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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 3, 2004
To our Shareholders:
The 2004 annual meeting of shareholders of The Walt Disney Company will be held at the Pennsylvania Convention Center, 1101 Arch Street, Philadelphia, Pennsylvania, on Wednesday, March 3, 2004, beginning at 10:00 a.m. local time. At the meeting, the holders of the Company’s outstanding common stock will act on the following matters:
(1) Election of 11 directors, each for a term of one year;
(2) Ratification of the appointment of the Company’s independent auditors for fiscal 2004;
(3) Consideration of three shareholder proposals, if presented at the meeting; and
(4) Any other matters that properly come before the meeting.
All holders of record of shares of Disney common stock (NYSE: DIS) at the close of business on January 16, 2004 are entitled to vote at the meeting and any postponements or adjournments of the meeting.
IF YOU PLAN TO ATTEND:
Please note that space limitations make it necessary to limit attendance to shareholders and one guest. Admission to the meeting will be on a first-come, first-served basis. Registration will begin at 8:00 a.m., and seating will begin at 9:00 a.m. Each shareholder may be asked to present valid picture identification, such as a driver’s license or passport. Shareholders holding stock in brokerage accounts (“street name” holders) will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting.
By order of the Board of Directors,
David K. Thompson Senior Vice President–Deputy General Counsel – Corporate and Corporate Secretary
January 27, 2004 Burbank, California
TABLE OF CONTENTS
- About the Meeting Page
- What is the purpose of the annual meeting?
- Who is entitled to vote at the meeting?
- What are the voting rights of the holders of Disney common stock?
- Who can attend the meeting?
- What constitutes a quorum?
- How do I vote?
- Can I vote by telephone or electronically?
- Can I change my vote after I return my proxy card?
- How do I vote my 401(k) shares?
- What are the Board’s recommendations?
- What vote is required to approve each item?
- Stock Ownership
- Who are the largest owners of the Company’s stock?
- How much stock do the Company’s directors and executive officers own?
- Section 16(a) Beneficial Ownership Reporting Compliance
- Governance of the Company
- Who are the current members of the Board?
- What is the role of the Board’s committees?
- Who is the Board’s presiding director?
- How does the Board select nominees for the Board?
- How does the Board determine which directors are considered independent?
- How often did the Board meet during fiscal 2003?
- How are directors compensated?
- directors? Certain Relationships and Related Transactions—What related party transactions involved
- How do shareholders communicate with the Board?
- Does the Company have a Code of Ethics?
- Certain Legal Proceedings
- Report of the Audit Committee
- Executive Compensation
- Report of the Compensation Committee
- Compensation Committee Interlocks and Insider Participation
- Employment Agreements
- Executive Compensation Summary Table
- Option Grants during Fiscal
- Option Exercises and Values for Fiscal
- Retirement Plans
- Equity Compensation Plans
- Comparison of Cumulative Total Returns
- Item 1—Election of Directors
- Item 2—Ratification of Appointment of Independent Auditors
- Fees to Independent Auditors for Fiscal 2003 and
- Item 3—Shareholder Proposals
- Proposal 1— China Labor Standards (Harrington Investments)
- Proposal 2— China Labor Standards (New York City Retirement Systems and Pension Funds)
- Proposal 3— Theme Park Safety
- Other Matters
- Additional Information
- ANNEX I—Charter of the Audit Committee of the Board of Directors A-
- ANNEX II—Corporate Governance Guideline on Director Independence B-
How do I vote?
If you complete and properly sign the accompanying proxy card and return it to the Company, it will be voted as you direct. If you are a registered shareholder and attend the meeting, you may deliver your completed proxy card in person. “Street name” shareholders who wish to vote at the meeting will need to obtain a proxy form from the institution that holds their shares.
Can I vote by telephone or electronically?
If you are a registered shareholder (that is, if you hold your stock in certificate form or participate in the Walt Disney Investment Plan or Employee Stock Purchase Program), you may vote by telephone, or electronically through the Internet, by following the instructions included with your proxy card. If your shares are held in “street name,” please check your proxy card or contact your broker or nominee to determine whether you will be able to vote by telephone or electronically. The deadline for voting by telephone or electronically is 11:59 p.m., Eastern Standard Time, on March 2, 2004.
Can I change my vote after I return my proxy card?
Yes. Even after you have submitted your proxy, you may revoke or change your vote at any time before the proxy is exercised by filing with the Corporate Secretary of the Company either a notice of revocation or a duly executed proxy bearing a later date. The powers of the proxy holders will be suspended if you attend the meeting in person and so request, although attendance at the meeting will not by itself revoke a previously granted proxy.
How do I vote my 401(k) shares?
If you participate in the Disney Salaried Savings and Investment Plan, the ABC, Inc. Savings and Investment Plan, the go.com Savings and Investment Plan or the Disney Hourly Savings and Investment Plan, you may give voting instructions as to the number of shares of common stock equivalent to the interest in Disney common stock credited to your account as of the record date. You may provide voting instructions to Fidelity Management Trust Company, by completing and returning the proxy card accompanying this proxy statement. The trustee will vote your shares in accordance with your duly executed instructions received by February 27,
- If you do not send instructions, the trustee will vote the number of shares equal to the share equivalents credited to your account in the same proportion that it votes shares for which it did receive timely instructions.
You may also revoke previously given voting instructions by February 27, 2004 by filing with the trustee either a written notice of revocation or a properly completed and signed proxy card bearing a later date. Your voting instructions will be kept confidential by the trustee.
What are the Board’s recommendations?
Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board. The Board’s recommendation is set forth together with the description of each item in this proxy statement. In summary, the Board recommends a vote:
- for election of the nominated slate of directors (see Item 1);
- for ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent auditors for fiscal 2004 (see Item 2); and
- against approval of each of the shareholder proposals, if presented (see Item 3).
With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by the Board or, if no recommendation is given, in their own discretion.
What vote is required to approve each item?
Election of Directors. The affirmative vote of a plurality of the votes cast at the meeting is required for the election of directors. A properly executed proxy marked “Withhold authority” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for purposes of determining whether there is a quorum.
Other Items. For each other item, the affirmative vote of the holders of a majority of the shares represented in person or by proxy and entitled to vote on the item will be required for approval. A properly
executed proxy marked “Abstain” with respect to any such matter will not be voted, although it will be counted for purposes of determining whether there is a quorum. Accordingly, an abstention will have the effect of a negative vote.
If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some of the matters to be acted upon. Thus, if you do not give your broker or nominee specific instructions, your shares may not be voted on those matters and will not be counted in determining the number of shares necessary for approval. Shares represented by such “broker non-votes” will, however, be counted in determining whether there is a quorum.
STOCK OWNERSHIP
Who are the largest owners of the Company’s stock?
Based on a review of filings with the Securities and Exchange Commission, the Company is unaware of any holders of more than 5% of the outstanding shares of Disney common stock.
How much stock do the Company’s directors and executive officers own?
The following table shows the amount of Disney common stock beneficially owned (unless otherwise indicated) by our directors, the executive officers named in the Executive Compensation Summary Table below and the directors and executive officers as a group. Except as otherwise indicated, all information is as of January 16, 2004.
Name
Aggregate Number of Shares Beneficially Owned(1)(2)
Aggregate Number of Stock Units Beneficially Owned(3)
Acquirable Within 60 Days(4)
Percent of Class Outstanding(5) Alan N. Braverman...................... 6,944 — 493,000 * John E. Bryson.......................... 1,500 10,277 7,200 * John S. Chen........................... 5,793 — — * Michael D. Eisner....................... 13,933,808(6) — 21,309,648 1.7% Judith L. Estrin.......................... 24,616 — 18,000 * Robert A. Iger.......................... 44,905 — 3,919,353 * Aylwin B. Lewis........................ 1,100 — — * Monica C. Lozano....................... 1,057 3,602 7,200 * Robert W. Matschullat.................... 8,000 3,430 1,200 * George J. Mitchell....................... 5,100 14,063 38,400 * Peter E. Murphy......................... 7,229 — 1,534,795 * Thomas S. Murphy....................... 1,664,839 17,115 36,000 * Leo J. O’Donovan, S.J.................... — — 28,800 * Thomas O. Staggs....................... 15,674 — 1,706,095 * Raymond L. Watson..................... 29,520 15,664 42,000 * Gary L. Wilson.......................... 3,000 12,841 42,000 * All directors and executive officers as a group (16 persons).......................... 15,753,085 76,992 29,183,691 2.2%
- Represents less than 1% of the outstanding common stock of the class.
(1) The number of shares shown includes shares that are individually or jointly owned, as well as shares over which the individual has either sole or shared investment or voting authority. Some directors and executive officers disclaim beneficial ownership of some of the shares included in the table, as indicated below:
- Mr. Chen—1,125 shares held for the benefit of children;
- Mr. Eisner—21,600 shares owned by his wife and 9,600 shares held in a trust of which Mr. Eisner is the income beneficiary;
GOVERNANCE OF THE COMPANY
Who are the current members of the Board?
The members of the Board of Directors on the date of this proxy statement, and the committees of the Board on which they serve, are identified below.
Director
Executive Committee
Compensation Committee
Audit Committee
Governance and Nominating Committee John E. Bryson............................... John S. Chen................................. * Michael D. Eisner............................. * Judith L. Estrin............................... ** * Robert A. Iger................................ Aylwin B. Lewis.............................. * Monica C. Lozano............................ * ** Robert W. Matschullat......................... * ** George J. Mitchell............................ ** Thomas S. Murphy†........................... Leo J. O’Donovan, S.J.......................... * * Raymond L. Watson†.......................... Gary L. Wilson............................... *
- Member. ** Chair. † Retiring effective as of the date of the Company’s annual meeting.
What is the role of the Board’s committees?
The Board of Directors has standing Audit, Governance and Nominating, Compensation and Executive Committees.
Audit Committee. The functions of the Audit Committee are described in Item 2 below under the heading “ Report of the Audit Committee.” The charter of the Audit Committee is attached to this proxy statement as Annex I and is available on the Company’s Investor Relations website ( www.disney.com/investors ). The Audit Committee met nine times during fiscal 2003.
On January 6, 2004, the Board selected the members of the Audit Committee for the coming year, as shown above. All of the members of the Audit Committee are independent within the meaning of SEC regulations, the listing standards of the New York Stock Exchange and the Company’s Corporate Governance Guidelines. Mr. Matschullat, the chair of the Committee, is qualified as an audit committee financial expert within the meaning of SEC regulations and the Board has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the New York Stock Exchange.
Governance and Nominating Committee. The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of the Company’s Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. The charter of the Governance and Nominating Committee is available on the Company’s Investor Relations website ( www.disney.com/investors ). The Committee met 12 times during fiscal 2003.
On January 6, 2004, the Board selected the members of the Governance and Nominating Committee for the coming year, as shown above. All of the members of the Committee are independent within the meaning of the listing standards of the New York Stock Exchange and the Company’s Corporate Governance Guidelines.
Compensation Committee. The function of the Compensation Committee is described in “Executive Compensation” below, under the heading “Report of the Compensation Committee.” The charter of the Compensation Committee is available on the Company’s Investor Relations website ( www.disney.com/investors ). In fiscal 2003, the Compensation Committee met six times. During fiscal 2003, a separate subcommittee charged with reviewing, approving, administering and giving advice and recommendations to the Board with respect to performance-based and other compensation of corporate officers who are, or who are likely to become, subject to Section 162(m) of the Internal Revenue Code, met once before it was dissolved in December 2002 and its responsibilities returned to the Compensation Committee. All of the members of the Committee are independent within the meaning of the listing standards of the New York Stock Exchange and the Company’s Corporate Governance Guidelines.
Executive Committee. The Executive Committee possesses all of the powers of the Board except the power to issue stock, approve mergers with nonaffiliated corporations or declare dividends (except at a rate or in a periodic amount or within a price range established by the Board), and certain other powers specifically reserved by Delaware law to the Board. In fiscal 2003, the Executive Committee held no meetings, but took action by unanimous written consent three times.
Who is the Board’s presiding director?
In December 2002, the Board created a new position of presiding director, whose primary responsibility is to preside over periodic executive sessions of the Board in which management directors and other members of management do not participate. The presiding director also advises the Chairman of the Board and, as appropriate, Committee chairs with respect to agendas and information needs relating to Board and Committee meetings, provides advice with respect to the selection of Committee chairs and performs other duties that the Board may from time to time delegate to assist the Board in the fulfillment of its responsibilities.
Director George Mitchell served in this position during fiscal 2003, and in January 2004 the non-management members of the Board designated him to continue serving in this position until the Company’s 2005 annual meeting of shareholders.
How does the Board select nominees for the Board?
The Governance and Nominating Committee considers candidates for Board membership suggested by its members and other Board members, as well as management and shareholders. The Committee has also retained a third-party executive search firm to identify candidates upon request of the Committee from time to time. A shareholder who wishes to recommend a prospective nominee for the Board should notify the Company’s Corporate Secretary or any member of the Governance and Nominating Committee in writing with whatever supporting material the shareholder considers appropriate. The Governance and Nominating Committee will also consider whether to nominate any person nominated by a shareholder pursuant to the provisions of the Company’s bylaws relating to shareholder nominations as described in “ Additional Information—Advance Notice Procedures ,” below.
Once the Governance and Nominating Committee has identified a prospective nominee, the Committee makes an initial determination as to whether to conduct a full evaluation of the candidate. This initial determination is based on whatever information is provided to the Committee with the recommendation of the prospective candidate, as well as the Committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional Board members to fill vacancies or expand the size of the Board and the likelihood that the prospective nominee can satisfy the evaluation factors described below. If the Committee determines, in consultation with the Chairman of the Board and other Board members as appropriate, that additional consideration is warranted, it may request the third-party search firm to gather additional information about the prospective nominee’s background and experience and to report its findings to the Committee. The Committee then evaluates the prospective nominee against the standards and qualifications set out in the Company’s Corporate Governance Guidelines , including:
- the ability of the prospective nominee to represent the interests of the shareholders of the Company;
- the prospective nominee’s standards of integrity, commitment and independence of thought and judgment;
dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including by attending meetings of the shareholders of the Company, the Board and Committees of which he or she is a member.
How are directors compensated?
Base Compensation. Each non-employee director receives an annual retainer of $45,000 and a fee of $1,000 per Board or Committee meeting attended. Committee chairs receive an additional annual retainer of $3,500. Under the Company’s Amended and Restated 1997 Non-Employee Directors Stock and Deferred Compensation Plan, non-employee directors may elect, on an annual basis, to receive all or part of their retainer and meeting fees in common stock, distributed after the end of each calendar year, or to defer all or part of their compensation until the termination of their service as a director. Deferred compensation may be maintained, at the participating director’s election, in a cash or stock unit account. In addition, the Board may direct the Compensation Committee to establish a stock unit account for an eligible director and to credit such eligible director’s stock unit account with stock units instead of paying the retainer and fees in cash on a non-elective basis at such times and in such amounts as the Board determines (i.e., regardless of whether such eligible director elects to defer any portion of his or her cash compensation under the Plan). The Company also reimburses directors for travel expenses incurred in connection with attending Board, committee and shareholder meetings and for other Company-business related expenses. Directors who are also employees of the Company receive no additional compensation for service as a director.
The Company does not provide retirement benefits to directors under any current program. Three persons who served as directors during fiscal 2003 are eligible for benefits under a retirement policy terminated as of December 31, 1994, based upon their years of service through that date: Stanley Gold, who was a director until December 1, 2003, receives 70% of the annual retainer payable to non-employee directors each year for seven years following such date; Mr. Watson will be entitled to receive 100% of the annual retainer for 19 years following his retirement; and Mr. Wilson will be entitled to receive 50% of the annual retainer for five years following his retirement.
Options. Each non-employee director receives an automatic grant, on March 1 of each year, of options to purchase 6,000 shares of the Company’s common stock. For fiscal 2003, Ms. Estrin, Ms. Lozano, Fr. O’Donovan and Messrs. Bryson, Gold, Mattschulat, Mitchell, Murphy, Watson and Wilson received grants under this plan as did former directors Reveta Bowers, Sidney Poitier, Robert Stern and Andrea Van de Kamp. Each option grant, vesting in equal installments over five years and having a ten-year term, permits the holder to purchase shares at their fair market value on the date of grant, which was $16.945 in the case of options granted in 2003. In the event of termination of service by reason of mandatory retirement or permanent disability, the options continue to vest in accordance with their original schedule. In the event of termination of service by reason of death, the options vest immediately. In either case, the options remain exercisable for five years following termination, but in no event longer than the original expiration date of the option. In all other cases, options cease to vest upon termination and all options must be exercised within three months of termination.
Certain Relationships and Related Transactions—What related party transactions involved directors?
Jennifer Gold, a daughter of Stanley Gold, who was a director until December 1, 2003, was employed by a Company subsidiary as a senior marketing manager throughout fiscal 2003. Ms. Gold was paid an aggregate salary and bonus of $96,482 for her services during the year. Director Ray Watson’s son, David Watson, worked as executive director for new media for a Company subsidiary during the year, receiving an aggregate salary and bonus of $147,963.
Director John Bryson’s wife, Louise Bryson, serves as Executive Vice President – Distribution and Business Development for Lifetime Entertainment Television, a cable television programming service in which the Company has an indirect 50% equity interest. Ms. Bryson received an aggregate salary (including car allowance) of $414,366 for her services with Lifetime during fiscal 2003 and received a bonus of $635,134 in fiscal 2003 with respect to her services in fiscal 2002. She is also eligible for an annual bonus for fiscal 2003, although as of the date of this report no bonus determination for 2003 had yet been made by Lifetime with respect to Ms. Bryson. By agreement among the Company, Lifetime and Lifetime’s other equity owner, The Hearst Corporation, neither the Company nor any of its employees or affiliates participates in any decision making at Lifetime with respect to Ms. Bryson’s performance or compensation. In addition, as noted above, Lifetime
acquired programming and purchased advertising time from, and sold advertising time to, Company subsidiaries, but the Company believes that neither Mr. Bryson nor Ms. Bryson had a material direct or indirect interest in those transactions.
The Company paid $162,000 to Air Shamrock, Inc. as reimbursement for use of an Air Shamrock aircraft for business travel during fiscal 2003 by Roy Disney, who was Vice Chairman of the Company and a director until November 30, 2003. Payment was based on an independent evaluation obtained by the Company of the average incremental cost of operating the type of aircraft typically used by the Company including an allowance for incidental expenses, which together formed the basis for an agreed maximum reimbursement rate. Air Shamrock is owned by Shamrock Holdings, Inc., of which Mr. Disney is a director and which is wholly owned by Mr. Disney and his children and trusts for their and his grandchildren’s benefit. Stanley Gold is also a director of Air Shamrock, Inc. and President and Chief Executive Officer of Shamrock Holdings, Inc.
During fiscal 2003, a Company subsidiary sold programming content to PRN Corporation, an entity in which Shamrock Capital, a subsidiary of Shamrock Holdings, Inc. has a greater than 10% equity investment and on whose board of directors an officer of Shamrock Capital sits. The Company subsidiary received $173,340 in fiscal 2003 for the programming content sold to PRN Corporation.
Company President and director Robert Iger’s father-in-law, Eugene Bay, is a principal of Eugene Bay Associates, Inc., a marketing company that has been retained by the Company’s subsidiary ESPN, Inc. since 1990 (prior to Mr. Iger’s marriage to Mr. Bay’s daughter) to provide sports marketing services. Mr. Bay’s company received a total of $115,917 for services provided during fiscal 2003.
The Company’s subsidiary ABC, Inc. makes an office and secretarial services available to director Thomas Murphy, who served as Chairman of the Board of Capital Cities/ABC, Inc. prior to its acquisition by the Company in 1996. ABC, Inc. also provides Mr. Murphy with a leased car and a driver. The aggregate cost to the Company of the secretarial and transportation services in fiscal 2003 was approximately $255,464; Mr. Murphy’s office did not represent an incremental expense to the Company, but reflected an internal cost allocation of approximately $62,457.
During fiscal 2003, the Company made a contribution of $5,000,000 through the Performing Arts Center of Los Angeles County to Walt Disney Concert Hall I, a California not-for-profit corporation. The contribution was the fifth equal installment of a $25,000,000 pledge under a pledge agreement, dated November 26, 1997, for the development of The Walt Disney Concert Hall and The Roy O. Disney and Edna F. Disney CalArts Theater in downtown Los Angeles, California. Andrea Van de Kamp, who was a director of the Company until March 2003, is Chairman Emeritus, and was until July 1, 2003, Chairman and Chief Executive Officer, of The Performing Arts Center, and was a director of Walt Disney Concert Hall I until November 2002. Ms. Van de Kamp was not a member of the Company’s Board at the time of the Company’s pledge.
Pursuant to the provisions of the Company’s bylaws and indemnification agreements, legal expenses incurred by certain Directors in connection with derivative litigation against the Directors relating to the employment agreement with the Company’s former president, Michael S. Ovitz, as described in the Company’s 2003 Annual Report on Form 10-K, are being advanced on behalf of those Directors by the Company or the Company’s insurer. Accordingly, from the beginning of fiscal 2003 through January 13, 2004, the Company paid $633,885 to law firms that represented, for all or a portion of the period, Ms. Bowers, Messrs. Disney, Eisner, Gold, Mitchell, Murphy, Poitier, Stern, Watson and Wilson and Fr. O’Donovan and $9,657 to a law firm that represented Mr. Eisner for a portion of the period. In addition, from the beginning of fiscal 2003 through January 13, 2004, the Company paid a law firm representing Messrs. Disney and Gold $444,752 in connection with the Ovitz matter and the SEC proceeding described in the Company’s 2003 Annual Report on Form 10-K. The Company also is advancing legal expenses incurred by Directors in connection with derivative litigation relating to the disclosure of ongoing commercial litigation regarding intellectual property rights to Winnie the Pooh and accordingly, from the beginning of fiscal 2003 through January 13, 2004, paid $22,296 to a law firm that represented each of the persons who served as a Director during fiscal 2003. Additional bills with respect to the foregoing matters have been submitted to the Company and are either being reviewed and processed for payment or sent to the Company’s insurer for payment, and other bills have been submitted directly to the Company’s insurer.
- the Company’s compliance with legal and regulatory requirements;
- the qualifications and independence of the Company’s independent auditors; and
- the performance of the Company’s independent auditors and of the Company’s internal audit function.
The full text of the Committee’s revised charter is attached to this proxy statement as Annex I and is available on the Company’s Investor Relations website ( www.Disney.com/investors ).
In carrying out these responsibilities, the Audit Committee, among other things:
- monitors preparation of quarterly and annual financial reports by the Company’s management;
- supervises the relationship between the Company and its independent auditors, including: having direct responsibility for their appointment, compensation and retention; reviewing the scope of their audit services; approving significant non-audit services; and confirming the independence of the independent auditors; and
- oversees management’s implementation and maintenance of effective systems of internal and disclosure controls, including review of the Company’s policies relating to legal and regulatory compliance, ethics and conflicts of interests and review of the Company’s internal auditing program.
The Committee met nine times during fiscal 2003. The Committee schedules its meetings with a view to ensuring that it devotes appropriate attention to all of its tasks. The Committee’s meetings include, whenever appropriate, executive sessions with the Company’s independent auditors and with the Company’s internal auditors, in each case without the presence of the Company’s management.
As part of its oversight of the Company’s financial statements, the Committee reviews and discusses with both management and the Company’s independent auditors all annual and quarterly financial statements prior to their issuance. During fiscal 2003, management advised the Committee that each set of financial statements reviewed had been prepared in accordance with generally accepted accounting principles, and reviewed significant accounting and disclosure issues with the Committee. These reviews included discussion with the independent auditors of matters required to be discussed pursuant to Statement on Auditing Standards No. 61 (Communication with Audit Committees) , including the quality of the Company’s accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. The Committee also discussed with PricewaterhouseCoopers LLP matters relating to its independence, including a review of audit and non-audit fees and the written disclosures and letter from PricewaterhouseCoopers LLP to the Committee pursuant to Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).
In addition, the Committee reviewed key initiatives and programs aimed at strengthening the effectiveness of the Company’s internal and disclosure control structure. As part of this process, the Committee continued to monitor the scope and adequacy of the Company’s internal auditing program, reviewing staffing levels and steps taken to implement recommended improvements in internal procedures and controls.
Taking all of these reviews and discussions into account, the undersigned Committee members recommended to the Board that the Board approve the inclusion of the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, for filing with the Securities and Exchange Commission.
Members of the Audit Committee
Monica C. Lozano Robert W. Matschullat, Chair Leo J. O’Donovan, S.J. Raymond L. Watson*
- John S. Chen replaced Mr. Watson as a member of the Audit Committee effective January 6, 2004.
EXECUTIVE COMPENSATION
Report of the Compensation Committee
The following Report of the Compensation Committee and the performance graph included elsewhere in this proxy statement do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report or the performance graphs by reference therein.
The Compensation Committee of the Board has furnished the following report on executive compensation for fiscal 2003.
What is the role of the Compensation Committee in establishing compensation?
The charter of the Compensation Committee, which is available in the Investor Relations section of the Company’s website ( www.disney.com/investors ), gives the Committee direct responsibility to:
- review and approve corporate goals and objectives relevant to the compensation of the Company’s Chief Executive Officer;
- evaluate the performance of the Chief Executive Officer and, either as a committee or together with the other independent members of the Board, determine and approve the compensation level for the Chief Executive Officer; and
- make recommendations to the Board regarding compensation of other executive officers and certain compensation plans.
The Committee’s specific responsibilities include:
- periodic review of the Company’s general executive compensation policies and strategies;
- review and approval of corporate goals and objectives relevant to compensation of executive officers and evaluation of their performance in light of those goals and objectives;
- determination, either as a committee or together with the other independent members of the Board, of the compensation of the Chief Executive Officer and the President and Chief Operating Officer;
- approval of the salaries, bonuses and all equity-based compensation of certain other executive officers, including setting performance targets for bonuses for executive officers subject to Section 162(m) of the Internal Revenue Code;
- review of the Company’s benefit programs for all executive officers and review and approval of all incentive, performance-based and equity based plans plus review and approval of other plans submitted to the Committee by management;
- review and approval of the terms of employment contracts of executive officers and other senior members of management; and
- recommendations to the Board with respect to compensation policies for outside directors.
In addition, the Committee has been given responsibility by the Board for reviewing and making recommendations with respect to the professional development of the Company’s executive personnel, including policies and practices with respect to professional training and executive succession within the Company’s various business segments. This responsibility supplements the Board’s overall responsibilities with respect to succession planning for the Company’s principal senior executive officers, as provided in the Board’s Corporate Governance Guidelines.
Each of the members of the Compensation Committee is independent within the meaning of the Company’s Corporate Governance Guidelines and the listing standards of the New York Stock Exchange.
In carrying out its responsibilities, the Committee is authorized to engage, and has engaged, outside advisers to consult with it as the Committee deems appropriate.
The proposed bonus pool, together with a description of the key factors upon which it was based, was presented to and reviewed with the Compensation Committee, which also received advice on the proposal from its independent compensation consultant. Based upon this review, the Committee approved the actual amount of the annual bonus pool. In doing so, the Committee gave particular weight to segment financial performance, although it did not specifically weigh individual factors. Once the overall bonus pool was approved by the Committee and the full Board, the Company’s senior management developed individual bonus recommendations, within the limits of the pool, for eligible executive employees, based on an evaluation of their individual performance and contribution to their business unit, the performance of their business unit as a whole and the Company’s overall performance. The Committee reviewed management’s presentation and gave final approval to the recommended bonuses.
Annual bonuses for executive officers subject to Section 162(m)
Annual bonuses for executive officers shown in the Executive Compensation Summary Table below, all of whom are treated as “covered employees” under Section 162(m) of the Internal Revenue Code, are granted under the Company’s 2002 Executive Performance Plan, which was approved by shareholders at the Company’s 2002 annual meeting.
In approving fiscal 2003 bonus awards for Section 162(m) officers, the Committee determined that the Company’s performance target established for 2003 under the plan had been achieved, thus permitting the payment of the maximum bonuses under the plan, as described below under “ How is the Company addressing Internal Revenue Code limits on deductibility of compensation? ” The plan permits the Committee to approve the payment of bonus amounts of less than these permitted maximums, based on such factors as it deems appropriate. In determining the actual bonus amounts payable to the Section 162(m) officers, the Committee took into account the overall performance factors described above, as well as individual performance and achievements during the year. The Committee also reviewed compensation paid for comparable positions at other large, diversified publicly held corporations, including major entertainment companies. In addition, the Committee took into account the specific recommendations of the Chief Executive Officer and the President and Chief Operating Officer (except with respect to their own compensation). Based on these factors, the Committee granted the bonuses set forth in the Executive Compensation Summary Table.
For fiscal 2003, as for fiscal 2002, the Committee decided to pay a substantial portion of annual bonuses to most of the Section 162(m) officers in the form of stock unit awards that are subject to time-based vesting requirements (see Note 1 to the Executive Compensation Summary Table). By granting these stock unit awards, the Committee sought to enhance the retention effect of the bonus program.
Annual bonus for the Company’s Chief Executive Officer
In determining a bonus for Mr. Eisner for fiscal 2003 under the 2002 Executive Performance Plan, the Committee determined that the Company’s performance target for the year had been achieved, thus permitting the payment of a bonus under the Plan to Mr. Eisner, subject to the permitted maximum. The Committee also took into account all of the same performance factors described above that were considered in the determination of bonuses for executive officers generally and for other executive officers subject to Section 162(m). In addition, with respect specifically to Mr. Eisner, the Committee noted that his base salary remains lower than that of chief executives of comparable corporations and thus a greater proportion of his overall compensation is determined by performance-based awards, such as the annual bonus, and stock appreciation. The Committee also took note of the overall quality of Mr. Eisner’s leadership of the Company’s affairs during the year, as well as his role in promoting the following fiscal 2003 achievements:
- the significant improvement in the Company’s overall financial performance during the year, including an overall improvement in as-reported earnings and earnings excluding non-recurring items;
- the strengthened performance of key businesses, including outstanding performance by the Walt Disney Studios and improved operations and results at the ABC television network;
- the continuing focus on close control of costs and prudent capital investment, contributing to an increase in cash flow from operations and free cash flow after capital investment, which was in line with prior-year investment levels, and a reduction in total and net debt; and
- clear strategic leadership for the protection of the Company’s key assets and the development of new directions for future growth through digital innovation and other means and ongoing international expansion.
Based upon these considerations, and with input from the Committee’s independent consultant, the Committee awarded Mr. Eisner a non-cash bonus in the form of restricted stock units having a value of $6,250,000 as of the date of grant. This award represented a 25% increase over the amount awarded for fiscal 2002, which was also made payable in restricted stock units rather than cash. All of the units awarded for fiscal 2003 are scheduled to vest at the end of the current term of Mr. Eisner’s employment agreement (see Note 1 to the Executive Compensation Summary Table below).
Annual stock option and stock unit awards Annual stock option and stock unit grants, as well as options granted on initial hire, are designed to provide long-term incentives to executive officers and to better align interests of executives with the interests of shareholders. The Committee grants stock options and stock units on an annual basis to existing employees and to new employees upon hiring in amounts that take into account such factors as market data on total compensation packages, the value of stock option and stock unit grants at targeted external companies, total shareholder return, share usage and shareholder dilution. Special grants may also be authorized outside of the annual-grant framework, though a grantee who receives a special grant that exceeds the typical annual-grant level will generally not be eligible for annual grants for two to five years or until he or she is promoted, enters into a new employment agreement or is within twelve months of full vesting, unless the Committee specifically determines otherwise.
In carrying out these option guidelines for fiscal 2003, Mr. Iger, under the direction of Mr. Eisner (neither of whom received annual grants in fiscal 2003), recommended the number of options and stock units for each annual grant, generally within a range associated with the individual’s position and salary level.
Long-term performance-based compensation Under the 2002 Executive Performance Plan, the Committee is authorized to grant restricted stock or restricted stock units that are intended to qualify as performance-based compensation under Section 162(m). In general, restricted stock granted under the plan is a grant of stock that is subject to forfeiture if specified performance-based vesting requirements are not satisfied, and restricted stock units are awards denominated in shares of the Company that are payable to a participant in cash or shares upon satisfaction of performance-based conditions specified by the Committee.
As described in last year’s report, the Committee awarded performance-based restricted stock units to certain executive officers in April 2002 as set forth in the Long-Term Incentive Plan Awards table in the proxy statement for the 2003 annual meeting. Those awards were designed to provide long-term performance incentives over a period of several years. The Committee therefore did not make additional awards in fiscal 2003.
How is the Company addressing Internal Revenue Code limits on deductibility of compensation?
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation over $1,000,000 paid for any fiscal year to each of the corporation’s chief executive officer and the four other most highly compensated executive officers as of the end of the fiscal year. However, the statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met.
To address these requirements, the Company’s 2002 Executive Performance Plan provides for the Compensation Committee to establish, early in each fiscal year, a performance target or targets for the year. At the same time, the Committee establishes an objective formula or standard for calculating the maximum bonus payable to each participating executive officer, which may not exceed the maximum amounts provided for under the plan. After the end of the fiscal year, if the applicable target or targets have been met, the Committee determines the bonus amount for each participating executive officer (not exceeding the permitted maximum established for such officer for the year), the form in which it will be paid (cash, shares of stock or stock units, or a combination thereof) and whether payment or vesting of all or a portion of the bonus will be deferred.
other than as an independent producer within twelve months of termination. Each such post-termination bonus would be in the amount of the greater of $6,000,000 or the average of the three highest bonuses in the last four years prior to termination. In the event of termination of employment as a result of death or disability or upon normal termination of the agreement in September 2006, Mr. Eisner will be eligible for a bonus for the fiscal year in which the termination occurs and will receive post-termination bonuses calculated in accordance with the foregoing for the 24 months following such fiscal year.
The Company has the right to terminate Mr. Eisner’s employment upon his death, upon illness or disability that has incapacitated him for six consecutive months, or for “good cause,” which is defined as gross negligence, malfeasance or resignation without approval of the Company (except for termination for “good reason”). Mr. Eisner has the right to terminate the agreement for “good reason” in the event he is not elected or retained as Chairman and Chief Executive Officer and a director of the Company, or the Company acts to reduce his duties and responsibilities materially or to change the location of the performance of his duties from the Los Angeles area. “Good reason” will not be deemed to exist solely by virtue of a sale of the Company or all or substantially all of its assets or its combination with another entity, provided that Mr. Eisner continues to have the same authority with respect to the Company’s current businesses and that he reports directly to, and is retained as a member of, the board of directors of the acquiror or its parent entity (if there is one). In the event of any termination of Mr. Eisner’s employment by the Company without “good cause” or by Mr. Eisner for “good reason,” or in the event of his death or disability, all of Mr. Eisner’s options granted in connection with his employment agreement vest immediately and remain exercisable until the earlier of five years thereafter or their scheduled expiration dates, and he or his estate is entitled to a cash payment equal to the present value of the remainder of the salary and to the bonus payments provided for in his agreement as described above. In the event of any termination of employment for good cause prior to a business combination, all of Mr. Eisner’s options, whether vested or unvested, terminate immediately. After a business combination, vested options terminate only in the event that Mr. Eisner voluntarily resigns. The employment agreement also provides for a death benefit to Mr. Eisner’s estate in the event of his death during the term of the agreement, in an after-tax amount equal to $3,000,000.
The agreement also provides for Mr. Eisner to serve as a consultant to the Company after expiration of the agreement at a fee to be mutually agreed, which may be nominal, plus continuation of the benefits and/or perquisites provided to him during his term as Chief Executive Officer, excluding any items that would conflict with laws, regulations and/or tax qualifications applicable to the Company’s group health, pension and employee welfare plans, and other than salary, bonuses and stock options, except as otherwise provided in the agreement with respect to certain specified continuing obligations (principally post-termination bonuses, as described above). Any such consulting agreement would be terminable by the Company if Mr. Eisner were to accept employment with a third party, render any services to a competitor or become disabled.
If any payments to or benefits under Mr. Eisner’s employment agreement would be subject to excise tax as an “excess parachute payment” under federal income tax rules, he will receive either the full amount of the payments or such lesser amount as would result in the greatest after-tax payment to him.
In connection with the original employment agreement, stock options were granted to Mr. Eisner on September 30, 1996 to acquire a total of 24,000,000 shares of Disney common stock under the Company’s Amended and Restated 1995 Stock Incentive Plan. Of this total, an option with respect to 15,000,000 shares bears an exercise price of $21.10, the fair market value of the Company’s common stock on September 30, 1996, as determined under the Plan. In June 2000, in connection with the amendment of Mr. Eisner’s employment agreement, this option was amended to vest with respect to 3,000,000 shares on June 30, 2000, and to vest as to 6,000,000 shares on each of September 30, 2001, and September 30, 2002. The option terminates on September 30, 2008, and contractual restrictions on the transfer of shares acquired upon exercise of this option have now terminated. In addition, at the Company’s request, Mr. Eisner exercised during August 2000, an option with respect to 3,000,000 shares that vested on June 30, 2000. Three additional options, each with respect to 3,000,000 shares, bear exercise prices in excess of fair market value on the date of grant: one, with an exercise price of $26.38 (125% of fair market value); the second, with an exercise price of $31.66 (150% of fair market value); and the third, with an exercise price of $42.21 (200% of fair market value). These options were also amended in June 2000 and vested on September 30, 2003, provided that any shares acquired upon their exercise are not transferable until September 30, 2004, September 30, 2005, and September 30, 2006, respectively (the original vesting dates of these options prior to their amendment), except for (a) (i) permitted share withholding or
permitted sales of shares to pay minimum required taxes due upon option exercise or (ii) certain family transfers of up to 8,000,000 shares, in each case if permitted by the Compensation Committee or (b) upon the earlier termination of employment by the Company without “good cause” or by Mr. Eisner for “good reason.” These options expire on September 30, 2011.
Mr. Eisner’s agreement contains provisions relating to non-competition during the term of employment, protection of the Company’s confidential information and intellectual property, and non-solicitation of Company employees for two years following termination of employment.
Robert A. Iger. Mr. Iger is employed as President and Chief Operating Officer of the Company, reporting to the Company’s Chief Executive Officer, pursuant to an employment agreement entered into in 2000. The agreement, which originally had a term of four years until January 2004 and provided for an annual salary of $1,500,000, was modified in fiscal 2002 to extend the term to September 30, 2005. In December 2002, his salary was increased to $2,000,000. Of this amount, $1,500,000 is payable in accordance with the Company’s prevailing payroll policies, while the remaining $500,000 is deferred, to be paid, together with interest at the applicable federal rate for mid-term treasuries, reset annually, no less than 30 days after Mr. Iger is no longer subject to the provisions of Section 162(m) of the Internal Revenue Code. Pursuant to a modification of the Company’s Amended and Restated Key Plan in January 2003, the deferred amounts of Mr. Iger’s salary (including amounts previously deferred) are credited for purposes of determining his retirement benefits. (See “Retirement Plans” below.) Mr. Iger is also eligible for an annual bonus under the Company’s 2002 Executive Performance Plan and for performance-based stock unit awards such as those awarded to him in fiscal 2002. In addition, the Compensation Committee in November 2001 granted Mr. Iger an option to acquire 1,750,000 shares of Company common stock in connection with the extension of his employment agreement during the fiscal year. The option has an exercise price of $21.05 (the fair market value on the date of grant), vests in five equal annual installments beginning one year after the date of grant, subject to acceleration in certain circumstances, and terminates on November 27, 2011. Mr. Iger’s employment agreement also provided for a special one-time payment of $2,200,000 in fiscal year 2000 in discharge of all obligations of the Company and its affiliates to provide compensation under prior employment arrangements.
Mr. Iger is entitled to participate in employee benefits and perquisites generally made available to senior executives of the Company. The Company has also agreed to nominate him for election to the Board as a member of the management slate at each annual meeting of shareholders during the term of the agreement, and he has agreed to serve on the Board if elected.
Mr. Iger’s employment may be terminated by the Company in the event of death or permanent disability, in which case Mr. Iger or his estate is entitled to receive 100% of his salary (including the deferred portion) for an additional twelve months, 75% of such salary for twelve months thereafter and 50% for the next twelve months. In the case of disability, such payments will be reduced by the amount of any disability insurance or other income paid to Mr. Iger. In addition, in the event of termination because of death or permanent disability, all of his stock options become immediately exercisable for the period specified in the relevant stock option agreements, and his performance-based stock unit award vests in full, regardless of whether any performance periods have been completed. He or his estate is entitled to a pro rata bonus for the year in which death or termination for disability occurred, calculated on the basis of an assumed bonus for the full year equal to the greater of $1,000,000 or the annual bonus received for the prior fiscal year.
Mr. Iger’s employment may be terminated by the Company for “good cause,” which is defined as willful gross neglect or malfeasance in the performance of his duties or resignation without Company consent (except as provided in the following paragraph). In the event of such termination, the Company’s only obligation is to pay any amounts unconditionally accrued, earned or vested through the date of termination.
Mr. Iger has the right to terminate his employment in the event of a reduction in his compensation rights, or a material reduction of any employee benefit or perquisite, other than as part of an across-the-board reduction generally applicable to all senior executives; the Company’s failure to retain him as President and Chief Operating Officer or to nominate him for election to the Board; a material diminution in his duties, assignment of duties that are materially inconsistent with those duties or a change in his reporting relationship so that he no longer reports to the Chief Executive Officer of the Company; or relocation of his office more than 50 miles from
