e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended July 2, 2005
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Commission File Number 1-11605 |
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Incorporated in
Delaware
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I.R.S. Employer Identification |
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No. 95-4545390 |
500 South Buena Vista Street, Burbank, California 91521
(818) 560-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES þ NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
YES þ NO
There were 2,010,139,928 shares of common stock outstanding as of August 2, 2005.
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per share data)
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Quarter Ended |
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Nine Months Ended |
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July 2, |
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June 30, |
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July 2, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues |
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$ |
7,715 |
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$ |
7,471 |
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$ |
24,210 |
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$ |
23,209 |
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Costs and expenses |
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(6,369 |
) |
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(6,375 |
) |
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(20,516 |
) |
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(19,912 |
) |
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Gain on sale of businesses and restructuring and
impairment charges |
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24 |
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(56 |
) |
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(59 |
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Net interest expense |
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(134 |
) |
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(151 |
) |
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(364 |
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(446 |
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Equity in the income of investees |
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125 |
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126 |
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363 |
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300 |
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Income before income taxes and minority interests |
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1,361 |
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1,015 |
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3,693 |
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3,092 |
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Income taxes |
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(463 |
) |
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(365 |
) |
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(1,294 |
) |
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(1,132 |
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Minority interests |
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(47 |
) |
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(46 |
) |
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(127 |
) |
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(131 |
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Net income |
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$ |
851 |
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$ |
604 |
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$ |
2,272 |
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$ |
1,829 |
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Earnings per share: |
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Diluted |
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$ |
0.41 |
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$ |
0.29 |
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$ |
1.09 |
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$ |
0.88 |
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Basic |
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$ |
0.42 |
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$ |
0.29 |
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$ |
1.11 |
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$ |
0.89 |
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Average number of common and common equivalent
shares outstanding: |
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Diluted |
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2,096 |
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2,111 |
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2,105 |
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2,106 |
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Basic |
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2,031 |
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2,053 |
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2,039 |
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2,049 |
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See Notes to Condensed Consolidated Financial Statements
2
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions)
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July 2, |
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September 30, |
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2005 |
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2004 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
2,034 |
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$ |
2,042 |
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Receivables |
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4,870 |
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4,558 |
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Inventories |
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611 |
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775 |
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Television costs |
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537 |
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484 |
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Deferred income taxes |
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772 |
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772 |
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Other current assets |
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684 |
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738 |
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Total current assets |
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9,508 |
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9,369 |
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Film and television costs |
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5,741 |
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5,938 |
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Investments |
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1,345 |
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1,292 |
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Parks, resorts and other properties, at cost |
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Attractions, buildings and equipment |
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25,827 |
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25,168 |
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Accumulated depreciation |
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(12,400 |
) |
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(11,665 |
) |
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13,427 |
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13,503 |
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Projects in progress |
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2,134 |
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1,852 |
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Land |
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1,129 |
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1,127 |
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16,690 |
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16,482 |
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Intangible assets, net |
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2,794 |
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2,815 |
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Goodwill |
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16,974 |
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16,966 |
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Other assets |
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840 |
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1,040 |
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$ |
53,892 |
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$ |
53,902 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable and other accrued liabilities |
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$ |
4,831 |
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$ |
5,623 |
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Current portion of borrowings |
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1,609 |
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4,093 |
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Unearned royalties and other advances |
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1,596 |
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1,343 |
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Total current liabilities |
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8,036 |
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11,059 |
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Borrowings |
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10,925 |
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9,395 |
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Deferred income taxes |
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3,113 |
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2,950 |
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Other long term liabilities |
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3,611 |
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3,619 |
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Minority interests |
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1,153 |
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|
798 |
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Commitments and contingencies (Note 13) |
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Shareholders equity |
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Preferred stock, $.01 par value
Authorized 100 million shares, Issued none |
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Common stock, $.01 par value
Authorized 3.6 billion shares, Issued 2.2 billion shares at
July 2, 2005 and 2.1 billion shares at September 30, 2004 |
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12,926 |
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12,447 |
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Retained earnings |
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17,514 |
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15,732 |
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Accumulated other comprehensive loss |
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(163 |
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(236 |
) |
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30,277 |
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27,943 |
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Treasury stock, at cost, 150.4 million shares at July 2, 2005 and
101.6 million shares at September 30, 2004 |
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(3,223 |
) |
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(1,862 |
) |
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27,054 |
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26,081 |
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$ |
53,892 |
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$ |
53,902 |
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See Notes to Condensed Consolidated Financial Statements
3
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
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Nine Months Ended |
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July 2, |
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June 30, |
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2005 |
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2004 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
2,272 |
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$ |
1,829 |
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|
|
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Depreciation |
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|
998 |
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|
872 |
|
Deferred income taxes |
|
|
129 |
|
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|
103 |
|
Equity in the income of investees |
|
|
(363 |
) |
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|
(300 |
) |
Cash distributions received from equity investees |
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|
279 |
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|
299 |
|
Minority interests |
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|
127 |
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131 |
|
Amortization of film and television production costs |
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2,370 |
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|
2,105 |
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Film and television production spending |
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(2,012 |
) |
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|
(1,633 |
) |
Non current television programming costs |
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(43 |
) |
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|
(307 |
) |
Changes in noncurrent assets and liabilities, and other |
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|
(147 |
) |
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|
96 |
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|
|
|
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|
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|
1,338 |
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|
1,366 |
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Changes in working capital |
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Receivables |
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(261 |
) |
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|
(88 |
) |
Inventories |
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|
41 |
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|
53 |
|
Other current assets |
|
|
(75 |
) |
|
|
(83 |
) |
Accounts payable and other accrued liabilities |
|
|
(274 |
) |
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|
149 |
|
Income taxes |
|
|
(38 |
) |
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|
101 |
|
Television programming costs |
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(52 |
) |
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|
76 |
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(659 |
) |
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208 |
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Cash provided by operations |
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2,951 |
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|
3,403 |
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INVESTING ACTIVITIES |
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Investments in parks, resorts and other property |
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(1,187 |
) |
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(894 |
) |
Working capital proceeds from the Disney Stores North
America sale |
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100 |
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Other |
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18 |
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31 |
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Cash used by investing activities |
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(1,069 |
) |
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|
(863 |
) |
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FINANCING ACTIVITIES |
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Commercial paper borrowings, net |
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819 |
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|
100 |
|
Borrowings |
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|
245 |
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|
79 |
|
Reduction of borrowings |
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|
(1,723 |
) |
|
|
(1,301 |
) |
Dividends |
|
|
(490 |
) |
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|
(430 |
) |
Repurchases of common stock |
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|
(1,361 |
) |
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|
Euro Disney equity offering |
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|
171 |
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Equity partner contributions |
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|
104 |
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Exercise of stock options and other |
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|
345 |
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|
178 |
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|
|
|
|
|
|
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|
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Cash used by financing activities |
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|
(1,890 |
) |
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|
(1,374 |
) |
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(Decrease) Increase in cash and cash equivalents |
|
|
(8 |
) |
|
|
1,166 |
|
Cash and cash equivalents, beginning of period |
|
|
2,042 |
|
|
|
1,857 |
|
|
|
|
|
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|
Cash and cash equivalents, end of period |
|
$ |
2,034 |
|
|
$ |
3,023 |
|
|
|
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|
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|
See Notes to Condensed Consolidated Financial Statement
4
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
1. Principles of Consolidation
These Condensed Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) for interim
financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been reflected in these Condensed
Consolidated Financial Statements. Operating results for the nine months ended July 2, 2005 are not
necessarily indicative of the results that may be expected for the year ending October 1, 2005.
Certain reclassifications have been made in the fiscal 2004 financial statements to conform to the fiscal 2005
presentation.
These financial statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year
ended September 30, 2004 (the 2004 Annual Report).
Effective with the beginning of fiscal year 2005 and in connection with the completion of the
Companys implementation of new company-wide integrated financial systems in late fiscal 2004, the
Company changed its reporting period from a calendar period end to a period end that coincides with
the cut-off of the Companys accounting systems. The accounting systems cut off on the Saturday
closest to the calendar quarter end. Accordingly, the third quarter of fiscal 2005 began on April
3, 2005 and ended on July 2, 2005 whereas the third quarter of the prior-year began on April 1,
2004 and ended on June 30, 2004. This resulted in the same number of reporting days in each
quarter and one incremental day for the current nine-month period. This change did not have a
material impact on quarter-over-quarter earnings comparisons; however, it did benefit diluted earnings per
share by approximately $0.01 on a cumulative basis for the current nine-month period. Fiscal 2005
will end on October 1, 2005 and fiscal 2009 will be the first fifty-three week fiscal year
following this change.
In December 1999, DVD Financing, Inc. (DFI), a subsidiary of Disney Vacation Development, Inc.
and an indirect subsidiary of the Company, completed a receivables sale transaction which
established a facility that permits DFI to sell receivables arising from the sale of vacation club
memberships on a periodic basis. In connection with this facility, DFI prepares separate financial
statements, although its separate assets and liabilities are also consolidated in these financial
statements.
The terms Company, we, us and our are used in this report to refer collectively to the
parent company and the subsidiaries through which our various businesses are actually conducted.
5
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
2. Segment Information
The operating segments reported below are the segments of the Company for which separate
financial information is available and for which segment results are evaluated regularly by the
Chief Executive Officer in deciding how to allocate resources and in assessing performance.
|
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|
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|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Networks |
|
$ |
3,386 |
|
|
$ |
2,931 |
|
|
$ |
9,855 |
|
|
$ |
8,891 |
|
Parks and Resorts |
|
|
2,449 |
|
|
|
2,288 |
|
|
|
6,663 |
|
|
|
5,588 |
|
Studio Entertainment |
|
|
1,462 |
|
|
|
1,711 |
|
|
|
6,084 |
|
|
|
6,837 |
|
Consumer Products |
|
|
418 |
|
|
|
541 |
|
|
|
1,608 |
|
|
|
1,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,715 |
|
|
$ |
7,471 |
|
|
$ |
24,210 |
|
|
$ |
23,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Segment operating income (loss)(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Networks |
|
$ |
998 |
|
|
$ |
673 |
|
|
$ |
2,190 |
|
|
$ |
1,721 |
|
Parks and Resorts |
|
|
448 |
|
|
|
421 |
|
|
|
899 |
|
|
|
841 |
|
Studio Entertainment |
|
|
(34 |
) |
|
|
28 |
|
|
|
552 |
|
|
|
639 |
|
Consumer Products |
|
|
61 |
|
|
|
76 |
|
|
|
403 |
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,473 |
|
|
$ |
1,198 |
|
|
$ |
4,044 |
|
|
$ |
3,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Studio Entertainment segment receives royalties on Consumer
Products sales of merchandise based on certain Studio film properties. This
intersegment revenue and operating income was $16 million and $10 million for the
quarters ended July 2, 2005 and June 30, 2004, respectively, and $69 million and
$55 million for the nine months ended July 2, 2005 and June 30, 2004,
respectively. |
The Company evaluates the performance of its operating segments based on segment
operating income. A reconciliation of segment operating income to income before income
taxes and minority interests is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Segment operating income |
|
$ |
1,473 |
|
|
$ |
1,198 |
|
|
$ |
4,044 |
|
|
$ |
3,589 |
|
Corporate and unallocated shared expenses |
|
|
(124 |
) |
|
|
(99 |
) |
|
|
(342 |
) |
|
|
(284 |
) |
Amortization of intangible assets |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
(8 |
) |
Gain on sale of businesses and
restructuring and impairment charges |
|
|
24 |
|
|
|
(56 |
) |
|
|
|
|
|
|
(59 |
) |
Net interest expense |
|
|
(134 |
) |
|
|
(151 |
) |
|
|
(364 |
) |
|
|
(446 |
) |
Equity in the income of investees |
|
|
125 |
|
|
|
126 |
|
|
|
363 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority
interests |
|
$ |
1,361 |
|
|
$ |
1,015 |
|
|
$ |
3,693 |
|
|
$ |
3,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
3. Accounting Changes
FIN 46
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46R, Consolidation of Variable Interest Entities (FIN 46). Pursuant to the provisions of FIN
46, 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 2004 and the income and cash flow
statements beginning April 1, 2004, the beginning of the third quarter of fiscal 2004. Under FIN
46 transition rules, the operating results of Euro Disney and Hong Kong Disneyland continued to be
accounted for on the equity method for the six months ended March 31, 2004.
The following table presents a condensed consolidating balance sheet for the Company as of
July 2, 2005, reflecting the impact of consolidating the balance sheets of Euro Disney and Hong
Kong Disneyland.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Euro |
|
|
|
|
|
|
|
|
|
Disney and |
|
|
Euro Disney, |
|
|
|
|
|
|
Hong Kong |
|
|
Hong Kong |
|
|
|
|
|
|
Disneyland |
|
|
Disneyland and |
|
|
|
|
|
|
Consolidation |
|
|
Adjustments |
|
|
Total |
|
Cash and cash equivalents |
|
$ |
1,649 |
|
|
$ |
385 |
|
|
$ |
2,034 |
|
Other current assets |
|
|
7,228 |
|
|
|
246 |
|
|
|
7,474 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
8,877 |
|
|
|
631 |
|
|
|
9,508 |
|
Investments |
|
|
2,146 |
|
|
|
(801 |
) |
|
|
1,345 |
|
Fixed assets |
|
|
12,407 |
|
|
|
4,283 |
|
|
|
16,690 |
|
Intangible assets |
|
|
2,794 |
|
|
|
|
|
|
|
2,794 |
|
Goodwill |
|
|
16,974 |
|
|
|
|
|
|
|
16,974 |
|
Other assets |
|
|
6,570 |
|
|
|
11 |
|
|
|
6,581 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
49,768 |
|
|
$ |
4,124 |
|
|
$ |
53,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of borrowings |
|
$ |
1,608 |
|
|
$ |
1 |
|
|
$ |
1,609 |
|
Other current liabilities |
|
|
5,944 |
|
|
|
483 |
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
7,552 |
|
|
|
484 |
|
|
|
8,036 |
|
Borrowings |
|
|
8,073 |
|
|
|
2,852 |
|
|
|
10,925 |
|
Deferred income taxes |
|
|
3,113 |
|
|
|
|
|
|
|
3,113 |
|
Other long-term liabilities |
|
|
3,488 |
|
|
|
123 |
|
|
|
3,611 |
|
Minority interest |
|
|
488 |
|
|
|
665 |
|
|
|
1,153 |
|
Shareholders equity |
|
|
27,054 |
|
|
|
|
|
|
|
27,054 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
49,768 |
|
|
$ |
4,124 |
|
|
$ |
53,892 |
|
|
|
|
|
|
|
|
|
|
|
7
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
The following tables present a condensed consolidating income statement of the Company for the
quarter and nine-months ended July 2, 2005, reflecting the impact of consolidating the income
statements of Euro Disney and Hong Kong Disneyland.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended July 2, 2005 |
|
|
|
Before Euro |
|
|
Euro Disney, |
|
|
|
|
|
|
Disney and |
|
|
Hong Kong |
|
|
|
|
|
|
Hong Kong |
|
|
Disneyland |
|
|
|
|
|
|
Disneyland |
|
|
and |
|
|
|
|
|
|
Consolidation(1) |
|
|
Adjustments |
|
|
Total |
|
Revenues |
|
$ |
7,404 |
|
|
$ |
311 |
|
|
$ |
7,715 |
|
Cost and expenses |
|
|
(6,024 |
) |
|
|
(345 |
) |
|
|
(6,369 |
) |
Gain on sale of businesses and restructuring and
impairment charges |
|
|
24 |
|
|
|
|
|
|
|
24 |
|
Net interest expense |
|
|
(121 |
) |
|
|
(13 |
) |
|
|
(134 |
) |
Equity in the income of investees |
|
|
107 |
|
|
|
18 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
1,390 |
|
|
|
(29 |
) |
|
|
1,361 |
|
Income taxes |
|
|
(463 |
) |
|
|
|
|
|
|
(463 |
) |
Minority interests |
|
|
(76 |
) |
|
|
29 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
851 |
|
|
$ |
|
|
|
$ |
851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 2, 2005 |
|
|
|
Before Euro |
|
|
Euro Disney, |
|
|
|
|
|
|
Disney and |
|
|
Hong Kong |
|
|
|
|
|
|
Hong Kong |
|
|
Disneyland |
|
|
|
|
|
|
Disneyland |
|
|
and |
|
|
|
|
|
|
Consolidation(1) |
|
|
Adjustments |
|
|
Total |
|
Revenues |
|
$ |
23,227 |
|
|
$ |
983 |
|
|
$ |
24,210 |
|
Cost and expenses |
|
|
(19,449 |
) |
|
|
(1,067 |
) |
|
|
(20,516 |
) |
Gain on sale of businesses and restructuring and
impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
(377 |
) |
|
|
13 |
|
|
|
(364 |
) |
Equity in the income of investees |
|
|
338 |
|
|
|
25 |
|
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
3,739 |
|
|
|
(46 |
) |
|
|
3,693 |
|
Income taxes |
|
|
(1,294 |
) |
|
|
|
|
|
|
(1,294 |
) |
Minority interests |
|
|
(173 |
) |
|
|
46 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,272 |
|
|
$ |
|
|
|
$ |
2,272 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts include Euro Disney and Hong Kong Disneyland under the equity
method of accounting. As such, any royalty and management fee income from these operations
is included in Revenues and our share of their net income is included in Equity in the
Income of Investees. |
8
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
The following table presents the condensed consolidating cash flow statement of the Company
for the nine months ended July 2, 2005, reflecting the impact of consolidating the cash flow
statements of Euro Disney and Hong Kong Disneyland.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Euro |
|
|
Euro Disney, |
|
|
|
|
|
|
Disney and |
|
|
Hong Kong |
|
|
|
|
|
|
Hong Kong |
|
|
Disneyland |
|
|
|
|
|
|
Disneyland |
|
|
and |
|
|
|
|
|
|
consolidation |
|
|
Adjustments |
|
|
Total |
|
Cash provided (used) by operations |
|
$ |
3,036 |
|
|
$ |
(85 |
) |
|
$ |
2,951 |
|
Investments in parks, resorts and other property |
|
|
(705 |
) |
|
|
(482 |
) |
|
|
(1,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,331 |
|
|
|
(567 |
) |
|
|
1,764 |
|
Other investing activities |
|
|
(17 |
) |
|
|
135 |
|
|
|
118 |
|
Cash (used) provided by financing activities |
|
|
(2,395 |
) |
|
|
505 |
|
|
|
(1,890 |
) |
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(81 |
) |
|
|
73 |
|
|
|
(8 |
) |
Cash and cash equivalents, beginning of period |
|
|
1,730 |
|
|
|
312 |
|
|
|
2,042 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
1,649 |
|
|
$ |
385 |
|
|
$ |
2,034 |
|
|
|
|
|
|
|
|
|
|
|
EITF D-108
On September 30, 2004, the Emerging Issues Task Force (EITF) of the FASB issued Topic No.
D-108, Use of the Residual Method to Value Acquired Assets Other than Goodwill (EITF D-108). EITF
D-108 requires that a direct value method be used to value intangible assets acquired in business
combinations completed after September 29, 2004. EITF D-108 also requires the Company to perform an
impairment test using a direct value method on all intangible assets that were previously valued
using the residual method. This impairment test is required to be performed no later than the
beginning of fiscal 2006 for the Company. Any impairments arising from the initial application of
a direct value method would be reported as a cumulative effect of accounting change. For radio
station acquisitions subsequent to the acquisition of Cap Cities/ABC, Inc. in 1996, the Company has
applied the residual value method to value the acquired FCC licenses. The remaining net book value
of FCC licenses that were valued under the residual method was approximately $550 million at July
2, 2005. The Company is in the process of evaluating the impact that adopting EITF D-108 will have
on the Companys financial statements. Based on our analysis to date, we believe that some of
these FCC licenses may be impaired under EITF D-108, but we currently do not expect such impairment
to exceed $65 million.
SFAS 123R
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004) Share-Based Payments (SFAS 123R). The statement requires companies to record stock option
expense in its financial statements based on a fair value methodology beginning no later than the
first fiscal quarter beginning after June 15, 2005. The United States Securities and Exchange
Commission (SEC) subsequently deferred the implementation date for SFAS 123R to the first fiscal
year that begins after June 15, 2005 which is the first quarter of fiscal 2006 for the Company.
The Company is evaluating the impact of the new standard and the method and timing of adoption.
Although we have not completed our analysis, we anticipate that the expense would not exceed the
amounts disclosed in Note 12 had the Company been expensing under the new rule.
9
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
4. Investment in Leveraged Leases
As of July 2, 2005, our investment in aircraft leveraged leases totaled approximately
$153 million, consisting of $101 million and $52 million, with Delta Air Lines, Inc. (Delta) and
FedEx Corporation, respectively. Given the current status of the airline industry, we continue to
monitor the recoverability of these investments, particularly the Delta leases. Delta has disclosed
in their earnings release dated July 21, 2005 that while it is making progress in reducing costs
and increasing revenue, other factors beyond its control, including high fuel costs outpaced its
initiatives, and its management team must implement further change with greater speed to strive to
improve its competitive and financial position. Although Delta remains current on their lease
payments to us, the inability of Delta to make their lease payments, or the termination of our
lease through a bankruptcy proceeding, could result in the write-down of our investment and the
acceleration of certain income tax payments.
5. Gain on Sale of Businesses and Restructuring and Impairment Charges
On June 20, 2005, the Company sold the Mighty Ducks of Anaheim, which resulted in a
pre-tax gain of $26 million that was reported in Gain on Sale of Businesses and Restructuring and
Impairment Charges in the Condensed Consolidated Statements of Income.
Effective November 21, 2004, the Company sold substantially all of the Disney Stores chain in
North America under a long-term licensing arrangement to a wholly-owned subsidiary of The
Childrens Place (TCP). The Company received $100 million for the working capital transferred to
the buyer at the closing of the transaction. During the nine months ended July 2, 2005, the
Company recorded a loss on the working capital that was transferred to the buyer and additional
restructuring and impairment charges related to the sale totaling $26 million, of which $2 million
was recorded in the third quarter. The restructuring and impairment charges were primarily for
employee retention and severance and lease termination costs. Pursuant to the terms of sale, the
Disney Stores North America retained its lease obligations related to the stores transferred to the
buyer and became a wholly owned subsidiary of TCP. TCP is required to pay the Company a royalty on
substantially all of the physical retail store sales beginning on the second anniversary of the
closing date of the sale.
After considering its options with respect to the Disney Store chain in Europe, including a
potential sale of the business, the Company has decided to retain and continue to operate the
chain.
10
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
6. Borrowings
During the nine months ended July 2, 2005, the Companys borrowing activity was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
|
2004 |
|
|
Additions |
|
|
Payments |
|
|
Other activity |
|
|
2005 |
|
Commercial paper borrowings |
|
$ |
100 |
|
|
$ |
819 |
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
917 |
|
U.S. medium-term notes |
|
|
6,624 |
|
|
|
|
|
|
|
(775 |
) |
|
|
|
|
|
|
5,849 |
|
Convertible senior notes |
|
|
1,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,323 |
|
Other U.S. dollar denominated debt |
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305 |
|
Privately placed debt |
|
|
254 |
|
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
207 |
|
European medium-term notes |
|
|
1,099 |
|
|
|
|
|
|
|
(886 |
) |
|
|
|
|
|
|
213 |
|
Preferred stock |
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
366 |
|
Capital Cities/ABC and ABC Family debt |
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
187 |
|
Other(1) |
|
|
455 |
|
|
|
|
|
|
|
(2 |
) |
|
|
(145 |
) |
|
|
308 |
|
Euro Disney borrowings(2) |
|
|
2,221 |
|
|
|
|
|
|
|
(13 |
) |
|
|
(156 |
) |
|
|
2,052 |
|
Hong Kong Disneyland borrowings |
|
|
545 |
|
|
|
245 |
|
|
|
|
|
|
|
17 |
|
|
|
807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,488 |
|
|
$ |
1,064 |
|
|
$ |
(1,723 |
) |
|
$ |
(295 |
) |
|
$ |
12,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The $145 million included in other activity is primarily adjustments related to interest rate hedging activity. |
|
|
(2) |
|
Other activity included a $130 million reduction of Euro Disney senior debt using cash security deposits and a
$17 million decrease due to foreign currency translation as a result of the appreciation of the U.S. dollar
against the Euro. |
7. Euro Disney
In September 2004, Euro Disney, the Company, and Euro Disneys lenders finalized a
Memorandum of Agreement (MOA) relating to the financial restructuring of Euro Disney and
subsequently finalized the legal documentation called for by the MOA. The MOA provided for new
financing as well as restructuring Euro Disneys existing financing. The key provisions of the MOA
are described in Note 4 to the Consolidated Financial Statements in the 2004 Annual Report.
The transactions contemplated by the MOA were fully implemented on February 23, 2005 with the
completion of a 253 million equity rights offering, of which the Company subscribed for 100
million. Following the completion of the financial restructuring, the Companys effective
ownership interest in Euro Disneys operations increased to 51%. As discussed in Note 4 to the
Consolidated Financial Statements in the 2004 Annual Report, the MOA provided for a 2% interest
rate increase for certain tranches of Euro Disneys debt which resulted in a substantial
modification of a portion of this debt. Relevant accounting rules required that the substantially
modified portion be accounted for as though it had been extinguished and replaced with new
borrowings recorded at fair value, which resulted in a $61 million gain recorded to net interest
expense in the second quarter.
Certain indirect, wholly-owned subsidiaries of The Walt Disney Company have liability as
current or former general partners of the operating subsidiary of Euro Disney to which
substantially all of Euro Disneys assets and liabilities were transferred in the restructuring.
In addition to their interests in this operating subsidiary of Euro Disney, certain of these
subsidiaries of The Walt Disney Company have been capitalized with interest-bearing demand notes
with an aggregate face value of 200 million.
11
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
8. Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
Pension Plans |
|
|
Medical Plans |
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
34 |
|
|
$ |
38 |
|
|
$ |
102 |
|
|
$ |
113 |
|
|
$ |
8 |
|
|
$ |
9 |
|
|
$ |
24 |
|
|
$ |
27 |
|
Interest cost |
|
|
58 |
|
|
|
54 |
|
|
|
174 |
|
|
|
162 |
|
|
|
15 |
|
|
|
15 |
|
|
|
45 |
|
|
|
45 |
|
Expected return on plan assets |
|
|
(55 |
) |
|
|
(54 |
) |
|
|
(165 |
) |
|
|
(162 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(12 |
) |
|
|
(12 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Recognized net actuarial loss |
|
|
15 |
|
|
|
19 |
|
|
|
45 |
|
|
|
58 |
|
|
|
8 |
|
|
|
17 |
|
|
|
24 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
52 |
|
|
$ |
57 |
|
|
$ |
156 |
|
|
$ |
172 |
|
|
$ |
27 |
|
|
$ |
37 |
|
|
$ |
81 |
|
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the quarter and nine months ended July 2, 2005, we made contributions of $34
million and $108 million, respectively, into the pension and postretirement medical plans. The
Company expects to make contributions of $90 million to its pension and postretirement medical
plans during the fourth quarter of the fiscal year.
9. Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average number of common
and common equivalent shares outstanding during the period and are calculated using the treasury
stock method for stock options and assuming conversion of the Companys convertible senior notes.
For the quarters ended July 2, 2005 and June 30, 2004, options for 90 million and 125 million
shares, respectively, were excluded from the diluted earnings per share calculation as they were
anti-dilutive. For the nine months ended July 2, 2005 and June 30, 2004, options for 90 million
and 111 million shares, respectively, were excluded.
A reconciliation of net income and weighted average number of common and common equivalent shares
outstanding for calculating diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
851 |
|
|
$ |
604 |
|
|
$ |
2,272 |
|
|
$ |
1,829 |
|
Interest expense on convertible senior notes (net of tax) |
|
|
5 |
|
|
|
5 |
|
|
|
16 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
856 |
|
|
$ |
609 |
|
|
$ |
2,288 |
|
|
$ |
1,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding (basic) |
|
|
2,031 |
|
|
|
2,053 |
|
|
|
2,039 |
|
|
|
2,049 |
|
Weighted average dilutive stock options |
|
|
20 |
|
|
|
13 |
|
|
|
21 |
|
|
|
12 |
|
Assumed conversion of convertible senior notes |
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and common equivalent
shares outstanding (diluted) |
|
|
2,096 |
|
|
|
2,111 |
|
|
|
2,105 |
|
|
|
2,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Shareholders Equity
The Company declared a $490 million dividend ($0.24 per share) on December 1, 2004
related to fiscal 2004, which was paid 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 second quarter of
fiscal 2004 related to fiscal 2003.
During the current nine month period, the Company repurchased 49 million shares of Disney
common stock for $1.4 billion, of which 33 million shares for $0.9 billion were repurchased in the
third quarter. As of July 2, 2005, the Company had authorization in place to repurchase
approximately 267 million additional shares.
12
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
11. Comprehensive Income
Comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
851 |
|
|
$ |
604 |
|
|
$ |
2,272 |
|
|
$ |
1,829 |
|
Market value adjustments
for investments and hedges,
net of tax |
|
|
98 |
|
|
|
48 |
|
|
|
64 |
|
|
|
16 |
|
Foreign currency translation |
|
|
(45 |
) |
|
|
12 |
|
|
|
9 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
904 |
|
|
$ |
664 |
|
|
$ |
2,345 |
|
|
$ |
1,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss is as follows:
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Market value adjustments for investments and hedges, net of tax |
|
$ |
3 |
|
|
$ |
(61 |
) |
Foreign currency translation |
|
|
95 |
|
|
|
86 |
|
Additional minimum pension liability adjustment, net of tax |
|
|
(261 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(163 |
) |
|
$ |
(236 |
) |
|
|
|
|
|
|
|
12. Stock Incentive Plans
The following table reflects pro forma net income and earnings per share had the Company
elected to record employee stock option expense on a fair value basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
851 |
|
|
$ |
604 |
|
|
$ |
2,272 |
|
|
$ |
1,829 |
|
Less stock option expense |
|
|
(64 |
) |
|
|
(106 |
) |
|
|
(187 |
) |
|
|
(299 |
) |
Tax effect |
|
|
24 |
|
|
|
39 |
|
|
|
69 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma after stock option expense |
|
$ |
811 |
|
|
$ |
537 |
|
|
$ |
2,154 |
|
|
$ |
1,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.41 |
|
|
$ |
0.29 |
|
|
$ |
1.09 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma after option expense |
|
$ |
0.39 |
|
|
$ |
0.26 |
|
|
$ |
1.03 |
|
|
$ |
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.42 |
|
|
$ |
0.29 |
|
|
$ |
1.11 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma after option expense |
|
$ |
0.40 |
|
|
$ |
0.26 |
|
|
$ |
1.06 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The pro forma amounts assume that the Company
had been following the fair value approach since the beginning of fiscal 1996.
The Company generally grants stock options and restricted stock units to its key management
employees annually in the second quarter of each fiscal year. Historically, these options vested
ratably over four or more years and had a ten-year term. Beginning with the grant made in the
quarter ended April 2, 2005, the Company generally has reduced the term of these options to seven
years. We have assumed that the 10-year options have an average expected life of six years for
input into the Black Scholes option valuation which we have used in our
13
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
pro forma disclosures. For the new seven-year options, we have used a
life of 4.75 years based on a simplified method set out in SEC Staff Accounting Bulletin No. 107
(SAB 107). SAB 107, which was issued by the SEC in March 2005, provides interpretive guidance on
SFAS 123R. The simplified method defines the life as the average of the contractual term of the
options and the weighted average vesting period for all option tranches.
Additionally, in connection with our analysis of option valuation methodologies for our
upcoming adoption of SFAS 123R, we reviewed and updated, among other things, our forfeiture and
volatility assumptions. Our volatility assumption has been based on the historical volatility of
Disney stock and for the last two years we have used an assumed volatility of 40%. The
interpretive guidance provided in SAB 107 indicates that if companies have traded financial
instruments from which they can derive an implied volatility, they should consider implied
volatility in their volatility assumption. We reviewed the implied volatility of our share price
from the market prices of Disney exchange traded options and other traded financial instruments,
such as our convertible debt. Based on our analysis, we concluded that we can reliably estimate
implied volatility such that it can be taken into account in our volatility assumption. We
considered the implied and historical volatility to determine an expected volatility of 27% which
we have used to value the annual grant that was made in January 2005 and any subsequent grants.
The weighted average fair values of options at their grant date during the nine months ended July
2, 2005 and June 30, 2004, were $7.71 and $9.94, respectively.
During the nine month period ended July 2, 2005, the Company granted approximately 19 million
stock options and approximately nine million restricted stock units. Approximately one million of
the restricted stock units include market based performance conditions, which require that on each
vesting date, the Companys total shareholder return must exceed that of the S&P 500 for either the
one or three-year period preceding the vesting date in order for the units to vest. Prior to the
current year, the Company had issued performance restricted stock that generally vests based on
achieving specified earnings targets. As of July 2, 2005, approximately 16 million restricted stock
units were outstanding, of which two million vest upon performance conditions. All other units do
not include performance conditions and generally vest 50% two years from grant date and 50% four
years from grant date. In certain circumstances as described in our proxy statement dated January
6, 2005, accelerated vesting may occur. During the nine month periods ended July 2, 2005 and June
30, 2004, the Company recorded compensation expense related to restricted stock totaling $92
million and $41 million, respectively. Unearned restricted stock compensation expense for existing
grants totaled approximately $268 million as of July 2, 2005 which will be amortized over the
remaining vesting period. The increase in restricted stock expense reflects the shift in the
Companys long-term incentive compensation plan to increase the proportion of restricted stock
units and reduce the proportion of stock options.
13. Commitment and Contingencies
The Company has exposure to various legal and other contingencies arising from the
conduct of its businesses.
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. On March 29, 2004, the 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. Plaintiffs
subsequent attempts to disqualify the judge who granted the terminating sanctions were denied in 2004, and its
14
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
motion for a new trial was denied on
January 26, 2005, allowing plaintiff to proceed with its noticed appeal from the April 5, 2004,
order of dismissal.
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. 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. Subsequently, the Court ruled
that Milnes termination notices are invalid and dismissed SSIs counterclaims as moot. Following
further motions 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 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 November 2004, the District Court granted a motion by Milne to dismiss her
complaint for the purpose of obtaining a final appealable order of dismissal, so as to permit her
appeal to the Court of Appeals to proceed. Oral argument of that appeal is scheduled to be heard
on September 13, 2005.
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.
Contractual Guarantees
The Company has guaranteed certain special assessment and water/sewer revenue bonds 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 July 2, 2005, the remaining debt service
obligation guaranteed by the Company was $94 million, of which $58 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 future 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
15
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except per share data)
Company will be responsible to fund the shortfall. As of July 2, 2005, the remaining debt service obligation guaranteed by the Company was $400 million,
of which $109 million was principal. To the extent that subsequent 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.
Commitments
In April 2005, the Company entered into a new agreement with the NFL for the right to
broadcast NFL Monday Night football games on ESPN. The contract provides for total payments of
approximately $8.87 billion over the eight-year period, commencing with the 2006-2007 season.
14. Income Taxes
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. Among current
audits, the Internal Revenue Service (IRS) is examining the Companys federal income tax returns
for 1996 through 2000. In connection with this examination, the IRS has proposed assessments with
respect to certain of the Companys tax positions for the years under examination. However, the
Company continues to believe that its tax positions comply with applicable tax law and intends to
defend its positions vigorously. The Company believes it has adequately provided for any
reasonably foreseeable outcome of these matters and does not anticipate any material earnings
impact from their ultimate resolution. During the first quarter of fiscal 2005, there was a
favorable resolution of an income tax matter that resulted in a $24 million tax reserve release.
16
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
ORGANIZATION OF INFORMATION
Managements Discussion and Analysis provides a narrative of the Companys financial
performance and condition that should be read in conjunction with the accompanying financial
statements. It includes the following sections:
Overview
Seasonality
Business Segment Results
Quarter Results
Nine Month Results
Corporate and Other Non-Segment Items
Stock Option Accounting
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
Forward Looking Statements
OVERVIEW
Our summary consolidated results are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
(in millions, except per |
|
July 2, |
|
|
June 30, |
|
|
% |
|
|
July 2, |
|
|
June 30, |
|
|
% |
|
share data) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
Revenues |
|
$ |
7,715 |
|
|
$ |
7,471 |
|
|
|
3 |
% |
|
$ |
24,210 |
|
|
$ |
23,209 |
|
|
|
4 |
% |
Costs and expenses |
|
|
(6,369 |
) |
|
|
(6,375 |
) |
|
|
|
|
|
|
(20,516 |
) |
|
|
(19,912 |
) |
|
|
(3 |
)% |
Gain on sale of
businesses and
restructuring and
impairment charges |
|
|
24 |
|
|
|
(56 |
) |
|
nm |
|
|
|
|
|
|
(59 |
) |
|
nm |
Net interest expense |
|
|
(134 |
) |
|
|
(151 |
) |
|
|
11 |
% |
|
|
(364 |
) |
|
|
(446 |
) |
|
|
18 |
% |
Equity in the
income of investees |
|
|
125 |
|
|
|
126 |
|
|
|
(1 |
)% |
|
|
363 |
|
|
|
300 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes and
minority interests |
|
|
1,361 |
|
|
|
1,015 |
|
|
|
34 |
% |
|
|
3,693 |
|
|
|
3,092 |
|
|
|
19 |
% |
Income taxes |
|
|
(463 |
) |
|
|
(365 |
) |
|
|
(27 |
)% |
|
|
(1,294 |
) |
|
|
(1,132 |
) |
|
|
(14 |
)% |
Minority interests |
|
|
(47 |
) |
|
|
(46 |
) |
|
|
(2 |
)% |
|
|
(127 |
) |
|
|
(131 |
) |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
851 |
|
|
$ |
604 |
|
|
|
41 |
% |
|
$ |
2,272 |
|
|
$ |
1,829 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per share |
|
$ |
0.41 |
|
|
$ |
0.29 |
|
|
|
41 |
% |
|
$ |
1.09 |
|
|
$ |
0.88 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Results
Net income increased 41%, or $247 million, to $851 million due to operating income growth at
Media Networks and Parks and Resorts, partially offset by a decrease at Studio Entertainment and
Consumer Products. Diluted earnings per share increased 41% to $0.41 in the current quarter.
Current quarter earnings per share included a $32 million ($20 million after-tax or $0.01 per
share) partial impairment of a cable television investment in Latin America, a $26 million ($16
million after-tax or $0.01 per share) gain on the sale of the Mighty Ducks of Anaheim and a $24
million ($15 million after-tax or $0.01 per share) write-down related to the MovieBeam venture. The prior-year quarters
earnings per share included restructuring and impairment charges of $56 million ($35 million
after-tax or $0.02 per share) recorded in connection with the disposition of the Disney Stores
North America.
17
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Nine-Month Results
Net income for the nine-month period increased 24%, or $443 million, to $2.3 billion. The
increase in net income was primarily due to segment operating income growth at the Media Networks
and Parks and Resorts segments partially offset by a decrease at Studio Entertainment.
Diluted earnings per share increased 24% to $1.09 in the nine-month period. In addition to
the partial impairment of the Latin American cable television investment, the gain on sale of the
Mighty Ducks of Anaheim and the write-down related to the MovieBeam venture recorded in the third
quarter and the effective income tax rate benefit, the current nine-month period also included a
$61 million benefit ($38 million after-tax or $0.02 per share) from the restructuring of Euro
Disneys borrowings and a $24 million benefit ($0.01 per share) from the favorable resolution of
certain income tax matters. These benefits were partially offset by a $32 million charge ($20
million after-tax or $0.01 per share) to write-down an investment and restructuring and impairment
charges related to the sale of the Disney Stores North America of $26 million ($16 million
after-tax or $0.01 per share).
SEASONALITY
The Companys businesses are subject to the effects of seasonality. Consequently, the
operating results for the quarter and nine months ended July 2, 2005 for each business segment, and
for the Company as a whole, are not necessarily indicative of results to be expected for the full
year.
Media Networks revenues are influenced by advertiser demand and the seasonal nature of
programming, and generally peak in the spring and fall.
Parks and Resorts revenues fluctuate with changes in theme park attendance and resort
occupancy resulting from the seasonal nature of vacation travel. Peak attendance and resort
occupancy generally occur during the summer months, when school vacations occur, and during
early-winter and spring holiday periods.
Studio Entertainment revenues fluctuate based upon the timing of theatrical motion picture,
home entertainment (DVD and VHS) and television releases. Release dates for theatrical, home
entertainment and television products are determined by several factors, including timing of
vacation and holiday periods and competition in the market.
Consumer Products revenues are influenced by seasonal consumer purchasing behavior and the
timing of animated theatrical releases.
18
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
BUSINESS SEGMENT RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
% |
|
|
July 2, |
|
|
June 30, |
|
|
% |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Networks |
|
$ |
3,386 |
|
|
$ |
2,931 |
|
|
|
16 |
% |
|
$ |
9,855 |
|
|
$ |
8,891 |
|
|
|
11 |
% |
Parks and Resorts |
|
|
2,449 |
|
|
|
2,288 |
|
|
|
7 |
% |
|
|
6,663 |
|
|
|
5,588 |
|
|
|
19 |
% |
Studio Entertainment |
|
|
1,462 |
|
|
|
1,711 |
|
|
|
(15 |
)% |
|
|
6,084 |
|
|
|
6,837 |
|
|
|
(11 |
)% |
Consumer Products |
|
|
418 |
|
|
|
541 |
|
|
|
(23 |
)% |
|
|
1,608 |
|
|
|
1,893 |
|
|
|
(15 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,715 |
|
|
$ |
7,471 |
|
|
|
3 |
% |
|
$ |
24,210 |
|
|
$ |
23,209 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Networks |
|
$ |
998 |
|
|
$ |
673 |
|
|
|
48 |
% |
|
$ |
2,190 |
|
|
$ |
1,721 |
|
|
|
27 |
% |
Parks and Resorts |
|
|
448 |
|
|
|
421 |
|
|
|
6 |
% |
|
|
899 |
|
|
|
841 |
|
|
|
7 |
% |
Studio Entertainment |
|
|
(34 |
) |
|
|
28 |
|
|
nm |
|
|
552 |
|
|
|
639 |
|
|
|
(14 |
)% |
Consumer Products |
|
|
61 |
|
|
|
76 |
|
|
|
(20 |
)% |
|
|
403 |
|
|
|
388 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,473 |
|
|
$ |
1,198 |
|
|
|
23 |
% |
|
$ |
4,044 |
|
|
$ |
3,589 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates the performance of its operating segments based on segment
operating income. The following table reconciles segment operating income to income before income
taxes and minority interests.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
% |
|
|
July 2, |
|
|
June 30, |
|
|
% |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
Segment operating income |
|
$ |
1,473 |
|
|
$ |
1,198 |
|
|
|
23 |
% |
|
$ |
4,044 |
|
|
$ |
3,589 |
|
|
|
13 |
% |
Corporate and unallocated shared
expenses |
|
|
(124 |
) |
|
|
(99 |
) |
|
|
(25 |
)% |
|
|
(342 |
) |
|
|
(284 |
) |
|
|
(20 |
)% |
Amortization of intangible assets |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
(8 |
) |
|
|
|
|
Gain on sale of businesses
and restructuring and impairment
charges |
|
|
24 |
|
|
|
(56 |
) |
|
nm |
|
|
|
|
|
|
(59 |
) |
|
nm |
Net interest expense |
|
|
(134 |
) |
|
|
(151 |
) |
|
|
11 |
% |
|
|
(364 |
) |
|
|
(446 |
) |
|
|
18 |
% |
Equity in the income of investees |
|
|
125 |
|
|
|
126 |
|
|
|
(1 |
)% |
|
|
363 |
|
|
|
300 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests |
|
$ |
1,361 |
|
|
$ |
1,015 |
|
|
|
34 |
% |
|
$ |
3,693 |
|
|
$ |
3,092 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Depreciation expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Media Networks |
|
$ |
46 |
|
|
$ |
40 |
|
|
$ |
133 |
|
|
$ |
124 |
|
Parks and Resorts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
206 |
|
|
|
182 |
|
|
|
578 |
|
|
|
540 |
|
International (1) |
|
|
49 |
|
|
|
48 |
|
|
|
149 |
|
|
|
48 |
|
Studio Entertainment |
|
|
6 |
|
|
|
4 |
|
|
|
20 |
|
|
|
14 |
|
Consumer Products |
|
|
7 |
|
|
|
12 |
|
|
|
20 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation expense |
|
|
314 |
|
|
|
286 |
|
|
|
900 |
|
|
|
764 |
|
Corporate |
|
|
33 |
|
|
|
34 |
|
|
|
98 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense |
|
$ |
347 |
|
|
$ |
320 |
|
|
$ |
998 |
|
|
$ |
872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents 100% of Euro Disney and Hong Kong
Disneylands depreciation expense for all periods
since the Company began consolidating the results of
operations and cash flows of these two entities
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.
Business Segment Results Quarter Results
Media Networks
The following table provides supplemental revenue and segment operating income detail for the
Media Networks segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
2005 |
|
|
2004 |
|
|
% Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable Networks |
|
$ |
1,933 |
|
|
$ |
1,627 |
|
|
|
19 |
% |
|
$ |
5,362 |
|
|
$ |
4,695 |
|
|
|
14 |
% |
Broadcasting |
|
|
1,453 |
|
|
|
1,304 |
|
|
|
11 |
% |
|
|
4,493 |
|
|
|
4,196 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,386 |
|
|
$ |
2,931 |
|
|
|
16 |
% |
|
$ |
9,855 |
|
|
$ |
8,891 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable Networks |
|
$ |
729 |
|
|
$ |
529 |
|
|
|
38 |
% |
|
$ |
1,727 |
|
|
$ |
1,401 |
|
|
|
23 |
% |
Broadcasting |
|
|
269 |
|
|
|
144 |
|
|
|
87 |
% |
|
|
463 |
|
|
|
320 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
998 |
|
|
$ |
673 |
|
|
|
48 |
% |
|
$ |
2,190 |
|
|
$ |
1,721 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Media Networks revenues increased 16%, or $455 million, to $3.4 billion, consisting of a 19%
increase, or $306 million, at the Cable Networks, and an 11% increase, or $149 million, at
Broadcasting.
Increased Cable Networks revenues were due to growth of $284 million from cable and satellite
operators. Revenues from cable and satellite operators are generally derived from fees charged on
a per subscriber basis, and the increase in the current quarter was due to growth at ESPN which
resulted from contractual rate increases, recognition of previously deferred revenues and
subscriber growth. Subscriber growth and rate improvements at the Disney Channel also contributed
to the increase.
The Companys contractual arrangements with cable and satellite operators are renewed or
renegotiated from time to time in the ordinary course of business. A number of these arrangements
are currently in negotiations. Consolidation in the cable and satellite distribution industry and
other factors may adversely affect the Companys ability to obtain and
20
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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
stabilize or decline. Certain of the Companys existing contracts with cable and satellite
operators as well as contracts in negotiation include annual programming commitments. In these
cases, revenue subject to the commitment is deferred until the annual commitments are satisfied
which generally results in revenue shifting from the first half of the year to the second half.
During the quarter, the Company recognized net revenues of $42 million related to these commitments
compared to a net deferral of $36 million in the prior-year quarter.
Increased Broadcasting revenues were due to growth at Television Production
and Distribution and the ABC Television Network. The increase at Television
Production and Distribution was driven by higher license fee revenue from domestic and
international markets as a result of a higher number of pilots produced and sales of Desperate Housewives and Lost, respectively. ABC Television Network revenues
increased due to higher advertising rates and improved primetime ratings.
Costs and Expenses
Costs and expenses, which consist primarily of programming rights costs, production costs,
distribution and marketing expenses, labor costs and general and administrative costs, increased
6%, or $130 million, to $2.4 billion consisting of a 10% increase, or $106 million, at the Cable
Networks, and a 2% increase, or $24 million, at Broadcasting. The increase at Cable Networks was
driven by higher marketing expenses, increased costs for new business initiatives, and higher
general and administrative expenses, while the increase in Broadcasting was due to higher
production and distribution costs partially offset by lower programming costs.
The Company has various contractual commitments for the purchase of television rights for
sports and other programming, including the NBA, NFL, MLB, and various college football and
basketball conferences and football 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 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.
Segment Operating Income
Segment operating income increased 48%, or $325 million, to $998 million for the quarter due
to an increase of $200 million at the Cable Networks and an increase of $125 million at
Broadcasting. The increase in cable operating income was due to higher affiliate revenues
partially offset by higher marketing and general and administrative expenses. The increase at
Broadcasting was due to lower programming costs and higher advertising revenues at the ABC
Television Network partially offset by increased production costs as more pilots were produced.
MovieBeam
The Company launched MovieBeam, an on-demand electronic movie rental service in three domestic
cities in October 2003. The Company suspended service in April 2005 while evaluating its
go-forward business model and negotiating a refinancing of the business with strategic and
financial investors. If successful, a refinancing transaction will result in the Company making a
further investment in the business while retaining only a minority interest in MovieBeam. Based on
recent negotiations with a financial investor, the Company has concluded that any such refinancing
will not be sufficient to recover all of its recorded investment related to the MovieBeam venture
and has recognized $24 million of impairment charges during the third quarter of fiscal year 2005.
In the second quarter of fiscal 2005, the Company had taken a $32 million write-down of its
investment in the company that provides the technology used by MovieBeam.
21
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Parks and Resorts
Revenues
Revenues at Parks and Resorts increased 7%, or $161 million, to $2.4 billion. The increase was
due to increases of $92 million at the Walt Disney World Resort and $70 million at the Disneyland
Resort.
At the Walt Disney World Resort, increased revenues were driven by higher theme park guest
spending and increased occupied room nights. Higher guest spending reflected ticket price
increases and fewer promotional offers compared to the prior-year quarter. During the quarter, the
Company launched two new programs, Disneys Magical Express and Extra Magic Hours, which are
designed to increase occupancy at Walt Disney World hotels.
At the Disneyland Resort, increased revenues were primarily due to higher theme park guest
spending and increased attendance. Higher guest spending was due to ticket price increases, while
increased attendance was due to the strength of the 50th anniversary celebration.
Across our domestic theme parks, attendance increased 1% and per capita theme park guest
spending increased 6% compared to the prior-year quarter. Attendance at the Walt Disney World
Resort decreased 1% while per capita theme park guest spending increased 4%. Attendance at the
Disneyland Resort increased 6%, while per capita theme park guest spending increased 11%.
Operating statistics for our domestic hotel properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Coast Resorts |
|
|
West Coast Resorts |
|
|
Total Domestic Resorts |
|
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Occupancy |
|
|
88 |
% |
|
|
83 |
% |
|
|
96 |
% |
|
|
88 |
% |
|
|
88 |
% |
|
|
84 |
% |
Available Room
Nights
(in thousands) |
|
|
2,193 |
|
|
|
2,171 |
|
|
|
202 |
|
|
|
202 |
|
|
|
2,396 |
|
|
|
2,373 |
|
Per Room Guest
Spending |
|
$ |
209 |
|
|
$ |
209 |
|
|
$ |
276 |
|
|
$ |
265 |
|
|
$ |
215 |
|
|
$ |
214 |
|
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.
Costs and Expenses
Costs and expenses, which consist principally of labor, cost of merchandise, food and
beverages sold, depreciation, repairs and maintenance, entertainment, marketing and sales and
information technology expense, increased 7%, or $134 million compared to the prior-year quarter.
The increase in costs and expenses was primarily due to an increase in marketing costs related to
the celebration of the 50th anniversary of Disneyland, at both Walt Disney World and
Disneyland. In addition, costs and expenses increased due to new attractions and new service
programs at Walt Disney World, higher volume-related expenses at Disneyland and increased
pre-opening costs at Hong Kong Disneyland. Hong Kong Disneyland is scheduled to open in September
2005 and has incurred pre-opening costs and other expenses of $25 million and $49 million during
the current quarter and nine-month periods, respectively. We expect to incur additional
pre-opening costs during the remainder of fiscal 2005 which will be charged to expense as incurred.
Segment Operating Income
Segment operating income increased 6%, to $448 million primarily due to growth across the
domestic resorts partially offset by pre-opening costs at Hong Kong Disneyland.
22
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Studio Entertainment
Revenues
Revenues decreased 15%, or $249 million, to $1.5 billion, due to decreases of $198 million in
worldwide home entertainment and $46 million in worldwide theatrical motion picture distribution,
partially offset by an increase of $23 million in television distribution.
Worldwide home entertainment revenues declined due to lower overall unit sales in the current
quarter as there were fewer strong performing titles. Prior-year quarter titles included
Disney/Pixars Finding Nemo, Kill Bill Vol.1, Haunted Mansion, Cold Mountain and Scary Movie 3,
while current quarter titles included National Treasure, The Pacifier and Disney/Pixars The
Incredibles. Additionally, the Company observed a decline in home video unit sales for feature
films relative to the related total domestic box-office results. Lower worldwide theatrical motion
picture distribution revenues were due to fewer releases in the current quarter. The increase in
television distribution revenues was due to a higher number of titles being made available during
the current quarter.
Costs and Expenses
Costs and expenses, which consist primarily of production cost amortization, distribution and
selling expenses, product costs and participation costs, decreased 11% or $187 million. Lower
costs in international home entertainment and worldwide theatrical motion picture distribution were
partially offset by higher costs in domestic home entertainment. Lower costs in international home
entertainment were driven by lower participation and distribution costs for The Incredibles in the
current quarter as compared to Finding Nemo in the prior-year quarter. Pixar receives an equal
share of profits (after distribution fees) as co-producer of Finding Nemo and The Incredibles.
Accordingly, participation costs were higher in the prior-year quarter due to the stronger
performance of Finding Nemo. Lower costs in worldwide theatrical motion picture distribution were
due to lower distribution costs and production cost amortization related to fewer releases in the
current quarter and lower promotional spending on films to be released in the fourth quarter.
Higher costs in domestic home entertainment were driven by higher promotional spending on catalog
titles.
Segment Operating Income
Segment operating income decreased $62 million, to a loss of $34 million, due to lower overall
unit sales in worldwide home entertainment partially offset by lower costs in worldwide theatrical
motion picture distribution and higher revenues in television distribution.
Miramax
In March 2005, the Company entered into agreements with Miramax co-chairmen, Bob and Harvey
Weinstein, and their new production company. Pursuant to those agreements, the Company, among
other things, substantially resolved all economic issues relating to the Weinsteins existing
employment agreements; terminated the Weinsteins existing employment agreements and entered into
new employment agreements with them through September 30, 2005 and sold interests in certain films
in various stages of production to the Weinsteins new company and provided it with the opportunity
to acquire certain development projects, as well as sequel rights to certain library product. The
Company will retain certain co-financing, distribution and participation rights in several of these
properties. The Company will also retain the Miramax and Dimension film libraries and the name
Miramax Films, while the Weinsteins will take the Dimension name into their new company. No
material charges were recorded as a result of the execution of the agreements. The Company
appointed a new president for Miramax in July 2005 and is in the process of evaluating projects
currently in progress and other aspects of Miramaxs business plan. Although the Company does not
currently anticipate that it will incur material charges in connection with this evaluation, it is
unable to determine the amount of any potential charges until the evaluation is completed.
In addition,
the Company expects to release seven more
Miramax films theatrically in the fourth quarter of fiscal 2005 as compared to the same period
in the prior year, when Miramax released only four films. As feature films
frequently incur losses during the theatrical window because of the related distribution costs,
we expect that the expenses associated with these additional releases will increase our costs
and reduce the Studio segments operating income in the fourth quarter
compared to the amount absent these releases. The impact of these releases on operating income will
depend on how these titles perform and, to the extent the titles are successful, much of the benefit would be
realized after the fourth quarter.
23
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Consumer Products
Revenues
Revenues for the quarter decreased 23%, or $123 million, to $418 million, reflecting a
decrease of $130 million due to the sale of the Disney Store North America in November 2004 partially offset by an increase in merchandise
licensing of $15 million. Growth at merchandise licensing was driven by increases at hardlines and
softlines in North America and Europe.
Costs and Expenses
Costs and expenses decreased 23%, or $108 million, to $357 million. The decrease was driven
by the sale of the Disney Stores North America chain partially offset by higher product development
expenses at Buena Vista Games.
Segment Operating Income
Segment operating income decreased 20%, or $15 million, to $61 million, driven by higher
product development expenses at Buena Vista Games partially offset by growth in merchandise
licensing.
Business Segment Results Nine Month Results
Media Networks
Revenues
Media Networks revenues increased 11%, or $964 million, to $9.9 billion, due to an increase of
14%, or $667 million at the Cable Networks, and an increase of 7%, or $297 million at Broadcasting.
Increased Cable Networks revenues were due to increases of $538 million in revenues from cable
and satellite operators and $174 million in advertising revenues. The increase in cable and
satellite operator revenues was due to contractual rate increases at ESPN and subscriber growth at
ESPN and the Disney Channels. Increased advertising revenue was primarily due to higher rates at
ESPN and higher ratings at ABC Family.
Through the nine month period, the Company has deferred net revenue of $86 million related to
sports programming commitments at ESPN compared to a $48 million deferral in the prior-year period.
The Company expects to fulfill these sports programming commitments within the contractual time
periods over the next two quarters.
Increased Broadcasting
revenues were due to growth at Television
Production and Distribution and the ABC Television Network. Television Production
and Distribution revenues increased driven by higher license fee revenues led by sales of
Desperate Housewives and Lost in international markets. The increase at ABC
Television Network was due to an increase in primetime advertising revenue resulting from higher
ratings and rates.
Costs and Expenses
Costs and expenses increased 7%, or $495 million, to $7.7 billion due to a 10% or $341 million
increase at the Cable Networks, and a 4% or $154 million increase at Broadcasting. The increase at
Cable Networks was due to higher programming and production costs, general and administrative costs
and marketing expenses. Broadcasting costs and expenses increased due to higher production and
distribution costs.
Segment Operating Income
Segment operating income increased 27%, or $469 million, to $2.2 billion due to increases of
$326 million at the Cable Networks and $143 million at Broadcasting. The increase in cable
operating income was due to higher affiliate and advertising revenue partially offset by higher
costs and expenses. The increase at Broadcasting was due to higher license fee and advertising
revenues partially offset by higher production and distribution costs.
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Parks and Resorts
Revenues
Revenues at Parks and Resorts increased 19%, or $1.1 billion, to $6.7 billion. The increase
was driven by a $672 million impact from the consolidation of Euro Disney and Hong Kong Disneyland.
As we began consolidating the results of Euro Disney and Hong Kong Disneyland at the beginning of the third quarter of
fiscal 2004, the nine-month period in the prior year includes only three months of operations.
Excluding this impact, revenues grew 7%, or $403 million, driven by growth of $313 million at the
Walt Disney World Resort and $120 million at the Disneyland Resort.
At the Walt Disney World Resort, increased revenues were primarily driven by higher occupied
room nights, theme park guest spending and attendance. Increased hotel occupancy and theme park
attendance were driven by increased international and domestic guest visitation, reflecting the
ongoing recovery in travel and tourism and the popularity of Disney as a travel destination.
Higher guest spending at the theme parks reflected ticket price increases and increased meal
package spending due to increased product demand.
At the Disneyland Resort, increased revenues were driven by higher guest spending at the theme
parks due to increased ticket prices and fewer promotional discounts.
Across our domestic theme parks, attendance increased 2% and per capita theme park guest
spending increased 6%. Attendance at the Walt Disney World Resort increased 2% while per capita
theme park guest spending increased 4%. Attendance at the Disneyland Resort increased 1% while per
capita theme park guest spending increased 12%. Operating statistics for our domestic hotel
properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Coast Resorts |
|
|
West Coast Resorts |
|
|
Total Domestic Resorts |
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Occupancy |
|
|
84 |
% |
|
|
80 |
% |
|
|
88 |
% |
|
|
86 |
% |
|
|
85 |
% |
|
|
80 |
% |
Available Room Nights
(in thousands) |
|
|
6,560 |
|
|
|
6,290 |
|
|
|
607 |
|
|
|
607 |
|
|
|
7,167 |
|
|
|
6,897 |
|
Per Room Guest Spending |
|
$ |
204 |
|
|
$ |
205 |
|
|
$ |
264 |
|
|
$ |
250 |
|
|
$ |
209 |
|
|
$ |
209 |
|
The increase in available room nights was primarily due to the opening of Disneys Pop
Century Resort, which has approximately 2,900 rooms, late in the first quarter of fiscal 2004 and
the re-opening of approximately 1,000 rooms in the French Quarter portion of the Port Orleans hotel
in the second 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.
Costs and Expenses
Costs and expenses increased 21%, or $1.0 billion, driven by a $722 million impact from the
consolidation of Euro Disney and Hong Kong Disneyland beginning in the third quarter of fiscal
2004. The remaining increase of $295 million was due to higher costs at Walt Disney World and Disneyland.
Walt Disney World incurred higher volume-related expenses, marketing
and sales costs, information technology costs, and depreciation and other costs associated with new attractions and the new
service programs. Disneyland incurred higher marketing and sales costs and volume-related expenses associated with the 50th anniversary celebration, as well as higher
depreciation and other costs.
Segment Operating Income
Segment operating income increased 7%, or $58 million, to $899 million due to growth at Walt
Disney World and Disneyland. These increases were partially offset by a decrease of $50 million
due to the consolidation of Euro Disney and Hong Kong Disneyland beginning in the third quarter of
fiscal 2004, and higher pre-opening expenses at Hong Kong Disneyland in the third quarter.
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Studio Entertainment
Revenues
Revenues decreased 11%, or $753 million, to $6.1 billion, due to decreases of $886 million in
worldwide home entertainment and $188 million in international theatrical motion picture
distribution, which were partially offset by increases of $187 million in television distribution
and $97 million in domestic theatrical motion picture distribution.
Worldwide home entertainment revenues declined due to lower overall unit sales in the current
period as there were fewer strong performing titles. The prior-year titles included Finding Nemo,
Pirates of the Caribbean and The Lion King Platinum release, while the current period titles
included The Incredibles, National Treasure and King Arthur. In international theatrical motion
picture distribution, the performances of prior-period titles, which included Finding Nemo, Brother
Bear and Haunted Mansion, were stronger than the current period titles, which included The
Incredibles and National Treasure. Additionally, the prior-year period had more releases. Higher
television distribution revenues were due to better performing titles in the pay television market
and more titles being made available in the current period. Higher revenues in domestic theatrical
motion picture distribution were due to the strong performances of current period titles, which
included The Incredibles, National Treasure, and The Pacifier compared to the prior-period, which
included Scary Movie 3, Cold Mountain and Brother Bear.
Costs and Expenses
Costs and expenses decreased 11%, or $666 million, due to lower costs in worldwide theatrical
motion picture distribution and worldwide home entertainment. These declines were partially offset
by an increase in television distribution. The decline in costs and expenses in worldwide
theatrical distribution were driven by lower distribution costs and lower film write-offs. The
prior-year period included higher profile films that had more extensive marketing campaigns to
launch the films. The lower costs in worldwide home entertainment were also due to higher profile
films in the prior-year period, which included Finding Nemo, Pirates of the Caribbean and The Lion
King Platinum Release. Additionally, the Company incurred higher participation costs due to the
better performance of Finding Nemo and Pirates of the Caribbean in the prior-year period compared
to The Incredibles and National Treasure in the current period. Higher costs and expenses in
television distribution were due to higher production cost amortization from increased sales in the
current period.
Segment Operating Income
Segment operating income decreased 14%, or $87 million, to $552 million, due to lower overall
unit sales in worldwide home entertainment, partially offset by lower costs in worldwide theatrical
motion picture distribution and growth in television distribution.
Consumer Products
Revenues
Revenues decreased 15%, or $285 million, to $1.6 billion, driven by a decrease of $406 million
due to the sale of the Disney Stores North America in November 2004, as well as a decrease of $11
million at Publishing. These decreases were partially offset by increases in merchandise licensing
and Buena Vista Games of $88 million and $43 million, respectively.
The increase in merchandise licensing reflected higher revenues in all lines of business and
recognition of contractual minimum guarantee revenues at Toys which increased by $37 million.
Growth in other categories was driven by home and infant furnishings and food, health and beauty
products. The increase at Buena Vista Games was due to higher Game Boy Advance sales and increased
license revenues as well as the recognition of contractual minimum guarantee revenues which
increased by $16 million.
Costs and Expenses
Costs and expenses decreased 20%, or $300 million, to $1.2 billion driven by a decrease of
$399 million due to the sale of the Disney Stores North America chain partially offset by higher
product development spending at Buena Vista Games and higher expenses at merchandise licensing.
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Segment Operating Income
Segment operating income increased 4%, or $15 million, to $403 million, driven by increased
revenues at merchandise licensing and Buena Vista Games, partially offset by increased spending at
Buena Vista Games and lower revenues at Publishing.
The Disney Store
Effective November 21, 2004, the Company sold substantially all of the Disney Stores chain in
North America under a long-term licensing arrangement to a wholly-owned subsidiary of The
Childrens Place (TCP). The Company received $100 million for the working capital transferred to
the buyer at the closing of the transaction. During the nine months ended July 2, 2005, the
Company recorded a loss on the working capital that was transferred to the buyer and additional
restructuring and impairment charges related to the sale totaling $26 million, of which $2 million
was recorded in the third quarter. The restructuring and impairment charges were primarily for
employee retention and severance and lease termination costs. Pursuant to the terms of sale, the
Disney Stores North America retained its lease obligations related to the stores transferred to the
buyer and became a wholly owned subsidiary of TCP. TCP is required to pay the Company a royalty on
substantially all of the physical retail store sales beginning on the second anniversary of the
closing date of the sale.
After considering its options with respect to the Disney Store chain in Europe, including a
potential sale of the business, the Company has decided to retain and continue to operate the
chain.
The following table provides supplemental revenue and operating income detail for the Disney
Stores. Amounts for North America reflect operations through November 20, 2004 (the day prior to
the effective date of the sale of these stores).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
2005 |
|
|
2004 |
|
|
% Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
2 |
|
|
$ |
132 |
|
|
|
(98 |
)% |
|
$ |
84 |
|
|
$ |
490 |
|
|
|
(83 |
)% |
Europe |
|
|
58 |
|
|
|
60 |
|
|
|
(3 |
)% |
|
|
255 |
|
|
|
249 |
|
|
|
2 |
|
Other |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
14 |
|
|
|
16 |
|
|
|
(13 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64 |
|
|
|
196 |
|
|
|
(67 |
)% |
|
$ |
353 |
|
|
$ |
755 |
|
|
|
(53 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
(6 |
) |
|
$ |
(9 |
) |
|
|
33 |
% |
|
$ |
(7 |
) |
|
$ |
|
|
|
nm |
Europe |
|
|
(7 |
) |
|
|
(3 |
) |
|
nm |
|
|
8 |
|
|
|
17 |
|
|
|
(53 |
)% |
Other |
|
|
2 |
|
|
|
1 |
|
|
|
100 |
% |
|
|
8 |
|
|
|
7 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(11 |
) |
|
$ |
(11 |
) |
|
|
|
|
|
$ |
9 |
|
|
$ |
24 |
|
|
|
(63 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
CORPORATE AND OTHER NON-SEGMENT ITEMS
Corporate and Unallocated Shared Expenses
Corporate and unallocated shared expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
Nine Months Ended |
|
|
|
|
July 2, |
|
June 30, |
|
|
|
|
|
July 2, |
|
June 30, |
|
|
(in millions) |
|
2005 |
|
2004 |
|
% Change |
|
2005 |
|
2004 |
|
% Change |
Corporate and
unallocated shared
expenses |
|
$ |
(124 |
) |
|
$ |
(99 |
) |
|
|
(25 |
)% |
|
$ |
(342 |
) |
|
$ |
(284 |
) |
|
|
(20 |
)% |
The increase in corporate and unallocated shared expenses for the quarter and nine months
primarily reflected reductions in litigation reserves in the prior year as a result of favorable
developments in legal matters.
Net Interest Expense
Net interest expense is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
2005 |
|
|
2004 |
|
|
% Change |
|
Interest expense |
|
$ |
(153 |
) |
|
$ |
(174 |
) |
|
|
12 |
% |
|
$ |
(456 |
) |
|
$ |
(462 |
) |
|
|
1 |
% |
Interest and investment income |
|
|
19 |
|
|
|
23 |
|
|
|
(17 |
)% |
|
|
31 |
|
|
|
16 |
|
|
|
94 |
% |
Euro Disney gain on restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
$ |
(134 |
) |
|
$ |
(151 |
) |
|
|
11 |
% |
|
$ |
(364 |
) |
|
$ |
(446 |
) |
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense decreased $21 million and $6 million for the quarter and nine months
ended July 2, 2005, respectively. Interest expense in the current quarter and nine month periods
decreased due to lower average debt balances partially offset by higher effective interest rates.
Interest expense for the nine months ended July 2, 2005 included an increase of $36 million due to
the consolidation of Euro Disney and Hong Kong Disneyland as only three months of operations are
reported in the nine-month period of fiscal 2004 as compared to nine months reported in the current
year period.
See Note 7 to the Condensed Consolidated Financial Statements for a discussion of the Euro
Disney gain on restructuring.
Interest and investment income for the nine months ended July 2, 2005 includes $42 million of
write-downs of our investment in a company that licenses technology to the MovieBeam venture, of
which $10 million was recorded in the third quarter. The prior-year nine-month period includes a
$13 million write-down of another investment, while the current nine-month period includes $14
million in gains from the sale of investments.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Equity in the Income of Investees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
Nine Months Ended |
|
|
|
|
July 2, |
|
June 30, |
|
|
|
|
|
July 2, |
|
June 30, |
|
|
(in millions) |
|
2005 |
|
2004 |
|
% Change |
|
2005 |
|
2004 |
|
% Change |
Equity in the Income of Investees |
|
$ |
125 |
|
|
$ |
126 |
|
|
|
(1 |
)% |
|
$ |
363 |
|
|
$ |
300 |
|
|
|
21 |
% |
Equity in the income of investees remained flat for the quarter at $125 million as
improved overall performance by the equity investees was offset by a $32 million partial impairment
of a cable television investment in Latin America due to revised expectations for long term
business performance.
The increase in equity in the income of investees for the nine months ended July 2, 2005 was
due to the absence of equity losses from Euro Disney and improved overall performance by the equity
investees partially offset by the $32 million partial impairment of the Latin American cable
television investment. Euro Disney was accounted for under the equity method in the first half of
the prior-year and was consolidated starting the third quarter of the prior year.
Effective Income Tax Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
Nine Months Ended |
|
|
|
|
July 2, |
|
June 30, |
|
ppt |
|
July 2, |
|
June 30, |
|
ppt |
|
|
2005 |
|
2004 |
|
Change |
|
2005 |
|
2004 |
|
Change |
Effective Income Tax Rate |
|
|
34.0 |
% |
|
|
36.0 |
% |
|
|
(2.0 |
)% |
|
|
35.0 |
% |
|
|
36.6 |
% |
|
|
(1.6 |
)% |
The decrease in the effective income tax rate from 36.0% to 34.0% for the current quarter
was primarily attributable to the settlement of tax examinations in the intervening periods and an
adjustment to tax benefits estimated in the prior year to actual amounts claimed. In addition to
the items in the current quarter, the decrease in the effective income tax rate from 36.6% to 35.0%
for the nine months was also driven by the favorable resolution of an income tax matter in the
first quarter of the current year which resulted in a $24 million tax reserve release.
The tax provision for the current quarter and nine months reflects an estimated tax benefit of
$22 million and $60 million, respectively, 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, and no exclusion will generally be
available in fiscal years 2008 and thereafter.
The Act also made a number of other changes to the U.S. 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 IRS and U.S. Treasury Department are expected to issue further guidance
regarding the application of this new law by the end of the current fiscal year. We are evaluating
and, following the issuance of the additional guidance, will quantify the impact of the new
deduction for qualifying domestic production activities.
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Pension and Postretirement Benefit Costs
The Company determines annual net periodic benefit cost for the subsequent fiscal year based
on its pension measurement date of June 30 of the prior year. Based on information as of June 30,
2005, we expect net periodic benefit cost for fiscal year 2006 to increase in the range of $125
million to $175 million over the current fiscal year. The majority of these costs are borne by the
Parks and Resorts segment. The increase in net periodic benefit cost is driven by the significant
decrease in high quality long-term corporate bond yields from June 30, 2004 to June 30,
2005, as the level of these rates on the measurement date determines the discount rate used to
calculate the present value of our pension and postretirement liabilities. The lower discount rate
causes an increase in the present value of our plan obligations which, in turn, results in higher
benefit costs. This increase will also result in the Company recording a significant increase in
our minimum pension liability adjustment in other accumulated comprehensive income/(loss) in the
fourth quarter of fiscal 2005.
STOCK OPTION ACCOUNTING
The following table reflects pro forma net income and earnings per share had the Company
elected to record stock option expense on a fair value basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
|
July 2, |
|
|
June 30, |
|
(in millions, except per share data) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
851 |
|
|
$ |
604 |
|
|
$ |
2,272 |
|
|
$ |
1,829 |
|
Less stock option expense |
|
|
(64 |
) |
|
|
(106 |
) |
|
|
(187 |
) |
|
|
(299 |
) |
Tax effect |
|
|
24 |
|
|
|
39 |
|
|
|
69 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma after stock option expense |
|
$ |
811 |
|
|
$ |
537 |
|
|
$ |
2,154 |
|
|
$ |
1,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.41 |
|
|
$ |
0.29 |
|
|
$ |
1.09 |
|
|
$ |
0.88 |
|
Pro forma after stock option expense |
|
$ |
0.39 |
|
|
$ |
0.26 |
|
|
$ |
1.03 |
|
|
$ |
0.79 |
|
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. The pro forma amounts assume that the Company
had been following the fair value approach since the beginning of fiscal 1996.
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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
conversion of the convertible senior notes. The dilution from employee options increases as the
Companys share price increases, as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Total |
|
|
Incremental |
|
|
Percentage of |
|
|
Hypothetical |
|
Disney |
|
In-the-Money |
|
|
Diluted |
|
|
Average Shares |
|
|
Q3 2005 |
|
Share Price |
|
Options |
|
|
Shares (1) |
|
|
Outstanding |
|
|
EPS Impact (3) |
|
|
$27.17 |
|
142 million |
|
|
|
(2) |
|
|
|
|
|
$ |
0.000 |
|
30.00 |
|
165 million |
|
8 million |
|
|
0.38 |
% |
|
|
(0.002 |
) |
40.00 |
|
223 million |
|
35 million |
|
|
1.67 |
% |
|
|
(0.007 |
) |
50.00 |
|
230 million |
|
54 million |
|
|
2.58 |
% |
|
|
(0.010 |
) |
(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 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 quarter ended July 2, 2005 total 2,096
million and include the dilutive impact of in-the-money options at the average
share price for the period of $27.17 and assume conversion of the convertible
senior notes. At the average share price of $27.17, the dilutive impact of
in-the-money options was 20 million shares for the quarter. |
|
(3) |
|
Based upon Q3 2005 earnings of $851 million, or $0.41 diluted earnings per share. |
FINANCIAL CONDITION
For the nine months ended July 2, 2005, cash and cash equivalents decreased by $8 million as
detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
Cash provided by operations |
|
$ |
2,951 |
|
|
$ |
3,403 |
|
|
$ |
(452 |
) |
Cash used by investing activities |
|
|
(1,069 |
) |
|
|
(863 |
) |
|
|
(206 |
) |
Cash used by financing activities |
|
|
(1,890 |
) |
|
|
(1,374 |
) |
|
|
(516 |
) |
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in cash and
cash equivalents |
|
$ |
(8 |
) |
|
$ |
1,166 |
|
|
$ |
(1,174 |
) |
|
|
|
|
|
|
|
|
|
|
Operating Activities
Cash provided by operations decreased $452 million to $3.0 billion, primarily due to timing of
payments for accounts payable, accrued expenses and income taxes.
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Film and Television Costs
The Companys Studio and Media Networks segments incur costs to acquire and produce television
and feature film content. These amounts are generally expensed based on the ratio of the current
periods gross revenues to estimated remaining total gross revenues. Spending and amortization for
the nine months ended July 2, 2005 and June 30, 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
(in millions) |
|
July 2, |
|
|
June 30, |
|
Source/(use) of cash |
|
2005 |
|
|
2004 |
|
Film and Television Production |
|
|
|
|
|
|
|
|
Spending |
|
$ |
(2,012 |
) |
|
$ |
(1,633 |
) |
Amortization |
|
|
2,370 |
|
|
|
2,105 |
|
|
|
|
|
|
|
|
Net Change |
|
$ |
358 |
|
|
$ |
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast Programming Costs |
|
|
|
|
|
|
|
|
Spending |
|
$ |
(2,831 |
) |
|
$ |
(3,199 |
) |
Amortization |
|
|
2,736 |
|
|
|
2,968 |
|
|
|
|
|
|
|
|
Net Change(1)(2) |
|
$ |
(95) |
|
|
$ |
(231 |
) |
|
|
|
|
|
|
|
|
(1) |
|
Broadcast programming costs are classified as current or non-current
depending upon the expected timing of airing of the program. The net change in
broadcast programming is allocated between current and non-current programming as
follows: |
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
(in millions) |
|
2005 |
|
|
2004 |
|
Non-current |
|
$ |
(43) |
|
$ |
(307 |
) |
Current |
|
|
(52 |
) |
|
|
76 |
|
|
|
|
|
|
|
|
|
|
$ |
(95) |
|
|
$ |
(231 |
) |
|
|
|
|
|
|
|
|
(2) |
|
In addition to the cash spending amounts detailed above, we record
programming assets with a corresponding increase to programming liabilities when the
programming becomes available to us. These amounts were $119 million and $45 million
for the nine months ended July 2, 2005 and June 30, 2004, respectively. |
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Investing Activities
During the nine months ended July 2, 2005, the Company invested $1.2 billion in parks, resorts
and other properties. Investments in parks, resorts and other properties by segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
July 2, |
|
|
June 30, |
|
(in millions) |
|
2005 |
|
|
2004 |
|
Media Networks |
|
$ |
125 |
|
|
$ |
137 |
|
Parks and Resorts |
|
|
|
|
|
|
|
|
Domestic |
|
|
497 |
|
|
|
476 |
|
International (1) |
|
|
482 |
|
|
|
142 |
|
Studio Entertainment |
|
|
26 |
|
|
|
21 |
|
Consumer Products |
|
|
7 |
|
|
|
8 |
|
Corporate and unallocated |
|
|
50 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
$ |
1,187 |
|
|
$ |
894 |
|
|
|
|
|
|
|
|
|
(1) |
|
Represents 100% of Euro Disney and Hong Kong Disneylands
capital expenditures for all periods since the Company
began consolidating the results of operations and cash
flows of these two entities 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
international park spending in 2005 primarily reflects Hong Kong Disneyland construction cost where
capital expenditures totaled $428 million compared to the prior-year amount of $129 million which
includes only three months of activity as the Company began consolidating the results of Hong Kong
Disneyland on April 1, 2004. Our equity partner funded $104 million of Hong Kong Disneylands cash
requirement for the current nine-month period which is included as a source of cash in financing
activities.
Financing Activities
During the nine months ended July 2, 2005, the Companys borrowing activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
(in millions) |
|
2004 |
|
|
Additions |
|
|
Payments |
|
|
Other activity |
|
|
2005 |
|
Commercial paper borrowings |
|
$ |
100 |
|
|
|
819 |
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
917 |
|
U.S. medium-term notes |
|
|
6,624 |
|
|
|
|
|
|
|
(775 |
) |
|
|
|
|
|
|
5,849 |
|
Convertible senior notes |
|
|
1,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,323 |
|
Other U.S. dollar denominated debt |
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305 |
|
Privately placed debt |
|
|
254 |
|
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
207 |
|
European medium-term notes |
|
|
1,099 |
|
|
|
|
|
|
|
(886 |
) |
|
|
|
|
|
|
213 |
|
Preferred stock |
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
366 |
|
Capital Cities/ABC and ABC Family
debt |
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
187 |
|
Other(1) |
|
|
455 |
|
|
|
|
|
|
|
(2 |
) |
|
|
(145 |
) |
|
|
308 |
|
Euro Disney borrowings(2) |
|
|
2,221 |
|
|
|
|
|
|
|
(13 |
) |
|
|
(156 |
) |
|
|
2,052 |
|
Hong Kong Disneyland borrowings |
|
|
545 |
|
|
|
245 |
|
|
|
|
|
|
|
17 |
|
|
|
807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,488 |
|
|
$ |
1,064 |
|
|
$ |
(1,723 |
) |
|
$ |
(295 |
) |
|
$ |
12,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The $145 million included in other activity is primarily adjustments related to interest rate hedging activity. |
|
|
(2) |
|
Other activity included a $130 million reduction of Euro Disney senior debt using cash security deposits and a
$17 million decrease due to foreign currency translation as a result of the appreciation of the U.S. dollar
against the Euro. |
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The Companys bank facilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed |
|
|
Capacity |
|
|
Unused |
|
(in millions) |
|
Capacity |
|
|
Used |
|
|
Capacity |
|
Bank facilities expiring 2009(1) |
|
$ |
2,250 |
|
|
$ |
208 |
|
|
$ |
2,042 |
|
Bank facilities expiring 2010(1) |
|
|
2,250 |
|
|
|
|
|
|
|
2,250 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,500 |
|
|
$ |
208 |
|
|
$ |
4,292 |
|
|
|
|
|
|
|
|
|
|
|
|
(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
July 2, 2005, the Company had not borrowed under these bank
facilities. The Company also has the ability to issue up
to $500 million of letters of credit under the facility
expiring in 2009, which if utilized, reduces available
borrowing. As of July 2, 2005, $208 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.
On January 18, 2005, the Company filed a shelf registration statement which allows the Company
to borrow up to $5 billion and effectively replaces a previously-filed $7.5 billion shelf
registration. The terms of the $5 billion shelf registration are substantially similar to those of
the $7.5 billion shelf. The Company subsequently established a domestic medium-term note program
under the new shelf, which permits issuance of $5 billion of additional debt instruments, of which
none have been issued at July 2, 2005. In addition to the shelf, the Company also has a Euro
medium-term note program, which permits issuance of approximately $4 billion of additional debt
instruments, of which $0.2 billion has been utilized at July 2, 2005.
The Company declared a $490 million dividend ($0.24 per share) on December 1, 2004 related to
fiscal 2004, which was paid 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 second quarter of fiscal 2004
related to fiscal 2003.
During the current nine-month period, the Company repurchased 49 million shares of Disney
common stock for $1.4 billion, of which 33 million shares for $0.9 billion were repurchased in the
third quarter. As of July 2, 2005, the Company had authorization in place to repurchase
approximately 267 million additional shares.
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 credit metrics such as interest coverage and leverage ratios. As of July 2, 2005,
Moodys Investors Services long and short-term debt ratings for the Company were Baal and P-2,
respectively; with a positive outlook on the long-term rating; and Standard & Poors long and
short-term debt ratings for the Company were A- 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 July 2, 2005, 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.
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
COMMITMENTS AND CONTINGENCIES
Legal and Tax Matters
As disclosed in the Notes 13 and 14 to the Condensed Consolidated Financial Statements the
Company has exposure for certain legal and tax matters.
Aircraft leveraged lease investment
As disclosed in Note 4 to the Condensed Consolidated Financial Statements, the Companys $153
million aircraft leveraged lease investments are exposed to the credit risk of the carriers. As
discussed in Note 4, we are closely monitoring Delta Air Lines Inc.s (Delta) financial
restructuring progress as $101 million of our lease investment is with Delta. Although Delta
remains current on their lease payments to us, the inability of Delta to make their lease payments,
or the termination of our lease through a bankruptcy proceeding, could result in the write-down of
our investment and the acceleration of certain income tax payments.
Information Technology Outsourcing
During the quarter, the Company entered into agreements with two suppliers to outsource
certain information technology functions and support services. The transition of services to the
new suppliers began in late July 2005. The terms of these agreements extend five to seven years
with an option for the Company to extend for an additional two to three years. The Company will
retain all responsibility and authority for systems architecture, technology strategy, and product
standards under the agreements. While payments under these agreements are primarily variable, the
Company anticipates spending approximately $1.3 billion for these services over the next seven
years, which is less than what we estimate we would have spent had we not outsourced these
functions.
Contractual commitments and guarantees
See Note 13 to the Condensed Consolidated Financial Statements for information regarding the
Companys contractual commitments and guarantees.
OTHER 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 our significant accounting policies, including the
accounting policies discussed below, see Note 2 of the Consolidated Financial Statements in the
2004 Annual Report.
Film and Television Revenues and Costs
We expense the cost of film and television production and participations as well as certain
multi-year sports rights over the applicable product life cycle based upon the ratio of the current
periods gross revenues to the estimated remaining total gross revenues or on a straight-line
basis, as appropriate. These estimates are calculated on an individual production basis for film
and television and on an individual contract basis for sports rights. 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.
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 ten 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, if later. 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.
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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, prime time,
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 assets 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,
television and programming cost write-downs may be required.
Revenue Recognition
The Company has revenue recognition policies for its various operating segments, which are
appropriate to the circumstances of each business. See Note 2 to the Consolidated Financial
Statements in the 2004 Annual Report for a summary of these revenue recognition policies.
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 Companys pension and postretirement medical benefit obligations and related costs are
calculated using actuarial concepts, within the framework of Statement of Financial Accounting
Standards No. 87 Employers Accounting for Pensions and Statement of Financial Accounting Standards
No. 106, Employers Accounting for Postretirement Benefits Other than Pensions, respectively. Two
critical assumptions, the discount rate and the expected return on plan assets, are important
elements of expense and/or liability measurement. We evaluate these critical assumptions annually.
Refer to the 2004 Annual Report for estimated impacts of changes in these assumptions. Other
assumptions include the healthcare cost trend rate and employee demographic factors such as
retirement patterns, mortality, turnover and rate of compensation increases.
The discount rate enables us to state expected future cash payments for benefits 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.
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.
Goodwill, Intangible Assets, Long-lived Assets and Investments
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142) requires that goodwill and other intangible assets be tested for impairment at least on
an annual basis. We completed our impairment testing as of September 30, 2004 and determined that
there were no impairment losses related to goodwill and other intangible assets. In assessing the
recoverability of goodwill and other intangible assets, market values and projections regarding
estimated future cash flows and other factors are used to determine the fair value of the
respective assets. If these estimates or related projections change in the future, we may be
required to record impairment charges for these assets.
SFAS 142 requires the Company to compare the fair value of each reporting unit to its carrying
amount on an annual basis to determine if there is potential goodwill impairment. If the fair value
of a 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.
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.
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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, except
for the Television Network, a business within the Television Broadcasting reporting unit. 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.
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.
The Company has cost and equity investments. The fair value of these 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
We are currently involved in certain legal proceedings and, as required, have accrued
estimates of the probable and estimable losses for the resolution of these claims. These estimates
have been developed in consultation with outside counsel and are based upon an analysis of
potential results, assuming a combination of litigation and settlement strategies. It is possible,
however, that future results of operations for any particular quarterly or annual period could be
materially affected by changes in our assumptions or the effectiveness of our strategies related to
these proceedings. See Note 13 to the Condensed Consolidated Financial Statements for more
detailed information on litigation exposure.
Income Tax Audits
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. Among current
audits, the Internal Revenue Service (IRS) is examining the Companys federal income tax returns
for 1996 through 2000. In connection with this examination, the IRS has proposed assessments with
respect to certain of the Companys tax positions for the years under examination. However, the
Company continues to believe that its tax positions comply with applicable tax law and intends to
defend its positions vigorously. The Company believes it has adequately provided for any
reasonably foreseeable outcome of these matters and does not anticipate any material earnings
impact from their ultimate resolution. During the first quarter of fiscal 2005, there was a
favorable resolution of an income tax matter that resulted in a $24 million tax reserve release.
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Accounting Changes
EITF D-108
On September 30, 2004, the EITF issued EITF D-108. EITF D-108 requires that a direct value
method be used to value intangible assets acquired in business combinations completed after
September 29, 2004. EITF D-108 also requires the Company to perform an impairment test using a
direct value method on all intangible assets that were previously valued using the residual method.
This impairment test is required to be performed no later than the beginning of fiscal 2006 for
the Company. Any impairments arising from the initial application of a direct value method would
be reported as a cumulative effect of accounting change. For radio station acquisitions subsequent
to the acquisition of Cap Cities/ABC, Inc. in 1996, the Company has applied the residual value
method to value the acquired FCC licenses. The remaining net book value of FCC licenses that were
valued under the residual method was approximately $550 million at July 2, 2005. The Company is in
the process of evaluating the impact that adopting EITF D-108 will have on the Companys financial
statements. Based on our analysis to date, we believe that some of these FCC licenses may be
impaired under EITF D-108, but we currently do not expect such impairment to exceed $65 million.
SFAS 123R
In December 2004, the FASB issued SFAS 123R. The statement requires companies to record stock
option expense in its financial statements based on a fair value methodology beginning no later
than the first fiscal quarter beginning after June 15, 2005. The SEC subsequently deferred the
implementation date for SFAS 123R to the first fiscal year that begins after June 15, 2005 which is
the first quarter of fiscal 2006 for the Company. The Company is evaluating the impact of the new
standard and the method and timing of adoption. Although we have not completed our analysis, we
anticipate that the expense would not exceed the amounts disclosed in Note 12 to the Condensed
Consolidated Financial Statements had the Company been expensing under the new rule.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency fluctuations
and changes in the market values of its investments.
Policies and Procedures
In the normal course of business, we employ established policies and procedures to manage the
Companys exposure to changes in interest rates, foreign currencies and the fair market value of
certain investments in debt and equity securities using a variety of financial instruments.
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 minimum and maximum percentages.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of
earnings and cash flow 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 U.S. dollar equivalent 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 U.S. dollar equivalent value of the related exposures.
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 or any other hedging
transactions for speculative purposes.
38
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for
forward-looking statements made by or on behalf of the Company. 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.
All forward-looking statements are made on the basis of managements views and assumptions
regarding future events and business performance as of the time the statements are made and the
Company does not undertake any obligation to update its disclosure relating to forward looking
matters. Actual results may differ materially from those expressed or implied. Such differences
may result from actions taken by the Company, including restructuring or strategic initiatives
(including capital investments or asset acquisitions or dispositions), as well as from developments
beyond the Companys control, including international, political, health concern, weather related
and military developments, technological developments and changes in domestic and global economic
conditions, competitive conditions and consumer preferences. Such developments may affect travel
and leisure businesses generally and may, among other things, affect the performance of the
Companys theatrical and home entertainment releases, the advertising market for broadcast and
cable television programming, expenses of providing medical and pension benefits, demand for our
products and performance of some or all company businesses either directly or through their impact
on those who distribute our products. Additional factors are set forth in the 2004 Annual Report
under the heading Factors that may affect forward-looking statements.
39
PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk. See Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedure 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 July 2, 2005, 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.
40
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Since our Form 10-Q filing for the quarter ended April 2, 2005, developments identified below
occurred in the following legal proceedings. For information on certain other legal proceedings,
see Note 13 to the Condensed Consolidated Financial Statements included in this report.
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. 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. Subsequently, the Court ruled
that Milnes termination notices are invalid and dismissed SSIs counterclaims as moot. Following
further motions 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 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 November 2004, the District Court granted a motion by Milne to dismiss her
complaint for the purpose of obtaining a final appealable order of dismissal, so as to permit her
appeal to the Court of Appeals to proceed. Oral argument of that appeal is scheduled to be heard
on September 13, 2005.
Shamrock Holdings of California, Inc. v. Iger. On May 9, 2005, Shamrock Holdings of
California, Inc., Roy Disney and Stanley Gold filed a complaint against The Walt Disney Company and
Company directors Robert Iger, Michael Eisner, Judith Estrin, John Chen, Aylwin Lewis, Monica
Lozano, George Mitchell and Fr. Leo ODonovan in the Delaware Court of Chancery. The complaint
alleged that the representations made by the defendants in connection with the process of selecting
the Companys next Chief Executive Officer were false and misleading, and that this led Shamrock,
Disney and Gold to forego running an alternate slate of directors at the Companys 2005 Annual
Meeting. The complaint sought an order voiding the 2005 election of directors, compelling the
Company to hold another election of directors, and enjoining the defendants from changing either
Eisner or Igers compensation or employment contracts. On July 11, 2005, the complaint
was dismissed with prejudice pursuant to a settlement agreement between the parties, as set forth
in the Form 8-K filed by the Company on July 14, 2005.
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 and on August 9, 2005, the Delaware Court of Chancery issued an order entering
judgment against the plaintiffs and in favor of all defendants on all counts.
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.
Management believes that it is not currently possible to estimate the impact, if any, that the
ultimate resolution of these and previously reported 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.
41
PART II. OTHER INFORMATION (continued)
ITEM 2. Issuer Purchases of Equity Securities
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 July
2, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
Shares |
|
Number of |
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
Shares that |
|
|
|
|
|
|
|
|
|
|
Part of |
|
May Yet Be |
|
|
Total |
|
|
|
|
|
Publicly |
|
Purchased |
|
|
Number of |
|
Average |
|
Announced |
|
Under the |
|
|
Shares |
|
Price Paid |
|
Plans or |
|
Plans or |
Period |
|
Purchased (1) |
|
per Share |
|
Programs |
|
Programs(2) |
April 3, 2005 April 30, 2005
|
|
|
126,897 |
|
|
$ |
27.48 |
|
|
|
|
|
|
300 million |
May 1, 2005 May 28, 2005
|
|
|
10,430,553 |
|
|
|
27.41 |
|
|
|
10,281,400 |
|
|
290 million |
May 29, 2005 July 2, 2005
|
|
|
23,210,299 |
|
|
|
27.50 |
|
|
|
23,053,000 |
|
|
267 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33,767,749 |
|
|
$ |
27.47 |
|
|
|
33,334,400 |
|
|
267 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
433,349 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) |
|
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. |
42
PART II. OTHER INFORMATION (continued)
ITEM 6. Exhibits
See Index of Exhibits.
43
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
THE WALT DISNEY COMPANY
(Registrant)
|
|
|
By: |
/s/ THOMAS O. STAGGS
|
|
|
|
(Thomas O. Staggs, Senior Executive |
|
|
|
Vice President and Chief Financial
Officer) |
|
|
August 10, 2005
Burbank, California
44
INDEX OF EXHIBITS
|
|
|
|
|
|
|
|
|
Document Incorporated by Reference |
Number and Description of Exhibit |
|
from a Previous Filing or Filed |
(Numbers Coincide with Item 601 of Regulation S-K) |
|
Herewith, as Indicated below |
31(a)
|
|
Rule 13a-14(a) Certification of Chief
Executive Officer of the Company in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed Herewith |
31(b)
|
|
Rule 13a-14(a) Certification of Chief
Financial Officer of the Company in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed Herewith |
32(a)
|
|
Section 1350 Certification of Chief Executive
Officer of the Company in accordance with Section
906 of the Sarbanes-Oxley Act of 2002*
|
|
Furnished |
32(b)
|
|
Section 1350 Certification of Chief Financial
Officer of the Company in accordance with Section
906 of the Sarbanes-Oxley Act of 2002*
|
|
Furnished |
* 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.
45