The Walt Disney Company and Subsidiaries

1999 RESTRUCTURING CHARGES

In the third quarter, the company began an across-the-board assessment of its cost structure. The company’s efforts are directed toward leveraging marketing and sales efforts, streamlining operations and further developing distribution channels, including its Internet sites and cable and television networks (see Note 14 to the Consolidated Financial Statements).

    In connection with actions taken to streamline operations, restructuring charges of $132 million ($0.04 per share) were recorded in the fourth quarter. The restructuring activities primarily related to the following:

Consolidation of Television Production and Distribution Operations - The company decided to consolidate certain of its television production and distribution operations to improve efficiencies through reduced labor and overhead costs. Related charges include lease and contract termination costs and severance, substantially all of which was paid as of September 30, 1999.

Club Disney Closure - The company determined that its Club Disney regional entertainment centers would not provide an appropriate return on invested capital, and, accordingly decided to close its five Club Disney locations and terminate further investment. Related charges primarily include lease termination costs and write-offs of fixed assets.

ESPN Store Closures and Consolidation of Retail Operations - The company determined that the sale of ESPN-branded product could be accomplished more efficiently via the Internet and through its ESPN Zone regional entertainment centers, rather than through stand-alone retail stores, and accordingly decided to close its three ESPN stores. In addition, the company will eliminate certain job responsibilities as part of the consolidation of its retail operations. Related charges for both actions include severance and asset write-offs.

    A summary of the restructuring charges is as follows (in millions):

    The company’s cost-saving initiatives will continue into next year and may result in additional charges of a similar nature. In addition, the company is undertaking a strategic sourcing initiative which is designed to consolidate its purchasing power. Together these cost-saving measures are expected to result in total annual savings in excess of $500 million beginning in fiscal 2001.

1998 vs. 1997  Compared to 1997 pro forma results, revenues increased 6% to $23 billion, driven by growth in all business segments. Net income and diluted earnings per share increased 4% and 3% to $1.9 billion and $0.89, respectively. These results were driven by a reduction in net expense associated with Corporate and other activities and lower net interest expense, partially offset by decreased operating income. The reduction in net expense associated with Corporate and other activities was driven by improved results from the company’s equity investments, including A&E Television and Lifetime Television, and a gain on the sale of the company’s interest in Scandinavian Broadcasting System. Decreased net interest expense reflected lower average debt balances during 1998. Lower operating income was driven by a decline in Studio Entertainment and Internet and Direct Marketing results, partially offset by improvements from Theme Parks and Resorts, Consumer Products and Media Networks.

    As reported revenues increased 2% and net income and diluted earnings per share decreased by 6%. The as reported results reflect the items described above, as well as the impact of the disposition of certain ABC publishing assets and the sale of KCAL in 1997.

BUSINESS SEGMENT RESULTS MEDIA NETWORKS

The following table provides supplemental revenue and operating income detail for the Media Networks segment (in millions):

1999 vs. 1998  Revenues increased 5% or $370 million to $7.5 billion, driven by increases of $410 million at the Cable Networks, partially offset by a $40 million decrease in Broadcasting revenues. Cable Network revenue growth reflected increased advertising revenues, subscriber growth and contractual rate increases at ESPN and subscriber growth at the Disney Channel. International expansion at the Disney Channel also contributed to increased revenues. Lower Broadcasting revenues were driven by decreases at the television network and stations, partially offset by growth from radio operations. Television network revenues were impacted by lower ratings, and lower revenues at owned television stations reflected ongoing softness in local advertising markets. Revenue growth at the radio network and stations was driven by strong advertising markets and higher ratings.

    Operating income decreased 8% or $135 million to $1.6 billion, reflecting higher Broadcasting and Cable Network costs and expenses and lower Broadcasting revenues. These decreases were partially offset by Cable Network revenue growth. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 9% or $505 million, driven by higher sports programming costs associated with the NFL contract and other programming costs at the television network and ESPN.