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Part III February 9 was the day we finally closed our merger with ABC. It was also the day I started reimmersing myself in a television broadcasting business that gave me my professional start many years ago. I had forgotten what it was like getting up every morning to the ratings. It's like getting your final exam results over and over again. And of course there is always that test you thought you got an A in and later found out you had read the question wrong. As fate would have it, the ABC network, number one in prime time total household viewing in 1994-95, started slipping in the ratings in the months prior to the merger. To stem this slippage, ABC network programmers worked diligently starting late in the 1995-96 TV season to refashion a prime time lineup for the opening of the 1996-97 season in September. While the competitive results to date have been mixed, I am pleased to report that we have stanched much of the bleeding and, in fact, are making slow but steady progress toward better ratings. The idea in the prime time development business is to create one new hit every season and over time build a number one schedule. Every network that becomes number one—and three out of the four primary networks have been number one at some point in their history—does it one show at a time. Patience, perseverance, creativity, some good fortune is the way to go. Panic is not an ingredient needed in this mix. It is harder and more expensive today than it was when I worked in TV in the '70s. Today, there are six broadcast networks, tens of cable networks, pay television networks, sports networks, games networks, and of course, the computer. I am happy about e-mail and computer "spell check," but unhappy about computers as another competitor in entertainment. But if ABC keeps its eye on the ball, doesn't merely wait for great ideas to come in the door but also creates them inside, does not join the shark frenzy of panicked buying and maintains management stability, we will once again be number one. In the meantime, there is some encouraging news. ABC's two-year drought of not producing a successful new series is over. The Drew Carey Show from last season's crop has become an unqualified hit in its second season. This year's Spin City ranks as the 7th-highest-rated series on television among young adults, averaging a 10.2 rating. Life's Work, produced by our own Buena Vista Television group, is the third-most-popular new show on television among young adults and wins its time period by as much as 85 percent. Sabrina, The Teenage Witch is the highest-rated show among young adults on ABC's Friday Night TGIF lineup and the number one show on television among children 2-11. I am confident that as we go forward Disney will make substantial contributions to the success of the ABC network. I look forward especially to our launch next fall of the Wonderful World of Disney franchise show we are planning for Sunday nights. The show will offer a full season of theatrical features such as Toy Story, Pocahontas and The Hunchback of Notre Dame, as well as Disney-made movies for television. We fully expect that airing these films as part of Wonderful World of Disney will give ABC a giant boost in the ratings, and we base that expectation on our recent network premiere of The Lion King on ABC during the November sweeps. The movie not only dominated its time period but gave the network a badly needed win for the entire week. The bad news, of course, is the complete dominance of NBC's Thursday night lineup, which includes several of the top shows in the ratings each week. These successful shows reinforce each other, and it will be some time before any network, including our own, will be able to make substantial inroads on Thursday. I have been there before. I worked at ABC when we had to face CBS's Saturday night domination. That domination did pass. I also feel that as time goes on acceptance of Disney's Saturday morning slate of children's shows will also enhance the network and give the company additional Disney content to satisfy the hunger for programming on our Disney Channels around the world. We have placed all cable operations under ABC management, which in addition to ESPN Channels and the partnerships of Lifetime, A&E and the History Channel include The Disney Channel which is still commercial-free and whose audience now numbers 25 million households. ESPN and ABC Sports are now also under one management. While Disney's domestic TV syndication company, Buena Vista, and its similar operations outside the United States including the offshore Disney Channels are managed under the ABC umbrella, our home video and interactive operations including those from ABC are managed by the Disney Home Video and Interactive and Online groups. In other words, the marriage of ABC and Disney has taken place and properties have been combined where it makes sense. These marriages of operations have already produced results. ESPNews, a 24-hour sports news cable channel, is on line, a soap opera channel is "on deck," and a children's educational and entertainment channel is in the works. ABC Sports, incidentally, will be beneficiary of the historic agreement among the NCAA, established football conferences and bowls to hold national championship playoff games for the first time. Our network will carry the first game for the 1997 championship in January 1998. And as football fortunes would have it, this year's Rose Bowl and Sugar Bowl telecasts on ABC feature the NCAA's only undefeated Division 1 schools, thus serving as a de facto playoff for determining the 1996 champion as well. Our Consumer Products group, whose financial results are now included in the Creative Content segment, continues to grow. After all these years, its primary strength stems from the continuing popularity of Disney's standard characters—Mickey and Minnie, Donald, Goofy, Pluto and the recently acquired Winnie the Pooh license, which is owned by the heirs of the creator, A. A. Milne. Also popular, of course, are characters from the company's animated features, including 101 Dalmatians, Pocahontas, The Hunchback of Notre Dame, Aladdin and The Little Mermaid. Consumer Products also includes our Disney Stores, of which there are now more than 550 in 11 countries. Remember, there were none just 10 years ago. In addition to being the great success The Disney Stores have proven to be, they offer a glowing example of how a small idea, pushed along and nurtured, can evolve within a company like Disney and become a significant business. We are opening one ESPN store in the Glendale Galleria in Southern California, the mall in which we opened our first Disney Store in 1987. We did not pick this location because of superstition, although that would be a reasonable conclusion. We picked it because it is down the block from our corporate headquarters. In February we are also opening a new type of family play place called Club Disney in Thousand Oaks, California. This "imagination-powered playsite" where children, their friends and grown-ups can bond through active, interactive and creative play will serve as a possible prototype for additional playsites which would be developed and operated by the new Disney Regional Entertainment group. Another operation of which I am especially proud is our Disney Interactive group. Even though it takes significant investment to enter this new industry, this unit is achieving explosive growth since its inception in December 1994. The group has released five of the best-selling children's software titles and several chart-topping video games in its relatively short history. Last year Disney Interactive partnered with Pixar for development of the Toy Story Animated StoryBook, which sold nearly a half-million copies, making it one of the bestsellers of 1996. We hope to show profits in this area by 1998.
Performance is one of the most important words in the Disney lexicon, perhaps because we started out as a film production company where the focus has always been on successfully entertaining the audience. We have 1.5 million shareholder accounts, and pleasing you is a major preoccupation for those of us charged with making important day-to-day decisions on where and how we will represent your interests, invest your money and promote and manage your properties in ways that benefit you most. The Disney culture, and maintaining it, is still my number one priority. Equally important is maintaining the autonomous ABC news culture: serving the broadest possible public interest, being willing to stand for the values of a free press, pursuing the news aggressively, reporting it without fear or favor, and being guided by an unbiased commitment to fairness and honesty and tough-mindedness, all the while resisting the pressure to pull punches, homogenize the product and avoid all controversy— and doing all this with the same high standards of excellence that we pursue in all of our divisions. This coming year should be exciting. Hercules, our 35th animated movie, opens nationwide on June 20. I've seen it...a smash!!!!! I don't have room in this report to beat around the bush. We will test even further the idea of doing Disney movies directly for the home video market as we release Honey, We Shrunk Ourselves in March and Winnie the Pooh later in the year. And we will follow the successful Beauty and the Beast on Broadway with The Lion King, which opens in the New Amsterdam Theater on 42nd Street next fall. We are preparing for the millennium. We have a sizable but very manageable debt load coming off our Capital/ABC acquisition. This will be paid down out of excess cash in a reasonable amount of time. Our additional excess cash and debt capacity will basically be used to invest in extensions of our current business and to repurchase our own shares. You will note in the financial review, which immediately follows this letter, that in the fourth quarter we repurchased 8.2 million shares for $462 million as our stock showed some weakness just after the close of the merger. In my 12 years at Disney, we have repurchased 84.4 million shares at an average price of $25.59, for a total investment of $2.2 billion for shares that are worth over $6.2 billion today. I wish we could have bought more, but doesn't everybody say that when things go well? I doubt we will use our excess cash for the other possibilities available—namely a large acquisition or a huge dividend. We've made our large purchase for the time being, and most of our shareholders would rather we invest in growth than pay out the cash in additional dividends. We have to manage the growth of revenue while we equally manage the cost of doing business. Both are what contribute to earnings-per-share growth. We are always lowering or trying to lower our cost of capital, and we are always trying to protect the company from undue financial risk. Finally, you have no doubt read by now that we and Michael Ovitz have come to an agreement that he will leave his position as president but continue in a role as an advisor to the company and its Board of Directors. While I will miss Michael's energy, creativity and enthusiasm, our shared view is that this decision is in the best interest of Disney. We do not plan to name a successor to Michael but will continue to operate organizationally as we did prior to his arrival. Over the past decade, we have steadily built a strong creative and management team and I am confident that Disney will continue to develop new businesses and to maintain its leadership position in its existing businesses. Your company now is quite large, but as large as it is, the primary principles of its growth continue. Excellence in every adventure! The spirit of the Mouse for every season! Speaking for all the cast members of The Walt Disney Company, your management will continue to build and prepare for the future with the compasses of growth and ethics headed in the same direction. We appreciate your continued support.
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