Chairman and CEO Michael D. Eisner's Letter to Stockholders.

BURBANK, Calif.--(BUSINESS WIRE)--Jan. 6, 1999--The following is the text of Chairman and CEO Michael D. Eisner's letter to stockholders, as contained in The Walt Disney Company's 1998 annual report, released today.

(The entire annual report can be found beginning Friday, Jan. 8, on the Internet at: http://www.disney.com/investors/annual98/index.htm)

To Disney Owners and Fellow Cast Members:

I am looking out the window and can see the seasons change (yes, the seasons do change in Los Angeles -- the eucalyptus leaves droop more and the sprinklers go on less often). I am reminded that our rhythms are set by the seasons and that any number of human endeavors are ruled by the calendar. Such as this annual report. Every 12 months we compile it, and every 12 months I sit down to write you this letter.

There's just one problem with this annual exercise: It implies that businesses can be run in neat, 12-month chunks of time. Unfortunately, the business cycle has its own seasons, which are not ruled by the orderly and predictable orbit of the Earth around the Sun. Indeed, at Disney, we live by a 60-month calendar. We set our goals over rolling five-year timelines. In this context, each year is more like a season. Some are sunny and some are overcast, but each is merely a period of passage and not a destination. Our five-year calendars force us to think long-term. They make us devise strategies that add value, not squeeze profits.

But this is an annual report, not a quinquennial report. Our fiscal year earnings were roughly the same as they were in the previous 12 months. This flat performance doesn't come as a surprise to you, given the metaphorical way I opened this letter, trying to ease gently into a discussion of what appears to be our twice-a-decade problem.

I'll call it "semi-decadal" because, in many ways, 1998 reminds me of 1991, a year that also featured languishing earnings. But I believe that there is a more important similarity between 1998 and 1991 ... namely, that both were years of key strategic investments and significant new initiatives.

In 1991, our initiatives included three new hotels at Walt Disney World; Hyperion Books; Discover Magazine; the Disney Vacation Club; Fantasmic!; and the CarToon Spin at Disneyland and Muppet 3D at the Disney-MGM Studios.

In 1998, the list of major new initiatives was even longer, with Disney's Animal Kingdom; DisneyQuest; the Disney Cruise Line; ESPN Zone; ESPN-The Magazine; Jane Magazine; new Disney Channels in Italy and Spain; Downtown Disney and the All-Star Movies Resort at Walt Disney World; Radio Disney; the ESPN Classic sports channel; Toon Disney on cable; the new Tomorrowland at Disneyland; the refurbishment of Anaheim Stadium; and the acquisition of Starwave, the investment in Infoseek, and the creation of the Go Network.

In 1998, I also saw the end of an initiative begun five years ago and subsequently accomplished in midnight-to-2a.m. shifts, namely my book "Work in Progress." At long last, it is finally done! It turned out to be a book about the challenges of running a creative company, utilizing examples from my personal experience. It did not destroy my marriage, it was reviewed reasonably well, despite some criticism for not being "a kiss-and-tell," and it has yet to be read by my three sons -- who fortunately have their own lives and have heard enough stories from their father.

As with our 1991 initiatives, our 1998 efforts are all designed to further Disney's overall corporate mission -- to offer quality entertainment that people will seek out. Consider what this really means. About 2,300 years ago, the Greek philosopher Theophrastus said, "Time is the most valuable thing a man can spend." It still is.

At Disney, we are dedicated to creating entertainment of such excellence that people will choose to spend some of their valuable time with us. All of our 1998 initiatives are geared toward this goal. Given their high quality and given the evidence that people all over the world will be enjoying more and more disposable time (a horrible phrase, considering time's preciousness) in the years ahead, these investments have the potential to create significant growth down the road. Unfortunately, like all investments that create theoretical opportunities in the future, they cost real money right now. Consequently, during the fiscal season that was 1998, they helped drag down our net income. But that's the short-run story. In the long run (which is the run that really matters), we believe they will enrich our company.

Not only do all of these initiatives represent wonderful ways to spend one's time, but they also reflect a tremendous range of experience. Some, like Disney's Animal Kingdom, the new Tomorrowland and the expansion of the Disney Channel, are extensions of established forms of Disney entertainment. Others, like DisneyQuest, the Disney Cruise Line and the Go Network, encompass forms of entertainment that are new to us. They reflect our belief that developments such as regional entertainment, the cruise business and the Internet relate directly to our core business and are opportunities that will help lead us to the future.

The future was very much on our minds this past October when we held a senior management retreat at my parents' apple orchard in Vermont. Although we were a week late for "cow appreciation day" in Woodstock, we were not too late to cruise Sam's Army and Navy Store (recently renamed Sam's Outfitters for political correctness) or to meet and hike, communicate and get excited and organized about the seasons and years and decade ahead. We pondered the ecological environment and the economic environment, which a few weeks earlier the pundits had proclaimed was teetering on the brink of recession. Lately, they seem to be saying "never mind."

While we didn't find a crystal ball at Sam's Outfitters, we did crystallize a Disney methodology for weathering any economic storms that may lie ahead. That methodology can be stated quite simply: "Put the creative process first and while we're at it, try to make sure not to lose money." At its heart, ours is a creative company, and creativity of all kinds -- artistic, financial and administrative -- holds the key to prospering as the new century approaches, whatever surprises it may bring with it. By the way, this methodology is nothing new. Throughout its 75-year history, creativity has been the hallmark of our company and has driven its remarkable success.

On October 16, we honored this legacy of creativity during our 75th anniversary celebration. On this occasion, we inducted another 19 people as Disney Legends, including two especially legendary individuals. The first was Virginia Davis, who starred in the Alice Comedies, the very first films produced by the Disney Brothers Cartoon Studio. The second was Roy E. Disney, who is vice chairman of our Board of Directors and chairman of Feature Animation.

If it weren't for Roy, the Disney legacy would have ended at its 60th anniversary. It was in 1984 that he provided crucial leadership in fending off corporate raiders intent on breaking the company apart. Roy is also a record-setting international yachtsman, which I mention because, when he's not on the high seas, he continues to be an invaluable rudder and stabilizer for our company. You need look no further than his name to see why Roy understands better than anyone the creative essence of Disney ... an essence, I might add, that was remarkably evident in those very first Alice Comedies.

Two individuals who are also legends in their own right are Card Walker and Dick Nunis, who have announced their retirement as members of our Board of Directors, with Dick also stepping down as chairman of Walt Disney Attractions. Between them, these two men have dedicated 103 years to our company! Card first joined Disney in 1938 and ultimately served as chairman and chief executive officer, while Dick started in 1955 and went on to head our Attractions division. They may be retiring, but I will continue to rely on their wisdom and insights about all things Disney.

And, while I am recognizing legends, I want to mention the Singing Cowboy, Gene Autry, who died this year. He was not only a Hollywood legend and a brilliant businessman, but also a good friend of our company, dating back to the days of Walt, who served on the original board of directors of Gene's Angels baseball team. I am sure Gene is somewhere smiling at the Angels' acquisition of Mo Vaughn, a quality star who completely fits into Gene's Cowboy Code, especially Code No. 6: "He must help people in distress."

The weekend following our 75th anniversary celebration, we conducted the Disney VoluntEARS Global Celebration of Children. During these two days, nearly 11,000 Disney cast members volunteered in 212 cities in 44 states, five Canadian provinces, 24 countries, on five continents. Our goal was to further celebrate our 75th anniversary by helping 75,000 children around the globe. This was one more way to honor the Disney heritage of making the world a better and happier place.

Toward the end of the year, action was taken in Washington that should help us further protect and build on our heritage. Congress passed and the President signed an extension of the copyright law, assuring that Mickey Mouse's home will continue to be exclusively at The Walt Disney Company.

One important way that we're continuing to make Mickey and his friends feel right at home is a new initiative for 1999, tentatively called MouseWorks. We are producing brand new cartoon shorts featuring everyone's favorite mice, ducks and dogs -- Mickey, Minnie, Donald, Daisy, Pluto and Goofy (yes, Goofy is a dog). Some of these shorts will initially appear with Disney theatrical and video releases. After that, they will form the basis of a television series that will appear initially in the United States and eventually around the world. In recent decades, these Disney stars have remained incredibly popular despite the fact they've rarely ventured away from their residences in Toon Town. Now, they are going to be put back to work doing what they do best -- entertaining their fans on the big and little screen.

One other parallel between 1998 and 1991 was the bad news/good news of our live-action movie business. The bad news is that 1998 was a tough year for us. As in 1991, we succumbed to the overall industry trend of paying more and more for talent in front of and behind the camera. Of course, we had our successes, such as the number one film of the summer "Armageddon," and the remake of "The Parent Trap." We also had some highly regarded films such as "The Horse Whisperer" and "Beloved." And, Miramax enjoyed the commercially and artistically successful "Good Will Hunting."

But, in too many instances, profits did not materialize from the revenues achieved by our films. Stated more bluntly, either the films and marketing cost too much, or the audience rejected our ideas. Whatever the reason, we're glad fiscal '98 is over in this area.

Which brings me to the good news. Fiscal '99 has started off like gangbusters for our movie division. I know this is last year's annual report, but I am not about to wait a year to report on "A Bug's Life," "Enemy of the State" and "The Waterboy," which were three of the top four films during Thanksgiving weekend. I go for the good news wherever and whenever I can. And it is good news indeed when the first two months of the new fiscal year bring break-out hits.

In an effort to improve our odds for continued success in the live-action film business, we are implementing a strategy that calls for the making of a higher percentage of Disney-labeled films ... a strategy that, needless to say, could only be undertaken by our studio. Disney continues to be the only brand name in the entertainment industry. For 75 years, it has earned the trust of the public. Under our new strategy, we hope to build on this trust with a renewed emphasis on Disney family films.

Another area that is getting our strategic attention is broadcasting. All three of the once-dominant networks have seen audience erosion, and the ABC network has been no exception. But the fact is that ABC's prime-time ratings receive too much emphasis as a measure of our broadcasting division's performance. The entire ABC network -- daytime, prime-time, news and late night -- continues to comprise less than 10 percent of broadcasting's operating income. This is a primary reason that we opted, in 1995, to purchase Cap Cities/ABC rather than one of the other networks that was then available. Not only were we getting one of the major broadcast networks, which is still a completely unique entertainment asset in its enormous audience reach, but we were also getting some of the rising brands on the cable spectrum, such as ESPN, A&E, Lifetime and The History Channel, as well as some of the strongest owned-and-operated stations in the country.

To be sure, the days of total dominance by just three networks are over. But with our wide range of broadcast assets, which also include the Disney Channel here and abroad, we are well-positioned to play a strong role in the ongoing evolution of the incredible medium that is television.

O.K., I have now dutifully stated a rational, mature, restrained and, I hope, intelligent overview of the broadcast and cable landscape. Now, please allow me to succumb to my more native impulses by simply saying, "Watch `Sports Night' on ABC!"

It is fantastic and it is one of the building blocks we are putting together to eventually make ABC number one, irrespective of the new competition! (There, now I feel better.)

In much the same way we have invested in cable television, we have also invested in another growing area of home entertainment that is drawing eyes to screens -- the Internet. Under the management of our Buena Vista Internet Group, we were already reaping benefits from the Internet, thanks to Disney.com, the Web's most-visited entertainment site; ESPN.com, the most-visited sports site; and ABCNews.com, the fastest-growing news site.

In recognition of the immense opportunity that the Internet poses, we took three important steps this year to move from being a major participant on the Internet to becoming a true leader. First, we purchased Starwave, one of the top Internet technology companies. Then, we sold Starwave to Infoseek in exchange for a 43 percent stake in this popular search engine.

With these two partners in place, we announced the creation of the Go Network, which will be launched in the spring and, we believe, will be something of a next step in the development of the World Wide Web. Once Internet users enter the Go Network, they will find a wealth of integrated services just a click away, all of which offer content from units of The Walt Disney Company, plus access to every other destination on the World Wide Web.

The opportunity posed by the Internet is both very new and very old. As I've expressed before in these letters, I firmly believe that Disney is ruled by the royalty of King Content and Queen Creativity, serving as their advancing army is Technology. This is as it has always been. Creativity gave birth to the Content we call Mickey Mouse.

And, look where Technology has led him -- onto movie screens and television screens, videotape and theme park attractions, T-shirts and toys, CD-ROMs and video games. Every one of these technological venues has offered a new way for Mickey to engage audiences and gain fans. Now Mickey is encountering the opportunities of the Internet.

But, beyond Mickey, this new medium is wonderfully suited for the development of new characters, and it is on the backs of new characters that our Internet business will grow. These characters can also be coordinated with our parks and consumer products and co-produced with our broadcast and cable entities. For example, "Zoog Disney" on the Disney Channel has created the new characters that also appear on the Disney.com and the ZOOGDisney.com sites.

Just as the Buena Vista Internet Group is providing a new venue for Disney content inside the home, Disney Regional Entertainment is providing new venues for Disney content outside the home. We have developed three lines of business, each of which has an inherent potential for growth.

Club Disney came first, offering a richly themed play space for young children and their parents (adults without children may not enter!). Then came the first DisneyQuest, an interactive entertainment zone within one, giant 100,000-square-foot building that offers a whole new way for families to enjoy the Disney experience. One month later, we opened the first ESPNZone, a lively extension of the ESPN brand that gives fans a place to talk sports, eat sports, watch sports and play sports.

Over the coming years, more Club Disneys, DisneyQuests and ESPNZones will be established in cities across America. If the concepts are successful, as we anticipate, then they should be readily exportable overseas. The closest model for these efforts is the Disney Stores and our new ESPN Stores, which owe their great popularity not just to the merchandise, but to the fact that people like being able to step inside a Disney-designed environment close to home. Now we'll be providing three significant new ways for guests to enter the world of Disney and, judging from the early results, the appeal and the potential are great.

It should be emphasized that the new venues of Disney Regional Entertainment are designed to complement the Disney theme park experience, not replace it. Indeed, we suspect they may whet more than a few appetites for a trip to Orlando or Anaheim. Fortunately, lots of trips to Orlando and Anaheim are already being taken. Our Attractions division had a spectacular year in 1998. For the fourth consecutive year, park attendance and hotel occupancy were up across the board, partly because there were more parks to attend and more hotel rooms to occupy. Disney's Animal Kingdom was filled to capacity for much of the summer and the new Coronado Springs Resort was an instant hit. Disneyland's new Tomorrowland was also a big draw and the All-Star Movies Resort recently opened to sell-out business.

We plan to build on this success by continuing to improve our parks in little ways and big ways. Among the big ways, there are the additions of major attractions, such as the GM Test Track, Downtown Disney and the Rock `n' Roller Coaster at Walt Disney World; Disneyland's new Tomorrowland; and the Asia section of Disney's Animal Kingdom.

And then there are the really big ways: the creation of entirely new theme parks. Currently underway are Disney's California Adventure in Anaheim and Tokyo DisneySea  in Japan. Until now, Disneyland and Tokyo Disneyland  have been wonderful single-day venues that most families visit during one rising and setting of the sun. With the addition of these new adjacent parks, they will be transformed into true resort destinations.

In the fall, I traveled to Japan to participate in the groundbreaking for Tokyo DisneySea. I generally don't get nervous appearing before large groups of people, even in foreign lands ... but participating in a Shinto ceremony, for which I had to memorize the exacting customs of a religious tradition that has been nurtured over thousands of years, did test my ability to maintain my professional aplomb.

Also participating in the event were our partners from the Oriental Land Company. OLC is actually paying for the construction and will own the park. Disney will receive licensing and management fees. This will result in a strong cash flow starting with opening day. Oriental Land Company's willingness to make such a huge investment in this new park reflects the Japanese people's underlying confidence in the future and the enormous potential upside that exists in Japan and throughout the currently depressed economies of Asia.

Following my visit to Japan, I went on to meet with leaders in China and was exposed to more of this extraordinary nation. I saw a number of exotic sights, but there was one recurring sight that, given where I was traveling, seemed especially exotic to me -- the golden arches of McDonald's. I am completely confident that the Chinese people love Mickey no less than Big Mac. I plan to have lunch with Jack Greenberg, the CEO of McDonald's, to ask him how they managed to make the fries taste just as good in Shanghai as on Sunset Blvd. As evidenced by the popularity of McDonald's, we could be getting close to the time for a major Disney attraction in the world's most populous nation.

Our efforts in China underscore the growing importance of the international market in general. The coming century will not be the American Century, it will be the World Century. It used to be that in order for a company to be successful, it had to devise strategies that would work in Maine, Montana and Missouri. Now, the list includes all the nations of the world. Outside the United States, we must still remember we are guests, and not just export our American product, but produce locally created entertainment that reflects local cultures as well. This makes our work more challenging, but it also makes it vastly more exciting as we can see possibilities anywhere we spin the globe.

Of course, China already had a markedly favorable impact on our company this year, since it supplied the folktale around which we built our 36th animated film "Mulan." "Mulan" just won 10 first place awards presented by the International Animated Film Society. The film's commercial and artistic success was all the more remarkable since it was the first feature to come from our new Florida animation studio. It provided one more example of the incredible ability of our Feature Animation group to marry an emotional story to an artistic vision. Would it be too much like a father to dreamingly say nobody does it as well, that no one comes close to this level of work? Probably!

1999 will be a historic year for Walt Disney Feature Animation. For the first time in the 75 years that Disney has been animating movies, we will be releasing three feature-length animated films in a single year -- "Tarzan," "Toy Story 2" and, to close out the year, "Fantasia 2000."

In addition, from our growing TV Animation group, we have the terrific shows being produced for ABC's One Saturday Morning, which has become the top-rated Saturday morning show for kids 2 to 11. Then there's our made-for-video product line, the latest of which, "The Lion King II: Simba's Pride," is performing exceptionally well. Next year, we will have four made-for-video films, including "Mickey's Once Upon a Christmas."

Another development that may or may not have an impact on our animation business is the digital video disk. I say "may not" because, over time, it may simply replace videotape. Therefore, I will restrain my enthusiasm for the potential of this new format, which of course is difficult for me. In 1998, we began releasing our films onto DVD. We are hopeful that, in the coming decade, this technology will grow to the point where we can profitably release more of our animated library titles in this format.

We will be greeting the new decade, the new century and the new millennium with "Fantasia 2000," a film that harkens directly to our creative roots even as it leads the way into a new era. "Fantasia 2000" will be part of a year-long millennial celebration that will be centered at Epcot and will include entertainment spectaculars, special welcoming ceremonies and exhibits from around the globe. To further memorialize the millennium, we have commissioned two symphonies by the world-renowned composers, Michael Torke and Aaron Jay Kernis.

Of course, every CEO, in every annual report this year, will feel obliged to talk in grand and expansive terms about the millennium. And, at Disney we will be firing off more than our share of fireworks when the calendar turns. But, personally, I think the year 2000 will offer a quiet moment to reflect on the past, present and future of our company (once all the bugs are out of our computers, and I am assured that we are ahead of schedule in this effort). To put it mildly, the little business that Walt and Roy founded 75 years ago grew to have an important and positive impact throughout the 20th century. Now, it is up to all of us, the 120,000 cast members of The Walt Disney Company, to make sure that this heritage is honored and built upon in a new century.

To be sure, the years of the 21st century will include ups and downs, just as did the years of the 20th. But, through all our fiscal seasons, I am confident that, over the long-term, Disney will continue to be a leader in offering creative new ways -- and creative old ways -- for people to spend their most precious possession: their time.

Sincerely,

Michael D. Eisner

Chairman and CEO