Overview

The Walt Disney Company's key objective is to be the world's premier family entertainment company through the ongoing development of its powerful brand and character franchises. The company's primary financial goals are to maximize earnings and cash flow from existing businesses and to allocate capital profitably toward growth initiatives that will drive long-term shareholder value.

2000 Financial Performance

Fiscal 2000 proved to be a very successful year financially as well as creatively for The Walt Disney Company. For the year, consolidated pro forma revenues grew to $25.4 billion. Revenue growth in 2000 was led by Media Networks, which now constitutes the largest portion of Disney's business in terms of both revenues and operating profits.

Operating income rose 39 percent to $2.9 billion and net income, excluding non-cash amortization of intangible assets, increased by 30 percent to $2.1 billion.

Disney's strongest drivers of growth in 2000 were Media Networks and Parks and Resorts. Since these two businesses are heavily weighted toward U.S. opportunities, the company's domestic growth outpaced international growth. Nonetheless, international revenues amounted to more than $4.6 billion in fiscal 2000, representing approximately 18 percent of total Walt Disney Company revenues.

The company believes that international markets offer Disney tremendous opportunities for long-term growth. To capture that potential, the company continues to invest in businesses that will help further establish Disney's brands and characters around the world. These businesses include international television distribution, such as international Disney Channels, international versions of Disney's Daily Blast Internet product, and new theme parks in Tokyo, Paris and Hong Kong.

Capitalization

Growing levels of free cash flow generated by operations and the sale of certain assets enabled Disney to reduce its debt balances by $2.2 billion to just under $9.5 billion, leaving the company with an attractive 1.8x total debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio and a fiscal 2000 EBITDA to gross interest coverage ratio of 7.2x.

Operating and Capital Efficiencies

At the beginning of its 2000 fiscal year, the company targeted certain cost-containment measures that are expected to lead to $500 million in annual savings by the end of 2001. The efficiency initiatives implemented in 2000 include more than 500 productivity initiatives at its theme parks, overhead reductions in the company's television and film production businesses and a company wide effort to coordinate and bring greater efficiency to the procurement of good and services.

The company's priorities for use of its cash flow are based on the overall goal of driving attractive returns on invested capital. Toward this end, Disney deployed capital in fiscal 2000 toward continued resort expansion at Walt Disney World, the construction of new theme park and resort facilities in Anaheim, the launch of new Disney Channels in Germany, Asia and Latin America, the new SoapNet cable channel, continued growth of the ESPN Classic Sports programming service and development of the company's Internet businesses. In addition, the company utilized funds to repurchase Walt Disney Internet Group common stock and Disney common stock as discussed below.

Walt Disney Internet Group (DIG) - Overview

Early fiscal 2000 saw the formation of the Walt Disney Internet Group and the issuance of a new, separately traded class of stock listed on the New York and Pacific stock exchanges under the ticker symbol DIG. In fiscal 2000, the Walt Disney Internet Group's revenues were $392 million, 13 percent higher than prior year pro forma amounts. Internet revenues, which exclude the non-Internet based Disney Catalog, grew at a much higher 39 percent. The loss per share attributable to Internet Group shares in fiscal 2000, excluding non-cash amortization of intangibles, was $1.40.

Walt Disney Internet Group's revenues are generated from three key sources: Media, which consists primarily of advertising and sponsorship; Commerce, composed largely of merchandise sales at DisneyStore.com and travel product sales at DisneyVacations.com; and Direct Marketing, which includes The Disney Catalog and the DisneyStore.com fulfillment operation.1

Walt Disney Internet Group's higher revenues in fiscal 2000 were due in part to growth in its media revenues, a reflection of advertisers' attraction to a growing user base over the same timeframe. The Internet Group's registered user base reached 27 million by September 2000.

1 For a full description of the Walt Disney Internet Group's segment performance, please refer to this annual report's Management's Discussion and Analysis of Financial Condition and Results of Operations.

Walt Disney Internet Group - Investor Returns

Like many Internet company stocks, Walt Disney Internet Group shares did not perform well in 2000. The company continues to believe that investment in its Internet-based businesses is an important part of its long-term growth strategy. The Internet provides an important new distribution outlet for Disney's content as well as a medium in which to create new forms of programming utilizing the company's brand and character franchises. Although the company expects continued losses in its Internet businesses in the near-term, it is constantly evaluating its Internet operations in an effort to focus on those areas that offer the greatest opportunity for profitability and long-term value creation.

Walt Disney Internet Group - Share Repurchase and Dividends

The company believes that share repurchase is an attractive use of its cash flow over and above that which the company retains for investment in value-creating business opportunities. Accordingly, the company's Board of Directors authorized the open market repurchase of up to 5 million shares of Walt Disney Internet Group stock in April 2000. The company subsequently purchased approximately 910,000 DIG shares at a cost of $11.4 million during fiscal 2000. Consistent with the practice of other Internet and technology growth companies, no dividends were paid on Walt Disney Internet Group shares in 2000.

Disney (DIS) - Overview

Earnings per share attributable to Disney shareholders in fiscal 2000, excluding Disney's share of Walt Disney Internet Group losses, rose 42 percent, to $0.92. For the period from 1985 to 2000, Disney's earnings per share growth measured on the same basis has averaged 15 percent per year.

Non-cash amortization of intangibles, which many investors choose to add back to book earnings for valuation purposes, totaled $0.20 per share in fiscal 2000. Therefore, total earnings per share excluding Disney's share of Walt Disney Internet Group losses and before this non-cash goodwill would have been $1.12.

Disney - Segment Results

While each of Disney's business units is a leader in its sector, two of its five key component businesses were most responsible for driving the outstanding growth in fiscal 2000: Media Networks and Parks and Resorts.2 Media Networks' record-setting performance was the result of a strong advertising market and higher ratings, not only at the ABC Television Network but also at the company-owned television stations, radio stations and radio networks. The robust advertising environment also benefited several cable properties in which Disney holds ownership interests, namely ESPN, A&E, Lifetime, E! Entertainment Television and The History Channel. The company's cable businesses, including Disney Channel, also grew due to continued subscriber growth and associated fee income.

At Disney's Parks and Resorts unit, higher guest spending and record total theme park attendance due to the Millennium Celebration at Walt Disney World in Florida and the 45th Anniversary celebration at Disneyland in California, contributed to financial success. Improved results at Disney Cruise Line from the full-year sailing of both cruise ships, the Disney Magic and the Disney Wonder, and record levels of occupied room nights at Walt Disney World resorts, also contributed to Parks and Resorts' performance.

Meanwhile, Disney's Consumer Products and Studio Entertainment business units continued to implement key strategies the company believes will lead to improvements in their respective financial performance over time. In Consumer Products, Mickey Mouse and Winnie the Pooh merchandise were once again the leaders in this business. However, 2000 was a year of continued softness in worldwide merchandise licensing. Although recent results have fallen short of historical performance, the company is confident in the long-term appeal and marketability of its assets.

For Studio Entertainment, declines in worldwide home video in 2000 were partially offset by improvements year-over-year in international theatrical distribution. In the medium to long-term, the company believes that the strength of its animation library, including its 37 full-length animation classics, will be a key factor in driving strong results for the Studio. The rapid growth of DVD players and new distribution opportunities afforded by the Internet could also augment the Studio's results.

Disney - Share Repurchase and Dividends

Disney's priority is to apply its growing cash flow and earnings to projects with the potential for creating long-term value for its shareholders. Above and beyond the capital retained for such projects, the company may utilize excess cash flow for share repurchase. In fiscal 2000, the company repurchased approximately 4.9 million Disney shares for a total investment of $155 million. As of September 30, 2000, the company had authorization to purchase approximately 394 million additional Disney shares.

Since 1983, Disney has invested $3.3 billion to buy back nearly485 million shares at an average price of approximately $6.80 per share. Measured as of November 30, 2000, these shares were worth $14 billion for an annualized return of 15 percent.

In December 2000, the company paid cash dividends of $0.21 per share to holders of Disney stock. The company has paid dividends on Disney stock for the past 44 years.

Disney - Investor Returns

The company strives to maximize growth in earnings and cash flow and to allocate capital profitably toward projects with high potential returns as the primary means of delivering value to its long-term shareholders. The company's long-term financial track record reflects this commitment. The return to investors in Disney stock since 1985 has exceeded the return delivered over the same timeframe by the market overall as measured by the Standard & Poor's 500 Index.