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Management's Discussion and Analysis of Financial Condition and Results of Operations Charts: Consolidated Statement of Income, Consolidated Balance Sheet, Consolidated Statement of Cash Flows Results of Operations On February 9, 1996, the Company acquired Capital Cities/ABC, Inc. ("ABC"). The Company's results of operations have incorporated ABC's activity since that date. To enhance comparability, certain information below is presented on a "pro forma" basis and reflects the acquisition of ABC as though it had occurred at the beginning of the respective periods presented. The pro forma results are not necessarily indicative of the combined results that would have occurred had the acquisition actually occurred at the beginning of those periods.
As a result of the acquisition, the Company has reconfigured its financial reporting segments into Creative Content, Broadcasting, and Theme Parks and Resorts. Consumer products operations, ABC's publishing operations and filmed entertainment activities not related to broadcasting have been classified as Creative Content. Operations previously reported as Filmed Entertainment that pertain to broadcasting, as well as ABC's broadcasting operations, have been classified as the Broadcasting segment. The Theme Parks and Resorts segment contains the same operations as in prior years. The following discussion of 1996 versus 1995 performance is primarily based on pro forma results. The Company believes pro forma results represent the best comparative standard for assessing net income, changes in net income and earnings trends, as the pro forma presentation combines a full year of the results of the Company and its acquired ABC operations. The discussion of consolidated results also includes "as reported" comparisons to the extent there have been material changes in reported amounts. The discussion of Theme Parks and Resorts segment results is on an as reported basis since the pro forma adjustments did not impact this segment. Consolidated Results 1996 vs. 1995 (pro forma and as reported)
Pro forma revenues increased 12% to $21.2 billion, reflecting growth in all business segments. Net income, excluding non-recurring charges, increased 16% to $1.5 billion, and earnings per share increased 15% to $2.23. These results were driven by increased operating income at the Theme Parks and Resorts and Broadcasting segments. Pro forma net interest expense decreased 10% to $698 million reflecting lower interest rates and a reduction in net borrowings (the Company's borrowings less cash and liquid investments). As reported revenues increased 54% to $18.7 billion, reflecting increases in all business segments and the impact of the acquisition of ABC. Net income, excluding the non-recurring charges, increased 11% to $1.5 billion driven by increased operating income for each business segment. Earnings per share, excluding the non-recurring charges, decreased 5% to $2.48, reflecting the impact of additional shares issued in connection with the acquisition. As reported corporate activities and other increased 29% to $309 million, reflecting higher corporate general and administrative costs and a $55 million gain in the prior year related to the sale of a portion of the Company's investment in Euro Disney. 1995 vs. 1994 (as reported) Operating income rose 25% or $494 million to $2.5 billion in 1995, driven by increases in Creative Content and Theme Parks and Resorts operating income of $326 million and $169 million, respectively. Net income increased 24% to $1.4 billion and earnings per share increased 27% to $2.60 from $1.1 billion and $2.04, respectively. Corporate activities and other expenses decreased 14% or $40 million to $239 million. The results for 1995 included a gain of $55 million from the sale of approximately 75 million shares, or 20% of the Company's investment in Euro Disney, partially offset by higher corporate general and administrative expenses. Net interest income decreased $120 million to an expense of $110 million in 1995. The decrease reflected both a decline in interest income driven by lower average investment balances and yields and an increase in interest expense primarily reflecting the impact of higher borrowings. The higher borrowings were due in part to prior-year common stock repurchases and Euro Disney funding, which were initiated in the latter part of 1994. Business Segment Results Creative Content Operating income remained flat at $1.6 billion, reflecting improved results in home video and worldwide merchandise licensing offset by lower theatrical results. Costs and expenses increased 21% or $1.5 billion. The increase is primarily due to higher theatrical distribution and home video selling costs, higher production cost amortization, expansion of the Disney Stores and the write-off of certain theatrical development projects. 1995 vs. 1994 (as reported) Operating income increased 27% or $326 million to $1.5 billion in 1995, primarily due to growth in worldwide home video, television, worldwide character merchandise licensing and the Disney Stores. Costs and expenses increased 23% or $1.2 billion, principally due to higher home video marketing and distribution costs reflecting the worldwide release of Snow White and the Seven Dwarfs and the domestic release of The Lion King, the ongoing expansion and revenue growth of the Disney Stores, higher distribution costs related to theatrical releases and costs associated with the syndication of Home Improvement. Broadcasting Operating income increased 12% or $114 million to $1.1 billion, reflecting decreased costs and expenses at the television network, revenue increases at ESPN and The Disney Channel and lower program write-offs at KCAL. Costs and expenses increased 3% or $153 million, reflecting increased program rights and production costs driven by growth at ESPN and The Disney Channel internationally, partially offset by significantly decreased program amortization at the television network, primarily attributable to the acquisition, and lower program write-offs at KCAL. 1995 vs. 1994 (as reported) Theme Parks and Resorts Fiscal 1996 operating income increased 15% or $131 million to $990 million, resulting primarily from higher theme park attendance, increased guest spending and increased occupied rooms at Florida resorts. Costs and expenses, which consist principally of labor, costs of merchandise, food and beverages sold, depreciation, repairs and maintenance, entertainment and marketing and sales expenses, increased 12% or $370 million, primarily due to increased operating hours in response to higher attendance, expansion of theme park attractions and resorts, increased marketing and sales expenses and increased costs associated with higher guest spending and increased occupied rooms. 1995 vs. 1994 Operating income increased 24% or $169 million to $859 million in 1995, driven by higher theme park attendance and increased occupied rooms at Florida resorts. Costs and expenses increased 12% or $333 million, primarily due to increased attendance and occupied rooms, expansion of theme park attractions and Florida resorts and increased marketing and sales expenses, partially offset by the impact of ongoing cost reduction initiatives. Liquidity and Capital Resources Net borrowings increased $10.6 billion to $12.0 billion during fiscal 1996. The increase was primarily due to an increase in debt in connection with the acquisition of ABC. In 1996, the Company invested $3.7 billion to develop, produce and acquire rights to film and television properties and $1.7 billion to design and develop new theme park attractions, resort properties, real estate developments and other properties. 1995 investments totaled $1.9 billion and $896 million, respectively. The $1.8 billion increased investment in film and television properties was primarily driven by ABC's television spending subsequent to the acquisition. Television expenditures in 1997 will be higher as they will reflect a full year of ABC's operations. The $849 million increased investment in theme parks, resorts and other properties resulted from initiatives including Disney's Animal Kingdom, Disney Cruise Line, Disney's BoardWalk Resort, Disney's Coronado Springs Resort, Disney's Wide World of Sports, and the town of Celebration. Continued spending increases related to these projects and from development of additional initiatives, including Disney's California Adventure and Downtown Disney, are anticipated through 1997. The Company repurchased 8 million shares of its common stock for approximately $462 million in 1996. Under its share repurchase program, the Company is authorized to purchase up to an additional 96 million shares. The Company evaluates share repurchase decisions on an ongoing basis, taking into account borrowing capacity, management's target capital structure, and other investment opportunities. The Company also used $271 million to fund dividend payments during the year. During the second quarter of 1996, the Company completed its acquisition of ABC. Aggregate consideration paid to ABC shareholders in March 1996 consisted of $10.1 billion in cash and 155 million shares of Company common stock. The Company initially funded the cash portion through the issuance of approximately $8.8 billion of commercial paper and the use of existing cash and investments. At acquisition, the Company assumed $627 million of ABC's long-term debt. Since the acquisition of ABC, the Company has replaced a portion of its commercial paper with longer-term financing, and expects to continue this process in the future. In the United States, the Company has issued $275 million of medium-term notes maturing in two to fifteen years, and in the global bond market, the Company has issued $1.3 billion of five year notes and $1.3 billion of ten year notes. In Europe, the Company has issued 300 billion Italian lira (approximately $190 million) of four year notes, and borrowed £335 million (approximately $520 million) through a private offering. In the Japanese market, the Company issued ¥150 billion (approximately $1.4 billion) of three-year bonds through two public offerings. The Company has swapped the interest payable on the foreign denominated borrowings into United States dollar LIBOR. The Company employs a variety of on- and off-balance-sheet financial instruments to manage its exposure to changes in interest rates and fluctuations in the value of foreign currencies. The Company does not expect interest rate movements or fluctuations in the value of foreign currencies to significantly affect its liquidity in the foreseeable future. For 1996 and 1995, a 1% increase or decrease in interest rates would not have had a material impact on the Company's liquidity or operating results. The Company currently maintains significant borrowing capacity to take advantage of growth and investment opportunities. The Company focuses on net borrowings, which take into account its cash and investment balances, when monitoring borrowing capacity. The Company's borrowing capacity includes a $5 billion line of credit which is available for general corporate purposes and to support commercial paper issuance. The Company has the capacity to issue up to $2.1 billion in additional debt under a U.S. shelf registration filed in March 1996, and $1.2 billion under a Euro Medium-Term Note Program established in June 1996. The Company sold its Los Angeles television station KCAL in November 1996 for $387 million in cash. The Company's financial condition remains strong. The Company believes that its cash, other liquid assets, operating cash flows and access to capital markets 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.
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