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The Walt Disney Company strives to maximize value to its shareholders by leveraging the strength of its brand, character and entertainment franchises through a commitment to creative excellence and guest service coupled with strict financial discipline. The company evaluates its existing businesses and new initiatives based on their ability to contribute to Disney's long-term cash flow and earnings growth and to provide returns that exceed Disney's cost of capital.

1998 was a year that highlighted Disney's commitment to continued value-creating investment in the company's branded attractions, entertainment and consumer products offerings. Creating value through investment in existing businesses and new initiatives has been an ongoing focus for the company since Michael Eisner joined Disney nearly 15 years ago. This year, investment in future growth opportunities was higher than in any previous year.

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    The company delivered record revenues and solid earnings in 1998. Nonetheless, the year presented a number of challenges, including increasing cost pressures in the filmed entertainment and broadcasting businesses and turbulent international market conditions. These challenges led to lower-than-expected earnings growth for the year. As a result, the company has begun and will continue to take steps to reduce costs and investment where appropriate while positioning itself for future growth.

fin_rev10pgpic1.gif (7298 bytes) Disney delivered record revenues of just under $23 billion in fiscal year 1998. Disney's revenues have grown substantially over time, registering average annual growth of 21 % over the last 15 years.
The company generated operating income of $4 billion in 1998, with contributions in nearly equal measure from Disney's individual business segments. Creative Content generated 35% of the company's total operating income, with 33% coming from Broadcasting and 32% from Theme Parks and Resorts.

With the exception of Theme Parks and Resorts, growth in operating income in 1998 lagged historical trends, due in part to increased external cost pressures from such things as higher costs for key sports programming rights and increased industry-wide live-action film production costs. Difficult international economic conditions also impacted 1998 results.

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Net income increased 4% over the prior year's pro forma results to $1.9 billion in 1998, while diluted earnings per share increased 3% to 89 cents. Over the past 15 years, Disney's earnings per share have grown by a factor of nearly 15 times for a compound annual growth rate of 20%. While earnings growth in 1998 fell short of historical growth, the company believes that its core franchises coupled with recent investments are capable of generating long-term earnings increases.

Amortization of intangible assets, including the goodwill associated with the acquisition of ABC, amounted to 21 cents per share in 1998. For those who prefer to look at earnings before this non-cash charge, diluted earnings per share excluding this amortization was $ 1.10 in the fiscal year just ended.

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    In 1998, revenues from international sources, including U.S. exports, totaled almost $5 billion, or 21% of total company revenues.

1998 was a year of volatile economic conditions that challenged Disney to become ever more cost-conscious, as is evidenced by the strategic downsizing in certain of the company's international operations, primarily in Asia. Nonetheless, the company believes there are opportunities for significant growth in international revenues over the long term. For instance, the United States, Japan and the four largest countries in Europe constitute just over 10% of the world's population, yet they accounted for approximately 80% of Disney's licensed merchandise sales in 1998. Additionally, The Disney Store opened more new stores outside the U.S. than within the U.S. for the first time. In television, the international expansion of the Disney Channel and other Disney programming helps expand and deepen market awareness of the company's brands and products around the world, thereby paving the way for future growth. Thus, while dramatic economic growth in other parts of the world may take some time to develop, Disney continues to position itself to capitalize on long-term international growth opportunities.

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    In addition to exceptional long-term earnings growth, Disney strives to achieve increasing cash flow from its operations. Over the past three years Disney has generated cumulative after-tax cash flow from operations of nearly $14 billion. 1998's after-tax cash flow from operations totaled over $5 billion.

Disney's primary priority for use of its cash flow continues to be investment for attractive shareholder returns in new and existing businesses. When appropriate, Disney also seeks to efficiently return capital to shareholders through repurchase of the company's shares.



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*Total cash flow includes after-tax cash flow from operations, borrowings and proceeds from the exercise of stock options and asset dispositions.

    In allocating its discretionary capital to projects around the company, Disney assesses and then continuously monitors each project's return on investment versus required returns (i.e., the cost of capital). By this mechanism, Disney strives to maximize the shareholder value created by its investments. In 1998, the company's total cash flow exceeded $6 billion.* Of this total cash flow, approximately $700 million or 12% was spent to maintain existing assets. The company allocated another $5.2 billion in capital spending toward projects to fuel Disney's future growth. The majority of this spending was in businesses that capitalize on and help to expand the company's coreDisney , ESPN and abc.gif (203 bytes) brand franchises. Disney believes this allocation of capital to its key global brands is an important driver of long-term shareholder value.

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Thomas O. Staggs
Executive Vice President and
Chief Financial Officer,
The Walt Disney Company

In addition to the capital investment cited above, 1998 results reflected the absorption of start-up costs and operating losses associated with new initiatives that the company believes can generate significant incremental value and growth for Disney shareholders within the next four to five years and beyond. These initiatives include Disney's Animal Kingdom theme park; the Disney Cruise Line; international expansion of the Disney Channel in Italy and Spain; new Toon Disney cable programming; RadioDisney; DisneyQuest; Club Disney; ESPN Classic sports network; ESPNZone restaurants/entertainment centers; ESPN-The Magazine; and a variety of Internet-related activities under the Disney, ESPN and ABC brands, as well as the soon-to-be-launched Go Network developed through the company's investment in Infoseek.

While continuing to allocate capital to promising new initiatives, Disney has also moved aggressively to limit its ongoing investment requirements in certain areas. For example, there has been an industry-wide increase in the cost of producing and marketing live-action films. In response, the company plans to release just 15 live-action motion pictures domestically under the Walt Disney, Touchstone and Hollywood Pictures labels in calendar 1999 compared to 18 live-action releases in calendar 1998. This move allows Disney to reduce its overall investment and overhead spending in live-action films, while still focusing on the highest-potential motion picture projects. As a result, the company believes it can increase its return on investment in the live-action film business.


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fin_rev12pgpic2.gif (8775 bytes)    At fiscal year end, Disney had a total capitalization of $65 billion, placing it among the 40 largest corporations in the United States. Measured as of November 30, 1998, the company's total capitalization was even higher, at $79 billion.

Disney's solid balance sheet allows the company to borrow at attractive rates, helping to reduce the overall cost of capital and thereby creating value for shareholders. As of year end, Disney maintained total borrowings of approximately $12 billion and a debt-to-total-capital ratio of 38%. The company believes that this level of debt represents a prudent degree of leverage, which provides for substantial financial flexibility to borrow should sound business opportunities present themselves. As measured by the ratio of earnings before net interest, taxes, depreciation and amortization (EBITDA) to net interest expense, the company covered its interest costs by a factor of more than eight times for the year ended September 30.

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The company monitors its cash flow, interest coverage and its debt-to-total-capital ratio with the long-term goal of maintaining a strong single-A or better credit rating. Standard & Poor's/Moody's rates Disney's long-term debt A/A2 and its short-term debt A1/P1. Additionally, as part of its overall risk management program, the company evaluates and seeks to manage its exposure to changes in interest rates and currency exchange rates on an ongoing basis.



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Sanford M. Litvack
Senior Executive Vice President and
Chief of Corporate Operations,
The Walt Disney Company

   The company distributes value to shareholders through dividends and share repurchase.

Over time, Disney has returned significant amounts of capital to shareholders through cash dividends. In January, Disney's board of directors voted to raise the company's dividend by 19%, to just over 20 cents per share. As a result, the company paid over $400 million in dividends to Disney shareholders in 1998. Later in the year, the company's board decided that all shareholder dividends will be paid on an annual rather than a quarterly basis beginning in fiscal 1999. This change will reduce costs and vastly simplify payments to a shareholder base that includes a great number of small investors. Annual dividends will be paid in November each year as approved by the board of directors.



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Through share repurchase, Disney has both returned capital to its shareholders and created significant shareholder value. Since 1983, Disney has invested $3.1 billion to buy back 480 million shares at an average price of approximately $6.50 per share. Measured as of November 30, these shares were worth $15.5 billion for an annualized return of 20%, exceeding the stock market return of 14% as measured by the Standard & Poor's 500 index over the same time. As of November 30, Disney had authorization from its board of directors to repurchase an additional 400 million shares.



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As a result of Disney's financial performance over time, driven by expansion and extension of existing brands and businesses, investment in new businesses and share repurchase, the return to long-term investors in Disney stock has surpassed the return delivered by the market overall. An investment of $1,000 in Disney stock on November 30, 1983, including reinvestment of dividends, was worth $35,965 on November 30, 1998, providing a 27% compound annual return over the ensuing 15-year period. A similar investment in the Standard & Poor's 500 would have been worth $11,090 over the same time, representing a 17% annual return to investors.

Disney split its stock 3-for-4 on July 9, the seventh stock split since the company went public in 1940. As evidence of the ongoing strength of the Disney franchise, 100 shares of Disney stock purchased for $2,500 in the company's initial public offering would have equaled 250,233 shares worth approximately $8 million as of November 30, a compound annual growth rate of nearly 15% over the last 58 years. Through the patient pursuit of earnings growth and an intense focus on managing and investing to create shareholder value, the company strives to continue providing superior returns for its shareholders.

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