courses, full-service spas, tennis,
sailing, water skiing, swimming, horseback riding and a number
of other noncompetitive sports and leisure time activities. The
resort also includes two water parks: Blizzard Beach and Typhoon
Lagoon.
We have also developed a 120-acre retail, dining
and entertainment complex known as Downtown Disney, which
consists of the Marketplace, Pleasure Island and West Side. In
addition to more than 20 specialty retail shops and restaurants,
the Downtown Disney Marketplace is home to the
50,000-square-foot World of Disney retail store featuring
Disney-branded merchandise. Pleasure Island, a nighttime
entertainment center adjacent to the Downtown Disney
Marketplace, includes restaurants, nightclubs and shopping
facilities. Downtown Disney West Side is situated on 66 acres on
the west side of Pleasure Island and includes a DisneyQuest
facility, Cirque du Soleil, House of Blues and several retail,
dining and entertainment operations.
Disneys Wide World of Sports, which opened
in 1997, is a 220 acre sports complex providing professional
caliber training and competition, festival and tournament events
and interactive sports
-12-
In the Downtown Disney Resort area, seven
independently operated hotels are situated on property leased
from the Company. These hotels have a capacity of approximately
3,700 rooms. Additionally, two hotels, the Walt Disney World
Swan and the Walt Disney World Dolphin, with an aggregate
capacity of approximately 2,300 rooms, are independently
operated on property leased from the Company near Epcot.
Disneyland Resort
The entire Disneyland Resort is marketed through
international, national and local advertising and promotional
activities as a destination resort. A number of the attractions
and restaurants at each of the theme parks are sponsored by
other corporations through long-term agreements.
Disneyland
Disneyland, which opened in 1955, consists of Main Street USA
and seven principal areas: Adventureland, Critter Country,
Fantasyland, Frontierland, New Orleans Square, Tomorrowland and
Toontown. These areas feature themed rides and attractions,
restaurants, refreshment stands and merchandise shops.
Disneys California
Adventure
Disneys
California Adventure, which opened in 2001, is adjacent to
Disneyland and includes four principal areas: Golden State,
Hollywood Pictures Backlot, Paradise Pier and a bugs
land. These areas include rides, attractions, shows,
restaurants, merchandise shops and refreshment stands.
Resort
Facilities
Disneyland
Resort includes three Company-owned hotels: the 1,000-room
Disneyland Hotel, 500-room Disneys Paradise Pier Hotel and
Disneys Grand Californian Hotel, a deluxe 750-room hotel
located adjacent to Disneys California Adventure.
The Resort also includes Downtown Disney, a
themed 310,000 square foot outdoor complex of entertainment,
dining and shopping venues, located adjacent to both Disneyland
Park and Disneys California Adventure.
Disneyland Resort Paris
Disneyland Park, which opened in 1992, consists
of Main Street and four principal themed areas: Adventureland,
Discoveryland, Fantasyland and Frontierland. These areas include
themed rides, attractions, shows, restaurants, merchandise shops
and refreshment stands.
Walt Disney Studios Park opened in March 2002
adjacent to Disneyland Park. The park takes guests into the
worlds of cinema, animation and television and includes four
principal themed areas:
-13-
Development of the site also continues with the
Val dEurope project, a newly constructed planned community
being built near Disneyland Resort Paris. The first two phases
of the city of Val dEurope include a town center, which
consists of a shopping center; a 150 room hotel; office,
commercial and residential space; and a regional train station.
These new developments are operated by third parties on land
leased or purchased from Euro Disney. In July 2003 Euro Disney
signed an agreement with a third party developer beginning the
third phase of Val dEurope. Included in this phase will be
expansion of Disney Village and projects aimed at increasing Val
dEuropes capacity to welcome new residents.
In addition, there are several new on-site hotels
which were opened in 2003 and 2004 that are owned and operated
by third party developers that provide approximately 1,860
rooms. Agreements have been signed with additional third party
developers to provide approximately 350 additional on-site hotel
rooms and/or time share units over the next two years.
Euro Disney is currently in the process of a
financial restructuring that, if completed, will provide for an
increase in capital and refinancing of its borrowings. Subject
to certain deferrals, Euro Disney is required to pay royalties
and management fees to the Company. (See Note 4 to the
Consolidated Financial Statements for further discussion).
The Company receives a royalty and management fee
based on the performance of the operations of the park. Payment
of the royalties and management fees were deferred during fiscal
year 2004. The financial restructuring provides for payment of
these fees on completion of the restructuring anticipated in
fiscal year 2005.
Hong Kong Disneyland
Construction and operation of the project will be
the responsibility of Hongkong International Theme Parks
Limited, an entity in which the Hong Kong Government owns a 57%
interest and a subsidiary of the Company owns the remaining 43%.
A separate Hong Kong subsidiary of the Company is responsible
for managing Hong Kong Disneyland. Based on the current exchange
rate between the Hong Kong and U.S. dollars, the Companys
equity contribution obligation is limited to U.S.
$314 million. As of September 30, 2004 the Company had
contributed U.S. $168 million and the remaining
$146 million is payable over the next two years. Once Hong
Kong Disneyland commences operations, Company subsidiaries will
be entitled to receive management fees and royalties in addition
to the Companys equity interest.
Tokyo Disney Resort
-14-
Tokyo Disneyland, which opened in 1983, was the
first Disney theme park to open outside the United States. Tokyo
Disneyland consists of seven principal areas: Adventureland,
Critter Country, Fantasyland, Tomorrowland, Toontown,
Westernland and World Bazaar.
Tokyo DisneySea, adjacent to Tokyo Disneyland,
opened in 2001. The park is divided into seven unique
ports of call, including Mediterranean Harbor,
American Waterfront, Port Discovery, Lost River Delta, Mermaid
Lagoon, Mysterious Island and Arabian Coast. The resort includes
the 502-room Tokyo Disney Sea Hotel MiraCosta, the 504-room
Disney Ambassador Hotel, the Disney Resort Line monorail and the
Bon Voyage merchandise location and Ikspiari, a retail, dining
and entertainment complex.
Disney Cruise Line
ESPN Zone
Walt Disney Imagineering
The Mighty Ducks of Anaheim
Seasonality and Competition
The Companys theme parks and resorts
compete with all other forms of entertainment, lodging, tourism
and recreational activities. The profitability of the
leisure-time industry is influenced by various factors that are
not directly controllable, such as economic conditions including
business cycle and exchange rate fluctuations, travel industry
trends, amount of available leisure time, oil and transportation
prices and weather patterns.
STUDIO ENTERTAINMENT
The Studio Entertainment segment produces and
acquires live-action and animated motion pictures, animated
direct-to-video programming, musical recordings and live stage
plays.
-15-
The Company distributes produced and acquired
films (including its film and television library) to the
theatrical, home entertainment, pay-per-view, video-on-demand,
pay television and free-to-air television markets. Each of these
markets is discussed in more detail below.
Theatrical Distribution
During fiscal 2005, we expect to distribute in
domestic markets approximately 18 feature films under the Walt
Disney Pictures and Touchstone Pictures banners and
approximately 19 films under the Miramax and Dimension banners.
These expected releases include several live-action family films
and full-length animated films, with the remainder targeted to
teenagers, families and/or adults. As of September 30,
2004, the Company had released 832 full-length live-action
features (primarily color), 69 full-length animated color
features, approximately 540 cartoon shorts and 53 live action
shorts under the Walt Disney Pictures, Touchstone Pictures,
Hollywood Pictures, Miramax and Dimension banners.
We distribute and market our filmed products
principally through our own distribution and marketing companies
in the United States and major foreign markets. Films released
theatrically in the U.S. can be released simultaneously
theatrically in international territories or generally up to six
months later.
The Company incurs significant marketing and
advertising costs before and throughout the theatrical release
of a film in an effort to generate public awareness of the film,
to increase the publics intent to view the film and to
help generate significant consumer interest in the subsequent
home entertainment and other ancillary markets. These costs are
expensed as incurred, and therefore we typically incur losses in
the theatrical markets on a film, including the quarters before
the theatrical release of the film.
Home Entertainment
The domestic and international home entertainment
window typically starts four to six months after each theatrical
release with the issuance of DVD and VHS versions of each title.
Domestically, most titles are sold simultaneously to both
rentailers, such as Blockbuster Inc., and retailers,
such as Best Buy Co., Inc. Upon a titles home
entertainment release, consumers are afforded the option to rent
for a limited period of time typically, two to seven days, or
purchase the titles outright (sell-through).
In the international home entertainment market,
titles are either released simultaneously in the rental and
sell-through channels or with a rental window before
sell-through, depending on local market regulations, DVD
hardware penetration and DVD software demand. The international
market has experienced a trend in the compression of, or in some
cases the disappearance of, the rental window.
-16-
As of September 30, 2004, under the banners
Walt Disney Pictures, Touchstone Pictures, Hollywood Pictures,
Miramax and Dimension, 1,121 produced and acquired titles,
including 937 live action titles and 184 cartoon shorts and
animated features, were available to the domestic home
entertainment marketplace and 2,481 produced and acquired
titles, including 2,006 live action titles and 475 cartoon
shorts and animated features, were available to the
international home entertainment market.
Television Distribution
Pay Television (Pay 1):
Effective with theatrical releases
beginning January 1, 2003, there are two pay television
windows. The first window is generally fifteen months in
duration and follows the PPV/ VOD window. The Company has
licensed to the Encore pay television services, over a
multi-year period, exclusive domestic pay television rights to
certain films released under the Walt Disney Pictures,
Touchstone Pictures, Hollywood Pictures, Miramax and Dimension
banners.
Free Television (Free 1):
Following the Pay 1 window is a free
television window wherein telecasts are accessible to consumers
without charge. This free window may last up to 84 months.
Motion pictures are usually sold in the first free window on an
ad hoc basis to major networks and basic cable services. For
films released theatrically prior to October 1st, 2004, the
Company maintains only one output deal, with the ABC Television
Network and its affiliates, covering branded live action and
animated product broadcast in the Wonderful World of Disney
slot. Films released after that date will be sold on an ad hoc
basis to other networks besides ABC.
Pay Television 2 (Pay 2) and Free Television 2
(Free 2):
In the U.S., Free 1 is
generally followed by a twelve month Pay 2 window, included
under our license arrangement with Encore, and finally by a
second Free window (Free 2). The Free 2 window is a syndication
window where films are licensed both to basic cable networks and
to station groups, such as Tribune Co. Major packages of the
Companys feature films and animated television programming
have been licensed for broadcast under multi-year agreements.
International Television:
The Company also licenses its
theatrical and television properties outside of the US. The
typical windowing sequence is broadly consistent with the
domestic cycle such that titles premiere on television in PPV/
VOD then air in pay TV before airing in free TV. Certain
properties may then be re-licensed to one or more of the above
windows. Windowing strategies are developed in response to local
market practices and conditions, and the exact sequence and
length of each window can vary country by country.
Audio Products and Music Publishing
In addition, each of our labels and our music
publishing companies commission new music for the Companys
motion pictures and television programs, and records the songs
and licenses the song
-17-
Buena Vista Theatrical Group
Disney Theatrical Productions develops, produces
and licenses stage musicals worldwide. To date, the
Companys shows have included
Beauty and the Beast, The
Lion King
and Elton John and Tim Rices
Aida.
The Company generally elects to produce its own shows in the
United States, the United Kingdom and Australia and licenses its
shows to local producers in other territories. As of
September 30, 2004, Disney Theatrical Production had
fourteen productions running worldwide. Three new productions
opening in fiscal 2005 include:
Mary Poppins
in London (a
co-production with Cameron Mackintosh) in December 2004;
On
The Record
US Tour which premiered in Cleveland in November
2004; and
Aida
in Seoul, Korea in August 2005.
Disney Live Family Entertainment has eight
different Disney on Ice shows touring in more than 40 countries
worldwide. The newest Disney On Ice show, Disney/ Pixars
Finding Nemo
opened in September 2004 and will tour
throughout the United States and in Mexico over the next two
years.
Disney Live! Winnie the Poohs Perfect Day
launched in July 2004. Disney Live! is a new brand of live
family entertainment which will perform in theaters and arenas.
Both Disney On Ice and Disney Live! are licensed to Feld
Entertainment.
Relationship with Pixar
Competition and Intellectual Property
Protection
The Studio Entertainment businesses compete with
all forms of entertainment. A significant number of companies
produce and/or distribute theatrical and television films,
exploit products in the home entertainment market, provide pay
television programming services and sponsor live theater. We
also compete to obtain creative and performing talents, story
properties, advertiser support, broadcast rights and market
share, which are essential to the success of our Studio
Entertainment businesses.
The Companys ability to exploit and protect
rights in its content, including its motion pictures, television
programs and sound recordings is affected by the strength and
effectiveness of intellectual property laws in the United States
and abroad. Inadequate laws or enforcement mechanisms to protect
intellectual property in a country can adversely affect the
results of the Companys operations, despite the
Companys strong efforts to protect its intellectual
property rights throughout the world.
-18-
The Companys businesses are also subject to
the risk of challenges by third parties claiming infringement of
their proprietary rights. Regardless of their validity, such
claims may result in substantial costs and diversion of
resources which could have an adverse effect on the Company.
See further discussion under Consumer
Products Competition, Seasonality and Intellectual
Property Protection below.
CONSUMER PRODUCTS
The Consumer Products segment partners with
licensees, manufacturers, publishers and retailers throughout
the world to design, promote and sell a wide variety of products
based on existing and new Disney characters and other
intellectual property. In addition to promoting the
Companys film and television programs, Consumer Products
develops new intellectual property within its publishing and
interactive gaming divisions with the potential of being
leveraged across the company. The Company also engages in
retail, direct mail and online distribution of products based on
the Companys characters and films through the Disney
Stores, the Disney Catalog and DisneyDirect.com, respectively.
As discussed in Note 14 to the Consolidated Financial
Statements, the Company sold the Disney Store in North America
in November 2004.
Character Merchandise and Publications
Licensing
Books and Magazines
Buena Vista Games
-19-
Direct Marketing
Disney Stores
Competition, Seasonality, and Intellectual
Property Protection
The Companys licensing businesses, as well
as its studio entertainment and theme park and resort
operations, are affected by the Companys ability to
exploit and protect its intellectual property, including
trademarks, trade names, copyrights, patents and trade secrets,
throughout the world. As a result, domestic and foreign laws
protecting intellectual property rights are important to the
Company. The right and ability to enforce intellectual property
rights against infringement are essential to the Companys
businesses. These businesses are also subject to the risk of
challenges by third parties claiming infringement of their
proprietary rights. Regardless of their validity, such claims
may result in substantial costs and diversion of resources which
could have an adverse effect on the Companys licensing
operations.
Available Information
ITEM 2. Properties
The Walt Disney World Resort, Disneyland Park and
other properties of the Company and its subsidiaries are
described in Item 1 under the caption
Parks and
Resorts
. Film library properties are
-20-
The Company and its subsidiaries own and lease
properties throughout the world. The table below provides a
brief description of the significant properties and the related
business segment.
ITEM 3. Legal Proceedings
In re The Walt Disney Company Derivative
Litigation.
William and Geraldine
Brehm and thirteen other individuals filed an amended and
consolidated complaint on May 28, 1997 in the Delaware
Court of Chancery seeking, among other things, a declaratory
judgment against each of the Companys directors as of
December 1996 that the Companys 1995 employment agreement
with its former president Michael S. Ovitz, was void, or
alternatively that Mr. Ovitzs termination should be
deemed a termination for cause and any severance
payments to him forfeited. On October 8, 1998, the Delaware
Court of Chancery dismissed all counts of the amended complaint.
Plaintiffs appealed, and on February 9, 2000, the Supreme
Court of Delaware affirmed the dismissal but ruled also that
plaintiffs should be permitted to file an amended complaint in
accordance with the Courts opinion. The plaintiffs filed
their amended complaint on January 3, 2002. On
February 6, 2003, the Companys directors motion
to dismiss the amended complaint was converted by the Court to a
motion for summary judgment and the plaintiffs were permitted to
take discovery. The Company and its directors answered the
amended complaint on April 1, 2003. On May 28, 2003,
the Court (treating as a motion to dismiss the motion for
summary judgment into which it had converted the original motion
on February 6, 2003) denied the directors motion to
dismiss the amended complaint. Trial commenced on
October 20, 2004.
Similar or identical claims have also been filed
by the same plaintiffs (other than William and Geraldine Brehm)
in the Superior Court of the State of California, Los Angeles
County, beginning with a claim filed by Richard and David Kaplan
on January 3, 1997. On May 18, 1998, an additional
claim was filed in the same California court by Dorothy L.
Greenfield. On September 25, 2001, Ms. Greenfield
sought leave to amend her claim, but withdrew her request to
amend on January 3, 2002. All of the California claims have
been consolidated and stayed pending final resolution of the
Delaware proceedings.
Stephen Slesinger, Inc. v. The Walt Disney
Company.
In this lawsuit, filed on
February 27, 1991 in the Los Angeles County Superior Court,
the plaintiff claims that a Company subsidiary defrauded it
-21-
Milne and Disney Enterprises, Inc. v. Stephen
Slesinger, Inc.
On November 5,
2002, Clare Milne, the granddaughter of A. A. Milne, author of
the Winnie the Pooh books, and the Companys subsidiary
Disney Enterprises, Inc. filed a complaint against Stephen
Slesinger, Inc. (SSI) in the United States District
Court for the Central District of California. On
November 4, 2002, Ms. Milne served notices to SSI and the
Companys subsidiary terminating A. A. Milnes prior
grant of rights to Winnie the Pooh, effective November 5,
2004, and granted all of those rights to the Companys
subsidiary. In their lawsuit, Ms. Milne and the
Companys subsidiary seek a declaratory judgment, under
United States copyright law, that Ms. Milnes
termination notices were valid; that SSIs rights to Winnie
the Pooh in the United States terminated effective
November 5, 2004; that upon termination of SSIs
rights in the United States, the 1983 licensing agreement that
is the subject of the
Stephen Slesinger, Inc. v. The Walt
Disney Company
lawsuit terminated by operation of law; and
that, as of November 5, 2004, SSI was entitled to no
further royalties for uses of Winnie the Pooh. In January 2003,
SSI filed (a) an answer denying the material allegations of
the complaint and (b) counterclaims seeking a declaration
that (i) Ms. Milnes grant of rights to Disney
Enterprises, Inc. is void and unenforceable and (ii) Disney
Enterprises, Inc. remains obligated to pay SSI royalties under
the 1983 licensing agreement. SSI also filed a motion to dismiss
the complaint or, in the alternative, for summary judgment. On
May 8, 2003, the Court ruled that Milnes termination
notices are invalid and dismissed SSIs counterclaims as
moot. Following further motions, on August 1, 2003, SSI
filed an amended answer and counterclaims and a third-party
complaint against Harriet Hunt (heir to E. H. Shepard,
illustrator of the original Winnie the Pooh stories), who had
served a notice of termination and a grant of rights similar to
Ms. Milnes. By order dated October 27, 2003, the
Court certified an interlocutory appeal from its May 8 order to
the Court of Appeals for the Ninth Circuit, but on
January 15, 2004, the Court of Appeals denied the
Companys and Milnes petition for an interlocutory
appeal. By order dated August 3, 2004, the Court granted
SSI leave to amend its answer to assert counterclaims against
the Company allegedly arising from the Milne and Hunt
terminations and the grant of rights to the Companys
subsidiary for (a) unlawful and unfair business practices; and
(b) breach of the 1983 licensing agreement. In October
2004, Milne, joined by the Company, moved to amend its complaint
to dismiss its claim against SSI for the purpose of obtaining a
final order of
-22-
Management believes that it is not currently
possible to estimate the impact if any, that the ultimate
resolution of these matters will have on the Companys
results of operations, financial position or cash flows.
The Company, together with, in some instances,
certain of its directors and officers, is a defendant or
co-defendant in various other legal actions involving copyright,
breach of contract and various other claims incident to the
conduct of its businesses. Management does not expect the
Company to suffer any material liability by reason of such
actions.
SEC Proceeding.
The
U.S. Securities and Exchange Commission (the SEC) is
conducting an investigation into an amendment of the
Companys Annual Report on Form 10-K for fiscal year
2001, certain related matters and other related party
transactions that have been previously disclosed by the Company.
The investigation does not relate to the Companys
financial statements but rather to the issue of disclosure of
those relationships. The Company is in discussions with the
staff of the SEC about a possible administrative resolution of
these non-financial matters, which would allege disclosure
deficiencies generally about these matters and cite violation
under Sections 13(a) and 14(a) of the Exchange Act
regarding the following relationships between the Company and
certain directors: the employment of adult children of three
directors by the Company and the wife of another director by a
50% owned joint venture (whose employment preceded the
directors tenure); the provision of an office, secretary
and driver to one director following his retirement as Chief
Executive Officer of Capital/ Cities ABC, Inc.; and the payments
to Air Shamrock, Inc., a company controlled by a former
director, in reimbursement for his business use of his private
corporate jet. The settlement under discussion would involve the
issuance of an administrative cease and desist order.
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Television
Analog
Market
Market
TV Station
Channel
Ranking
(1)
WABC-TV
7
1
KABC-TV
7
2
WLS-TV
7
3
WPVI-TV
6
4
KGO-TV
7
5
KTRK-TV
13
11
WTVD-TV
11
29
KFSN-TV
30
57
WJRT-TV
12
64
WTVG-TV
13
69
(1)
Based on Nielsen Media Research, U.S. Television
Household Estimates, January 1, 2004
Subscribers
Property
Ownership %
(in millions)
80.0
89
80.0
88
80.0
55
80.0
43
100.0
85
100.0
31
100.0
48
100.0
39
100.0
88
75.1
37
100.0
11
37.5
89
37.5
87
37.5
31
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Subscribers
Property
Ownership %
(in millions)
37.5
18
37.5
47
50.0
88
50.0
43
50.0
5
39.6
85
39.6
38
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Channel
Launch Date
March 1995
October 1995
June 1996
October 1996
March 1997
April 1997
April 1998
October 1998
October 1999
January 2000
February 2000
February 2000
July 2000
July 2000
April 2001
November 2001
March 2002
July 2002
February 2003
February 2003
February 2003
November 2003
December 2003
March 2004
December 2004
(1)
Represents feed extensions from the Asia regional
channel.
(2)
Represents feed extensions from the Latin America
regional channel.
(3)
Represents feed extensions from the Scandinavian
regional channel.
(4)
Represents feed extensions from the Australian
regional channel.
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Radio
Radio
Market
Market
Station
Frequency
Ranking
(1)
WABC
AM
1
WPLJ
FM
1
WEPN
AM
1
KABC
AM
2
KSPN
AM
2
KDIS
AM
2
KLOS
FM
2
WLS
AM
3
WMVP
AM
3
WRDZ
AM
3
WZZN
FM
3
KGO
AM
4
KSFO
AM
4
KMKY
AM
4
WBAP
AM
5
KMKI
AM
5
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Radio
Radio
Market
Market
Station
Frequency
Ranking
(1)
KTYS
FM
5
KSCS
FM
5
KESN
FM
5
WWJZ
AM
6
KMIC
AM
7
WMAL
AM
8
WRQX
FM
8
WJZW
FM
8
WMKI
AM
9
WJR
AM
10
WDVD
FM
10
WDRQ
FM
10
WDWD
AM
11
WKHX
FM
11
WYAY
FM
11
WMYM
AM
12
KKDZ
AM
14
KMIK
AM
15
KDIZ
AM
16
KQRS
FM
16
KXXR
FM
16
WGVX
FM
16
WGVY
FM
16
WGVZ
FM
16
WSDZ
AM
19
WWMI
AM
21
KDDZ
AM
22
WEAE
AM
23
KDZR
AM
24
KKSL
AM
24
WWMK
AM
25
KIID
AM
26
KPHN
AM
29
KRDY
AM
30
KWDZ
AM
31
WKSH
AM
32
WDDZ
AM
34
WGFY
AM
36
WDYZ
AM
39
WHKT
AM
40
WPMH
AM
40
WRDZ
FM
41
WBYU
AM
46
WMNE
AM
47
WDZK
AM
50
WBWL
AM
50
WDRD
AM
55
WDZY
AM
56
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Radio
Radio
Market
Market
Station
Frequency
Ranking
(1)
WDDY
AM
64
KMUS
AM
65
KALY
AM
71
KDIS
FM
86
WQUA
FM
94
KQAM
AM
95
WFDF
AM
126
(1)
Based on 2004 Arbitron Radio Market Rank
(2)
The three radio signals are operated as a single
station
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Licensing of television and radio stations.
Each of the television and radio
stations we own must be licensed by the FCC. These licenses are
granted for periods of up to eight years, and we must obtain
renewal of licenses as they expire in order to continue
operating the stations. We must also obtain FCC approval
whenever we seek to have a license transferred in connection
with the acquisition of a station. The FCC may decline to renew
or approve the transfer of a license in certain circumstances.
Although we have generally received such renewals and approvals
in the past, there can be no assurance that we will always
obtain necessary renewals and approvals in the future.
Television and radio station ownership limits.
The FCC imposes limitations on the
number of television stations and radio stations we can own in a
specific market, on the combined number of television and radio
stations we can own in a single market and on the aggregate
percentage of the national audience that can be reached by
television stations we own. Currently:
FCC regulations permit us to own an additional
television station in all of the markets in which we have
television stations except Toledo, Ohio, Flint, Michigan, and
Raleigh Durham, North Carolina. We do not own more
than one television station in any of the ten markets in which
we own a television station.
Federal statutes permit our stations in the
aggregate to reach a maximum of 39% of the national audience
(and FCC regulations attribute UHF television stations with only
50% of the television households in their market). Our stations
reached approximately 24 percent of the national audience,
(approximately 23 percent when calculated using the
FCCs attribution rule).
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FCC regulations in some cases impose restrictions
on our ability to acquire additional radio or television
stations in the markets in which we own radio stations, but we
do not believe any such limitations are material to our current
business plans.
Dual networks.
FCC
rules currently prohibit any of the four major television
networks ABC, CBS, Fox and NBC from
being under common ownership or control. The new FCC rules, if
implemented, would not modify this limitation.
Regulation of programming.
The FCC regulates programming by,
among other things, banning indecent programming and
imposing restrictions and commercial time limits on political
advertising. Broadcasters face a heightened risk of being found
in violation of the indecency prohibition because of recent FCC
decisions, coupled with the spontaneity of live programming.
Recently, the FCC has indicated that it is stepping up
enforcement activities as they apply to indecency, and has
indicated it would consider license revocation for serious
violations. Moreover, legislation has been introduced in
Congress that would increase penalties for broadcasting indecent
programming.
Federal legislation and FCC rules also limit the
amount of commercial matter that may be shown on broadcast or
cable channels during programming designed for children
12 years of age and younger. In addition, broadcast
channels are generally required to provide a minimum of three
hours per week of programming that has as a significant
purpose meeting the educational and informational needs of
children 17 years of age and younger. FCC rules also give
television station owners the right to reject or refuse network
programming in certain circumstances or to substitute
programming that the licensee reasonably believes to be of
greater local or national importance.
Cable and satellite carriage of broadcast
television stations.
With respect to
cable systems operating within a television stations
Designated Market Area, FCC rules require that every three years
each television station elect either must carry
status, pursuant to which cable operators must carry a local
television station in the stations market, or
retransmission consent status, pursuant to which the
cable operator is required to negotiate with the television
station to obtain the consent of the television station for
carriage of its signal. Under the Satellite Home Improvement
Act, satellite carriers are permitted to retransmit a local
television stations signal into its local market with the
consent of the local television station. If a satellite carrier
elects to carry one local station in a market, the satellite
carrier must carry the signals of all local television stations
that also request carriage. Certain of these satellite carriage
provisions are set to expire on December 31, 2004; however,
Congress is currently considering legislation that would extend
this term to December 31, 2009. We cannot predict whether
this legislation, or other similar legislation, will become law.
Digital television.
FCC rules currently require full-power
analog television stations, such as ours, to provide digital
service on a second broadcast channel granted specifically for
the phase-in of digital broadcasting. FCC rules also regulate
digital broadcasting to ensure continued quality carriage of
mandated free over-the-air program service. All of the Com-
Table of Contents
panys stations have launched digital
facilities, and we are evaluating various options with respect
to use of digital channels. Under current law, all broadcasters
are required to operate exclusively in digital mode and
permanently surrender one of their two channels by
December 31, 2006. However, the FCC has the authority in
certain circumstances to extend this deadline in a particular
market upon the request of a station. On September 7, 2004,
the FCC established intermediate deadlines by which stations
must proceed with the transition to digital, but deferred any
determination as to how it would interpret its authority to
extend the December 31, 2006 deadline in a particular
market.
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Location
Property/ Approximate Size
Use
Business Segment
(1)
Land (51 acres) & Building
(1,900,000 ft
2
)
Office/Production/Warehouse
Corp/Studio/Media
Building (1,100,000 ft
2
)
Office/Warehouse
Corp/Studio/Media/CP
Land (115 acres) & Building (2,500,000
ft
2
)
Office/Warehouse
Corp/Studio/Media/CP/TP&R
Building (316,000 ft
2
)
Office/Warehouse
Corp/CP
Land (22 acres) & Building
(567,000ft
2
)
Office/Production/Technical
Media
Land (6.5 acres) & Building (1,500,000
ft
2
)
Office/Production/Technical
Media
Building (750,000 ft
2
)
Office/Production/Warehouse
Corp/Studio/Media/CP
Land (68 acres) & Building
(684,000ft
2
)
Office/Production/Warehouse
Media
Buildings (Multiple sites and sizes)
Office/Production/Transmitter/
Retail/Warehouse
Studio/CP/Media
Building (330,000 ft
2
)
Office/Retail
Corp/Studio/Media/CP
& Latin America
Buildings (Multiple sites and sizes)
Office/Retail/Warehouse
Corp/Studio/Media/CP
(1)
Corp Corporate, CP
Consumer Products and TP&R Theme Parks and
Resorts
Table of Contents
Table of Contents
ITEM 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Company
At September 30, 2004, the executive
officers of the Company were as follows:
Executive
Name
Age
Title
Officer Since
62
Chief Executive Officer
(1)
1984
53
President and Chief Operating
Officer
(2)
2000
43
Senior Executive Vice President and Chief
Financial Officer
1998
42
Senior Executive Vice President and Chief
Strategic Officer
1998
56
Senior Executive Vice President and General
Counsel
(3)
2003
-23-
(1) | Mr. Eisner also served as Chairman of the Board from 1984 through March 2004. |
(2) | Mr. Iger was appointed to his present position in January 2000, having served (from February 1999 until January 2000) as President of Walt Disney International and Chairman of the ABC Group. Mr. Iger previously held a number of increasingly responsible positions at ABC, Inc. and its predecessor Capital Cities/ ABC, Inc., culminating in service as President and Chief Operating Officer of ABC, Inc. from 1994 to 1999. |
(3) | Mr. Braverman was named Executive Vice President and General Counsel of the Company in January 2003 and promoted to Senior Executive Vice President and General Counsel of the Company in October 2003. Prior to his appointment as General Counsel of the Company, Mr. Braverman had been Executive or Senior Vice President and General Counsel of ABC, Inc. since August 1996 and also Deputy General Counsel of the Company since August 2001. |
-24-
PART II
ITEM 5. | Market for the Companys Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Companys common stock is listed on the
New York and Pacific stock exchanges under the ticker symbol
DIS. The following table shows, for the periods
indicated, the high and low sales prices per share of common
stock as reported in the Bloomberg Financial markets services.
Sales Price
High
Low
$
25.50
$
20.88
26.65
21.39
28.41
22.90
23.76
20.36
$
23.80
$
19.40
21.55
16.92
18.74
14.84
20.24
13.90
The Company declared a dividend of $0.24 per share on December 1, 2004 with respect to fiscal 2004, and a dividend of $0.21 per share on December 2, 2003, with respect to fiscal 2003.
As of September 30, 2004, the approximate number of common shareholders of record was 1,001,000.
The following table provides information about
Company purchases of equity securities that are registered by
the Company pursuant to Section 12 of the Exchange Act
during the quarter ended September 30, 2004:
Total Number of
Shares Purchased
as Part of
Maximum Number of
Total Number
Average Price
Publicly
Shares that May Yet Be
of Shares
Paid
Announced Plans
Purchased Under the
Period
Purchased
(1)
per Share
or Programs
(2)
Plans or Programs
(3)
171,227
$
23.83
330 million
5,813,774
$
21.82
5,655,000
324 million
9,427,164
$
22.86
9,280,100
315 million
15,412,165
$
22.48
14,935,100
315 million
(1) | 477,065 shares were purchased on the open market to provide shares to participants in the Walt Disney Investment Plan (WDIP) and Employee Stock Purchase Plan (ESPP). These purchases were not made pursuant to a publicly announced repurchase plan or program. |
(2) | During the fourth quarter of fiscal 2004, the Company repurchased 14,935,100 shares, including 1,350,0000 shares which were settled after September 30, 2004. |
(3) | Under a share repurchase program most recently reaffirmed by the Companys Board of Directors on April 21, 1998, and implemented effective June 10, 1998, the Company was authorized to repurchase up to 400 million shares of its common stock. The repurchase program does not have an expiration date. |
-25-
ITEM 6. Selected Financial Data
(In millions, except per share data)
2004
(1)
2003
(2)
2002
(3)
2001
(4)
2000
(5)
$
30,752
$
27,061
$
25,329
$
25,172
$
25,325
2,345
1,338
1,236
120
920
$
1.12
$
0.65
$
0.60
$
0.11
$
0.57
1.14
0.65
0.61
0.11
0.58
0.21
0.21
0.21
0.21
0.21
$
53,902
$
49,988
$
50,045
$
43,810
$
45,027
13,488
13,100
14,130
9,769
9,461
26,081
23,791
23,445
22,672
24,100
$
4,370
$
2,901
$
2,286
$
3,048
$
3,755
(1,484
)
(1,034
)
(3,176
)
(2,015
)
(1,091
)
(2,701
)
(1,523
)
1,511
(1,257
)
(2,236
)
(1) | During fiscal 2004, the Company adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R) and as a result, consolidated the balance sheets of Euro Disney and Hong Kong Disneyland as of March 31, 2004 and the income and cash flow statements beginning April 1, 2004, the beginning of the Companys fiscal third quarter. Under FIN 46R transition rules, Euro Disney and Hong Kong Disneylands operating results continued to be accounted for on the equity method for the six month period ended March 31, 2004. In addition, the 2004 results include a benefit from the settlement of certain tax issues of $120 million or $0.06 per diluted share, and restructuring and impairment charges totaling $64 million pre-tax or ($0.02) per diluted share. |
(2) | The 2003 results include the write-off of an aircraft leveraged lease investment with United Airlines of $114 million pre-tax and a benefit from the favorable settlement of certain state tax issues of $56 million. See Notes 4 and 7 to the Consolidated Financial Statements. These items had a ($0.04) and $0.03 impact on diluted earnings per share, respectively. The amounts do not reflect the cumulative effect of adopting EITF 00-21 which was a charge of $71 million or ($0.03) per diluted share. See Note 2 to the Consolidated Financial Statements. |
(3) | The 2002 results include a $216 million pre-tax gain on the sale of investments and a $34 million pre-tax gain on the sale of the Disney Stores in Japan. These items had a $0.06 and $0.01 impact on diluted earnings per share, respectively. See Notes 3 and 4 to the Consolidated Financial Statements. During fiscal 2002, the Company acquired Fox Family Worldwide, Inc. for $5.2 billion. See Note 3 to the Consolidated Financial Statements. Effective at the beginning of fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets and, accordingly, ceased amortization of goodwill and substantially all other intangible assets. |
(4) | The 2001 results include restructuring and impairment charges totaling $1.5 billion pre-tax. The charges were primarily related to the closure of GO.com, investment write downs and a work force reduction. The diluted earnings per share impact of these charges was ($0.52). The amounts do not reflect the cumulative effect of required accounting changes related to film and derivative |
-26-
accounting which were charges of $228 million and $50 million, respectively or ($0.11) and ($0.02) per diluted share, respectively. | |
(5) | The 2000 results include pre-tax gains of $243 million, $93 million and $153 million from the sale of Fairchild Publications, Eurosport and Ultraseek, respectively. The impact of income taxes substantially offset certain of the gains. The diluted earnings per share impacts of these items were $0.00, $0.02 and $0.01, respectively. The results also include a $92 million pre-tax restructuring and impairment charge. The diluted earnings per share impact of the charge was ($0.01). |
-27-
ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
CONSOLIDATED RESULTS
% change | |||||||||||||||||||||
|
|||||||||||||||||||||
2004 | 2003 | ||||||||||||||||||||
vs. | vs. | ||||||||||||||||||||
RESULTS OF OPERATIONS | 2004 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
|
|
|
|
|
|
||||||||||||||||
Revenues
|
$ | 30,752 | $ | 27,061 | $ | 25,329 | 14 | % | 7 | % | |||||||||||
Costs and expenses
|
(26,704 | ) | (24,348 | ) | (22,945 | ) | 10 | % | 6 | % | |||||||||||
Gain on sale of business
|
| 16 | 34 | nm | (53 | )% | |||||||||||||||
Net interest expense
|
(617 | ) | (793 | ) | (453 | ) | (22 | )% | 75 | % | |||||||||||
Equity in the income of investees
|
372 | 334 | 225 | 11 | % | 48 | % | ||||||||||||||
Restructuring and impairment charges
|
(64 | ) | (16 | ) | | nm | nm | ||||||||||||||
|
|
|
|||||||||||||||||||
Income before income taxes, minority interests
and the cumulative effect of accounting change
|
3,739 | 2,254 | 2,190 | 66 | % | 3 | % | ||||||||||||||
Income taxes
|
(1,197 | ) | (789 | ) | (853 | ) | 52 | % | (8 | )% | |||||||||||
Minority interests
|
(197 | ) | (127 | ) | (101 | ) | 55 | % | 26 | % | |||||||||||
|
|
|
|||||||||||||||||||
Income before the cumulative effect of accounting
change
|
2,345 | 1,338 | 1,236 | 75 | % | 8 | % | ||||||||||||||
Cumulative effect of accounting change
|
| (71 | ) | | nm | nm | |||||||||||||||
|
|
|
|||||||||||||||||||
Net income
|
$ | 2,345 | $ | 1,267 | $ | 1,236 | 85 | % | 3 | % | |||||||||||
|
|
|
|||||||||||||||||||
Earnings per share before the cumulative effect
of accounting change
|
|||||||||||||||||||||
Diluted
(1)
|
$ | 1.12 | $ | 0.65 | $ | 0.60 | 72 | % | 8 | % | |||||||||||
|
|
|
|||||||||||||||||||
Basic
|
$ | 1.14 | $ | 0.65 | $ | 0.61 | 75 | % | 7 | % | |||||||||||
|
|
|
|||||||||||||||||||
Cumulative effect of accounting change per share
|
$ | | $ | (0.03 | ) | $ | | nm | nm | ||||||||||||
|
|
|
|||||||||||||||||||
Earnings per share:
|
|||||||||||||||||||||
Diluted
(1)
|
$ | 1.12 | $ | 0.62 | $ | 0.60 | 81 | % | 3 | % | |||||||||||
|
|
|
|||||||||||||||||||
Basic
|
$ | 1.14 | $ | 0.62 | $ | 0.61 | 84 | % | 2 | % | |||||||||||
|
|
|
|||||||||||||||||||
Average number of common and common equivalent
shares outstanding:
|
|||||||||||||||||||||
Diluted
|
2,106 | 2,067 | 2,044 | ||||||||||||||||||
|
|
|
|||||||||||||||||||
Basic
|
2,049 | 2,043 | 2,040 | ||||||||||||||||||
|
|
|
(1) | The calculation of diluted earnings per share assumes the conversion of the Companys convertible senior notes issued in April 2003 into 45 million shares of common stock, and adds back related after-tax interest expense of $21 million and $10 million for fiscal years 2004 and 2003, respectively. |
-28-
Organization of Information
| Consolidated Results | |
| Business Segment Results 2004 vs. 2003 | |
| Corporate Items 2004 vs. 2003 | |
| Business Segment Results 2003 vs. 2002 | |
| Corporate Items 2003 vs. 2002 | |
| Stock Option Accounting | |
| Liquidity and Capital Resources | |
| Contractual Obligations, Commitments and Off Balance Sheet Arrangements | |
| Accounting Policies and Estimates | |
| Accounting Changes | |
| Forward-Looking Statements |
CONSOLIDATED RESULTS
2004 vs. 2003
Net income for the year was $2.3 billion, which was $1.1 billion higher than the prior year. The increase in net income for the year was primarily the result of improvements in segment operating income in all of the operating segments (see Business Segment Results below for further discussion). Diluted earnings per share for the year were $1.12, an increase of $0.47 compared to the prior-year earnings per share of $0.65 before the cumulative effect of an accounting change. Results for the year included a benefit in the fourth quarter from the settlement of certain income tax issues of $120 million ($0.06 per share) and restructuring and impairment charges totaling $64 million ($0.02 per share) in connection with the sale of the Disney Stores in North America, the majority of which were recorded in the third quarter.
Results for the prior year included a $114 million ($0.04 per share) write-off of an aircraft leveraged lease investment during the first quarter and the favorable settlement of certain income tax issues of $56 million ($0.03 per share) in the fourth quarter. Additionally, we made an accounting change effective as of the beginning of fiscal 2003 to adopt a new accounting rule for multiple element revenue accounting (EITF 00-21, see Note 2 to the Consolidated Financial Statements) which resulted in an after-tax charge of $71 million for the cumulative effect of the change. Diluted earnings per share including this cumulative effect were $0.62 for the prior year.
Cash flow from operations has allowed us to continue to make necessary capital investments in our properties and to reduce our borrowings, which in turn is reducing our interest expense. During the year, we generated cash flow from operations of $4.4 billion and had net repayment of borrowings of $2.2 billion. As a result of our adoption of FIN 46R, we consolidated the balance sheets of Euro Disney and Hong Kong Disneyland as of March 31, 2004 and added their borrowings ($2.2 billion for Euro Disney and $545 million for Hong Kong Disneyland as of September 30, 2004) to our balance sheet, as well as their assets and other liabilities. Accordingly, our total borrowings at September 30, 2004 increased to $13.5 billion. We also used cash flow from operations to repurchase $335 million of our common stock in the fourth quarter.
2003 vs. 2002
Income before the cumulative effect of an accounting change was $1.3 billion in fiscal 2003, which was $102 million, or 8%, higher than in fiscal 2002. This represented diluted earnings per share before the cumulative effect of accounting change of $0.65, which was $0.05 higher than in fiscal 2002. We made an accounting change effective as of the beginning of fiscal 2003 to adopt a new accounting rule
-29-
Results for 2003 also included a write-off of an
aircraft leveraged lease investment with United Airlines
($114 million pre-tax or $0.04 per share), a pre-tax gain
of $16 million on the sale of the Anaheim Angels and
restructuring and impairment charges of $16 million at The
Disney Store. Additionally, fiscal 2003 included a benefit from
the favorable settlement of certain state tax issues
($56 million or $0.03 per share). Results for fiscal 2002
included a pre-tax gain on the sale of shares of Knight-Ridder,
Inc. ($216 million or $0.06 per share) and a pre-tax gain
on the sale of the Disney Store business in Japan
($34 million or $0.01 per share).
BUSINESS SEGMENT RESULTS
% change
2004
2003
vs.
vs.
(in millions)
2004
2003
2002
2003
2002
$
11,778
$
10,941
$
9,733
8
%
12
%
7,750
6,412
6,465
21
%
(1
)%
8,713
7,364
6,691
18
%
10
%
2,511
2,344
2,440
7
%
(4
)%
$
30,752
$
27,061
$
25,329
14
%
7
%
$
2,169
$
1,213
$
986
79
%
23
%
1,123
957
1,169
17
%
(18
)%
662
620
273
7
%
nm
534
384
394
39
%
(3
)%
$
4,488
$
3,174
$
2,822
41
%
12
%
The Company evaluates the performance of its operating segments based on segment operating income and management uses aggregate segment operating income as a measure of the overall performance of the operating businesses. The Company believes that aggregate segment operating income assists investors by allowing them to evaluate changes in the operating results of the Companys portfolio of businesses separate from factors other than business operations that affect net
-30-
% change | ||||||||||||||||||||
|
||||||||||||||||||||
2004 | 2003 | |||||||||||||||||||
vs. | vs. | |||||||||||||||||||
(in millions) | 2004 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Segment operating income
|
$ | 4,488 | $ | 3,174 | $ | 2,822 | 41 | % | 12 | % | ||||||||||
Corporate and unallocated shared expenses
|
(428 | ) | (443 | ) | (417 | ) | (3 | )% | 6 | % | ||||||||||
Amortization of intangible assets
|
(12 | ) | (18 | ) | (21 | ) | (33 | )% | (14 | )% | ||||||||||
Gain on sale of business
|
| 16 | 34 | nm | (53 | )% | ||||||||||||||
Net interest expense
|
(617 | ) | (793 | ) | (453 | ) | (22 | )% | 75 | % | ||||||||||
Equity in the income of investees
|
372 | 334 | 225 | 11 | % | 48 | % | |||||||||||||
Restructuring and impairment charges
|
(64 | ) | (16 | ) | | nm | nm | |||||||||||||
|
|
|
||||||||||||||||||
Income before income taxes, minority interests
and the cumulative effect of accounting change
|
$ | 3,739 | $ | 2,254 | $ | 2,190 | 66 | % | 3 | % | ||||||||||
|
|
|
Depreciation expense is as follows:
(in millions) | 2004 | 2003 | 2002 | ||||||||||
|
|
|
|
||||||||||
Media Networks
|
$ | 172 | $ | 169 | $ | 180 | |||||||
Parks and Resorts
|
|||||||||||||
Domestic
|
710 | 681 | 648 | ||||||||||
International
(1)
|
95 | | | ||||||||||
Studio Entertainment
|
22 | 39 | 46 | ||||||||||
Consumer Products
|
44 | 63 | 58 | ||||||||||
|
|
|
|||||||||||
Segment depreciation expense
|
1,043 | 952 | 932 | ||||||||||
Corporate
|
155 | 107 | 89 | ||||||||||
|
|
|
|||||||||||
Total depreciation expense
|
$ | 1,198 | $ | 1,059 | $ | 1,021 | |||||||
|
|
|
(1) | Represents 100% of Euro Disney and Hong Kong Disneylands depreciation expense beginning April 1, 2004. |
Segment depreciation expense is included in segment operating income and corporate depreciation expense is included in corporate and unallocated shared expenses.
-31-
Media Networks
Media Networks 2004 vs.
2003
% change
2004
2003
vs.
vs.
(in millions)
2004
2003
2002
2003
2002
$
6,410
$
5,523
$
4,675
16
%
18
%
5,368
5,418
5,058
(1
)%
7
%
11,778
10,941
9,733
8
%
12
%
1,924
1,176
1,023
64
%
15
%
245
37
(37
)
nm
nm
$
2,169
$
1,213
$
986
79
%
23
%
Revenues
Increased Cable Networks revenues were driven by increases of $696 million in revenues from cable and satellite operators and $236 million in advertising revenues. Increased advertising revenue was primarily a result of the increases at ESPN due to higher advertising rates and at ABC Family due to higher ratings. Revenues from cable and satellite operators are largely derived from fees charged on a per subscriber basis, and the increases in the current year reflected both contractual rate adjustments and to a lesser extent subscriber growth. The Companys contractual arrangements with cable and satellite operators are renewed or renegotiated from time to time in the ordinary course of business. A significant number of these arrangements will be up for renewal in the next 12 months. Consolidation in the cable and satellite distribution industry and other factors may adversely affect the Companys ability to obtain and maintain contractual terms for the distribution of its various cable and satellite programming services that are as favorable as those currently in place. If this were to occur, revenues from Cable Networks could increase at slower rates than in the past or could be stable or decline.
Decreased Broadcasting revenues were driven primarily by a decrease of $147 million at the ABC Television Production and Distribution businesses partially offset by an increase of $63 million at the ABC Television Network. The decrease in television production and distribution revenues was primarily due to lower syndication revenue and license fees. The increase at the Network was driven by higher advertising revenues reflecting higher rates due to an improved advertising marketplace, partially offset by lower ratings and a decrease due to airing the Super Bowl in fiscal 2003.
Costs and Expenses
-32-
Lower programming costs at Broadcasting were driven by lower sports programming costs due primarily to the airing of the Super Bowl in the prior-year, lower license fees for primetime series and fewer primetime movies. Additionally, the prior year included higher news production costs due to the coverage of the military conflict in Iraq.
Higher programming costs at the Cable Networks were primarily due to higher rights and production costs at ESPN, partially offset by lower NFL amortization due to commencing the three year option period as described under Sports Programming Costs below. The decrease in bad debt expense at the Cable Networks reflected the favorable impact of a bankruptcy settlement with a cable operator in Latin America in the second quarter of the current year.
Segment Operating Income
Sports Programming Costs
Cost recognition for NFL programming at the ABC Television Network in fiscal 2004 decreased by $300 million as compared to fiscal 2003. The decrease at the ABC Television Network is primarily due to the absence of the Super Bowl, which was aired by the ABC Television Network in fiscal 2003, as well as fewer games in fiscal 2004. The absence of the Super Bowl and the lower number of games at the ABC Television Network also resulted in lower revenue from NFL broadcasts in fiscal 2004.
Due to the payment terms in the NFL contract, cash payments under the contract in fiscal 2004 totaled $1.2 billion as compared to $1.3 billion in fiscal 2003.
The Company has various contractual commitments for the purchase of television rights for sports and other programming, including the NFL, NBA, MLB, NHL and various college football conference and bowl games. The costs of these contracts have increased significantly in recent years. We enter into these contractual commitments with the expectation that, over the life of the contracts, revenue from advertising during the programming and affiliate fees will exceed the costs of the programming. While contract costs may initially exceed incremental revenues and negatively impact operating income, it is our expectation that the combined value to our sports networks from all of these contracts will result in long-term benefits. The actual impact of these contracts on the Companys results over the term of the contracts is dependent upon a number of factors, including the strength of advertising markets, effectiveness of marketing efforts and the size of viewer audiences.
-33-
MovieBeam
Parks and Resorts 2004 vs. 2003
Revenues
At the Walt Disney World Resort, increased revenues were primarily driven by higher theme park attendance, occupied room nights, and per capita spending at the theme parks, partially offset by lower per room guest spending at the hotels. Higher theme park attendance was driven by increased resident, domestic, and international guest visitation, reflecting the continued success of Mission: SPACE, Mickeys PhilharMagic and Disneys Pop Century Resort, and improvements in travel and tourism. Guest spending decreases at the hotels reflected a higher mix of hotel guest visitation at the lower priced value resorts.
At the Disneyland Resort, increased revenues were primarily due to higher guest spending at the theme parks and hotel properties.
Across our domestic theme parks, attendance
increased 7% and per capita guest spending increased 6% compared
to the prior year. Attendance and per capita guest spending at
the Walt Disney World Resort increased 10% and 4%, respectively.
Attendance at the Disneyland Resort remained flat while per
capita guest spending increased 7%. Operating statistics for our
hotel properties are as follows (unaudited):
West Coast
Resorts
East Coast
Total Domestic
Resorts
Resorts
Twelve
Months
Twelve
Ended
Twelve
Months Ended
September
Months Ended
September 30,
30,
September 30,
2004
2003
2004
2003
2004
2003
77
%
76
%
87
%
83
%
78
%
77
%
8,540
7,550
816
816
9,356
8,366
$
198
$
202
$
253
$
245
$
204
$
206
The increase in available room nights reflected the opening of the value priced Disneys Pop Century Resort in the first quarter of fiscal 2004. Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverages, and merchandise at the hotels. The
-34-
Costs and Expenses
Segment Operating Income
Studio Entertainment 2004 vs. 2003
Revenues
Higher worldwide home entertainment revenues reflected higher DVD unit sales in the current year, which included Disney/ Pixars Finding Nemo, Pirates of the Caribbean, The Lion King and Brother Bear compared to the prior year, which included Lilo & Stitch and Beauty and the Beast . Increased revenues in television distribution reflected higher pay television sales due to better performances of live-action titles. Worldwide theatrical motion picture distribution revenue decreases reflected the performance of current year titles, which included Home on the Range, The Alamo and King Arthur, which faced difficult comparisons to the strong performances of prior year titles, which included Finding Nemo (domestically) and Pirates of the Caribbean . Partially offsetting the decrease was the successful performance of Finding Nemo internationally in fiscal 2004.
Costs and Expenses
-35-
Segment Operating Income
Miramax
Consumer Products 2004 vs. 2003
Revenues
Higher merchandise licensing revenues were due to higher sales of hardlines, softlines and toys which were driven by the strong performance of Disney Princess and certain film properties. The increase at publishing primarily reflected the strong performance of Finding Nemo and other childrens books and W.I.T.C.H magazine and book titles across all regions.
Costs and Expenses
Segment Operating Income
Disney Stores
During the year, the Company recorded $64 million of restructuring and impairment charges related to The Disney Store. The bulk of the charge ($50 million) was an impairment of the carrying value of the fixed assets related to the stores to be sold which was recorded in the third quarter based on the terms of sale. Additional charges recorded during the year related to the closure of stores that would not be sold and to transaction costs related to the sale.
-36-
The Company will record additional charges for working capital and other adjustments related to the close of this transaction during the first quarter of fiscal 2005. Additional restructuring costs will also be recognized later in fiscal 2005. We expect that the total costs that will be recorded in fiscal 2005 will range from $40 million to $50 million.
The Company is currently considering options with respect to the stores in Europe, including a potential sale. The carrying value of the fixed and other long-term assets of the chain in Europe totaled $36 million at September 30, 2004. Depending on the terms of a sale, an impairment of these assets is possible. The base rent lease obligations for the chain in Europe totaled $206 million at September 30, 2004.
The following table provides supplemental
revenues and operating income detail for The Disney Stores:
% change
2004
2003
vs.
vs.
(in millions)
2004
2003
2002
2003
2002
$
628
$
644
$
721
(2
)%
(11
)%
326
278
261
17
%
7
%
23
27
123
(15
)%
(78
)%
$
977
$
949
$
1,105
3
%
(14
)%
$
6
$
(101
)
$
(37
)
nm
nm
17
14
22
21
%
(36
)%
11
4
22
nm
(82
)%
$
34
$
(83
)
$
7
nm
nm
CORPORATE ITEMS 2004 vs. 2003
Corporate and Unallocated Shared Expenses
2004 vs 2003
Corporate and unallocated shared expenses
decreased 3% for the year to $428 million. The current year
reflected the favorable resolution of certain legal matters,
partially offset by higher legal and other administrative costs.
Net Interest Expense
Net interest expense is detailed below:
% change
2004
2003
vs.
vs.
(in millions)
2004
2003
2002
2003
2002
$
(629
)
$
(666
)
$
(708
)
(6
)%
(6
)%
(16
)
(114
)
(86
)%
nm
28
(13
)
255
nm
nm
$
(617
)
$
(793
)
$
(453
)
(22
)%
75
%
-37-
2004 vs 2003
Excluding an increase of $51 million due to the consolidation of Euro Disney and Hong Kong Disneyland for the year, interest expense decreased $88 million (or 13%) for the year. Lower interest expense for the year was primarily due to lower average debt balances.
Interest and investment income (loss) was income of $28 million compared to a loss of $13 million in the prior year. The current year reflected higher interest income while the prior year period included a loss on the early repayment of certain borrowings.
Equity in the Income of Investees
2004 vs 2003
The increase in equity in the income of our investees reflected increases at Lifetime Television, due to lower programming and marketing expenses, as well as increases at A&E and E! Entertainment due to higher advertising revenues.
Effective Income Tax Rate
2004 vs 2003
The effective income tax rate decreased from 35.0% in fiscal 2003 to 32.0% in fiscal 2004. The decrease in the fiscal 2004 effective income tax rate is primarily due to tax reserve adjustments including a $120 million reserve release as a result of the favorable resolution of certain federal income tax issues. As more fully disclosed in Note 7 to the Consolidated Financial Statements, the fiscal 2004 effective income tax rate reflects a $97 million benefit for certain income exclusions provided for under U.S. income tax laws. As discussed in Note 7 to the Consolidated Financial Statements, this exclusion has been repealed and will be phased out commencing fiscal 2005.
Pension and Benefit Costs
Increasing pension and post-retirement medical benefit plan costs have affected results in all of our segments, with the majority of these costs being borne by the Parks and Resorts segment. The costs increased from $131 million in fiscal 2003 to $374 million in fiscal 2004. The increase in fiscal 2004 was due primarily to decreases in the discount rate to measure the present value of plan obligations, the expected return on plan assets and the actual performance of plan assets. The discount rate assumption decreased from 7.20% to 5.85% reflecting the decline in overall market interest rates and the expected return on plan assets was reduced from 8.5% to 7.5% reflecting trends in the overall financial markets.
We expect pension and post-retirement medical costs to decrease in fiscal 2005 to $315 million. The decrease is due primarily to an increase in the discount rate assumption from 5.85% to 6.30%, reflecting increases in prevailing market interest rates.
Cash contributions to the plans are expected to decrease in fiscal 2005 to approximately $165 million from $173 million in fiscal 2004.
Due to plan asset performance and an increase in the present value of pension obligations, pension obligations exceed plan assets for certain of our pension plans. In this situation, the
-38-
Minimum Liability | ||||||||||||
at September 30, | ||||||||||||
|
Decreased Liability | |||||||||||
2004 | 2003 | in 2004 | ||||||||||
|
|
|
||||||||||
Pretax
|
$ | 415 | $ | 969 | $ | (554 | ) | |||||
Aftertax
|
$ | 261 | $ | 608 | $ | (347 | ) |
The decrease in the additional minimum pension liability in fiscal 2004 was due to the increase in the discount rate from 5.85% to 6.30% and improved plan asset performance. The accounting rules do not require that changes in the additional minimum pension liability adjustment be recorded in current period earnings but rather are to be recorded directly to equity through accumulated other comprehensive income. Expense recognition under the pension accounting rules is based upon long-term trends over the expected life of the Companys workforce. See Note 8 to the Consolidated Financial Statements for further discussion.
BUSINESS SEGMENT RESULTS 2003 vs. 2002
Media Networks 2003 vs. 2002
Revenues
Increased Cable Networks revenues were driven by increases of $455 million in revenues from cable and satellite operators and $385 million in advertising revenues. Increased advertising revenue was primarily a result of the addition of NBA games. Revenues from cable and satellite operators increased due to contractual rate adjustments and subscriber growth.
Increased Broadcasting revenues were driven primarily by an increase of $196 million at the ABC Television Network, $60 million at the Companys owned and operated television stations and $33 million at the radio networks and stations. The increases at the television network and stations were primarily driven by higher advertising revenues reflecting higher rates due to an improved advertising marketplace. The airing of the Super Bowl in the second quarter of fiscal 2003 also contributed to increased advertising revenues. Revenues at the radio networks and stations also increased due to the stronger advertising market.
Costs and Expenses
Higher programming and production costs at the ABC Television Network were primarily due to the airing of the Super Bowl and the costs of coverage of the war in Iraq. Higher programming costs at the Cable Networks were primarily due to NBA and MLB telecasts and higher programming costs at ABC Family. Programming cost increases were partially offset by lower cost amortization for the NFL contract due to commencing the three year option period as described under Sports Programming Costs above. The decrease in bad debt expense at Cable Networks reflected negative impacts in fiscal 2002 related to financial difficulties of Adelphia Communications Company in the United States and KirchMedia & Company in Germany.
-39-
Segment Operating Income
Parks and Resorts 2003 vs. 2002
Revenues
Revenues at the Walt Disney World Resort were down marginally, reflecting lower theme park attendance and hotel occupancy, partially offset by increased per capita guest spending at the theme parks and hotel properties. Decreased theme park attendance and hotel occupancy at the Walt Disney World Resort reflected continued softness in travel and tourism. Guest spending increases reflected ticket price increases during fiscal 2003.
At the Disneyland Resort, increased revenues were driven by higher theme park attendance and hotel occupancy. These increases were due primarily to the success of certain promotional programs offered during fiscal 2003, as well as the opening of new attractions and entertainment venues at Disneyland Park and Disneys California Adventure during fiscal 2003.
Costs and Expenses
Segment Operating Income
Studio Entertainment 2003 vs. 2002
Revenues
The worldwide theatrical motion picture distribution revenue increase reflected the strong performance of Pirates of the Caribbean, Finding Nemo, Chicago, Santa Clause 2 , Bringing Down the House and Bruce Almighty, which the Company distributed internationally, compared to fiscal 2002, which included Disney/ Pixars Monsters, Inc. , Signs and Lilo & Stitch . Worldwide home video
-40-
Costs and Expenses
Segment Operating Income
Consumer Products 2003 vs. 2002
Revenues
The decline at the Disney Store is due primarily to the sale of the Disney Store business in Japan in fiscal 2002, as well as lower comparative store sales and fewer stores in North America. The increase in merchandise licensing primarily reflected higher revenues from toy licensees, due in part to higher contractually guaranteed minimum royalties in North America, strong performance across Europe and increased royalties from direct-to-retail licenses. Higher publishing revenues were driven by increases in Europe, reflecting the strong performance of the Topolino, W.I.T.C.H. and Art Attack titles.
Costs and Expenses
Segment Operating Income
-41-
CORPORATE ITEMS 2003 vs. 2002
Corporate and Unallocated Shared Expenses
2003 vs 2002
Corporate and unallocated shared expenses increased in fiscal 2003 reflecting additional costs associated with new finance and human resource information technology systems, partially offset by lower brand promotion and litigation costs. Fiscal 2002 also included gains on the sale of properties in the U.K.
Net Interest Expense
2003 vs 2002
Lower interest expense in fiscal year 2003 was primarily due to lower interest rates and average debt balances.
Interest and investment income (loss) in fiscal year 2003 included the $114 million write-off of our leveraged lease investment with United Airlines referred to above. Fiscal 2002 included a $216 million gain on the sale of shares of Knight-Ridder, Inc.
Equity in the Income of Investees
2003 vs 2002
Higher equity in the income of our investees reflected increases at Lifetime Television, due to lower advertising expenses, as well as increases at A&E and E! Entertainment due to higher advertising revenues. In addition, in fiscal year 2002 a write-down of an investment in a Latin American cable operator negatively affected equity income.
Effective Income Tax Rate
2003 vs 2002
The effective income tax rate decreased from 38.9% in fiscal 2002 to 35.0% in fiscal 2003. The decrease in the fiscal 2003 effective income tax rate is primarily due to a $56 million reserve release as a result of the favorable resolution of certain state income tax exposures.
STOCK OPTION ACCOUNTING
The Company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for the fair value of its stock-based awards to employees in its Consolidated Statements of Income.
The following table reflects pro forma net income
and earnings per share had the Company elected to record an
expense for the fair value of employee stock options.
Year Ended
September 30,
(in millions, except for per share data)
2004
2003
2002
$
2,345
$
1,267
$
1,236
2,090
973
930
1.12
0.62
0.60
1.00
0.48
0.45
-42-
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.
Fully diluted shares outstanding and diluted earnings per share include the effect of in-the-money stock options calculated based on the average share price for the period and assumes
-43-
Average | Total | Percentage of | Hypothetical | |||||||||||||||
Disney | In-the-Money | Incremental | Average Shares | FY 2004 EPS | ||||||||||||||
Share Price | Options | Diluted Shares (1) | Outstanding | Impact (3) | ||||||||||||||
|
|
|
|
|
||||||||||||||
$ | 23.72 | 106 million |
|
(2) | | $ | 0.00 | |||||||||||
25.00 | 134 million | 3 million | 0.14 | % | (0.00 | ) | ||||||||||||
30.00 | 160 million | 17 million | 0.81 | % | (0.01 | ) | ||||||||||||
40.00 | 221 million | 43 million | 2.04 | % | (0.02 | ) | ||||||||||||
50.00 | 230 million | 59 million | 2.80 | % | (0.03 | ) |
(1) | Represents the incremental impact on fully diluted shares outstanding assuming the average share prices indicated, using the treasury stock method. Under the treasury stock method, the tax effected proceeds that would be received from the exercise of all in-the-money options are assumed to be used to repurchase shares. |
(2) | Fully diluted shares outstanding for the year ended September 30, 2004 total 2,106 million and include the dilutive impact of in-the-money options at the average share price for the period of $23.72 and the assumed conversion of the convertible senior notes. At the average share price of $23.72, the dilutive impact of in-the-money options was 12 million shares for the year. |
(3) | Based upon fiscal 2004 earnings of $2,345 million or $1.12 per share. |
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by
$459 million during the year ended September 30, 2004.
The change in cash and cash equivalents is as follows:
Year Ended September 30,
(in millions)
2004
2003
2002
$
4,370
$
2,901
$
2,286
(1,484
)
(1,034
)
(3,176
)
(2,701
)
(1,523
)
1,511
185
344
621
274
$
459
$
344
$
621
(1) | Amount represents the cash balances of Euro Disney and Hong Kong Disneyland on March 31, 2004 when they were initially consolidated pursuant to FIN 46R. As previously discussed the Company adopted FIN 46R, and as a result, began consolidating the balance sheets of Euro Disney and Hong Kong Disneyland as of March 31, 2004, and the income and cash flow statements beginning April 1, 2004. |
Operating Activities
Investing Activities
-43-
Investments in Parks, Resorts and Other Properties
Year Ended September 30, | |||||||||||||
|
|||||||||||||
(in millions) | 2004 | 2003 | 2002 | ||||||||||
|
|
|
|
||||||||||
Media Networks
|
$ | 221 | $ | 203 | $ | 151 | |||||||
Parks and Resorts:
|
|||||||||||||
Domestic
|
719 | 577 | 636 | ||||||||||
International
(1)
|
289 | | | ||||||||||
Studio Entertainment
|
39 | 49 | 37 | ||||||||||
Consumer Products
|
14 | 44 | 58 | ||||||||||
Corporate and unallocated shared expenditures
|
145 | 176 | 204 | ||||||||||
|
|
|
|||||||||||
$ | 1,427 | $ | 1,049 | $ | 1,086 | ||||||||
|
|
|
(1) | Represents 100% of Euro Disney and Hong Kong Disneylands capital expenditures beginning April 1, 2004. |
Capital expenditures for the Parks and Resorts segment are principally for theme park and resort expansion, new rides and attractions and recurring capital and capital improvements. The increase in domestic park spending in fiscal 2004 as compared to fiscal 2003 was primarily due to spending in anticipation of the 50th Anniversary Celebration which includes new attractions at Walt Disney World and Disneyland. The decrease in fiscal 2003 as compared to fiscal 2002 was primarily due to the completion in fiscal 2002 of a new resort facility at Walt Disney World. The international park spending in fiscal 2004, representing six months of Euro Disney and Hong Kong Disneyland capital expenditures following the implementation of FIN 46R, primarily relates to Hong Kong Disneyland construction. Our minority partner contributed $66 million which is included in financing activities.
Capital spending will increase in fiscal 2005 due to including a full year of spending for Euro Disney and Hong Kong Disneyland as a result of FIN 46, and to a lesser extent, due to higher domestic theme park spending.
Capital expenditures at Media Networks primarily reflect investments in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities.
Corporate and unallocated capital expenditures were primarily for information technology software and hardware.
Other Investing Activities
During fiscal 2003, the Company invested $130 million primarily for the acquisition of a radio station. The Company also made equity contributions to Hong Kong Disneyland totaling $47 million and received proceeds of $166 million from the sale of the Angels and certain utility infrastructure at Walt Disney World.
During fiscal 2002, the Company acquired ABC Family for $5.2 billion, which was funded with $2.9 billion of new long-term borrowings, plus the assumption of $2.3 billion of borrowings.
-44-
During fiscal 2002, the Company received proceeds totaling $601 million from the sale of investments, primarily the remaining shares of Knight-Ridder, Inc., which the Company had received in connection with the disposition of certain publishing assets in fiscal 1997. Additionally, the Company received aggregate proceeds of $200 million from the sale of the Disney Store business in Japan and the sale of certain real estate properties in the U.K. and Florida.
Financing Activities
During the year, the Companys borrowing
activity, including activity for Euro Disney and Hong Kong
Disneyland commencing on April 1, 2004, was as follows:
(in millions)
Additions
Payments
Total
$
100
$
$
100
(1,886
)
(1,886
)
(420
)
(420
)
(89
)
(89
)
13
(50
)
(37
)
$
113
$
(2,445
)
$
(2,332
)
2
(34
)
(32
)
161
161
$
276
$
(2,479
)
$
(2,203
)
See Note 6 to the Consolidated Financial Statements for more detailed information regarding the Companys borrowings.
At September 30, 2004, total committed
borrowing capacity, capacity used and unused borrowing capacity
were as follows:
Committed
Capacity
Unused
(in millions)
Capacity
Used
Capacity
$
2,250
$
$
2,250
2,250
205
2,045
$
4,500
$
205
$
4,295
(1) | These bank facilities allow for borrowings at LIBOR-based rates plus a spread, which depends on the Companys public debt rating and can range from 0.175% to 0.575%. As of September 30, 2004, the Company had not borrowed under these bank facilities. Our bank facilities were renewed on February 25, 2004 on substantially the same terms as our previous facilities. |
(2) | The Company also has the ability to issue up to $500 million of letters of credit under this facility, which if utilized, reduces available borrowing. As of September 30, 2004, $205 million of letters of credit had been issued under this facility. |
The Company expects to use commercial paper borrowings up to the amount of its above unused bank facilities, in conjunction with term debt issuance and operating cash flow, to retire or refinance other borrowings before or as they come due.
The Company has filed a U.S. shelf registration statement which allows the Company to borrow up to $7.5 billion of which $1.8 billion was available at September 30, 2004. The Company also has a
-45-
The Company declared an annual dividend of $0.24 per share on December 1, 2004 related to fiscal 2004. The dividend is payable on January 6, 2005 to shareholders of record on December 10, 2004. The Company paid a $430 million dividend ($0.21 per share) related to fiscal 2003 on January 6, 2004 to shareholders of record on December 12, 2003. The Company paid a $429 million dividend ($0.21 per share) during the first quarter of fiscal 2003 applicable to fiscal 2002 and paid a $428 million dividend ($0.21 per share) during the first quarter of fiscal 2002 applicable to fiscal 2001.
During the fourth quarter of fiscal 2004, the Company repurchased 14.9 million shares of Disney common stock for approximately $335 million. No shares of Disney common stock were repurchased during fiscal 2003 and fiscal 2002. As of September 30, 2004, the Company was authorized to repurchase up to approximately 315 million shares of Company common stock.
Euro Disney is currently in the process of a financial restructuring, that if completed, will result in a refinancing of its debt. See Note 4 to the Consolidated Financial Statements for further details on the terms of the restructuring.
We believe that the Companys financial condition is strong and that its cash balances, other liquid assets, operating cash flows, access to debt and 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. However, the Companys operating cash flow and access to the capital markets can be impacted by macroeconomic factors outside of its control. In addition to macroeconomic factors, the Companys borrowing costs can be impacted by short and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on the Companys performance as measured by certain credit measures such as interest coverage and leverage ratios. As of September 30, 2004, Moodys Investors Services long and short-term debt ratings for the Company were Baal and P-2, respectively, with stable outlook; and Standard & Poors long and short-term debt ratings for the Company were BBB+ and A-2, respectively, with stable outlook. The Companys bank facilities contain only one financial covenant, relating to interest coverage, which the Company met on September 30, 2004, by a significant margin. The Companys bank facilities also specifically exclude certain entities, including Euro Disney and Hong Kong Disneyland, from any representations, covenants or events of default.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
The Company has various contractual obligations which are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, the Company is contractually committed to acquire broadcast programming and make certain minimum lease payments for the use of property under operating lease agreements.
-46-
The following table summarizes our significant
contractual obligations and commercial commitments at
September 30, 2004 and the future periods in which such
obligations are expected to be settled in cash. In addition, the
table reflects the timing of principal payments on outstanding
borrowings. Additional details regarding these obligations are
provided in footnotes to the financial statements, as referenced
in the table:
Payments Due by Period
Less than
1-3
4-5
More than
(in millions)
Total
1 Year
Years
Years
5 Years
$
19,729
$
2,411
$
4,386
$
1,477
$
11,455
2,172
306
524
410
932
885
40
120
77
648
6,513
2,612
2,918
810
173
3,087
1,510
770
574
233
9,600
4,122
3,688
1,384
406
2,100
1,069
735
226
70
$
34,486
$
7,948
$
9,453
$
3,574
$
13,511
(1) | Amounts exclude market value adjustments totaling $369 million. Maturities of Euro Disneys borrowings are included based on the contractual terms. Amounts include interest payments based on contractual terms. |
(2) | Other commitments primarily comprise creative talent and employment agreements including obligations to actors, producers, sports personnel, executives and television and radio personalities. Amounts also include capital expenditure commitments at Hong Kong Disneyland and other commitments, such as computer hardware maintenance commitments, vendor commitments and minimum print and advertising commitments. |
(3) | Comprised of the following: |
Liabilities recorded on the balance sheet
|
$ | 14,329 | ||
Commitments not recorded on the balance sheet
|
20,157 | |||
|
||||
$ | 34,486 | |||
|
The Company also has obligations with respect to its pension and post-retirement medical benefit plans. See Note 8 to the Consolidated Financial Statements.
Contingent Commitments and Contingencies |
Contractual Guarantees |
-47-
Euro Disney |
Aircraft Leveraged Lease Investment |
Legal and Tax Matters |
ACCOUNTING POLICIES AND ESTIMATES
We believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements.
Film and Television Revenues and Costs |
For film productions, estimated remaining gross revenue from all sources includes revenue that will be earned within ten years of the date of the initial theatrical release. For television series, we include revenues that will be earned within 10 years of the delivery of the first episode, or if still in production, five years from the date of delivery of the most recent episode. For acquired film libraries, remaining revenues include amounts to be earned for up to 20 years from the date of acquisition.
Television network and station rights for theatrical movies, series and other programs are charged to expense based on the number of times the program is expected to be shown. Estimates of usage of television network and station programming can change based on competition and audience acceptance. Accordingly, revenue estimates and planned usage are reviewed periodically and are revised if necessary. A change in revenue projections or planned usage could have an impact on our results of operations.
-48-
Costs of film and television productions and programming costs for our television and cable networks are subject to valuation adjustments pursuant to applicable accounting rules. The net realizable value of the television broadcast program licenses and rights are reviewed using a daypart methodology. The Companys dayparts are: early morning, daytime, late night, primetime, news, children and sports (includes network and cable). A daypart is defined as an aggregation of programs broadcast during a particular time of day or programs of a similar type. The net realizable values of other cable programming are reviewed on an aggregated basis for each cable channel. Estimated values are based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than our projections, film and television programming asset write-downs may be required.
Revenue Recognition |
We record reductions to revenues for estimated future returns of merchandise, primarily home video, DVD and software products, and for customer programs and sales incentives. These estimates are based upon historical return experience, current economic trends and projections of customer demand for and acceptance of our products. If we underestimate the level of returns in a particular period, we may record less revenue in later periods when returns exceed the predicted amount. Conversely, if we overestimate the level of returns for a period, we may have additional revenue in later periods when returns are less than predicted.
Pension and Postretirement Benefit Plan Actuarial Assumptions |
The discount rate enables us to state expected future benefit payments as a present value on the measurement date. The guideline for setting this rate is a high-quality long-term corporate bond rate. A lower discount rate increases the present value of benefit obligations and increases pension expense. We increased our discount rate to 6.30% in 2004 from 5.85% in 2003 to reflect market interest rate conditions. A one percentage point decrease in the assumed discount rate would increase annual expense and the projected benefit obligation by $31 million and $620 million, respectively. A one percentage point increase in the assumed discount rate would decrease annual expense and projected benefit obligations by $29 million and $515 million, respectively.
To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on pension plan assets will increase pension expense. Our long-term expected return on plan assets was 7.50% in both 2004 and 2003, respectively. A one percentage point change in the long-term return on pension plan asset assumption would impact annual pension expense by approximately $29 million. See Note 8 to the Consolidated Financial Statements.
Goodwill, Intangible Assets, Long-lived Assets and Investments |
-49-
For purposes of performing the impairment test for goodwill as required by SFAS 142 we established the following reporting units: Cable Networks, Television Broadcasting, Radio, Studio Entertainment, Consumer Products and Parks and Resorts.
SFAS 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.
SFAS 142 requires the Company to compare the fair value of an indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values for goodwill and other indefinite-lived intangible assets are determined based on discounted cash flows, market multiples or appraised values as appropriate.
To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flow) corroborated by market multiples when available and as appropriate, for all of the reporting units except for the Television Network which is included in the Television Broadcasting Group. The Television Broadcasting reporting unit includes the Television Network and the owned and operated television stations. These businesses have been grouped together because their respective cash flows are dependent on one another. For purposes of our impairment test, we used a revenue multiple to value the Television Network. We did not use a present value technique or a market multiple approach to value the Television Network as a present value technique would not capture the full fair value of the Television Network and there is little comparable market data available due to the scarcity of television networks. We applied what we believe to be the most appropriate valuation methodology for each of the reporting units. If we had established different reporting units or utilized different valuation methodologies, the impairment test results could differ.
Long-lived assets include certain long-term investments. The fair value of the long-term investments is dependent on the performance of the investee companies, as well as volatility inherent in the external markets for these investments. In assessing potential impairment for these investments, we consider these factors as well as forecasted financial performance of our investees. If these forecasts are not met, impairment charges may be required.
Contingencies and Litigation |
Income Tax Audits |
-50-
ACCOUNTING CHANGES
FIN 46R |
The Company has minority equity interests in certain entities, including Euro Disney S.C.A. (Euro Disney) and Hongkong International Theme Parks Limited (Hong Kong Disneyland). In connection with the adoption of FIN 46R, the Company concluded that Euro Disney and Hong Kong Disneyland are VIEs and that we are the primary beneficiary. Pursuant to the transition provisions of FIN 46R, the Company began consolidating Euro Disney and Hong Kong Disneylands balance sheets on March 31, 2004, the end of the Companys second quarter of fiscal year 2004 and the income and cash flow statements beginning April 1, 2004, the beginning of the third quarter of fiscal year 2004. Under FIN 46R transition rules, the operating results of Euro Disney and Hong Kong Disneyland continued to be accounted for on the equity method for the six month period ended March 31, 2004.
We have concluded that the rest of our equity investments do not require consolidation as either they are not VIEs, or in the event that they are VIEs, we are not the primary beneficiary. The Company also has variable interests in certain other VIEs that will not be consolidated because the Company is not the primary beneficiary. These VIEs do not involve any material exposure to the Company.
-51-
The following table presents the condensed
consolidating balance sheet of the Company, reflecting the
impact of consolidating the balance sheets of Euro Disney and
Hong Kong Disneyland as of September 30, 2004.
Before Euro
Disney and Hong
Euro Disney, Hong
Kong Disneyland
Kong Disneyland
Consolidation
and Adjustments
Total
$
1,730
$
312
$
2,042
7,103
224
7,327
8,833
536
9,369
1,991
(699
)
1,292
12,529
3,953
16,482
2,815
2,815
16,966
16,966
6,843
135
6,978
$
49,977
$
3,925
$
53,902
$
1,872
$
2,221
$
4,093
6,349
617
6,966
8,221
2,838
11,059
8,850
545
9,395
2,950
2,950
3,394
225
3,619
487
311
798
26,075
6
26,081
$
49,977
$
3,925
$
53,902
(1) | All of Euro Disneys borrowings of $2.2 billion are classified as current as they are subject to acceleration if certain requirements of the Memorandum of Agreement (MOA) are not achieved as part of the current restructuring process (see Note 4 to the Consolidated Financial Statements). |
The following table presents the condensed
consolidating income statement of the Company for the year ended
September 30, 2004, reflecting the impact of consolidating
the income statements of Euro Disney and Hong Kong Disneyland
beginning April 1, 2004
(1)
.
Before Euro
Disney and Hong
Euro Disney, Hong
Kong Disneyland
Kong Disneyland and
Consolidation
Adjustments
Total
$
30,037
$
715
$
30,752
(26,053
)
(651
)
(26,704
)
(64
)
(64
)
(575
)
(42
)
(617
)
398
(26
)
372
3,743
(4
)
3,739
(1,199
)
2
(1,197
)
(199
)
2
(197
)
$
2,345
$
$
2,345
-52-
(1) | As discussed above, under FIN 46R transition rules, the operating results of Euro Disney and Hong Kong Disneyland continued to be accounted for on the equity method for the six month period ended March 31, 2004. |
The following table presents the condensed
consolidating cash flow statement of the Company for the year
ended September 30, 2004, reflecting the impact of
consolidating the cash flow statements of Euro Disney and Hong
Kong Disneyland beginning April 1, 2004.
Before Euro
Disney and Hong
Euro Disney, Hong
Kong Disneyland
Kong Disneyland
Consolidation
and Adjustments
(1)
Total
$
4,283
$
87
$
4,370
(1,138
)
(289
)
(1,427
)
3,145
(202
)
2,943
(107
)
50
(57
)
(2,891
)
190
(2,701
)
147
38
185
1,583
274
1,857
$
1,730
$
312
$
2,042
(1) | Includes cash flows of Euro Disney and Hong Kong Disneyland for the six months ended September 30, 2004. |
FSP 106-2
EITF 00-21
Under EITF 00-21s requirements for separating the revenue elements of a single contract, the Company no longer allocates ESPNs affiliate revenue between NFL and non-NFL programming for accounting purposes. As a consequence, the Company no longer matches all NFL revenue with NFL costs as ESPN affiliate revenue (including the NFL portion) is generally recognized ratably throughout the year, while NFL contract costs continue to be recognized in the quarters the games are aired. This accounting change impacts only the timing of revenue recognition and has no impact on cash flow. As a result of this change, the Media Networks segment reports significantly reduced revenue
-53-
The Company elected to adopt this new accounting rule using the cumulative effect approach. In the fiscal fourth quarter of 2003, the Company recorded an after-tax charge of $71 million for the cumulative effect of a change in accounting as of the beginning of fiscal year 2003. This amount represented the revenue recorded for NFL games in the fourth quarter of fiscal year 2002, which would have been recorded ratably over fiscal 2003 under the new accounting method.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. We may from time to time make written or oral statements that are forward-looking, including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our shareholders. Such statements may, for example, express expectations or projections about future actions that we may take, including restructuring or strategic initiatives or about developments beyond our control including changes in domestic or global economic conditions. These statements are made on the basis of managements views and assumptions as of the time the statements are made and we undertake no obligation to update these statements. There can be no assurance, however, that our expectations will necessarily come to pass.
Factors that may affect forward-looking statements. For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance. Significant factors affecting specific business operations are identified in connection with the description of these operations and the financial results of these operations elsewhere in this report. General factors affecting our operations include:
Changes in Company-wide or business-unit strategies, which may result in changes in the types or mix of businesses in which the Company is involved or will invest; | |
Changes in U.S., global or regional economic conditions, which may affect attendance and spending at the Companys parks and resorts, purchases of Company-licensed consumer products, the advertising market for broadcast and cable television programming and the performance of the Companys theatrical and home entertainment releases; | |
Changes in U.S. and global financial and equity markets, including market disruptions and significant interest rate fluctuations, which may impede the Companys access to, or increase the cost of, external financing for its operations and investments; | |
Changes in cost of providing pension and other postretirement medical benefits, including changes in health care costs, investment returns on plan assets, and discount rates used to calculate pension and related liabilities; | |
Increased competitive pressures, both domestically and internationally, which may, among other things, affect the performance of the Companys parks and resorts operations, divert consumers from our creative or other products, or to other products or other forms of entertainment, or lead to increased expenses in such areas as television programming acquisition and motion picture production and marketing; | |
Legal and regulatory developments that may affect particular business units, such as regulatory actions affecting environmental activities, consumer products, theme park safety, broadcasting or Internet activities or the protection of intellectual property; the imposition by foreign countries of trade restrictions or motion picture or television content requirements or quotas, and changes in domestic or international tax laws or currency controls; |
-54-
Adverse weather conditions or natural disasters, such as hurricanes and earthquakes, which may, among other things, affect performance at the Companys parks and resorts; | |
Technological developments that may affect the distribution of the Companys creative products or create new risks to the Companys ability to protect its intellectual property; | |
Labor disputes, which may lead to increased costs or disruption of operations in any of the Companys business units; | |
Changing public and consumer tastes and preferences, which may, among other things, affect the Companys entertainment, broadcasting and consumer products businesses generally or the Companys parks and resorts operations specifically, or result in lower broadcasting ratings or loss of advertising revenue; | |
Changes in or termination of long-term contracts for the acquisition or distribution of media programming or products, which may impact the availability of programming or product, the cost of acquired content, the ability to distribute content, or the revenue recognized from the distribution of content; and | |
International, political, health concerns and military developments that may affect among other things, travel and leisure businesses generally or the Companys parks and resorts operations specifically, or result in increases in broadcasting costs or loss of advertising revenue. |
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The Company is exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market values of its investments.
Policies and Procedures
Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to the Companys portfolio of borrowings. By policy, the Company maintains fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage.
Our objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility in order to allow management to focus on core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency assets, liabilities, commitments and forecasted foreign currency revenues. The Company utilizes option strategies and forward contracts that provide for the sale of foreign currencies to hedge probable, but not firmly committed, transactions. The Company also uses forward contracts to hedge foreign currency assets and liabilities. The principal foreign currencies hedged are the Euro, British pound, Japanese yen and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings to U.S. dollar denominated borrowings. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its forecasted foreign exchange exposures generally for periods not to exceed five years. The gains and losses on these contracts offset changes in the value of the related exposures.
-55-
It is the Companys policy to enter into foreign currency and interest rate derivative transactions and other financial instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions for speculative purposes.
Value at Risk (VAR)
The VAR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market factors.
VAR on a combined basis decreased from $51 million at September 30, 2003 to $31 million at September 30, 2004. The majority of the decrease is due to increased correlation benefits and lower market value of interest rate sensitive instruments.
The estimated maximum potential one-day loss in
fair value, calculated using the VAR model, is as follows
(unaudited, in millions):
Interest Rate
Currency
Sensitive
Sensitive
Equity Sensitive
Financial
Financial
Financial
Combined
(in millions)
Instruments
Instruments
Instruments
Portfolio
$
33
$
17
$
0
$
31
$
38
$
19
$
1
$
39
$
45
$
27
$
1
$
48
$
33
$
12
$
0
$
31
$
57
$
18
$
1
$
51
The VAR for Euro Disney and Hong Kong Disneyland is immaterial as of September 30, 2004. In calculating the VAR it was determined that credit risks are the primary driver for changes in the value of Euro Disneys debt rather than interest rate risks. Accordingly, we have excluded Euro Disneys borrowings from the VAR calculation.
ITEM 8. | Financial Statements and Supplementary Data |
See Index to Financial Statements and Supplemental Data on page 64.
-56-
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
ITEM 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Companys financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of September 30, 2004, the principal executive officer and principal financial officer of the Company have concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control Integrated Framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2004. Our managements assessment of the effectiveness of our internal control over financial reporting as of September 30, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Controls In fiscal 2002, the Company initiated a company-wide implementation of new integrated finance and human resources applications software, related information technology systems, and enterprise-wide shared services (the new systems). As of September 30, 2003, a substantial number of the Companys business units were using the new systems and as of September 30, 2004, substantially all of the Companys businesses are using the new systems. The implementation has involved changes in systems that included internal controls, and accordingly, these changes have required changes to our system of internal controls. We have reviewed each system as it is being implemented and the controls affected by the implementation of the new systems and made appropriate changes to affected internal controls as we implemented the new systems. We believe that the controls as modified are appropriate and functioning effectively.
ITEM 9B. | Other Information |
None.
-57-
PART III
ITEM 10. | Directors and Executive Officers of the Company |
Information regarding Section 16(a) compliance, the Audit Committee, the Companys code of ethics and background of the directors appearing under the captions Stock Ownership, Governance of the Company and Election of Directors in the Companys Proxy Statement for the 2005 annual meeting of Shareholders is hereby incorporated by reference.
Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3).
ITEM 11. | Executive Compensation |
Information appearing under the captions How are directors compensated? and Executive Compensation (other than the Report of the Compensation Committee) in the 2005 Proxy Statement is hereby incorporated by reference.
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information setting forth the security ownership of certain beneficial owners and management appearing under the caption Stock Ownership and information appearing under the caption Equity Compensation Plans in the 2005 Proxy Statement is hereby incorporated by reference.
ITEM 13. | Certain Relationships and Related Transactions |
Information regarding certain related transactions appearing under the captions Governance of the Company and Executive Compensation in the 2005 Proxy statement is hereby incorporated by reference.
ITEM 14. | Principal Accountant Fees and Services |
Information appearing under the captions Fees to Independent Registered Public Accountants for fiscal 2004 and 2003 in the 2005 Proxy Statement is hereby incorporated by reference.
-58-
PART IV
ITEM 15. | Exhibits and Financial Statement Schedules |
(a) | Exhibits and Financial Statements and Schedules |
(1) Financial Statements and Schedules
See Index to Financial Statements and Supplemental Data at page 64. |
(2) Exhibits
The documents set forth below are filed herewith or incorporated herein by reference to the location indicated. |
Exhibit | Location | |||
|
|
|||
3(a)
|
Amended and Restated Certificate of Incorporation of the Company |
Annex C to the Joint Proxy Statement/
Prospectus included in the Registration Statement on
Form S-4 (No. 333-88105) of the Company, filed
Sept. 30, 1999
|
||
3(b)
|
Bylaws of the Company |
Exhibit 3(a) to the Form 10-Q of the
Company for the period ended June 30, 2004
|
||
4(a)
|
Five-Year Credit Agreement, dated as of February 25, 2004 |
Exhibit 10(a) to the Form 10-Q of the
Company for the period ended March 31, 2004
|
||
4(b)
|
364-day Credit Agreement dated as of February 25, 2004 |
Exhibit 10(b) to the Form 10-Q of the
Company for the period ended March 31, 2004
|
||
4(c)
|
Indenture, dated as of Nov. 30, 1990, between DEI and Bankers Trust Company, as Trustee |
Exhibit 2 to the Current Report on
Form 8-K of DEI, dated Jan. 14, 1991
|
||
4(d)
|
Indenture, dated as of Mar. 7, 1996, between the Company and Citibank, N.A., as Trustee |
Exhibit 4.1(a) to the Current Report on
Form 8-K of the Company, dated March 7, 1996
|
||
4(e)
|
Senior Debt Securities Indenture, dated as of September 24, 2001, between the Company and Wells Fargo Bank, N.A., as Trustee |
Exhibit 4.1 to the Current Report on
Form 8-K of the Company, dated September 24, 2001
|
||
4(f)
|
Other long-term borrowing instruments are omitted pursuant to Item 601(b) (4) (iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Commission upon request | |||
10(a)
|
(i) Agreement on the Creation and the Operation of Euro Disneyland en France, dated Mar. 25, 1987, and (ii) Letter relating thereto of the Chairman of Disney Enterprises, Inc., dated Mar. 24, 1987 |
Exhibits 10(b) and 10(a), respectively, to
the Current Report on Form 8-K of DEI, dated Apr. 4,
1987
|
||
10(b)
|
Memorandum of Agreement dated June 8, 2004, among Euro Disney, S.C.A. and certain of its affiliates, the Company, Caisse des Dèpôts et Consignations, the Lenders (as defined therein), BNP Paribas and CALYON |
Exhibit 3 to the Companys Report on
Schedule 13D filed June 29, 2004, with respect to Euro
Disney SCA
|
-59-
Exhibit
Location
Amendments to the June 8, 2004 Memorandum of
Agreement
Composite Limited Recourse Financing Facility
Agreement, dated as of Apr. 27, 1988, between DEI and TDL
Funding Company, as amended
Amended and Restated Employment Agreement, dated
June 29, 2000, between the Company and Michael D. Eisner
First Amendment to Amended and Restated
Employment Agreement dated June 29, 2004 between the
Company and Michael D. Eisner
Employment Agreement, dated Jan. 24, 2000,
between the Company and Robert A. Iger
Amendment, dated April 15, 2002, to the
Employment Agreement between the Company and Robert A. Iger
Consulting Agreement dated as of
February 22, 2003 between the Company and Louis M. Meisinger
Employment Agreement, dated September 26,
2003 between the Company and Alan N. Braverman
Employment Agreement, dated September 26,
2003 between the Company and Thomas O. Staggs
Description of Directors Compensation
Directors Retirement Policy
Form of Indemnification Agreement for certain
officers and directors
1995 Stock Option Plan for Non-Employee Directors
Amended and Restated 1990 Stock Incentive Plan
and Rules
Amended and Restated 1995 Stock Incentive Plan
and Rules
Amendment to Amended and Restated 1995 Stock
Incentive Plan
(i) 1987 Stock Incentive Plan and Rules and
(ii) 1984 Stock Incentive Plan and Rules
-60-
Exhibit
Location
Amendment, dated June 26, 2000, to the
Companys Stock Incentive Plans
2002 Executive Performance Plan
Management Incentive Bonus Program approved
September 19, 2004
Amended and Restated 1997 Non-Employee Directors
Stock and Deferred Compensation Plan
Key Employees Deferred Compensation and
Retirement Plan
Group Personal Excess Liability Insurance Plan
Family Income Assurance Plan (summary description)
Form of Restricted Stock Unit Award Agreement
(Time-Based Vesting)
Form of Restricted Stock Unit Award Agreement
(Bonus Related)
Form of Performance-Based Stock Unit Award
Subsidiaries of the Company
Consent of PricewaterhouseCoopers LLP
Rule 13a-14(a) Certification of Chief Executive
Officer of the Company in accordance with Section 302 of
the Sarbanes-Oxley Act of 2002
Rule 13a-14(a) Certification of Chief
Financial Officer of the Company in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002
Section 1350 Certification of Chief
Executive Officer of the Company in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002*
Section 1350 Certification of Chief
Financial Officer of the Company in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002*
* | A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. |
-61-
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE WALT DISNEY COMPANY
(Registrant)
By: MICHAEL D. EISNER
(Michael D. Eisner,
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
|
|
|
||||
Principal Executive Officer
/s/ MICHAEL D. EISNER (Michael D. Eisner) |
Chief Executive Officer |
December 13, 2004 | ||||
Principal Operating Officer
/s/ ROBERT A. IGER (Robert A. Iger) |
President and Chief
Operating Officer |
December 13, 2004 | ||||
Principal Financial and Accounting
Officers
/s/ THOMAS O. STAGGS (Thomas O. Staggs) |
Senior Executive Vice President and Chief Financial Officer | December 13, 2004 | ||||
/s/ JOHN J. GARAND (John J. Garand) |
Executive Vice President-Planning and Control | December 13, 2004 | ||||
Directors
/s/ JOHN E. BRYSON (John E. Bryson) |
Director |
December 13, 2004 | ||||
/s/ JOHN S. CHEN
(John S. Chen) |
Director | December 13, 2004 | ||||
/s/ MICHAEL D. EISNER
(Michael D. Eisner) |
Director | December 13, 2004 | ||||
/s/ JUDITH L. ESTRIN
(Judith L. Estrin) |
Director | December 13, 2004 | ||||
/s/ ROBERT A. IGER
(Robert A. Iger) |
Director | December 13, 2004 | ||||
/s/ AYLWIN B. LEWIS
(Aylwin B. Lewis) |
Director | December 13, 2004 |
-62-
Signature | Title | Date | ||||
|
|
|
||||
/s/ MONICA C. LOZANO
(Monica C. Lozano) |
Director | December 13, 2004 | ||||
/s/ ROBERT W. MATSCHULLAT
(Robert W. Matschullat) |
Director | December 13, 2004 | ||||
/s/ GEORGE J. MITCHELL
(George J. Mitchell) |
Chairman of the Board and Director | December 13, 2004 | ||||
/s/ LEO J. ODONOVAN, S.J.
(Leo J. ODonovan, S.J.) |
Director | December 13, 2004 | ||||
/s/ GARY L. WILSON
(Gary L. Wilson) |
Director | December 13, 2004 |
-63-
THE WALT DISNEY COMPANY AND SUBSIDIARIES
Page | |||||
|
|||||
Report of Independent Registered Public
Accounting Firm
|
65 | ||||
Consolidated Financial Statements of The Walt
Disney Company and Subsidiaries
|
|||||
Consolidated Statements of Income for the Years
Ended September 30, 2004, 2003 and 2002
|
66 | ||||
Consolidated Balance Sheets as of
September 30, 2004 and 2003
|
67 | ||||
Consolidated Statements of Cash Flows for the
Years Ended September 30, 2004, 2003 and 2002
|
68 | ||||
Consolidated Statements of Shareholders
Equity for the Years Ended September 30, 2004, 2003 and 2002
|
69 | ||||
Notes to Consolidated Financial Statements
|
70 | ||||
Quarterly Financial Summary (unaudited)
|
105 |
All schedules are omitted for the reason that they are not applicable or the required information is included in the financial statements or notes.
-64-
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders of The
Walt Disney Company
In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
income, shareholders equity, and cash flows present
fairly, in all material respects, the financial position of The
Walt Disney Company and its subsidiaries (the Company) at
September 30, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2004, in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, managements assessment,
included in the accompanying Managements Report on
Internal Control Over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal
control over financial reporting as of September 30, 2004
based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2004, based on criteria
established in
Internal Control Integrated
Framework
issued by the COSO. The Companys management
is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions
on (i) these financial statements;
(ii) managements assessment; and (iii) the
effectiveness of the Companys internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audit of financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
As discussed in Note 2 to the Consolidated
Financial Statements, the Company adopted FASB Interpretation
46R,
Consolidation of Variable Interest Entities
and,
accordingly, began consolidating Euro Disney and Hong Kong
Disneyland as of March 31, 2004. Additionally, the Company
adopted EITF No. 00-21,
Revenue Arrangements with
Multiple Deliverables
as of October 1, 2002, changing
the timing of revenue from certain contracts.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
-65-
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30,
2004
2003
2002
$
30,752
$
27,061
$
25,329
(26,704
)
(24,348
)
(22,945
)
16
34
(617
)
(793
)
(453
)
372
334
225
(64
)
(16
)
3,739
2,254
2,190
(1,197
)
(789
)
(853
)
(197
)
(127
)
(101
)
2,345
1,338
1,236
(71
)
$
2,345
$
1,267
$
1,236
$
1.12
$
0.65
$
0.60
$
1.14
$
0.65
$
0.61
$
$
(0.03
)
$
$
1.12
$
0.62
$
0.60
$
1.14
$
0.62
$
0.61
2,106
2,067
2,044
2,049
2,043
2,040
See Notes to Consolidated Financial Statements
-66-
CONSOLIDATED BALANCE SHEETS
September 30,
2004
2003
$
2,042
$
1,583
4,558
4,238
775
703
484
568
772
674
738
548
9,369
8,314
5,938
6,205
1,292
1,849
25,168
19,499
(11,665
)
(8,794
)
13,503
10,705
1,852
1,076
1,127
897
16,482
12,678
2,815
2,786
16,966
16,966
1,040
1,190
$
53,902
$
49,988
$
5,623
$
5,044
4,093
2,457
1,343
1,168
11,059
8,669
9,395
10,643
2,950
2,712
3,619
3,745
798
428
12,447
12,154
15,732
13,817
(236
)
(653
)
27,943
25,318
(1,862
)
(1,527
)
26,081
23,791
$
53,902
$
49,988
See Notes to Consolidated Financial Statements
-67-
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Year Ended September 30,
2004
2003
2002
$
2,345
$
1,267
1,236
1,198
1,059
1,021
12
18
21
(98
)
441
327
(372
)
(334
)
(225
)
408
340
234
197
127
101
460
(369
)
(97
)
(16
)
(34
)
(216
)
52
13
16
114
203
(23
)
(55
)
2,076
1,370
1,077
(115
)
(194
)
(535
)
(40
)
(6
)
(35
)
(89
)
(28
)
(86
)
237
275
225
(44
)
217
404
(51
)
264
(27
)
4,370
2,901
2,286
(1,427
)
(1,049
)
(1,086
)
(48
)
(130
)
(2,845
)
166
200
14
40
601
(67
)
(14
)
(9
)
44
(47
)
(37
)
(1,484
)
(1,034
)
(3,176
)
176
1,635
4,038
(2,479
)
(2,059
)
(2,113
)
100
(721
)
(33
)
(430
)
(429
)
(428
)
201
51
47
(335
)
66
(2,701
)
(1,523
)
1,511
185
344
621
274
1,583
1,239
618
$
2,042
$
1,583
$
1,239
$
624
$
705
$
674
$
1,349
$
371
$
447
See Notes to Consolidated Financial Statements
-68-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
Accumulated
Other
TWDC
Compre-
Stock
hensive
Compen-
Total
Common
Retained
Income
Treasury
sation
Shareholders
Shares
Stock
Earnings
(Loss)
(1)
Stock
Fund
Equity
2,038
$
12,096
$
12,171
$
10
$
(1,395
)
$
(210
)
$
22,672
3
11
49
60
(428
)
(428
)
(95
)
(95
)
1,236
1,236
2,041
12,107
12,979
(85
)
(1,395
)
(161
)
23,445
3
47
29
76
(429
)
(429
)
(161
)
161
(568
)
(568
)
1,267
1,267
2,044
12,154
13,817
(653
)
(1,527
)
23,791
11
293
293
(15
)
(335
)
(335
)
(430
)
(430
)
417
417
2,345
2,345
2,040
$
12,447
$
15,732
$
(236
)
$
(1,862
)
$
$
26,081
(1) | Accumulated other comprehensive loss at September 30, 2004 and 2003 is as follows: |
2004 | 2003 | |||||||
|
|
|||||||
Market value adjustments for investments and
hedges, net of tax
|
$ | (61 | ) | $ | (108 | ) | ||
Foreign currency translation and other, net of tax
|
86 | 63 | ||||||
Additional minimum pension liability adjustment,
net of tax
|
(261 | ) | (608 | ) | ||||
|
|
|||||||
$ | (236 | ) | $ | (653 | ) | |||
|
|
Comprehensive income is as follows:
2004 | 2003 | 2002 | ||||||||||
|
|
|
||||||||||
Net income
|
$ | 2,345 | $ | 1,267 | $ | 1,236 | ||||||
Market value adjustments for investments and
hedges, net of tax
|
47 | (77 | ) | (101 | ) | |||||||
Foreign currency translation, net of tax
|
23 | 73 | 50 | |||||||||
Additional minimum pension liability adjustment,
net of tax decrease/ (increase) (See Note 8)
|
347 | (564 | ) | (44 | ) | |||||||
|
|
|
||||||||||
Comprehensive income
|
$ | 2,762 | $ | 699 | $ | 1,141 | ||||||
|
|
|
See Notes to Consolidated Financial Statements
-69-
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1
Description of the Business and
Segment Information
The Walt Disney Company, together with the
subsidiaries through which the Companys businesses are
conducted (the Company), is a diversified worldwide
entertainment company with operations in the following business
segments: Media Networks, Parks and Resorts, Studio
Entertainment and Consumer Products.
DESCRIPTION OF THE BUSINESS
-70-
SEGMENT INFORMATION
Segment operating results evaluated include
earnings before corporate and unallocated shared expenses,
amortization of intangible assets, gain on sale of business, net
interest expense, equity in the income of investees,
restructuring and impairment charges, income taxes, minority
interests and the cumulative effect of accounting change.
Corporate and unallocated shared expenses principally consist of
corporate functions, executive management and certain
unallocated administrative support functions.
The following segment results include allocations
of certain costs, including certain information technology
costs, pension, legal and other shared services, which are
allocated based on various metrics designed to correlate with
consumption. In addition, while all significant intersegment
transactions have been eliminated, Studio Entertainment revenues
and operating income include an allocation of Consumer Products
revenues, which is meant to reflect a portion of Consumer
Products revenues attributable to certain film properties
created by the studio. These allocations are agreed-upon amounts
between the businesses and may differ from amounts that would be
negotiated in an arms-length transaction.
-71-
-72-
2
Summary of Significant Accounting
Policies
-73-
The Company has minority equity interests in
certain entities, including Euro Disney S.C.A. (Euro Disney) and
Hongkong International Theme Parks Limited (Hong Kong
Disneyland). In connection with the adoption of FIN 46R, the
Company concluded that Euro Disney and Hong Kong Disneyland are
VIEs and that we are the primary beneficiary. Pursuant to the
transition provisions of FIN 46R, the Company began
consolidating Euro Disney and Hong Kong Disneylands
balance sheets on March 31, 2004, the end of the
Companys second quarter of fiscal year 2004 and the income
and cash flow statements beginning April 1, 2004, the
beginning of the third quarter of fiscal year 2004. Under FIN
46R transition rules, the operating results of Euro Disney and
Hong Kong Disneyland continued to be accounted for on the equity
method for the six month period ended March 31, 2004. See
Note 4 for the impact of consolidating the balance sheets,
income statement and cash flow statements of Euro Disney and
Hong Kong Disneyland.
We have concluded that the rest of our equity
investments do not require consolidation as either they are not
VIEs, or in the event that they are VIEs, we are not the primary
beneficiary. The Company also has variable interests in certain
other VIEs that will not be consolidated because the Company is
not the primary beneficiary. These VIEs do not involve any
material exposure to the Company.
FSP 106-2
EITF 00-21
Under EITF 00-21s requirements for
separating the revenue elements of a single contract, the
Company no longer allocates ESPNs affiliate revenue
between NFL and non-NFL programming for accounting purposes. As
a consequence, the Company will no longer match all NFL revenue
with NFL costs as ESPN affiliate revenue (including the NFL
portion) is generally recognized ratably throughout the year,
while NFL contract costs continue to be recognized in the
quarters the games are aired. This accounting change impacts
only the timing of revenue recognition and has no impact on cash
flow.
The Company elected to adopt this new accounting
rule using the cumulative effect approach. In the fiscal fourth
quarter of 2003, the Company recorded an after-tax charge of
$71 million for the cumulative effect of a change in
accounting as of the beginning of fiscal year 2003. This amount
represented the revenue recorded for NFL games in the fourth
quarter of fiscal year 2002, which would have been recorded
ratably over fiscal 2003 under the new accounting method.
Results for fiscal 2003 were restated to reflect the impact of
EITF 00-21 as of October 1, 2002.
-74-
The following table provides a reconciliation of
reported net earnings to adjusted earnings had EITF 00-21
been followed in fiscal year 2002:
Use of Estimates
Revenue Recognition
Revenues from advance theme park ticket sales are
recognized when the tickets are used. Revenues from corporate
sponsors at the theme parks are generally recognized over the
period of the applicable agreements commencing with the opening
of the related attraction.
Revenues from the theatrical distribution of
motion pictures are recognized when motion pictures are
exhibited. Revenues from video sales are recognized on the date
that video units are made widely available for sale by
retailers. Revenues from the licensing of feature films and
television programming are recorded when the material is
available for telecasting by the licensee and when certain other
conditions are met.
Merchandise licensing advance and guarantee
payments are recognized when the underlying royalties are earned.
Advertising Expense
Cash and Cash Equivalents
Investments
The Company continually reviews its investments
to determine whether a decline in fair value below the cost
basis is other than temporary. If the decline in fair value is
judged to be other than temporary, the cost basis of the
security is written down to fair value and the amount of the
write-down is included in the Consolidated Statements of Income.
-75-
Translation Policy
For U.S. dollar functional currency
locations, foreign currency assets and liabilities are
remeasured into U.S. dollars at end-of-period exchange
rates, except for property, plant and equipment, other assets
and deferred revenue, which are remeasured at historical
exchange rates. Revenue and expenses are remeasured at average
exchange rates in effect during each period, except for those
expenses related to the previously noted balance sheet amounts,
which are remeasured at historical exchange rates. Gains or
losses from foreign currency remeasurement are included in net
earnings.
For the local currency functional locations,
assets and liabilities are translated at end-of-period rates
while revenues and expenses are translated at average rates in
effect during the period. Equity is translated at historical
rates and the resulting cumulative translation adjustments are
included as a component of accumulated other comprehensive
income (AOCI).
Inventories
Film and Television Costs
Film and television production and participation
costs are expensed based on the ratio of the current
periods gross revenues to estimated remaining total gross
revenues from all sources on an individual production basis.
Television network series costs and multi-year sports rights are
charged to expense based on the ratio of the current
periods gross revenues to estimated remaining total gross
revenues from such programs or on a straight-line basis, as
appropriate. Estimated remaining gross revenue for film
productions includes revenue that will be earned within ten
years of the date of the initial theatrical release. For
television network series, we include revenues that will be
earned within 10 years of the delivery of the first
episode, or if still in production, five years from the date of
delivery of the most recent episode. For acquired film
libraries, remaining revenues include amounts to be earned for
up to 20 years from the date of acquisition. Television
network and station rights for theatrical movies and other
long-form programming are charged to expense primarily on an
accelerated basis related to the projected usage of the
programs. Development costs for projects that have been
determined will not go into production or have not been set for
production within three years are written-off.
Estimates of total gross revenues can change
significantly due to a variety of factors, including advertising
rates and the level of market acceptance of the production.
Accordingly, revenue estimates are reviewed periodically and
amortization is adjusted, if necessary. Such adjustments could
have a material effect on results of operations in future
periods. The net realizable value of network television
broadcast program licenses and rights is reviewed using a
daypart methodology. A daypart is defined as an aggregation of
programs broadcast during a particular time of day or programs
of a similar type. The Companys dayparts are early
morning, daytime, late night, primetime, news, children and
sports (sports includes network and cable). The net realizable
values of other cable programming are reviewed on an aggregated
basis for each cable channel.
Capitalized Software Costs
-76-
Parks, Resorts and Other Property
Goodwill and Other Intangible Assets
SFAS 142 requires the Company to compare the
fair value of the reporting unit to its carrying amount on an
annual basis to determine if there is potential goodwill
impairment. If the fair value of the reporting unit is less than
its carrying value, an impairment loss is recorded to the extent
that the fair value of the goodwill within the reporting unit is
less than its carrying value.
SFAS 142 requires the Company to compare the
fair value of an indefinite-lived intangible asset to its
carrying amount. If the carrying amount of an indefinite-lived
intangible asset exceeds its fair value, an impairment loss is
recognized. Fair values for goodwill and other indefinite-lived
intangible assets are determined based on discounted cash flows,
market multiples or appraised values as appropriate.
To determine the fair value of our reporting
units, we generally use a present value technique (discounted
cash flow) corroborated by market multiples when available and
as appropriate, for all of the reporting units except for the
Television Network which is included in the Television
Broadcasting Group. The Television Broadcasting reporting unit
includes the Television Network and the owned and operated
television stations. These businesses have been grouped together
because their respective cash flows are dependent on one
another. For purposes of our impairment test, we used a revenue
multiple to value the Television Network. We did not use a
present value technique or a market multiple approach to value
the Television Network as a present value technique would not
capture the full fair value of the Television Network and there
is little comparable market data available due to the scarcity
of television networks. We applied what we believe to be the
most appropriate valuation methodology for each of the reporting
units. If we had established different reporting units or
utilized different valuation methodologies, the impairment test
results could differ.
Amortizable intangible assets are amortized on a
straight-line basis over estimated useful lives as follows:
Risk Management Contracts
-77-
The Company formally documents all relationships
between hedging instruments and hedged items, as well as its
risk management objectives and strategies for undertaking
various hedge transactions. There are two types of derivatives
into which the Company enters: hedges of fair value exposure and
hedges of cash flow exposure. Hedges of fair value exposure are
entered into in order to hedge the fair value of a recognized
asset, liability, or a firm commitment. Hedges of cash flow
exposure are entered into in order to hedge a forecasted
transaction (e.g. forecasted revenue) or the variability of cash
flows to be paid or received, related to a recognized liability
or asset (e.g. floating rate debt).
The Company designates and assigns the financial
instruments as hedges of forecasted transactions, specific
assets, or specific liabilities. When hedged assets or
liabilities are sold or extinguished or the forecasted
transactions being hedged are no longer expected to occur, the
Company recognizes the gain or loss on the designated hedging
financial instruments.
Option premiums and unrealized losses on forward
contracts and the accrued differential for interest rate and
cross-currency swaps to be received under the agreements are
recorded on the balance sheet as other assets. Unrealized gains
on forward contracts and the accrued differential for interest
rate and cross-currency swaps to be paid under the agreements
are included in liabilities. Realized gains and losses from
hedges are classified in the income statement consistent with
the accounting treatment of the items being hedged. The Company
accrues the differential for interest rate and cross-currency
swaps to be paid or received under the agreements as interest
rates and exchange rates change as adjustments to interest
expense over the lives of the swaps. Gains and losses on the
termination of effective swap agreements, prior to their
original maturity, are deferred and amortized to interest
expense over the remaining term of the underlying hedged
transactions.
Cash flows from hedges are classified in the
Consolidated Statements of Cash Flows under the same category as
the cash flows from the related assets, liabilities or
forecasted transactions (see Notes 6 and 12).
Earnings Per Share
A reconciliation of net income and the weighted
average number of common and common equivalent shares
outstanding for calculating diluted earnings per share is as
follows:
-78-
For the years ended September 30, 2004, 2003
and 2002, options for 124 million, 184 million , and
156 million shares, respectively, were excluded from the
diluted EPS calculation for common stock because they were
anti-dilutive.
Stock Options
The following table reflects pro forma net income
and earnings per share had the Company elected to adopt the fair
value approach of Statement of Financial Accounting Standards
No. 123,
Accounting for Stock-Based Compensation
:
These pro forma amounts may not be representative
of future disclosures since the estimated fair value of stock
options is amortized to expense over the vesting period, and
additional options may be granted in future years.
Reclassifications
3
Significant Acquisitions and
Dispositions
On February 17, 2004, the Company acquired
the film library and intellectual property rights for the
Muppets and Bear in the Big Blue House for $68 million.
Substantially all of the purchase price was allocated to
definite-lived identifiable intangible assets.
In fiscal 2003, the Company sold the Anaheim
Angels baseball team, which resulted in a pre-tax gain of
$16 million. In fiscal 2002, the Company sold the Disney
Store operations in Japan generating a pre-tax gain of
$34 million. These gains are reported in the line
Gain on sale of business in the Consolidated
Statements of Income.
On October 24, 2001, the Company acquired
Fox Family Worldwide, Inc. (now called ABC Family)
for $5.2 billion, which was funded with $2.9 billion
of new long-term borrowings plus the assumption of
$2.3 billion of long-term debt. Among the businesses
acquired were the Fox Family Channel, which has been renamed ABC
Family Channel, a programming service that currently reaches
approximately 88 million cable and satellite television
subscribers throughout the U.S.; a 75% interest in Fox Kids
Europe, which has been renamed JETIX
-79-
The purchase price was allocated to the fair
value of the acquired assets and liabilities and the excess
purchase price of $5.0 billion was recorded as goodwill and
was assigned to the Cable Networks reporting unit within the
Media Networks segment. None of this amount is expected to be
deductible for tax purposes.
The Companys consolidated results of
operations have incorporated ABC Familys activity on a
consolidated basis from October 24, 2001, the date of
acquisition. On an unaudited pro forma basis assuming the
acquisition occurred on October 1, 2001, revenues for the
year ended September 30, 2002 were $25,360 million.
As-reported and unaudited pro forma net income and earnings per
share for fiscal 2002 were approximately the same. The unaudited
pro forma information is not necessarily indicative of future
results.
4
Investments
Investments consist of the following:
Euro Disney and Hong Kong Disneyland
-80-
The following table presents the condensed
consolidating balance sheet of the Company, reflecting the
impact of consolidating the balance sheets of Euro Disney and
Hong Kong Disneyland as of September 30, 2004.
The following table presents the condensed
consolidating income statement of the Company for the year ended
September 30, 2004, reflecting the impact of consolidating
the income statements of Euro Disney and Hong Kong Disneyland
beginning April 1, 2004
(1).
-81-
The following table presents the condensed
consolidating cash flow statement of the Company for the year
ended September 30, 2004, reflecting the impact of
consolidating the cash flow statements of Euro Disney and Hong
Kong Disneyland beginning April 1, 2004.
Euro Disney Financial Restructuring
Royalties and Management Fees
Debt Covenants
Existing Borrowings
-82-
New Financing
Any subordinated long-term borrowings due to the
Company and CDC cannot be paid until all senior borrowings have
been paid.
The MOA additionally provides for the
contribution by Euro Disney of substantially all of its assets
and liabilities (including most of the proceeds of the equity
rights offerings referred to above) into Euro Disney
Associés S.C.A. (Disney SCA) which will become
an 82% owned subsidiary of Euro Disney. Other wholly-owned
subsidiaries of the Company will retain the remaining 18%
ownership interest. This will enable Euro Disney to avoid having
to make
292 million
of payments to Disney SCA that would be due if Euro Disney
exercised the options under certain leases from Disney SCA. As a
result of this contribution, the Company will increase its
overall effective ownership interest in Euro Disneys
operations from 41% to 52%. Pursuant to the MOA, the Company
must maintain at least a direct 39% ownership investment in Euro
Disney through December 31, 2016.
The implementation of the MOA remains subject to
certain conditions including: approval of the reorganization by
the Shareholders (which the Company has agreed to vote in favor
of) and the completion of the equity rights offering (referred
to above) by March 31, 2005. Once implemented, the
Restructuring will provide Euro Disney with significant
liquidity, including protective measures intended to mitigate
the adverse impact of business volatility as well as capital to
invest in new rides and attractions. If the equity rights
offering does not occur by March 31, 2005, the parties will
have 30 days to negotiate a new arrangement. If the
negotiations do not succeed, most of the provisions of the MOA
will become null and void, and Euro Disneys debt will
become due or subject to acceleration, and absent a further debt
covenant waiver or new agreement, Euro Disney would be unable to
pay certain of its debt obligations.
As discussed above, the MOA will result in the
elimination of certain sublease arrangements between the
Companys wholly-owned subsidiary, Disney SCA and Euro
Disney. These subleases arose in connection with a financial
restructuring of Euro Disney in 1994 whereby Disney SCA (which
was then in the form of a SNC) entered into a lease agreement
with a financing company with a non-cancelable term of
12 years related to substantially all of the Disneyland
Park assets, and then entered into a 12-year sublease agreement
with Euro Disney on substantially the same payment terms.
Remaining lease rentals at September 30, 2004 of
approximately $385 million receivable from Euro Disney
under the sublease approximate the amounts payable by Disney SCA
under the lease. These lease transactions are currently
eliminated upon consolidation of Euro Disney by the Company as a
result of the implementation of FIN 46R. If the
restructuring does not occur as planned above, at the conclusion
of the sublease term in 2006, Euro Disney would have the option
of assuming Disney SCAs rights and obligations under the
lease for a payment of $97 million over the ensuing
15 months. If Euro Disney did not exercise its option,
Disney SCA would be able to purchase the assets, continue to
lease the assets or elect to
-83-
See Note 6 for the terms of Euro
Disneys borrowings.
Euro Disney had revenues and net loss of
$575 million and $122 million, respectively, for the
six months ended March 31, 2004 while the Company still
accounted for its investment on the equity method. Euro Disney
had revenues and net loss of $1,077 million and
$56 million, respectively, for the year ended
September 30, 2003. For the year ended September 30,
2002, Euro Disney had revenues and net loss of $909 million
and $57 million, respectively. Total assets and total
liabilities of Euro Disney were $3,373 million and
$3,304 million at September 30, 2003.
Other Equity Investments
A summary of combined financial information for
the other equity investments is as follows:
Cost Investments
In 2004, 2003 and 2002, the Company recorded
non-cash charges of $23 million, $23 million and
$2 million, respectively, to reflect other-than-temporary
losses in value of certain investments.
Investment in Leveraged Leases
-84-
5
Film and Television Costs
Film and Television costs are as follows:
Based on managements total gross revenue
estimates as of September 30, 2004, approximately 42% of
completed and unamortized film and television costs (excluding
amounts allocated to acquired film and television libraries) are
expected to be amortized during fiscal 2005. Approximately 73%
of unamortized film and television costs for released
productions (excluding acquired film libraries) are expected to
be amortized during the next three years. By September 30,
2008, approximately 80% of the total released and unamortized
film and television costs are expected to be amortized. As of
September 30, 2004, the Company estimated that
approximately $530 million of accrued participation and
residual liabilities will be payable in fiscal year 2005.
At September 30, 2004, acquired film and
television libraries have remaining unamortized film costs of
$447 million which are generally amortized straight-line
over a remaining period of approximately 5-15 years.
-85-
The following table provides detail of film and
television spending and amortization:
6
Borrowings
The Companys borrowings at
September 30, 2004 and 2003, including the impact of
interest rate swaps designated as hedges at September 30,
2004 are summarized below:
-86-
Commercial Paper
$7.5 Billion Shelf Registration
Statement
U.S. Medium-Term Note Program
Other U.S. Dollar Denominated
Debt
Convertible Senior Notes
-87-
Privately Placed Debt
European Medium-Term Note Program
Preferred Stock
In July 1999, a subsidiary of the Company issued
$102 million of Auction Market Preferred Stock (AMPS).
These are perpetual, non-cumulative, non-redeemable instruments.
Quarterly distributions, if declared, are at the rate of
5.427% per annum, for the first five years. In July 2004,
the AMPS were repurchased by the Company.
Capital Cities/ ABC Debt
Euro Disney and Hong Kong Disneyland
Borrowings
Euro Disney CDC
loans.
Pursuant to Euro Disneys
original financing and the terms of a 1994 financial
restructuring, Euro Disney borrowed funds from the
Caisse des
Dépôts et Consignations
(CDC), a
French state bank. As of September 30, 2004, these
borrowings consisted of approximately
128 million
($156 million at September 30, 2004 exchange rates) of
senior debt and
403 million
($495 million at September 30, 2004 exchange rates) of
subordinated debt. The senior debt is secured by certain fixed
assets of Disneyland Resort Paris and the underlying land,
whereas the subordinated debt is unsecured. The loans originally
bore interest at a fixed rate of 7.85%; however, effective
September 30, 1999, the terms of these loans were modified
so as to reduce the fixed interest rate to 5.15%, defer
principal repayments and extend the final maturity date from
fiscal year 2015 to fiscal year 2024.
Euro Disney also executed a credit agreement with
CDC to finance a portion of the construction costs of Walt
Disney Studios Park. As of September 30, 2004,
approximately
381 million
($468 million at September 30, 2004 exchange rates) of
subordinated loans were outstanding under this agreement. The
loans bear interest at a fixed
-88-
Euro Disney Credit facilities and
other.
Pursuant to Euro Disneys
original financing with a syndicate of international banks and
the terms of a 1994 financial restructuring, Euro Disney
borrowed funds which are secured by certain fixed assets of
Disneyland Resort Paris and the underlying land thereof. The
loans bear interest at EURIBOR plus margins with rates ranging
from 2.55% to 8.25% at September 30, 2004. The loans mature
between fiscal years 2008 and 2012.
Euro Disney Other
advances.
Advances of
383 million
($471 million at September 30, 2004 exchange rates)
bear interest at a fixed rate of 3.0%. The remaining advances of
19 million
($23 million at September 30, 2004 exchange rates)
bear interest at EURIBOR plus 1.125% (3.28% at
September 30, 2004). The advances are scheduled to mature
between fiscal years 2014 and 2017. $23 million of the
advances are secured by certain theme parks assets.
Certain of Euro Disneys borrowing
agreements include covenants, which primarily consist of
restrictions on additional indebtedness and capital
expenditures, the provision of certain financial information and
compliance with certain financial ratio thresholds.
Certain of Euro Disneys borrowings arose in
connection with a lease arrangement that was entered into in
connection with a financial restructuring of Euro Disney in
1994. See Note 4 for further discussion of this lease
arrangement.
As previously stated, all of Euro Disneys
borrowings totaling $2.2 billion are classified as current
on the balance sheet as they are subject to acceleration if
certain requirements of the MOA are not achieved as part of the
current restructuring process.
Hong Kong Disneyland Senior
loans.
Hong Kong Disneylands
senior loans are borrowings pursuant to a term loan facility of
HK$2.3 billion ($295 million at September 30,
2004 exchange rates) and a revolving credit facility of
HK$1.0 billion ($128 million at September 30,
2004 exchange rates). The balance of the senior loans as of
September 30, 2004 was HK$1.1 billion
($143 million at September 30, 2004 exchange rates).
The term loan facility can be drawn down until 6 months
after the theme park opening day (scheduled for late fiscal year
2005) with re-payments to begin approximately three years after
the theme park opening day. As of September 30, 2004, up to
25% of the revolving credit facility is available to be drawn
down. The remaining 75% is unavailable until the earlier of
i) the theme park opening or ii) all other senior and
subordinated debt facilities and equity funding have been fully
utilized and there is sufficient liquidity available to
accommodate working capital requirements. Both facilities are
secured by the assets of the Hong Kong Disneyland theme park,
currently carry a rate of 3 month HIBOR + 1.0% and are
scheduled to mature in fiscal 2016. The spread above HIBOR is
1.0% through November 15, 2005, 1.25% for the next five
years and 1.375% for the last five years of the facilities. As
of September 30, 2004, the rate on the Senior loans was
1.82%.
Hong Kong Disneyland Subordinated
loans.
Hong Kong Disneyland has a
subordinated unsecured loan facility of HK$5.6 billion
($720 million at September 30, 2004 exchange rates)
that is scheduled to mature 25 years after the theme park
opening day. The balance drawn on the subordinated unsecured
loan facility as of September 30, 2004 was HK
$3.1 billion ($402 million at September 30, 2004
exchange rates). Interest rates under this loan are subject to
biannual revisions (up or down) under certain conditions, but
capped at an annual rate of 6.75% (until eight and one half
years after opening day), 7.625% (for the next eight years) and
8.50% (over the last eight and one half years).
-89-
Total borrowings excluding market value
adjustments, have the following scheduled maturities:
The Company capitalizes interest on assets
constructed for its parks, resorts and other property and on
theatrical and television productions. In 2004, 2003 and 2002,
total interest capitalized was $35 million,
$33 million and $36 million, respectively.
7
Income Taxes
-90-
Deferred tax assets at September 30, 2004
and 2003 were reduced by a valuation allowance relating to a
portion of the tax benefits attributable to certain net
operating losses (NOLs) reflected on state tax returns of
Infoseek and its subsidiaries for periods prior to the Infoseek
acquisition on November 18, 1999 where applicable state
laws limit the utilization of such NOLs. In addition, deferred
tax assets at September 30, 2004 and 2003 were reduced by a
valuation allowance relating to a portion of the tax benefits
attributable to certain NOLs reflected on tax returns of ABC
Family Worldwide, Inc. and its subsidiaries for periods prior to
the ABC Family acquisition on October 24, 2001 (see
Note 3). Since the valuation allowances associated with
both acquisitions relate to acquired deferred tax assets, the
subsequent realization of these tax benefits would result in
adjustments to the allowance amount being applied as reductions
to goodwill. In addition, at September 30, 2004,
approximately $42 million of other acquired NOL carry
forwards from the acquisition of ABC family are available to
offset future taxable income through the year 2022.
In 2004, 2003, and 2002, income tax benefits
attributable to employee stock option transactions of
$25 million, $5 million and $8 million,
respectively, were allocated to shareholders equity.
In 2004 the Company derived tax benefits of
$97 million from an exclusion provided under
U.S. income tax laws with respect to certain
extraterritorial income attributable to foreign trading gross
receipts (FTGRs). This exclusion was repealed as
part of the American Jobs Creation Act of 2004 (the
Act), which was enacted on October 22, 2004.
The Act provides for a phase-out such that the exclusion for the
Companys otherwise qualifying FTGRs generated in fiscal
2005, 2006 and 2007 will be limited to approximately 85%, 65%
and 15%, respectively. No exclusion will be available in fiscal
years 2008 and thereafter.
-91-
The Act makes a number of other changes to the
income tax laws which will affect the Company in future years,
the most significant of which is a new deduction for qualifying
domestic production activities. The impact of this and other
changes made by the Act cannot be quantified at this time.
As a matter of course, the Company is regularly
audited by federal, state and foreign tax authorities. From time
to time, these audits result in proposed assessments. During the
fourth quarter of fiscal 2004, the Company reached a settlement
with the Internal Revenue Service regarding all assessments
proposed with respect to the Companys federal income tax
returns for 1993 through 1995. This settlement resulted in the
Company releasing $120 million in tax reserves which are no
longer required with respect to these matters. This release of
reserves is reflected in the current year income tax provision.
During the fourth quarter of fiscal 2003, the Company resolved
certain state income tax audit issues and the corresponding
release of $56 million of related tax reserves is reflected
in the 2003 income tax provision.
-92-
8
Pension and Other Benefit Programs
The Company maintains pension plans and
postretirement medical benefit plans covering most of its
domestic employees not covered by union or industry-wide plans.
Employees hired after January 1, 1994 and ABC employees
generally hired after January 1, 1987 are not eligible for
postretirement medical benefits. With respect to its qualified
defined benefit pension plans, the Companys policy is to
fund, at a minimum, the amount necessary on an actuarial basis
to provide for benefits in accordance with the requirements of
the Employee Retirement Income Security Act of 1974. Pension
benefits are generally based on years of service and/or
compensation. The following chart summarizes the balance sheet
impact, as well as the benefit obligations, assets, funded
status and rate assumptions associated with the pension and
postretirement medical benefit plans.
-93-
The components of net periodic benefit cost are
as follows:
Net periodic benefit cost for the current year is
based on assumptions from the prior year.
Plan Funded Status
The Companys total accumulated pension
benefit obligations at September 30, 2004 and
September 30, 2003 were $3.5 billion and
$3.5 billion, respectively, of which 95.2% and 98.6%,
respectively, were vested.
The accumulated postretirement medical benefit
obligations and fair value of plan assets for postretirement
medical plans with accumulated postretirement medical benefit
obligations in excess of plan assets were $954 million and
$215 million, respectively, for 2004 and
$1,035 million and $197 million, respectively, for
2003.
Plan Assets
-94-
Alternative investments include venture capital
funds, private equity funds and real estate, among other things.
The Companys pension plan asset mix at
June 30, 2004 and 2003 (the Plan measurement date), by
asset class, is as follows:
Equity securities include $63 million (2% of
total plan assets) and $56 million (2% of total plan
assets) of Company common stock at September 30, 2004 and
September 30, 2003, respectively.
Plan Contributions
Estimated Future Benefit Payments
Multi-employer Plans
Assumptions
Discount Rate The assumed discount
rate for pension plans represents the market rate for
high-quality fixed income investments or a long-term high
quality corporate bond rate. For 2004, we increased our rate to
6.30% to reflect market interest rate conditions.
Long-term return on assets The
assumed rate of return on plan assets represents an estimate of
long-term returns on an investment portfolio consisting of a
mixture of equities, fixed income, and alternative investments.
-95-
Healthcare cost trend rate The
Company reviews external data and its own historical trends for
healthcare costs to determine the healthcare cost trend rates
for the postretirement medical benefit plans. For 2004, we
assumed a 10.0% annual rate of increase in the per capita cost
of covered healthcare claims with the rate decreasing in even
increments over seven years until reaching 5.0%.
The effects of a one percentage point change in
the key assumptions would have had the following effects
increase/(decrease) in cost and/or obligation on the results for
fiscal year 2004:
Defined Contribution Plans
Medicare Modernization Act
9
Shareholders Equity
The Company declared an annual dividend of
$0.24 per share on December 1, 2004 related to fiscal
2004. The dividend is payable on January 6, 2005 to
shareholders of record on December 10, 2004. The Company
paid a $430 million dividend ($0.21 per share) during
the first quarter of fiscal 2004 applicable to fiscal 2003 and
paid a $429 million dividend ($0.21 per share) during
the first quarter of fiscal 2003 applicable to fiscal 2002.
During the fourth quarter of fiscal 2004, the
Company repurchased 14.9 million shares of Disney common
stock for approximately $335 million. As of
September 30, 2004, the Company had authorization in place
to repurchase approximately 315 million additional shares.
The par value of the Companys outstanding
common stock totaled approximately $21 million.
-96-
In December 1999, pursuant to the Companys
repurchase program, the Company established the TWDC Stock
Compensation Fund II to acquire shares of Company common
stock for the purpose of funding certain future stock-based
compensation. The fund expired on December 12, 2002. On
that date, the 5.4 million shares of the Companys
common stock still owned by the fund were transferred back to
the Company and classified as treasury stock.
10
Stock Incentive Plans
Under various plans, the Company may grant stock
options and other equity based awards to executive, management
and creative personnel at exercise prices equal to or exceeding
the market price at the date of grant. Effective in January
2003, options granted for common stock become exercisable
ratably over a four-year period from the grant date while
options granted prior to January 2003 generally vest ratably
over a five-year period from the grant date. All options expire
10 years after the date of grant. At the discretion of the
Compensation Committee, options can occasionally extend up to
15 years after date of grant. Shares available for future
option grants at September 30, 2004 totaled 57 million.
The following table summarizes information about
stock option transactions (shares in millions):
The following table summarizes information about
stock options outstanding at September 30, 2004 (shares in
millions):
-97-
The weighted average fair values of options at
their grant date during 2004, 2003 and 2002 were $9.94, $6.71
and $8.02, respectively. The weighted average assumptions used
in the Black-Scholes option-pricing model used to determine fair
value were as follows:
During the years ended September 30, 2004,
2003 and 2002, the Company granted restricted stock units of
5.4 million, 2.9 million and 1.9 million,
respectively, and recorded compensation expense of
$66 million, $20 million and $3 million,
respectively. Units totaling 750,000 shares and
250,000 shares were awarded to four executives in 2002 and
2004, respectively, that vest upon the achievement of certain
performance conditions. Otherwise, the units are not performance
related and generally vest 50% two years from grant date and 50%
four years from the grant date. Units are forfeited if the
employee terminates prior to vesting.
11
Detail of Certain Balance Sheet
Accounts
-98-
12
Financial Instruments
Interest Rate Risk Management
The Company typically uses pay-floating and
pay-fixed interest rate swaps to facilitate its interest rate
risk management activities. Pay-floating swaps effectively
convert fixed rate medium and long-term obligations to variable
rate instruments indexed to LIBOR. Swap agreements in place at
year-end expire in three to 19 years. Pay-fixed swaps
effectively convert floating rate obligations to fixed rate
instruments. The pay-fixed swaps in place at year-end expire in
one to eight years. As of September 30, 2004 and 2003
respectively, the Company held $148 million and
$711 million notional value of pay-fixed swaps that do not
qualify as hedges. The changes in market values of all swaps
that do not qualify as hedges have been included in earnings.
-99-
The impact of ineffective interest rate risk
management activities was not significant for fiscal 2004, 2003
and 2002. The net amount of deferred gains and losses in AOCI
from interest rate risk management transactions at
September 30, 2004 was a gain of $10 million while the
balance at September 30, 2003 was immaterial.
Foreign Exchange Risk Management
The Company enters into various contracts that
change in value as foreign exchange rates change to protect the
value of its existing foreign currency assets, liabilities, firm
commitments and forecasted but not firmly committed foreign
currency transactions. The Company uses option strategies and
forward contracts to hedge forecasted transactions. In
accordance with policy, the Company hedges a minimum percentage
(not to exceed a maximum percentage) of its forecasted foreign
currency transactions for periods generally not to exceed five
years. The Company uses forward contracts to hedge foreign
currency assets, liabilities and firm commitments. The gains and
losses on these contracts offset changes in the U.S. dollar
equivalent value of the related forecasted transaction, asset,
liability or firm commitment. The principal currencies hedged
are the Euro, British pound, Japanese yen and Canadian dollar.
Cross-currency swaps are used to effectively convert foreign
currency-denominated borrowings to U.S. dollars.
Gains and losses on contracts hedging forecasted
foreign currency transactions are initially recorded to AOCI,
and reclassified to current earnings when such transactions are
recognized, offsetting changes in the value of the foreign
currency transactions. At September 30, 2004 and 2003, the
Company had pre-tax deferred gains of $45 million and
$23 million, respectively, and pre-tax deferred losses of
$147 million and $203 million, respectively, related
to foreign currency hedges on forecasted foreign currency
transactions.
Deferred amounts to be recognized change with
market conditions and will be substantially offset by changes in
the value of the related hedged transactions. The Company
expects to reclassify a pre-tax loss of $88 million from
AOCI to earnings over the next twelve months. The Company
reclassified an after-tax loss of $144 million and a
$62 million after-tax gain from AOCI to earnings during
fiscal 2004 and 2003, respectively. These losses were offset by
changes in the U.S. dollar equivalent value of the items
being hedged.
At September 30, 2004 and 2003, changes in
value related to cash flow hedges included in AOCI were a
pre-tax loss of $102 million and $175 million,
respectively. In addition, the Company reclassified deferred
losses related to certain cash flow hedges from AOCI to
earnings, due to the uncertainty of the timing of the original
forecasted transaction. During fiscal 2004 and 2003, the Company
recorded the change in fair market value related to fair value
hedges and the ineffectiveness related to cash flow hedges to
earnings. The amounts of hedge ineffectiveness on fair value and
cash flow hedges were not material for fiscal 2004 and fiscal
2003. The impact of foreign exchange risk management activities
on operating income in 2004 and in 2003 was a net loss of
$277 million and $273 million, respectively. The
impact of foreign exchanges risk management activities on
operating income in 2002 was a gain of $44 million.
Fair Value of Financial Instruments
At September 30, 2004 and 2003, the fair
values of cash and cash equivalents, receivables and accounts
payable approximated carrying values because of the short-term
nature of these instruments. The estimated fair values of other
financial instruments subject to fair value disclosures,
determined based on broker quotes or
-100-
Credit Concentrations
The Company would not realize a material loss as
of September 30, 2004 in the event of nonperformance by any
single counterparty. The Company enters into transactions only
with financial institution counterparties that have a credit
rating of A- or better. The Companys current policy
regarding agreements with financial institution counterparties
is generally to require collateral in the event credit ratings
fall below A- or in the event aggregate exposures exceed limits
as defined by contract. In addition, the Company limits the
amount of investment credit exposure with any one institution.
As of September 30, 2004, counterparties had pledged a
total of $37 million of cash collateral.
The Companys trade receivables and
investments do not represent a significant concentration of
credit risk at September 30, 2004 due to the wide variety
of customers and markets into which the Companys products
are sold, their dispersion across many geographic areas, and the
diversification of the Companys portfolio among issuers.
13
Commitments and Contingencies
The Company has various contractual commitments
for the purchase of broadcast rights for sports, feature films
and other programming, aggregating approximately
$9.6 billion, including approximately $840 million for
available programming as of September 30, 2004, and
approximately $6.5 billion related to sports programming
rights, primarily NFL, NBA, College Football and MLB.
The Company has various real estate and equipment
operating leases, including retail outlets and distribution
centers for consumer products, broadcast equipment and office
space for general and administrative purposes. Rental expense
for the operating leases during 2004, 2003 and 2002, including
common-area maintenance and contingent rentals, was
$518 million, $528 million and $511 million,
respectively.
The Company also has contractual commitments
under various creative talent and employment agreements
including obligations to actors, producers, sports personnel,
television and radio personalities and executives.
-101-
Contractual commitments for broadcast programming
rights, future minimum lease payments under the non-cancelable
operating leases, creative talent and other commitments totaled
$14.0 billion at September 30, 2004, payable as
follows:
The Company has certain non-cancelable capital
leases primarily for land and broadcast equipment. Future
payments under these leases as of September 30, 2004 are as
follows:
The Company has guaranteed certain special
assessment and water/sewer revenue bond series issued by the
Celebration Community Development District and the Enterprise
Community Development District (collectively, the Districts).
The bond proceeds were used by the Districts to finance the
construction of infrastructure improvements and the water and
sewer system in the mixed-use, residential community of
Celebration, Florida. As of September 30, 2004, the
remaining debt service obligation guaranteed by the Company was
$96 million, of which $59 million was principal. The
Company is responsible to satisfy any shortfalls in debt service
payments, debt service and maintenance reserve funds, and to
ensure compliance with specified rate covenants. To the extent
that the Company has to fund payments under its guarantees, the
districts have an obligation to reimburse the Company from
District revenues.
The Company has also guaranteed certain bond
issuances by the Anaheim Public Authority that were used by the
City of Anaheim to finance construction of infrastructure and a
public parking facility adjacent to the Disneyland Resort.
Revenues from sales, occupancy and property taxes from the
Disneyland Resort and non-Disney hotels are used by the City of
Anaheim to repay the bonds. In the event of a debt service
shortfall, the Company will be responsible to fund the
shortfall. As of September 30, 2004, the remaining debt
service obligation guaranteed by the Company was
$402 million, of which $109 million was principal. To
the extent that tax revenues exceed the debt service payments in
subsequent periods, the Company would be reimbursed for any
previously funded shortfalls.
To date, tax revenues have exceeded the debt
service payments for both the Celebration and Anaheim bonds.
-102-
The Company has guaranteed payment of certain
facility and equipment leases on behalf of a third-party service
provider that supplies the Company with broadcasting
transmission, post production, studio and administrative
services in the U.K. If the third-party service provider
defaults on the leases, the Company would be responsible for the
remaining obligation unless the Company finds another service
provider to take over the leases. As of September 30, 2004,
the remaining facility and equipment lease obligation was
$85 million. These leases expire in March 2014.
Stephen Slesinger, Inc. v. The Walt
Disney Company.
In this lawsuit, filed
on February 27, 1991 in the Los Angeles County Superior
Court, the plaintiff claims that a Company subsidiary defrauded
it and breached a 1983 licensing agreement with respect to
certain Winnie the Pooh properties, by failing to account for
and pay royalties on revenues earned from the sale of Winnie the
Pooh movies on videocassette and from the exploitation of Winnie
the Pooh merchandising rights. The plaintiff seeks damages for
the licensees alleged breaches as well as confirmation of
the plaintiffs interpretation of the licensing agreement
with respect to future activities. The plaintiff also seeks the
right to terminate the agreement on the basis of the alleged
breaches. If each of the plaintiffs claims were to be
confirmed in a final judgment, damages as argued by the
plaintiff could total as much as several hundred million dollars
and adversely impact the value to the Company of any future
exploitation of the licensed rights. The Company disputes that
the plaintiff is entitled to any damages or other relief of any
kind, including termination of the licensing agreement. On
April 24, 2003, the matter was removed to the United States
District Court for the Central District of California, which, on
May 19, 2003, dismissed certain claims and remanded the
matter to the Los Angeles Superior Court. The Company appealed
from the District Courts order to the Court of Appeals for
the Ninth Circuit, but served notice that it was withdrawing its
appeal in September 2004. On March 29, 2004, the Superior
Court granted the Companys motion for terminating
sanctions against the plaintiff for a host of discovery abuses,
including the withholding, alteration, and theft of documents
and other information, and, on April 5, 2004, dismissed
plaintiffs case with prejudice. On May 6, 2004, the
plaintiff moved to disqualify the judge who issued the
March 29, 2004 decision, and on May 13, 2004, the
plaintiff moved for a new trial on the issue of the
terminating sanctions. On July 19, 2004, the
plaintiffs motion to disqualify the judge who issued the
March 29, 2004 decision was denied, and on August 2,
2004, the plaintiff filed with the state Court of Appeal a
petition for a writ of mandate to challenge the denial, which
was also denied. In September 2004, plaintiffs moved a second
time to disqualify the trial judge. That motion is pending.
Milne and Disney Enterprises, Inc. v.
Stephen Slesinger, Inc.
On
November 5, 2002, Clare Milne, the granddaughter of A. A.
Milne, author of the Winnie the Pooh books, and the
Companys subsidiary Disney Enterprises, Inc. filed a
complaint against Stephen Slesinger, Inc. (SSI) in
the United States District Court for the Central District of
California. On November 4, 2002, Ms. Milne served
notices to SSI and the Companys subsidiary terminating A.
A. Milnes prior grant of rights to Winnie the Pooh,
effective November 5, 2004, and granted all of those rights
to the Companys subsidiary. In their lawsuit,
Ms. Milne and the Companys subsidiary seek a
declaratory judgment, under United States copyright law, that
Ms. Milnes termination notices were valid; that
SSIs rights to Winnie the Pooh in the United States
terminated effective November 5, 2004; that upon
termination of SSIs rights in the United States, the 1983
licensing agreement that is the subject of the
Stephen
Slesinger, Inc. v. The Walt Disney Company
lawsuit
terminated by operation of law; and that, as of November 5,
2004, SSI was entitled to no further royalties for uses of
Winnie the Pooh. In January 2003, SSI filed (a) an answer
denying the material allegations of the complaint and
(b) counterclaims seeking a declaration that
(i) Ms. Milnes grant of rights to Disney
Enterprises, Inc. is void and unenforceable and (ii) Disney
Enterprises, Inc. remains obligated to pay SSI royalties under
the 1983 licensing agreement. SSI also filed a motion to dismiss
the complaint or, in the alternative, for summary judgment. On
May 8, 2003, the Court ruled that Milnes termination
notices are invalid and dismissed SSIs counterclaims as
moot. Following further motions, on August 1, 2003, SSI
filed an amended answer and counterclaims and a third-party
complaint against Harriet Hunt (heir to E. H. Shepard,
illustrator of the original Winnie the Pooh stories), who had
served a notice of termination and a grant of rights similar to
Ms. Milnes. By order dated October 27, 2003, the
Court certified an interlocutory appeal from its May 8 order to
the Court of Appeals for the Ninth Circuit, but on
January 15, 2004, the Court of Appeals denied the
Companys and Milnes petition for an interlocutory
appeal. By order dated August 3, 2004, the Court granted
SSI leave to amend its answer to assert counterclaims against
the Company allegedly arising from the Milne and Hunt
terminations and the grant of rights to the Companys
subsidiary for (a) unlawful and unfair business practices;
-103-
Management believes that it is not currently
possible to estimate the impact if any, that the ultimate
resolution of these matters will have on the Companys
results of operations, financial position or cash flows.
The Company, together with, in some instances,
certain of its directors and officers, is a defendant or
co-defendant in various other legal actions involving copyright,
breach of contract and various other claims incident to the
conduct of its businesses. Management does not expect the
Company to suffer any material liability by reason of such
actions.
14
Restructuring and Impairment
Charges
On November 21, 2004, the Company sold
substantially all of The Disney Store chain in North America
under a long-term licensing arrangement to a wholly-owned
subsidiary of The Childrens Place (TCP).
Pursuant to the terms of the sale, The Disney Store North
America will retain its lease obligation and will become a
wholly owned subsidiary of TCP. TCP will pay the Company a
royalty on the physical retail store sales beginning on the
second anniversary of the closing date of the sale.
During the year, the Company recorded
$64 million of restructuring and impairment charges related
to The Disney Store. The bulk of the charge ($50 million)
was an impairment of the carrying value of the fixed assets
related to the stores to be sold which was recorded in the third
quarter based on the terms of the sale. Additional charges
recorded during the year related to the closure of stores that
would not be sold and to transaction costs related to the sale.
Additional charges for working capital and other
adjustments will be expensed at the date of closing. Additional
restructuring costs will also be recognized later in fiscal
2005. We expect that the total costs that will be recorded in
fiscal 2005 will range from $40 million to $50 million.
The Company is currently considering options with
respect to the stores in Europe, including a potential sale. The
carrying value of the fixed and other long-term assets of the
chain in Europe totaled $36 million at September 30,
2004. Depending on the terms of a sale, an impairment of these
assets is possible. The base rent lease obligations for the
chain in Europe totaled $206 million at September 30,
2004.
-104-
QUARTERLY FINANCIAL SUMMARY
Media Networks
Parks and Resorts
Studio Entertainment
Table of Contents
Consumer Products
2004
2003
2002
$
11,778
$
10,941
$
9,733
7,750
6,412
6,465
8,637
7,312
6,622
76
52
69
8,713
7,364
6,691
2,587
2,396
2,509
(76
)
(52
)
(69
)
2,511
2,344
2,440
$
30,752
$
27,061
$
25,329
Table of Contents
2004
2003
2002
$
2,169
$
1,213
$
986
1,123
957
1,169
662
620
273
534
384
394
$
4,488
$
3,174
$
2,822
before income taxes, minority interests and the
cumulative effect of accounting change
$
4,488
$
3,174
$
2,822
(428
)
(443
)
(417
)
(12
)
(18
)
(21
)
16
34
(617
)
(793
)
(453
)
372
334
225
(64
)
(16
)
cumulative effect of accounting change
$
3,739
$
2,254
$
2,190
$
221
$
203
$
151
719
577
636
289
39
49
37
14
44
58
145
176
204
$
1,427
$
1,049
$
1,086
$
172
$
169
$
180
710
681
648
95
22
39
46
44
63
58
155
107
89
$
1,198
$
1,059
$
1,021
$
26,193
$
25,883
15,221
11,067
6,954
7,832
1,037
966
4,497
4,240
$
53,902
$
49,988
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2004
2003
2002
$
6,611
$
6,319
$
5,566
4,408
3,682
3,294
2,429
1,987
1,987
2,547
1,887
1,819
$
24,012
$
22,124
$
20,770
4,721
3,171
2,724
1,547
1,331
1,325
472
435
510
$
30,752
$
27,061
$
25,329
$
2,934
$
2,113
$
1,739
892
591
499
566
518
545
96
(48
)
39
$
4,488
$
3,174
$
2,822
$
46,788
$
47,177
5,370
2,200
1,622
484
122
127
$
53,902
$
49,988
(1)
Represents 100% of Euro Disney and Hong Kong
Disneylands capital expenditures and depreciation expense
beginning April 1, 2004. Hong Kong Disneylands
capital expenditures totaled $251 million and were
partially funded by minority interest partner contributions
totaling $66 million.
(2)
Identifiable assets include amounts associated
with equity method investments, including notes and other
receivables, as follows:
$
951
$
898
623
(3)
Includes goodwill and other intangible assets
totaling $19,341 in 2004 and $19,344 in 2003
(4)
Primarily deferred tax assets, investments, fixed
and other assets
Principles of Consolidation
Table of Contents
Accounting Changes
Table of Contents
Diluted
Earnings
Amount
per share
$
1,236
$
0.60
(46
)
(0.02
)
$
1,190
$
0.58
Table of Contents
Table of Contents
25 40 years
40 years
Life of lease or asset life if less
25 40 years
2 10 years
10 31 years
Table of Contents
Year Ended
September 30,
2004
2003
2002
$
2,345
$
1,338
$
1,236
21
10
$
2,366
$
1,348
$
1,236
2,049
2,043
2,040
12
3
4
45
21
2,106
2,067
2,044
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Year Ended
September 30,
2004
2003
2002
$
2,345
$
1,267
$
1,236
(255
)
(294
)
(306
)
$
2,090
$
973
$
930
$
1.12
$
0.62
$
0.60
1.00
0.48
0.45
$
1.14
$
0.62
$
0.61
1.02
0.48
0.46
(1)
Does not include restricted stock expense that is
reported in net income (See Note 10).
Table of Contents
2004
2003
$
971
$
1,051
165
106
156
175
517
$
1,292
$
1,849
(1)
Equity investments consist of investments in
affiliated companies over which the Company has significant
influence but not the majority of the equity or risks and
rewards.
(2)
Cost investments consist of marketable securities
classified as available-for-sale and investments in companies
over which the Company does not have significant influence and
ownership of less than 20%.
Table of Contents
Before Euro Disney
and Hong Kong
Euro Disney, Hong
Disneyland
Kong Disneyland
Consolidation
and Adjustments
Total
$
1,730
$
312
$
2,042
7,103
224
7,327
8,833
536
9,369
1,991
(699
)
1,292
12,529
3,953
16,482
2,815
2,815
16,966
16,966
6,843
135
6,978
$
49,977
$
3,925
$
53,902
$
1,872
$
2,221
$
4,093
6,349
617
6,966
8,221
2,838
11,059
8,850
545
9,395
2,950
2,950
3,394
225
3,619
487
311
798
26,075
6
26,081
$
49,977
$
3,925
$
53,902
(1)
All of Euro Disneys borrowings of
$2.2 billion are classified as current as they are subject
to acceleration if certain requirements of the MOA are not
achieved as part of the current restructuring process as
discussed below.
Before Euro Disney
and Hong Kong
Euro Disney, Hong
Disneyland
Kong Disneyland
Consolidation
and Adjustments
Total
$
30,037
$
715
$
30,752
(26,053
)
(651
)
(26,704
)
(64
)
(64
)
(575
)
(42
)
(617
)
398
(26
)
372
3,743
(4
)
3,739
(1,199
)
2
(1,197
)
(199
)
2
(197
)
$
2,345
$
$
2,345
(1)
Under FIN 46R transition rules, the
operating results of Euro Disney and Hong Kong Disneyland are
accounted for on the equity method for the six month period
ended March 31, 2004.
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Before Euro Disney
and Hong Kong
Euro Disney, Hong
Disneyland
Kong Disneyland
Consolidation
and Adjustments
(1)
Total
$
4,283
$
87
$
4,370
(1,138
)
(289
)
(1,427
)
(107
)
50
(57
)
(2,891
)
190
(2,701
)
147
38
185
1,583
274
1,857
$
1,730
$
312
$
2,042
(1)
Includes cash flow of Euro Disney and Hong Kong
Disneyland for the six months ended September 30, 2004.
Royalties and management fees totaling
58 million
for fiscal 2004 will be paid to the Company following completion
of the rights offering discussed below
Royalties and management fees for fiscal 2005
through fiscal 2009, totaling
25 million
per year, payable to the Company will be converted into
subordinated long-term borrowings
Royalties and management fees for fiscal 2007
through fiscal 2014, of up to
25 million
per year, payable to the Company will be converted into
subordinated long-term borrowings if operating results do not
achieve specified levels
Certain covenant violations for fiscal 2003 and
fiscal 2004 will be waived
Euro Disney will receive authorization for up to
240 million
of capital expenditures for fiscal 2005 through fiscal 2009 for
new attractions
Approximately
110 million
of amounts outstanding on the existing line of credit from the
Company and
58 million
of deferred interest payable to Caisse des Dépôts et
Consignations (CDC), a French state financial
institution, will be converted into long-term subordinated
borrowings
The interest rate on approximately
450 million
of Euro Disneys senior borrowings will be increased by
approximately 2%
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Approximately
300 million
of principal payments on senior borrowings will be deferred for
three and one half years
Principal payments on certain CDC borrowings will
be deferred for three and one half years
Euro Disneys security deposit requirement
will be eliminated and the existing deposit balance totaling
100 million
will be paid to senior lenders as a principal payment
Interest payments for fiscal 2005 through fiscal
2012, up to
20 million
per year, payable to the CDC will be converted to long-term
subordinated borrowings if operating results do not achieve
specified levels
Interest payments for fiscal 2013 through fiscal
2014, up to
23 million
per year, payable to the CDC will be converted to long-term
subordinated borrowings if operating results do not achieve
specified levels
250 million
equity rights offering, to which the Company has committed to
subscribe for at least
100 million
with the remainder to be underwritten by a group of financial
institutions
New ten-year
150 million
line of credit from the Company for liquidity needs, which
reduces to
100 million
after five years
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2004
2003
2002
$
3,893
$
3,453
$
3,111
$
1,017
$
826
$
635
$
2,025
$
1,839
1,167
1,163
$
3,192
$
3,002
$
902
$
846
727
603
1,563
1,553
$
3,192
$
3,002
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2004
2003
$
2,319
$
2,359
633
856
1,000
1,236
130
113
4,082
4,564
893
961
175
126
292
283
24
11
1,384
1,381
956
828
6,422
6,773
484
568
$
5,938
$
6,205
Table of Contents
2004
2003
2002
$
(2,364
)
$
(2,915
)
$
(2,315
)
2,824
2,546
2,218
$
460
$
(369
)
$
(97
)
2004
Interest rate and
Stated
Cross-Currency Swaps
(2)
Effective
Interest
Interest
Swap
2004
2003
Rate
(1)
Pay Variable
Pay Fixed
Rate
(3)
Maturities
$
100
$
1.78
%
$
$
100
4.37
%
2005
6,624
8,114
6.32
%
710
5.09
%
2006-2022
1,323
1,323
2.13
%
2.13
%
305
597
7.00
%
7.00
%
254
343
7.02
%
254
3.49
%
2007
1,099
1,519
1.81
%
1,099
2.31
%
2004-2007
373
485
9.00
%
9.00
%
2004
189
191
9.07
%
8.84
%
455
528
10,722
13,100
5.21
%
2,063
100
4.43
%
1,119
5.15
%
5.15
%
608
3.08
%
74
3.24
%
2004
494
3.01
%
3.01
%
545
2.91
%
135
3.03
%
2005
2,766
3.87
%
209
3.93
%
13,488
13,100
4.93
%
2,063
309
4.39
%
4,093
2,457
832
174
$
9,395
$
10,643
$
1,231
$
135
(1)
The stated interest rate represents the
weighted-average coupon rate for each category of borrowings.
For floating rate borrowings, interest rates are based upon the
rates at September 30, 2004; these rates are not
necessarily an indication of future interest rates.
(2)
Amounts represent notional values of interest and
cross-currency rate swaps.
(3)
The effective interest rate includes only the
impact of interest rate and cross-currency swaps on the stated
rate of interest. Other adjustments to the stated interest rate
such as purchase accounting adjustments and debt issuance costs
did not have a material impact on the overall effective interest
rate.
(4)
Includes market value adjustments for current and
non-current debt with qualifying hedges totaling
$369 million and $471 million at September 30,
2004 and 2003, respectively.
(5)
All of Euro Disneys borrowings of
$2.2 billion are classified as current as they are subject
to acceleration if certain requirements of the MOA are not
achieved as part of the current restructuring process (See
Note 4).
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Before Euro Disney and
Euro Disney and
Hong Kong Disneyland
Hong Kong
Consolidation
Disneyland
(1)
Total
$
1,732
$
102
$
1,834
1,514
95
1,609
1,762
116
1,878
61
133
194
486
117
603
4,798
2,203
7,001
$
10,353
$
2,766
$
13,119
(1)
Maturities of Euro Disneys borrowings are
included based on the contractual terms.
2004
2003
2002
$
3,279
$
1,802
$
1,832
460
452
358
$
3,739
$
2,254
$
2,190
$
835
$
(55
)
$
137
90
39
55
350
317
257
1,275
301
449
(103
)
448
372
25
40
32
(78
)
488
404
$
1,197
$
789
$
853
Table of Contents
2004
2003
2002
$
(1,412
)
$
(1,255
)
(842
)
(269
)
(22
)
(193
)
(30
)
(80
)
(17
)
(2,306
)
(1,814
)
3,818
3,036
214
132
261
312
298
117
4,410
3,778
2,104
1,964
74
74
$
2,178
$
2,038
35.0
%
35.0
%
35.0
%
2.0
2.3
2.6
0.4
(3.2
)
(2.5
)
(2.6
)
(3.1
)
(3.1
)
0.8
2.9
4.4
32.0
%
35.0
%
38.9
%
Table of Contents
Table of Contents
Postretirement
Pension Plans
Medical Plans
2004
2003
2004
2003
$
(3,747
)
$
(2,889
)
$
(1,035
)
$
(680
)
(150
)
(115
)
(35
)
(23
)
(216
)
(204
)
(60
)
(48
)
224
(651
)
152
(302
)
120
112
24
18
$
(3,769
)
$
(3,747
)
$
(954
)
$
(1,035
)
$
2,655
$
2,660
$
197
$
199
465
96
24
5
155
26
18
11
(120
)
(112
)
(24
)
(18
)
(16
)
(15
)
$
3,139
$
2,655
$
215
$
197
$
(630
)
$
(1,092
)
$
(739
)
$
(838
)
697
1,231
307
535
21
23
(18
)
(20
)
2
6
$
90
$
168
$
(450
)
$
(323
)
$
69
$
42
$
$
17
(394
)
(843
)
(450
)
(340
)
415
969
$
90
$
168
$
(450
)
$
(323
)
Table of Contents
Postretirement
Pension Plans
Medical Plans
2004
2003
2002
2004
2003
2002
$
149
$
114
$
97
$
35
$
23
$
22
216
204
157
60
48
43
(215
)
(262
)
(241
)
(15
)
(19
)
(21
)
2
2
1
(1
)
(1
)
1
77
(1
)
66
23
12
$
229
$
57
$
14
$
145
$
74
$
57
6.30
%
5.85
%
7.20
%
6.30
%
5.85
%
7.20
%
7.50
%
7.50
%
8.50
%
7.50
%
7.50
%
8.50
%
4.00
%
3.75
%
4.65
%
n/a
n/a
n/a
n/a
n/a
n/a
10.00
%
10.00
%
10.00
%
Minimum
Maximum
40
%
60
%
25
%
35
%
10
%
30
%
0
%
5
%
Table of Contents
2004
2003
57
%
53
%
27
25
15
21
1
1
100
%
100
%
Postretirement
Pension Plans
Medical Plans
$
129
$
25
139
27
149
27
161
29
173
31
1,119
188
$
1,870
$
327
Table of Contents
9% 10%
5% 7%
8% 10%
Pension Plans
Expected
Long-Term
Rate of
Assumed HealthCare
Return On
Cost Trend Rate
Discount Rate
Assets
Total Service
Postretirement
Total Service
Projected
and Interest
Medical
and Interest
Benefit
Net
Costs
Obligations
Costs
Obligations
Periodic Cost
$
(20
)
$
(188
)
$
31
$
620
$
29
27
245
(29
)
(515
)
(29
)
Table of Contents
2004
2003
2002
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
219
$
26.44
216
$
27.48
188
$
29.54
(8
)
24.40
(14
)
44.41
(14
)
33.64
27
24.61
30
17.34
50
21.99
(11
)
18.77
(3
)
14.57
(2
)
18.02
(6
)
33.56
(10
)
47.73
(6
)
34.72
221
$
26.50
219
$
26.44
216
$
27.48
132
$
28.39
109
$
27.86
88
$
26.89
Outstanding
Exercisable
Range of
Weighted Average
Weighted
Weighted
Exercise
Number
Remaining Years
Average
Number
Average
Prices
of Options
of Contractual Life
Exercise Price
of Options
Exercise Price
1
5.6
$
14.59
1
$
14.34
30
7.0
17.37
11
17.64
94
6.4
22.55
44
21.65
26
4.7
27.04
22
27.06
53
5.7
31.50
39
31.72
8
4.1
37.32
7
37.45
7
6.1
41.25
6
41.36
2
5.3
112.68
2
111.91
221
132
Table of Contents
2004
2003
2002
3.5
%
3.4
%
4.8
%
6.0
6.0
6.0
40
%
40
%
30
%
0.85
%
1.21
%
0.96
%
2004
2003
$
4,403
$
4,018
98
205
389
(148
)
(169
)
$
4,558
$
4,238
$
512
$
484
226
64
$
738
$
548
$
12,348
$
9,251
493
599
9,403
7,507
2,924
2,142
25,168
19,499
(11,665
)
(8,794
)
1,852
1,076
1,127
897
$
16,482
$
12,678
Table of Contents
2004
2003
$
324
$
287
84
84
(59
)
(47
)
349
324
1,489
1,486
944
944
33
32
$
2,815
$
2,786
$
341
$
382
29
86
69
59
601
663
$
1,040
$
1,190
$
4,531
$
4,095
1,009
850
21
83
78
$
5,623
$
5,044
$
608
$
540
339
344
230
236
256
230
844
1,183
1,342
1,212
$
3,619
$
3,745
Table of Contents
Table of Contents
2004
2003
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
$
60
$
60
$
17
$
17
(13,488
)
(13,811
)
(13,100
)
(13,692
)
$
(54
)
$
(54
)
$
(131
)
$
(131
)
(26
)
(26
)
(22
)
(22
)
66
66
173
173
86
86
77
77
Table of Contents
Broadcast
Operating
Programming
Leases
Other
Total
$
4,122
$
306
$
1,069
$
5,497
2,455
275
483
3,213
1,233
249
252
1,734
991
207
141
1,339
393
203
85
681
406
932
70
1,408
$
9,600
$
2,172
$
2,100
$
13,872
$
40
41
79
38
39
648
885
(530
)
355
16
$
339
Table of Contents
Table of Contents
Table of Contents
(unaudited)
December 31
March 31
June 30
September 30
$
8,549
$
7,189
$
7,471
$
7,543
688
537
604
516
$
0.33
$
0.26
$
0.29
$
0.25
0.34
0.26
0.29
0.25
$
7,170
$
6,500
$
6,377
$
7,014
107
314
502
415
$
0.05
$
0.15
$
0.24
$
0.20
0.05
0.15
0.25
0.20
(1)
Income and earnings per share before the
cumulative effect of accounting change for fiscal 2003 does not
reflect the after-tax charge for the adoption of EITF 00-21
of $71 million ($0.03 per share) in the first quarter
of 2003. See Note 2 to the Consolidated Financial
Statements.
-105-
Exhibit 10 (aa)
Form of Agreement
THE WALT DISNEY COMPANY
Restricted Stock Unit Award Agreement (Time-Based Vesting)
This AWARD AGREEMENT (the Agreement) is between (Participant) and The Walt Disney Company (Disney), in connection with the Restricted Stock Unit award granted to Participant on , by the Compensation Committee of the Board of Directors (the Committee) of Disney pursuant to the terms of the Amended and Restated 1995 Stock Incentive Plan (the Plan). The applicable terms of the Plan are incorporated herein by reference, including the definitions of terms contained in the Plan.
Section 1. Restricted Award. Disney hereby grants to the Participant, on the terms and conditions set forth herein, an Award of Restricted Stock Units. The Restricted Stock Units are notional units of measurement denominated in shares of Common Stock (i.e., one Restricted Stock Unit is equivalent in value to one share of Common Stock, subject to the terms hereof). The Restricted Stock Units represent an unfunded, unsecured deferred compensation obligation of Disney.
Section 2. Vesting Requirement. The Award shall become vested in two installments as to an equal number of Restricted Stock Units on each of and (each, a Vesting Date), provided the Participant remains continuously employed by Disney or an Affiliate from the date hereof until each such Vesting Date. If this service requirement is not satisfied, the Award (or remaining unvested portion thereof) shall be immediately forfeited. All Restricted Stock Units as to which the vesting requirement of this Section 2 have been satisfied shall be payable in accordance with Section 5 hereof.
Section 3. Accelerated Vesting. Notwithstanding the foregoing, upon the Participants death or disability (within the meaning of Section 409A of the Internal Revenue Code), or upon the occurrence of a Triggering Event within the 12-month period following a Change in Control (in accordance with Section 11 of the Plan as in effect on the date hereof), this Award shall become fully vested and shall be payable in accordance with Section 5 hereof to the extent that it has not previously been forfeited.
Section 4. Dividend Equivalents. Any dividend paid in cash on shares of the Common Stock of Disney will be credited to the Participant as additional Restricted Stock Units as if the Restricted Stock Units previously held by the Participant were outstanding shares of Common Stock of Disney, as follows: Such credit shall be made in whole and/or fractional Restricted Stock Units and shall be, based on the fair market value (as defined in the Plan) of the shares of Common Stock of Disney on the date of payment of any such dividend. All such additional Restricted Stock Units shall be subject to the same vesting requirements applicable to the previously held Restricted Stock Units in respect of which they were credited and shall be awarded in accordance with Section 5 hereof.
Section 5. Payment of Award. Payment of vested Restricted Stock Units shall be made within 30 days following the satisfaction of the vesting requirement under Section 2 hereof for each respective Vesting Date (or following accelerated vesting under Section 3 hereof). The Restricted Stock Units shall be paid in cash or in shares of Common Stock (or some combination thereof), as determined by the Committee in its discretion at the time of payment, and in either case shall be paid to the Participant after deduction of applicable minimum statutory withholding taxes as determined by Disney.
Section 6. Restrictions on Transfer. Neither this Restricted Stock Unit Award nor any Restricted Stock Units covered hereby may be sold, assigned, transferred, encumbered, hypothecated or pledged by the Participant, other than to Disney as a result of forfeiture of the units as provided herein.
Section 7. No Voting Rights. The Restricted Stock Units granted pursuant to this Award, whether or not vested, will not confer any voting rights upon the Participant, unless and until the Award is paid in shares of Common Stock.
Section 8. Award Subject to Plan. This Award is subject to the terms of the Plan. In the event of a conflict or ambiguity between any term or provision contained herein and a term or provision of the Plan, the Plan will govern and prevail. The Restricted Stock Units constitute phantom stock for purposes of the Plan.
Section 9. Changes in Capitalization. The Restricted Stock Units under this Award shall be subject to the provisions of the Plan relating to adjustments for changes in corporate capitalization.
Section 10. No Right of Employment. Nothing in this Award Agreement shall
confer upon the Participant any right to continue as an employee of Disney or
an Affiliate nor interfere in any way with the right of Disney or an Affiliate
to terminate the Participants employment at any time or to change the terms
and conditions of such employment.
Section 11. Governing Law. This Award Agreement shall be construed and
enforced in accordance with the laws of the State of Delaware, without giving
effect to the choice of law principles thereof.
THE WALT DISNEY COMPANY
PARTICIPANT
By:
(Signature of Participant)
2
Exhibit 10 (bb)
Form of Agreement
THE WALT DISNEY COMPANY
Restricted Stock Unit Award Agreement (Bonus-Related)
This AWARD AGREEMENT (the Agreement) is between (Participant) and The Walt Disney Company (Disney), in connection with the Restricted Stock Unit award granted to Participant on , by the Compensation Committee of the Board of Directors (the Committee) of Disney pursuant to the terms of the 2002 Executive Performance Plan (the Plan) and the Amended and Restated 1995 Stock Incentive Plan (the Stock Plan). (The Plan and the Stock Plan are collectively referred to herein as the Plans.) The applicable terms of the Plans are incorporated herein by reference, including the definitions of terms contained in the Plans.
Section 1. Restricted Award. Disney hereby grants to the Participant, on the terms and conditions set forth herein, an Award of Restricted Stock Units. These Restricted Stock Units represent [ a portion ] [ all ] of the annual bonus awarded to Participant for fiscal year pursuant to Section 5 of the Plan. The Restricted Stock Units are notional units of measurement denominated in shares of Common Stock (i.e., one Restricted Stock Unit is equivalent in value to one share of Common Stock, subject to the terms hereof). The Restricted Stock Units represent an unfunded, unsecured deferred compensation obligation of Disney.
Section 2. Vesting Requirement. The Award shall become vested in two installments as to an equal number of Restricted Stock Units on each of and (each, a Vesting Date), provided the Participant remains continuously employed by Disney or an Affiliate from the date hereof until such Vesting Date. If this service requirement is not satisfied, the Award (or remaining unvested portion thereof) shall be immediately forfeited. All Restricted Stock Units as to which the vesting requirement of this Section 2 have been satisfied shall be payable in accordance with Section 5 hereof.
Section 3. Accelerated Vesting. Notwithstanding the foregoing, upon the Participants death or disability (within the meaning of Section 409A of the Internal Revenue Code), or upon the occurrence of a Triggering Event within the 12-month period following a Change in Control (in accordance with Section 11 of the Stock Plan as in effect on the date hereof), this Award shall become fully vested and shall be payable in accordance with Section 5 hereof to the extent that it has not previously been forfeited. In addition, in the event of a termination of any Participants employment by Disney (or an Affiliate) in breach of any material provision of any employment agreement of Participant ( i.e., without good cause) or by Participant pursuant to any provision of his or her employment agreement conferring upon Participant the right of early termination of employment as a result of the failure of Disney (or an Affiliate) to comply with any provision of Participants employment agreement ( i.e., for good reason), or if Participant shall not be subject to an employment agreement with the Disney (or an Affiliate) and the employment of Participant shall be terminated in a manner that does not constitute good cause as such term is interpreted by the courts of the state in which Participant is employed, then this Award shall become immediately and fully vested and payable to Participant.
Section 4. Dividend Equivalents. Any dividend paid in cash on shares of the Common Stock of Disney will be credited to the Participant as additional Restricted Stock Units as if the Restricted Stock Units previously held by the Participant were outstanding shares of Common Stock of Disney, as follows: Such credit shall be made in whole and/or fractional Restricted Stock Units and shall be, based on the fair market value (as defined in the Plan) of the shares of Common Stock of Disney on the date of payment of any such dividend. All such additional Restricted Stock Units shall be subject to the same vesting requirements applicable to the previously held Restricted Stock Units in respect of which they were credited and shall be payable in accordance with Section 5 hereof.
Section 5. Payment of Award. Payment of vested Restricted Stock Units shall be made within 30 days following the satisfaction of the vesting requirement under Section 2 hereof for each respective Vesting Date (or following accelerated vesting under Section 3 hereof). The Restricted Stock Units shall be paid in cash or in shares of Common Stock (or some combination thereof), as determined by the Committee in its discretion at the time of payment, and in either case shall be paid to the Participant after deduction of applicable minimum statutory withholding taxes as determined by Disney.
Section 6. Restrictions on Transfer. Neither this Restricted Stock Unit Award nor any Restricted Stock Units covered hereby may be sold, assigned, transferred, encumbered, hypothecated or pledged by the Participant, other than to Disney as a result of forfeiture of the units as provided herein.
Section 7. No Voting Rights. The Restricted Stock Units granted pursuant to this Award, whether or not vested, will not confer any voting rights upon the Participant, unless and until the Award is paid in shares of Common Stock.
Section 8. Award Subject to the Plans. This Award is subject to the terms of the Plans. In the event of a conflict or ambiguity between any term or provision contained herein and a term or provision of the Plans, the Plans will govern and prevail. The Restricted Stock Units constitute phantom stock for purposes of the Stock Plan.
Section 9. Changes in Capitalization. The Restricted Stock Units under this Award shall be subject to the provisions of the Stock Plan relating to adjustments for changes in corporate capitalization.
Section 10. No Right of Employment. Nothing in this Award Agreement shall
confer upon the Participant any right to continue as an employee of Disney or
an Affiliate nor interfere in any way with the right of Disney or an Affiliate
to terminate the Participants employment at any time or to change the terms
and conditions of such employment.
Section 11. Governing Law. This Award Agreement shall be construed and
enforced in accordance with the laws of the State of Delaware, without giving
effect to the choice of law principles thereof.
THE WALT DISNEY COMPANY
PARTICIPANT
By:
(Signature of Participant)
2
Exhibit 10 (cc)
Form of Agreement
THE WALT DISNEY COMPANY
Performance-Based
Stock Unit Award
AWARD AGREEMENT, dated as of , between The Walt Disney Company, a Delaware corporation (Disney), and (the Participant). This Award is granted by the Compensation Committee of the Disney Board of Directors (the Committee) pursuant to the terms of the 2002 Executive Performance Plan (the Plan), and pursuant to the terms of the Amended and Restated 1995 Stock Incentive Plan (the Stock Plan). The applicable terms of the Plan and the Stock Plan are incorporated herein by reference, including the definitions of terms contained therein.
Stock Unit Award. Disney hereby grants to the Participant, on the terms and conditions set forth herein, an Award of Stock Units. The Stock Units are notional units of measurement denominated in Shares of Disney (i.e. one Stock Unit is equivalent in value to one Share, subject to the terms hereof). The Stock Units represent an unfunded, unsecured obligation of Disney.
Vesting Requirements. The vesting of this Award (other than pursuant to accelerated vesting in certain circumstances as provided in Section 3 below) shall be subject to the satisfaction of the conditions set forth in both subsection A and subsection B of this Section 2:
A. Performance Vesting Requirement. The Award shall be subject to
performance vesting requirements in two installments, each of
which shall relate to 50% of the total number of Stock Units
granted hereunder, based upon the achievement of the Performance
Targets applicable to the Performance Periods specified below,
subject to certification of achievement of such Performance
Targets by the Committee pursuant to Section 4.8 of the Plan (and
to compliance with subsection B of this Section 2). The
respective Performance Targets (and the Business Criteria to which
they relate) shall be established by the Committee not later than
90 days following the beginning of each Performance Period. If
the Performance Target for a Performance Period is not satisfied,
the applicable portion of the Award shall be immediately
forfeited. The Performance Periods for the Stock Units granted
hereunder shall be as follows:
Performance Period
Stock Units
[number of units]
[number of units]
B. Service Vesting Requirement. In addition to the performance vesting requirement of subsection A of this Section 2, the right of the Participant to receive payment of this Award shall become vested only if he or she remains continuously employed by Disney or an Affiliate from the date hereof until the last day of the month in which the Committee certifies in writing that the Performance Target has been satisfied for the applicable Performance Period prior to such date. If this service vesting requirement is not satisfied, this Award (or the remaining unvested portion thereof) shall be immediately forfeited and shall not become payable.
All Stock Units for which all of the requirements of this Section 2 have been satisfied shall become vested and shall thereafter be payable in accordance with Section 4 hereof.
Section 3. Accelerated Vesting. Notwithstanding the terms and conditions of Section 2 hereof, upon the Participants death or disability (within the meaning of Section 409A of the Internal Revenue Code), or upon the occurrence of a Triggering Event within the 12-month period following a Change in Control (in accordance with Section 11 of the Stock Plan as in effect on the date hereof), this Award shall become fully vested and shall be payable in accordance with Section 5 hereof to the extent that it has not previously been forfeited.
Section 4. Dividend Equivalents. Any dividends paid in cash on Shares of Disney will be credited to the Participant as additional Stock Units as if the Stock Units previously held by the Participant were outstanding Shares, as follows: Such credit shall be made in whole and/or fractional Stock Units and shall be based on the fair market value (as defined in the Stock Plan) of the Shares on the date of payment of such dividend. All such additional Stock Units shall be subject to the same vesting requirements applicable to the previously held Stock Units in respect of which they were credited and shall be payable in accordance with Section 5 hereof.
Section 5. Payment of Award. Payment of vested Stock Units shall be made within 30 days following the date specified in Section 2.B. hereof, provided that all of the applicable vesting requirements under Section 2 hereof shall have been satisfied for the applicable Performance Period1 (or within 30 days following acceleration of vesting, if applicable). The Stock Units shall be paid in cash or in Shares (or some combination thereof), as determined by the Committee in its discretion at the time of payment, and in either case shall be paid to the Participant after deduction of applicable withholding taxes in the amount determined by the Committee, provided that such amount shall not exceed the Participants estimated federal, state and local tax obligation with respect to payment of the Award.
Section 6. Restrictions on Transfer. Neither this Stock Unit Award nor any Stock Units covered hereby may be sold, assigned, transferred, encumbered, hypothecated or pledged by the Participant, other than to Disney as a result of forfeiture of the units as provided herein and as provided in Section 6 of the Plan. The Stock Units constitute Restricted Units as defined in Section 2.2 of the Plan.
1 | By way of example only, if the Performance Target for the period October 1, 200 through September 30, 200 is achieved, and the Committee certifies that such Performance Target has been met on November 21, 200 , the Award will be paid on or before December 30, 200 (subject to the Participants continued employment by Disney or an Affiliate through November 30, 200 ). |
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Section 7. No Voting Rights. The Stock Units granted pursuant to this Award, whether or not vested, will not confer any voting rights upon the Participant, unless and until the Award is paid in Shares.
Section 8. Award Subject to Plans. This Stock Unit Award is subject to the terms of the Plan and the Stock Plan, the terms and provisions of which are hereby incorporated by reference. In the event of a conflict or ambiguity between any term or provision contained herein and a term or provision of the Plan or the Stock Plan, the Plan or the Stock Plan (as applicable) will govern and prevail.
Section 9. Changes in Capitalization. The Stock Units under this Award shall be subject to the provisions of the Stock Plan relating to adjustments for changes in corporate capitalization.
Section 10. No Right of Employment. Nothing in this Award Agreement shall confer upon the Participant any right to continue as an employee of Disney or an Affiliate nor interfere in any way with the right of Disney or an Affiliate to terminate the Participants employment at any time or to change the terms and conditions of such employment.
Section 11. Governing Law. This Award Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without giving effect to the choice of law principles thereof.
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3
Exhibit 21
Subsidiaries of the Company
Name of Subsidiary
State or Region of Incorporation
California
California
Delaware
New York
New York
California
California
California
Netherlands Antilles
California
California
California
New York
Florida
California
New York
Delaware
France
California
France
Cayman Islands
Hong Kong
Delaware
Netherlands
New York
England
California
Japan
California
Florida
England
France
Florida
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-26106, 33-35405, 33-57811, 333-91571, 333-31012,
333-74624, 333-16953, and 333-116952), Form S-3 (No. 33-67870) and Form S-3/A
(333-34167) of The Walt Disney Company of our report dated December 9, 2004
relating to the consolidated financial statements, managements assessment of
the effectiveness of internal control over financial reporting and the
effectiveness of internal control over financial reporting, which appear in
this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, CA
December 9, 2004
Exhibit 31(a)
RULE 13a-14(a) CERTIFICATION IN
I, Michael D. Eisner, Chief Executive Officer of
The Walt Disney Company (the Company), certify that:
Date: December 13, 2004
1.
I have reviewed this annual report on
Form 10-K of the Company;
2.
Based on my knowledge, this annual report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;
3.
Based on my knowledge, the financial statements,
and other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4.
The registrants other certifying officers
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b)
designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles;
c)
evaluated the effectiveness of the
registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5.
The registrants other certifying officer
and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material
weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process,
summarize and report financial information; and
b)
any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
By:
/s/ MICHAEL D. EISNER
Michael D. Eisner
Chief Executive Officer
Exhibit 31(b)
RULE 13a-14(a) CERTIFICATION IN
I, Thomas O. Staggs, Senior Executive Vice
President and Chief Financial Officer of The Walt Disney Company
(the Company), certify that:
Date: December 13, 2004
1.
I have reviewed this annual report on
Form 10-K of the Company;
2.
Based on my knowledge, this annual report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;
3.
Based on my knowledge, the financial statements,
and other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4.
The registrants other certifying officers
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b)
designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles;
c)
evaluated the effectiveness of the
registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5.
The registrants other certifying officer
and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material
weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process,
summarize and report financial information; and
b)
any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
By:
/s/ THOMAS O. STAGGS
Thomas O. Staggs
Senior Executive Vice President
and Chief Financial Officer
Exhibit 32(a)
CERTIFICATION PURSUANT TO
In connection with the Annual Report of The Walt
Disney Company (the Company) on Form 10-K for
the fiscal year ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Michael D. Eisner, Chairman of the
Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements
of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934; and
2.
The information contained in the Report fairly
presents, in all material respects, the financial condition and
result of operations of the Company.
By:
/s/ MICHAEL D. EISNER
Michael D. Eisner
Chief Executive Officer
December 13, 2004
*
A signed original of this written statement
required by Section 906 has been provided to The Walt
Disney Company and will be retained by The Walt Disney Company
and furnished to the Securities and Exchange Commission or its
staff upon request.
Exhibit 32(b)
CERTIFICATION PURSUANT TO
In connection with the Annual Report of The Walt
Disney Company (the Company) on Form 10-K for
the fiscal year ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Thomas O. Staggs, Senior Executive
Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements
of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934; and
2.
The information contained in the Report fairly
presents, in all material respects, the financial condition and
result of operations of the Company.
By:
/s/ THOMAS O. STAGGS
Thomas O. Staggs
Senior Executive Vice President
and Chief Financial
Officer
December 13, 2004
*
A signed original of this written statement
required by Section 906 has been provided to The Walt
Disney Company and will be retained by The Walt Disney Company
and furnished to the Securities and Exchange Commission or its
staff upon request.