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Euro Disney S C A · 20-F · For 9/30/05

Filed On 4/4/06, 12:41pm ET   ·   Accession Number 1104659-6-22002   ·   SEC File 33-79548

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 4/04/06  Euro Disney S C A                 20-F        9/30/05    6:4.4M                                   Merrill Corp-MD/FA

Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual and Transition Report of Foreign Private     HTML   2.13M 
                          Issuers                                                
 2: EX-12.1     Statements Regarding Computation of Ratios          HTML     13K 
 3: EX-12.2     Statements Regarding Computation of Ratios          HTML     13K 
 4: EX-13.1     Annual Report to Security Holders                   HTML     10K 
 5: EX-15.1     Letter Re Unaudited Interim Financial Information   HTML     24K 
 6: EX-15.2     Letter Re Unaudited Interim Financial Information   HTML    677K 


20-F   —   Annual and Transition Report of Foreign Private Issuers
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Part I
"Presentation of Information and Accounting Principles
"Item 1
"Identity of Directors, Senior Management and Advisers
"Item 2
"Offer Statistics and Expected Timetable
"Item 3
"Key Information
"Item 4
"Information on the Company
"Item 5
"Operating and Financial Review and Prospects
"Item 6
"Directors, Senior Management and Employees
"Item 7
"Major Shareholders and Related Party Transactions
"Item 8
"Financial Information
"Item 9
"The Offer and Listing
"Item 10
"Additional Information
"Item 11
"Quantitative and Qualitative Disclosures About Market Risk
"Item 12
"Description of Securities Other Than Equity Securities
"Part Ii
"Item 13
"Defaults, Dividend Arrearages and Delinquencies
"Item 14
"Material Modifications to the Rights of Security Holders and Use of Proceeds
"Item 15
"Controls and Procedures
"Item 16
"Other
"Part Iii
"Item 17
"Financial Statements
"Item 18
"Item 19
"Financial Statements and Exhibits
"The accompanying footnotes are an integral part of these financial statements

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 20-F

 

ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2005

 

Commission file number 33-79548

 


 

Euro Disney S.C.A.

(Exact name of registrant as specified in its charter)

 

N/A

 

Republic of France

(Translation of registrant’s name into English)

 

(Jurisdiction of incorporation or organization)

 

Immeubles Administratifs

Route Nationale 34

77700 Chessy

France

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Ordinary Shares of Common Stock par value € 0.01

 

Euronext Paris

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 3,897,649,046 shares of common stock, par value € 0.01.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES o   NO ý.

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   YES o   NO ý.

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý.   NO o

 

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ý Item 18 o

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o   NO ý.

 

 



 

TABLE OF CONTENTS

 

PART I

 

 

PRESENTATION OF INFORMATION AND ACCOUNTING PRINCIPLES

 

 

 

 

 

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

 

 

 

 

 

 

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

 

 

 

 

 

 

 

ITEM 3.

 

KEY INFORMATION

 

 

 

 

 

 

 

ITEM 4.

 

INFORMATION ON THE COMPANY

 

 

 

 

 

 

 

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

 

 

 

 

 

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

 

 

 

 

 

 

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

 

 

 

 

 

 

ITEM 8.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 9.

 

THE OFFER AND LISTING

 

 

 

 

 

 

 

ITEM 10.

 

ADDITIONAL INFORMATION

 

 

 

 

 

 

 

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

 

 

 

 

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

 

 

 

 

 

PART II

 

 

 

 

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

 

 

 

 

 

 

ITEM 14.

 

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

 

 

 

 

 

 

ITEM 15.

 

CONTROLS AND PROCEDURES

 

 

 

 

 

 

 

ITEM 16

 

OTHER

 

 

 

 

 

 

PART III

 

 

 

 

ITEM 17.

 

FINANCIAL STATEMENTS

 

 

 

 

 

 

 

ITEM 18

 

NA

 

 

 

 

 

 

 

ITEM 19.

 

FINANCIAL STATEMENTS AND EXHIBITS

 

 



 

PART I

 

PRESENTATION OF INFORMATION AND ACCOUNTING PRINCIPLES

 

Euro Disney S.C.A. (the “Company”), including its legally controlled subsidiaries (the “Legally Controlled Group”) and consolidated special-purpose financing companies (the “Financing Companies”), together the “Group”, publishes its consolidated financial statements (“Consolidated Financial Statements”) in euros. All currency amounts in this annual report on Form 20-F (“Annual Report”) are expressed in euros.

 

The Company prepares its Consolidated Financial Statements in accordance with accounting principles generally accepted in France (“French GAAP”), which differ in certain significant respects from generally accepted accounting principles in the United States of America (“U.S. GAAP”). Unless otherwise specified, all financial information presented in this Annual Report has been derived from or based on the Consolidated Financial Statements. For a discussion of the principal differences between French GAAP and U.S. GAAP as they relate to the Group’s consolidated results of operations and financial position, see Note 29 to the Consolidated Financial Statements in Item 17 “Financial Statements”.

 

The Company’s fiscal year begins on October 1 of a given year and ends on September 30 of the following year. References in this annual report to a numbered fiscal year are to the twelve-month period ended on September 30 of the calendar year that bears such number (so that, for example, fiscal year 2005 is the fiscal year that ends on September 30, 2005).

 

In February 2005, the Company implemented a comprehensive restructuring (the “Restructuring”) of the Group’s financial obligations. The Restructuring included amendments to the Group’s principal financing agreements as well as its license and management agreements with The Walt Disney Company (“TWDC”); changes to the Group’s organizational structure; and a €253.3 million share capital increase. The effect of the Restructuring was to provide new cash resources to the Group, to reduce or defer cash payment obligations and to provide flexibility for investment and development.

 

ITEM 1.                                                     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.                                                     OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.                                                     KEY INFORMATION

 

A.            SELECTED FINANCIAL DATA

 

Five-Year Selected Financial Data

 

The following table sets forth the Group’s selected consolidated financial data for the five-year period ended September 30, 2005. This table is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and the related notes thereto included in Item 17 “Financial Statements” and Item 5 “Operating and Financial Review and Prospects”.

 

3



 

 

 

Year Ended September 30,

 

(€ in millions, except per share data)

 

2005

 

2004(1)

 

Pro-Forma
2003
(1)

 

As reported
2003

 

As reported
2002

 

As reported
2001

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In accordance with French GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Resort segment

 

1,047.3

 

1,036.2

 

1,023.2

 

1,023.9

 

1,043.9

 

964.3

 

Real estate development segment

 

28.7

 

11.8

 

23.6

 

23.6

 

27.3

 

37.2

 

Total Revenues

 

1,076.0

 

1,048.0

 

1,046.8

 

1,047.5

 

1,071.2

 

1,001.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before lease and financial charges

 

(26.9

)

(23.9

)

32.1

 

132.4

 

175.7

 

185.2

 

Income (loss) before exceptional items

 

(114.8

)

(129.6

)

(79.1

)

(67.9

)

4.9

 

37.7

 

Exceptional income (loss)

 

0.4

 

(22.3

)

12.0

 

11.9

 

(38.0

)

(7.2

)

Income tax (Expense)

 

(1.1

)

 

 

 

 

 

Minority interests

 

20.6

 

6.7

 

8.8

 

 

 

 

Net income (loss)  (3)

 

(94.9

)

(145.2

)

(58.3

)

(56.0

)

(33.1

)

30.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In accordance with U.S. GAAP:

 

2005

 

2004

 

 

 

2003

 

2002

 

2001

 

Revenues

 

1,041.5

 

1,015.9

 

 

1,024.9

 

1,052.9

 

982.6

 

Net loss (2)

 

(46.5

)

(77.5

)

 

(54.4

)

(67.3

)

(50.6

)

Net loss per share (in €) (4)

 

(0.02

)

(0.07

)

 

(0.05

)

(0.06

)

(0.05

)

 

 

 

Year Ended September 30,

 

(€ in millions, except per share data)

 

2005

 

2004

 

 

 

2003

 

2002

 

2001

 

Pro-Forma U.S. GAAP net loss (5)

 

(100.0

)

(130.0

)

 

(153.6

)

(144.5

)

(122.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro-Forma net loss per share (in €)  (5)

 

(0.04

)

(0.12

)

 

(0.15

)

(0.14

)

(0.12

)

 

 

 

September 30,

 

(€ in millions)

 

2005

 

2004(1)

 

Pro-Forma
2003
(1)

 

As reported
2003

 

As reported
2002

 

As reported
2001

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In accordance with French GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

2,894.1

 

2,876.6

 

2,954.4

 

2,583.6

 

2,708.6

 

3,106.1

 

Borrowings (6)

 

1,943.4

 

2,052.8

 

2,448.4

 

867.5

 

821.3

 

1,141.2

 

Equity and quasi-equity

 

295.7

 

(59.9

)

85.6

 

1,237.2

 

1,397.6

 

1,430.7

 

Minority interests (6) (7)

 

106.3

 

339.6

 

(41.3

)

 

 

 

 

In accordance with U.S. GAAP:

 

2005

 

2004

 

 

 

2003

 

2002

 

2001

 

Total assets

 

2,917.4

 

2,906.6

 

 

2,946.8

 

3,076.5

 

3,539.0

 

Borrowings (Current and Long-term)

 

1,890.5

 

1,950.0

 

 

2,208.9

 

2,218.6

 

2,565.1

 

Shareholders’ equity

 

366.8

 

(48.7

)

 

60.4

 

112.6

 

179.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares Outstanding (in millions)

 

3,897.6

 

1,082.7

 

 

1,055.9

 

1,055.9

 

1,055.8

 

 


Certain reclassifications have been made to the prior years comparative amounts in order to conform to the 2005 presentation.

 

(1)              Effective October 1, 2003 (first day of fiscal year 2004), the Group adopted new accounting rules mandated in France with respect to the consolidation of special purpose financing companies that are not legally controlled by the Group (See Item 4.”Information on the Company – Section C.3 “Financing Companies”). To enhance comparability, fiscal year 2003 French GAAP figures are presented on a pro-forma basis as if this change in accounting principle was in effect during all of fiscal year 2003. (See Item 5 “Operating and Financial Review and Prospects” — Section B “Results of Operations”). French GAAP figures reported in this table for fiscal years 2002 and 2001 are as reported and have not been restated for this change.

(2)              Effective October 1, 2003 (first day of fiscal year 2004), the Group implemented FIN 46R, “Consolidation of Variable Interest Entities”. As a result, fiscal year 2004 U.S. GAAP net loss was reduced by € 36.3 million reflecting the cumulative impact of adopting this change in accounting principle. (See Note 29 to the Consolidated Financial Statements in Item 17 “Financial Statements”).

(3)              French GAAP net loss for fiscal year 2003 includes the € 11.8 million net impact of a change in accounting principle for major fixed asset renovations and the impact of a conditional waiver of royalties and management fees for the last three quarters of the fiscal year (See Item 5 “Operating and Financial Review and Prospects” — Section B “Results of Operations”).

 

4



 

(4)              Per share data is based upon the weighted average number of common shares outstanding of 2,772 million, 1,062 million, 1,056 million, 1,056 million and 1,056 million for each of the years ended September 30, 2005, 2004, 2003, 2002 and 2001, respectively, and does not give effect to the exercise of any contingently issuable shares as they were anti-dilutive.

(5)              The Pro-Forma net loss and pro-forma net loss per share present the U.S. GAAP net loss that the Group would have had if royalties and management fees to The Walt Disney Company had not been adjusted from their original schedule for modifications agreed since the inception of the agreements (See Notes 19(b) and 29 to the Consolidated Financial Statements in Item 17 “Financial Statements”).

(6)              Effective September 30, 2004, Euro Disney Associés, one of the Group’s consolidated financing companies, was recapitalized resulting in a € 384.1 million decrease in borrowings and a corresponding increase in minority interests

(7)                 As a result of the Restructuring, substantially all of the Company’s assets and liabilities were contributed to Euro Disney Associés effective October 1, 2004. The Company’s increased interest in EDA was recorded as a reallocation between shareholders’ equity and minority interests for an amount of € 215.5 million.

 

Exchange Rates

 

Since the principal market for the Company’s common stock is the Euronext Paris exchange, fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar value of an investment in its common stock and dividend and other distribution payments, if any, thereon. The following tables set forth, for each of the periods indicated, certain information related to the euro / U.S. dollar exchange rate based on the noon buying rates in the city of New York for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rates”) expressed in dollars per € 1.00. Such rates are provided solely for the convenience of the reader and are not necessarily the rates that were used to prepare the Group’s Consolidated Financial Statements nor the selected consolidated financial data included herein.

 

U.S. dollar per euro

 

Low

 

High

 

February 2006

 

1.19

 

1.21

 

January 2006

 

1.20

 

1.23

 

December 2005

 

1.17

 

1.20

 

November 2005

 

1.17

 

1.21

 

October 2005

 

1.19

 

1.21

 

September 2005

 

1.20

 

1.25

 

 

U.S. dollar per euro
Fiscal Year

 

Low

 

High

 

Average(1)

 

End of Period

 

2005

 

1.19

 

1.36

 

1.27

 

1.20

 

2004

 

1.14

 

1.28

 

1.22

 

1.23

 

2003

 

0.97

 

1.19

 

1.09

 

1.16

 

2002

 

0.86

 

1.02

 

0.92

 

0.99

 

2001

 

0.83

 

0.95

 

0.88

 

0.91

 

2000

 

0.85

 

1.09

 

0.95

 

0.88

 

 


(1)              The average of the Noon Buying Rates on the last business day of each month during the relevant period.

 

The Noon Buying Rate on March 29, 2006 for the euro against the U.S. dollar was $ 1.20 per € 1.00 (€ 0.83 per dollar). No representation is made that the euro could have been converted into U.S. dollars at the rates shown herein or at any other rates for such periods or at such dates.

 

B.            CAPITALISATION AND INDEBTEDNESS

 

Not applicable.

 

C.            REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

5



 

D.                                    RISK FACTORS

 

Risks Relating to the Group

 

The Group’s high level of borrowings requires the Group to devote a large portion of its operating cash flow to service debt, and may limit its operating flexibility

 

The Group is highly leveraged. As of September 30, 2005, the Group had consolidated borrowings of € 1,943.4 billion and shareholders’ equity of € 295.7 million. In addition, the Group pays significant royalties and management fees to affiliates of TWDC. The Group’s high degree of leverage and the undertakings towards the Group’s Lenders can have important consequences for its business, such as:

 

                  limiting the Group’s ability to invest operating cash flow in its business, because its uses a substantial portion of these funds to pay debt service and because the Group’s covenants restrict the amount of its investments;

 

                  limiting the Group’s ability to make capital investments in new attractions and maintenance of the Theme Parks and Hotels, both of which are essential to its business;

 

                  limiting the Group’s ability to borrow additional amounts for working capital, capital expenditures, debt service requirements or other purposes; and

 

                  limiting the Group’s ability to withstand business and economic downturns, because of the high percentage of its operating cash flow that is dedicated to servicing its debt.

 

If the Group cannot pay its debt service, royalties and management fees and meet its other liquidity needs from operating cash flow, the Group could have substantial liquidity problems. In those circumstances, the Group might have to sell assets, delay planned investments, obtain additional equity capital or restructure its debt. Depending on the circumstances at the time, the Group may not be able to accomplish any of these actions on favorable terms, or at all. The Group’s financing agreements limit its ability to take some actions that could generate additional cash proceeds.

 

The Group must improve its earnings (excluding the impact of minority interest, income taxes, net financial charges, depreciation and amortization and certain non-cash charges) in order to meet financial performance covenants under its debt agreements

 

The Group’s strategic plan assumes earnings growth, from, among other things, the impact of the Group’s multi-year investment program. Absent such growth, the Group may not be able to meet its financial performance covenants. In such a circumstance, if not cured by obtaining new subordinated debt or other concessions from TWDC or other third parties, the relevant lenders could accelerate the maturity of the debt and take other actions that could adversely affect the Group.  For additional information regarding the financial performance covenants, see Item 5 “Operating and Financial Review and Prospects” – C “Liquidity and Capital Resources”

 

The Group has recently incurred losses, and expects to continue to incur a significant aggregate amount of losses over the next several years

 

The Group’s net loss for fiscal year 2005 totaled € 94.9 million, compared to a net loss of € 145.2 million in fiscal year 2004. Management expects that even under its growth assumptions, the Group will incur a significant aggregate amount of net losses over the next several fiscal years. Accordingly, the value of the Company’s shares could be adversely affected.

 

The Group is subject to interest rate risk

 

As of September 30, 2005, approximately 29% of the Group’s borrowings was tied to floating interest rates, resulting in a weighted average interest rate of 4.47% (no hedges were outstanding as of September 30, 2005) on total borrowings of € 1.9 billion. While the Group attempts to reduce interest rate risks in respect of a substantial portion of its borrowings and the borrowings of the Financing Companies through the use of interest rate swaps and other hedging techniques, an increase in interest rates could adversely affect the Group’s financial condition.

 

The Group is subject to exchange rate risks

 

A portion of the Group’s purchases and capital investments are denominated in U.S. dollars and could be adversely affected by an increase in the relative value of the U.S. dollar against the euro. The Company attempts to reduce the forecasted dollar risk by purchasing hedging instruments, although it cannot be certain that its hedging techniques will be fully effective to insulate the Group from the risk of changes in value of the U.S. dollar. A weakening of the U.S. dollar (such as that which has recently occurred) also makes tourist destinations in the United States relatively more attractive, increasing competitive pressures on the Group and potentially adversely affecting attendance at the Resort. In addition, a significant portion of the Group’s guests (20% in fiscal year 2005) come from the United Kingdom, which is not part of the euro zone. An increase in the relative strength of the euro against the British pound would raise the price of a visit to the resort for guests visiting from the United Kingdom and could negatively affect their rates of attendance, per-guest spending and hotel occupancy.

 

6



 

The Company has not paid any dividends in recent years, and does not expect to pay dividends for a substantial period of time

 

The Company will pay no dividends in respect of fiscal year 2005 and does not expect to pay dividends for a substantial period of time. The Company’s ability to pay dividends is dependent on the availability of distributable profits under French law, which, in turn, depends on the Company’s operating results, liquidity and financial condition. In addition, certain of the Company’s loan agreements limit or prohibit the payment of dividends in certain circumstances.

 

The Group’s relationship with TWDC – Potential conflicts of interest

 

TWDC currently owns 39.78% of the Company’s shares and voting rights through an indirect, wholly-owned subsidiary, EDL Holding Company. In addition, TWDC owns 18% of Euro Disney Associés S.C.A. (“EDA”) which is the Group’s principal operating subsidiary. Under French law, the Company’s business (and that of EDA) is managed by a management company (gérant) that is appointed by the Company’s general partner (associé commandité). The shareholders elect a Supervisory Board to oversee the Company, but the Supervisory Board does not have the power to remove the management company. Both the Company’s management company and the Company’s general partner are wholly-owned indirect subsidiaries of TWDC, and the same is true of EDA as regards the management company and two of its general partners. EDA incurs significant management fees payable to the management company.

 

The Group also has several business relationships with TWDC that are important to the Group’s operations. The Group uses Disney intellectual and industrial property rights, for which the Group pays royalties to an affiliate of TWDC. The Company’s management company provides and arranges for a variety of additional technical and administrative services, for which it receives a fee and is reimbursed its direct and indirect costs. For example, the designer and construction manager for Buzz Lightyear Laser Blast currently under construction is an affiliate of TWDC. These relationships create potential conflicts of interest.

 

While the Group believes that its dealings with TWDC and its affiliates are commercially reasonable, the Group has not solicited bids or independent evaluations of the terms of its commercial relationships with TWDC. All such dealings must be authorized by the Company’s Supervisory Board to the extent they involve the Company. Members of the Company’s Supervisory Board who are affiliated with TWDC are not entitled to vote on such dealings.

 

The Company will be obliged to adopt new accounting standards for fiscal year 2006, which could materially affect its financial statements

 

The Company prepared its financial statements in accordance with French GAAP through fiscal year 2005. In June 2002, the Council of Ministers of the European Union approved a new regulation proposed by the European Commission requiring all EU-listed companies, including our company, to apply International Financial Reporting Standards (“IFRS”) in preparing their financial statements for fiscal years beginning on or after January 1, 2005 (the Company’s first fiscal year that will be affected is fiscal year 2006, which began on October 1, 2005). Applying these standards to the Company’s financial statements may have a considerable impact on a number of important areas, including in particular depreciation and amortization and the accrual of costs of major renovations. See Item 5 “Operating and Financial Review and Prospects” – Section E.4 “New Accounting Pronouncements”. Because the Group’s financial statements prepared in accordance with IFRS could differ, perhaps materially, from its financial statements prepared in accordance with French GAAP, the financial community’s perception of the Group’s financial condition could be affected. Additionally, the Group’s agreements with its lenders will potentially need to be renegotiated as a result of the adoption of IFRS. Currently all reporting and covenant calculations are based upon the Group’s consolidated financial statements prepared in accordance with French GAAP.

 

Risks of Investing in the Theme Park Resort Business

 

Demand for Theme Park Resorts is variable and can be impacted by seasonality as well as economic and geopolitical conditions

 

Disneyland Resort Paris is subject to significant seasonal and daily fluctuations in attendance and to the effects of general economic conditions. While the Group has implemented and continues to implement measures designed to alleviate fluctuations in attendance and to mitigate their impact, the Group cannot be certain that such measures will sufficiently offset fluctuations in demand. In addition, the effectiveness and timing of marketing campaigns can have a significant impact on attendance levels. Given the discretionary nature of vacation travel and the fact that travel and lodging expenses often represent a significant expenditure for the average consumer, such expenditures may be reduced, deferred or cancelled by consumers during times of economic downturn or uncertainty.

 

7



 

In addition, a certain number of events, such as international terrorist attacks, subsequent military actions and the current geopolitical climate can adversely affect travel related industries and precipitate sudden economic downturns. Although the Group’s management closely monitors its operating trends and has developed cost-reduction strategies to address such risks, such steps, depending on the duration and intensity of the downturn, may be insufficient to prevent its financial performance from being adversely affected.

 

The Group needs to make significant, regular capital expenditures to continue to attract guests

 

As part of the Restructuring, the Group obtained bank authorization and has the obligation to complete a € 240 million development plan over the next few fiscal years. The development plan includes the construction of new attractions, as well as other investments, all designed to increase attendance. There can be no assurance, however, that the planned investments will in fact result in increased attendance at levels anticipated by the Group (or at all), or that, if attendance increases, the additional revenues will be sufficient to permit the recovery of the amounts invested, a return on such investments or the payment of the Group’s other financial obligations.

 

The theme park resort business is competitive, which could limit the Group’s ability to increase prices or to attract guests

 

The Group competes for guests throughout the year with other European and international holiday destinations and also other leisure and entertainment activities in the Paris region. The parks operated by the Group also compete with other European theme parks. The Group also relies on convention business, which is highly competitive, for a portion of its revenues and to maintain hotel occupancy in off-peak periods.

 

The Group’s hotels are subject to competition from the third-party hotels located on the Resort Site (2,324 rooms/units as of the date of this Annual Report), in central Paris and in the Seine-et-Marne area. The Group believes that its hotels are priced at a premium compared to the market, reflecting among other advantages, their proximity to Disneyland Park and Walt Disney Studios Park, their unique themes and the quality service they offer. The Group is aware, however, that a number of less costly alternatives exist.

 

Competition limits the Group’s ability to raise prices, and may require the Group to make significant new investments to avoid losing guests to competitors.

 

Risks of investing in the Company’s shares

 

No U.S. Public Market

 

There has been no public market in the United States for its shares, and the Company has no present intention to apply to list the shares on any U.S. exchange. Therefore, the opportunity for U.S. holders to trade shares may be limited.

 

ITEM 4.                                                     INFORMATION ON THE COMPANY

 

A.            HISTORY AND DEVELOPMENT OF THE COMPANY AND BUSINESS OVERVIEW

 

Introduction

 

The Group is primarily engaged in the development and operation of Disneyland Resort Paris (the “Resort”), formerly Euro Disneyland. The Resort commenced operations on April 12, 1992 (“Opening Day”) on a 2,000 hectare site (the “Site”), located 32 kilometers (approximately 20 miles) east of Paris in Marne-la-Vallée, Seine-et-Marne, France. Disneyland Resort Paris principally consists of Disneyland Park, Walt Disney Studios Park, seven themed hotels, including two convention centers, the Disney Village entertainment center comprising shopping and restaurant facilities, and a 27-hole golf course. The Group’s operating activities also include the management and development of the Site, which currently includes approximately 1,000 hectares of undeveloped land. Most of these facilities (with the exception of the Walt Disney Studios Park facilities, Additional Disneyland Park Assets (“ACP Assets”) two hotels and the golf course, which are owned by the Legally Controlled Group) are leased from the Financing Companies, which as of October 1, 2003 have been consolidated into the reporting group. The Legally Controlled Group has no ownership interest in the Financing Companies. Disneyland Resort Paris is modeled on the theme park and resort concepts developed by The Walt Disney Company for its own theme parks and hotel infrastructure.

 

The Company’s principal executive offices are located at Immeubles Administratifs, Route Nationale 34, 77700 Chessy (Seine-et-Marne), France. The postal address is BP 100, 77777 Marne-la-Vallée Cedex 04, France. Its telephone number is (33) (1) 64 74 40 00.

 

8



 

A.1.                          History of the Group

 

In March 1987, TWDC entered into an agreement for the creation and operation of Euro Disneyland in France (the “Master Agreement”) with the Republic of France and certain other French public authorities. The Company became a party to the Master Agreement after its original signature. The Master Agreement sets out a master land-use plan and general development program establishing the type and size of facilities that the Company has the right, subject to certain conditions, to develop at the Resort Site over a 30-year period ending in 2017.

 

The Resort, as it exists today, represents the fulfillment of the following development phases, and is currently in the initial stages of Phase III:

 

Phase

 

Development
period

 

Development description

Phase IA

 

1989 to 1992

 

Disneyland Park, Disneyland Hotel, Davy Crockett Ranch, golf course, infrastructure and support facilities.

Phase IB

 

1989 to 1992

 

Five theme hotels and the Disney Village, defined as the “Phase IB Facilities”.

Phase IC

 

1992 to 1995

 

Additional Capacity Disneyland Park Assets which included among other attractions, Space Mountain and Indiana Jones and the Temple of Peril.

 

 

1996 to 1997

 

Disneyland Park attraction Honey, I Shrunk the Audience! and the Newport Bay Club Convention Center.

Phase II

 

1998 to 2004

 

Val d’Europe new city development including an international mall, a second urban rail station on the Resort Site, and the development of a downtown district comprising offices and housing, the first phase of a business park, and Walt Disney Studios Park.

Phase III

 

2004 to 2010

 

Expansion of Disney Village, continuation of Val d’Europe town center expansion, development of new public services, continuation of the international business park development and other residential developments

 

The Group experienced significant losses during the period from the Opening Day through September 30, 1994. Net operating losses before the cumulative effect of an accounting change totaled approximately € 625 million for the two-and-a-half-year period ending September 30, 1994. In addition, the Group began to experience serious cash flow difficulties in the course of fiscal year 1993.

 

In March 1994, the Group entered into a memorandum of agreement with major stakeholders outlining the terms of a major restructuring of the Group’s obligations and those of the Phase I Financing Companies and of TWDC. The 1994 Financial Restructuring essentially provided for concessions and contributions to be made by the Group’s lenders and by TWDC, and for the prepayment of certain outstanding loan indebtedness of the Group and the Phase I Financing Companies, using the proceeds of a share capital increase of the Company amounting to € 907.0 million.

 

In fiscal year 1999, the Company obtained the approval of its lenders to obtain the financing necessary for the construction of Walt Disney Studios Park, which opened on March 16, 2002 adjacent to Disneyland Park. The construction of Walt Disney Studios Park was financed using the proceeds received from a share capital increase in the amount of € 219.5 million in fiscal year 2000 and a new subordinated long-term loan from the Caisse des Dépôts et Consignations (“CDC”) of € 381.1 million.

 

In fiscal year 2003, the Group experienced reduced revenues as a result of, in particular, a prolonged downturn in European travel and tourism combined with challenging general economic and geopolitical conditions in key markets of the Group. While this was partially offset by the impact of the opening of Walt Disney Studios Park, the number of visitors and the revenues generated by the new park were below expectations. The Group also recorded increased losses as a result of reduced revenues, as well as higher operating costs and higher marketing and sales expenses related to the opening of Walt Disney Studios Park.

 

In this context, the Company (on behalf of the Group) once again entered into negotiations with its various lenders with a view to restructuring all the credit agreements. After receiving successive waivers of covenants in its credit agreements, the Company (on behalf of the Group) implemented a new Restructuring in February 2005 that included amendments to the Group’s financing agreements and agreements with TWDC, changes to its organizational structure and a €253.3 million capital increase. For further information, see Item 5 “Operating and Financial Review and Prospects” – Section F “2005 Financial Restructuring”.

 

9



 

A.2.                          Strategic Overview

 

The Restructuring was an important step in re-establishing the Group’s liquidity, and a necessary condition to allow the Group to pursue its development strategy, described below. The impact of the Restructuring (including the impact on cash flows) is described in Item 5 “Operating and Financial Review and Prospects” – Section F “2005 Financial Restructuring”.

 

By reaching agreement on the Restructuring, the Group has the opportunity to pursue a strategy designed to attract new Theme Park visitors and hotel guests, and to increase repeat visitation by enhancing guest satisfaction and value perception. Coupled with what management hopes will be a strong rebound in the short break and theme park markets in Europe, the Group believes that its development strategy has the potential to increase its revenues and improve its financial performance.

 

The Group has designed its development strategy to take advantage of what management believes are significant opportunities to attract and retain visitors. The Group’s market research shows that guests indicating they were “completely satisfied” or “very satisfied” represented over 80% of the guests surveyed at Disneyland Park, and over 70% at Walt Disney Studios Park (a differential consistent with second parks in other Disney resorts). Market research also indicates that there are substantial numbers of European families that have never visited the Resort, but have indicated that they might like to do so in the future.

 

The Group’s strategy to take advantage of this opportunity includes the construction of three major new attractions scheduled to open in fiscal years 2006, 2007 and 2008, and the enhancement of existing attractions and the magical atmosphere of the Theme Parks. The enhancements will include significant short-term improvements, designed to attract new visitors while the new attractions are being constructed, most prominently the upgrade of Space Mountain, which occurred in fiscal year 2005. The principal elements of the Group’s development strategy are the following:

 

                  Revitalize the Disneyland Park experience and enhance the Walt Disney Studios Park Experience

 

With the increase in ongoing capital expenditure authorization provided by the Restructuring, the Group plans to reinvigorate its long-standing policy of continually upgrading Disneyland Park. In fiscal year 2005 the first example of this element of this strategy was the upgrade of Space Mountain, which has been renamed Space Mountain: Mission 2, creating a completely new experience in order to provide its visitors with a new twist on this already popular roller coaster ride.

 

For April 2006, the Group plans on opening in Disneyland Park Buzz Lightyear Laser Blast a ride-through interactive adventure featuring Buzz Lightyear and characters inspired by the Walt Disney Pictures presentation of the Pixar Animation Studios film, Toy Story 2. Buzz enlists guests to help him in the fight against the evil Emperor Zurg. Boarding a space cruiser, the guests spin, twist and turn their way through the galaxy while shooting at Zurg’s bad toy forces with on-board blasters. With each target hit, guests accumulate points that help them rise through the ranks of Buzz Lightyear’s elite squadron and help save the toy universe.

 

Beginning with fiscal year 2007, new additions are planned in the Walt Disney Studios Park. First, a new land consisting of multiple new attractions, preliminarily named Toon Studios ( a new land inspired by the Walt Disney Pictures presentations of the Pixar Animation Studios films “Finding Nemo” and “Cars”), is scheduled to open. Toon Studios will be followed by the Tower of Terror, scheduled to open in fiscal year 2008.

 

These attractions are designed to add to the appeal and capacity of Disneyland Resort Paris, further enhancing the core guest experience.

 

                  Expand seasonal events and popular shows

 

Although the Group’s business is seasonal, the Group has successfully employed a strategy to reduce the impact of seasonality through the staging of special promotional events in the off-peak season. The Group has added to its popular Halloween and Christmas events with new seasonal features including a “Magic Unlimited” season in January (allowing repeat rides on certain attractions without waiting in line), a Kids Carnival season and an Easter season. The Group has continued The Legend of the Lion King show.

 

The Group intends to continue to engage in promotional campaigns designed to maximize the number of visitors. For example, in fiscal year 2005, the Group implemented a promotional campaign around the re-launch of Space Mountain at the beginning of the high season. The Group also marked the 50th anniversary of the original Disneyland Park in California with a fireworks celebration throughout the summer of 2005.

 

10



 

                  Focus on differentiation of the Disney Hotels

 

The Group focuses visitors on the attractiveness of its own on-site Hotels in order to meet the challenges presented by the opening of the new on-site hotels operated by third-parties in fiscal years 2003, 2004 and 2005. Its marketing effort highlights the proximity of its hotels to the Theme Parks and special attractions such as Disney character breakfasts. In addition, during fiscal year 2005 the Group modified its pricing policy with respect to the balance between the Theme Parks and Hotel price components of its travel packages to give more weight to the ticket prices. The objective was to achieve a better competitive equilibrium and to improve the attractiveness of the Disney Hotels in packages booked through tour operators.

 

                  Focus sales and marketing efforts on first-time visitors and new distribution channels

 

The Group has implemented sales and marketing efforts designed specifically to encourage attendance by first-time visitors, taking advantage of the large untapped population base in Europe discussed in Item 4 “Information on the Company — Section A.4 “Marketing and Sales Strategy” .

 

The marketing effort includes a new communication strategy targeted by guest segment intended to familiarize European visitors with the theme park experience, while differentiating the Disneyland Resort Paris experience. The Group also is taking advantage of new distribution channels by establishing relationships with low-cost airlines and internet travel sites, as well as developing “calls to action” designed to trigger bookings when marketable news is released (for example, the opening of Buzz Lightyear Laser Blast).

 

A.3.                Operations by Segment

 

The Group operates in the following segments:

 

                  Resort activities include the operation of the Theme Parks, the Hotels and Disney Village, and the various services that are provided to guests visiting the Resort destination; and

 

                  Real Estate Development activities include the conceptualization and planning of improvements and additions to the existing Resort activity, as well as other commercial and residential real estate projects, whether financed internally or through third-party partners.

 

A breakdown of total revenues by major segment and activity during the past five fiscal years is set forth in the table below:

 

 

 

 

 

 

Pro-Forma

 

As-reported

 

(€ in millions)

 

2005

 

2004

 

2003(1)

 

2002

 

2001

 

Theme Parks

 

549.7

 

531.3

 

508.5

 

526.0

 

476.4

 

Hotels and Disney Village

 

394.6

 

405.2

 

416.7

 

411.7

 

386.5

 

Other

 

103.0

 

99.7

 

98.0

 

106.2

 

101.4

 

Resort Segment

 

1,047.3

 

1,036.2

 

1,023.2

 

1,043.9

 

964.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Development Segment

 

28.7

 

11.8

 

23.6

 

27.3

 

37.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

1,076.0

 

1,048.0

 

1,046.8

 

1,071.2

 

1,001.5

 

 


(1)              Reflecting the change in accounting principle related to the consolidation of Financing Companies. See Notes 2 and 29 to the Consolidated Financial Statements in Item 17 “Financial Statements”.

 

A.3.1.                Resort Segment

 

A.3.1.1.      Theme Parks

 

Theme Parks

 

Within the Resort segment, theme park activity includes all operations of Disneyland Park and Walt Disney Studios Park, including merchandise, food and beverage, special events and all other services provided to guests in the parks. Theme Parks revenue is determined primarily by two factors: the number of guests and the total average spending per guest (which includes the admission price and spending on food, beverage and merchandise).

 

11



 

The Theme Parks are operated on a year-round basis. In the first years of operations, Disneyland Park experienced significant difficulties in accommodating all prospective guests during peak days, which resulted in long wait times for attractions, guest dissatisfaction and lost revenues. Despite progress, operations continue to be subject to seasonal fluctuations.

 

Beginning in fiscal year 2004, seasonal theme park pricing has been eliminated and replaced with stable year-round ticket pricing. However, specific packages are regularly offered for specific markets.

 

The Company began offering and promoting a “Park Hopper” ticket for one-day, two-day and three-day periods in October 2003 whereby for an additional price of € 9 over a single-gate, one day admission price, a guest can go back and forth freely between Disneyland Park and Walt Disney Studios Park.

 

The following table summarizes the evolution of the single-gate, one-day theme park admission prices, attendance and average spending per guest:

 

Fiscal Year

 

Total Guests (1)

 

Total Average
Spending per
Guest
(2)

 

Theme Park
Admission Price
High Season
(3)

 

Theme Park
Admission Price
Low Season
(3)

 

 

 

(in millions)

 

 

 

 

 

 

 

2005

 

12.3

 

44.3

 

41.0

 

41.0

 

2004

 

12.4

 

42.7

 

40.0

 

40.0

 

2003

 

12.4

 

40.7

 

39.0

 

29.0

 

2002

 

13.1

 

40.1

 

38.0

 

27.0

 

2001

 

12.2

 

38.9

 

36.0

 

25.9

 

 


(1)              Includes Disneyland Park and, from March 16, 2002, Walt Disney Studios Park.

(2)              Average daily admission price and spending for food, beverage, merchandise and other services sold in the Theme Parks, excluding value added tax.

(3)              Represents at-gate park admission price for one adult including value added tax at the end of the fiscal year. Starting in fiscal year 2002, high season pricing generally applied to the whole year with the exception of the period from January to March inclusive. Since January 2004, a single rate applies throughout the year.

 

Disneyland Park

 

Disneyland Park is composed of five “themed lands”: Main Street U.S.A., which transports guests to an American town at the turn of the 20th century, with its houses and shops, Frontierland, which takes guests on the path of the pioneers who settled the American West, Adventureland, where guests dive into a world of intrigue and mystery, reliving Disney’s most extraordinary legends and best adventure movies, Fantasyland, a magical land where guests find the fairy tale heroes brought to life in Disney’s animated films, and Discoveryland, which lets guests discover different “futures” through the works of visionaries, inventors, thinkers and authors of science fiction from all periods.

 

There are 43 attractions in Disneyland Park, including upgraded versions of standard features of Disney theme parks around the world such as: Big Thunder Mountain, a roller coaster which simulates a mining railway train; Pirates of the Caribbean, which reproduces a pirate attack on a Spanish fort of the 17th century; Phantom Manor, a haunted Victorian mansion; It’s a small world, the most popular attraction in Fantasyland, an exhibition of dolls from around the world, dressed in their national costumes; and Honey, I Shrunk the Audience!, a three-dimensional film with interactive special effects during which spectators participate in the illusion of being “shrunk”. Other popular attractions that are unique to Disneyland Park include: Indiana Jones and the Temple of Peril, a full-loop roller coaster ride through simulated ancient ruins; and Space Mountain : Mission 2, a roller coaster ride themed to the work of Jules Verne in which guests board a spaceship and are catapulted by a giant canon into outer space.

 

Disneyland Park also has five permanent theatres. Live stage shows are presented in these venues throughout the year. Examples from the past and present include The Tarzan Encounter and Mickey’s Winter Wonderland, and more recently The Legend of the Lion King. The entertainment in the Disneyland Park also includes parades and firework displays, such as the Wonderful World of Disney Parade, Fantillusion Parade and Wishes. As a result of the number of guests that they attract, shows and parades enable an increase in the guest capacity of Disneyland Park while at the same time increasing guest satisfaction.

 

In addition to the permanent Disneyland Park attractions, parades and live stage shows, there are numerous seasonal events throughout the year which in the past have included the Halloween Festival in October, special Christmas festivities in December and early January, and the Kids Carnival in February and March. The appearance of Disney characters and their interaction with guests is another important aspect of the entertainment provided in the Theme Parks.

 

In fiscal year 2000, an innovative reservation system called Fastpass was introduced in Disneyland Park. A free service available to all guests, Fastpass provides an alternative to waiting in line. Guests choosing Fastpass receive a ticket designating a specific window of time during which they may return and enter directly into the pre-show or boarding area. The Fastpass system has been installed at five major attractions: Space Mountain: Mission 2, Indiana Jones and the Temple of Peril, Peter Pan’s Flight, Big Thunder Mountain and Star Tours.

 

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Walt Disney Studios Park

 

Walt Disney Studios Park opened to the public on March 16, 2002. Walt Disney Studios Park is a live-action, animation and television studio, where guests experience movies and television both from behind the scenes and in front of the camera. Guests discover the world of cinema, see how movies are made today and step into the future of movie making. They also have the opportunity to be part of the action, and get hands-on experience in animation techniques and special effects.

 

Walt Disney Studios Park is a full-day experience, designed for a six- or seven-hour stay and is one of three European parks with a cinema theme (the two others being the Warner Brothers Movie World Park in Germany and the Warner Brothers Movie World Park in Spain). Walt Disney Studios Park covers approximately 25 hectares, which is about half the size of Disneyland Park, and will be expanded in the future. It is located in front of the TGV/RER train station, in walking distance from Disneyland Park and Disney Village.

 

Guests access Walt Disney Studios Park through a monumental gate designed to look like the entry gates of the major Hollywood studios in the 1930s. The main gate provides access to a richly decorated central hub where all the ticketing and guest welcome services are located.

 

Walt Disney Studios Park includes nine major attractions, several of which were specifically developed for the park. Examples include: the Stunt Show Spectacular, a live show in which stuntmen, facing an audience of up to 3,200 guests, simulate the filming of an action scene involving car and motorcycle chases and other special effects; Cinemagique, a lyrical and emotional salute to the classics of international cinema; Armageddon, a revealing look into the world of film special effects while on board a spaceship hit by a meteorite shower; and Animagique, featuring some of the greatest moments of almost 80 years of Disney animation.

 

The park also features upgraded versions of attractions from Disney MGM-Studios near Orlando, Florida such as Rock’n’ Roller Coaster, a roller coaster ride themed to the music of Aerosmith and a visit to a music recording studio, and Catastrophe Canyon, the highlight of the Studio Tram Tour, which allows guests to experience a simulated earthquake and the resulting explosions and floods.

 

Since June 2002, the Disney Cinema Parade celebrates the steps in the life of a movie from A to Z featuring well-known Disney characters. To add to the overall park ambience, this parade also includes street entertainers (e.g. movie “look-alikes” and musicians), Disney characters centered around the world of animation and special entertainment.

 

As in Disneyland Park, the Fastpass system reduces guest waiting-times at Rock’n’ Roller Coaster and the Flying Carpets over Agrabah.

 

A.3.1.2.      Hotels and Disney Village

 

Also included in the Resort segment are the Group’s hotels and Disney Village operations. Revenues from these activities include room rental, food and beverage, merchandise, dinner shows, convention revenues and fixed and variable rent received from third-party partners operating within the Resort.

 

All of the hotel and resort amenities are currently operated on a year-round basis. Hotel operations are subject to significant seasonal fluctuations, as well as significant fluctuations between weekdays and weekends especially in off-peak seasons. The second convention center, the continued success of seasonal promotions such as Halloween, Guy Fawkes and Christmas, and the introduction of travel inclusive packages have helped to reduce these fluctuations. The Company believes that the successful implementation and marketing of these events is important to maintaining high average occupancy levels at the Hotels.

 

Hotels Operations

 

In fiscal year 2005, approximately 27% of total hotel room-nights sold were generated in the three-month period from June through August, while approximately 24% were generated in the three-month period from November through January, versus 36% and 14% respectively in fiscal year 1993 during the same periods. The Group currently differentiates pricing according to the season and the level of demand with a focus on yield optimization.

 

13



 

Hotel revenues are measured primarily by two factors: the average occupancy rate and per-room spending.

 

Fiscal Year

 

Average occupancy rate (1)

 

Total average daily
Spending per occupied room 
(2)

 

2005

 

80.7

%

179.1

 

2004

 

80.5

%

186.6

 

2003

 

85.1

%

183.5

 

2002

 

88.2

%

175.1

 

2001

 

86.0

%

168.6

 

2000

 

82.9

%

165.4

 

 


(1)              Average number of rooms sold per night as a percentage of the total number of rooms (total room inventory is approximately 5,800 rooms).

(2)              Average daily room price and spending on food, beverage and merchandise and other services sold in the Hotels, excluding value added tax.

 

The Group operates seven hotels at the Resort: the Disneyland Hôtel, the Hôtel New York, the Newport Bay Club, the Sequoia Lodge, the Hôtel Cheyenne, the Hôtel Santa Fe and the Davy Crockett Ranch (the “Hotels”). Together, the Hotels have a total capacity of approximately 5,800 rooms. Each of the Hotels was designed and built with a specific theme and for a particular market segment. The Disneyland Hôtel, which is located at the entrance of Disneyland Park, and the Hôtel New York are positioned as deluxe hotels offering service equivalent to that of the best hotels in Paris. The Newport Bay Club and the Sequoia Lodge are positioned as “first-class” hotels, while the Hôtel Cheyenne and the Hôtel Santa Fe were designed as “moderately-priced” hotels. The Davy Crockett Ranch campground is comprised of individual bungalows with private kitchens, camping sites, sports and leisure facilities and a retail shop. Both the Hôtel New York and the Newport Bay Club include convention facilities, which provide a total of approximately 10,500 square meters of meeting space. Resort amenities also include 12 restaurants, 9 cafés/bars, a 27-hole golf course, 5 swimming pools, 4 fitness centers, tennis courts and an ice-skating rink.

 

A wide range of services is offered at the Hotels. Guests are provided transportation between each of the Hotels (except the Davy Crockett Ranch) and the train station, and are given the option to check into the Hotels directly from the Chessy-Marne-la-Vallée train station or from on board the Eurostar (London) and Thalys (Brussels and Cologne) trains arriving at Disneyland Resort Paris. As part of the check-in process, guests are provided with room information and welcome booklets and for guests arriving by train, the Group also offers a luggage service, which allows them to go directly to the parks and have their luggage delivered from the train station to their rooms. Entertainment is also an integral part of the Hotel services, including Disney character breakfasts and dinners, character meet-and-greets in the lobbies of certain Hotels, face-painting workshops, and live music in the bars of certain Hotels. Children’s activity corners have also been set up where children can take part in various activities while allowing their parents additional leisure time.

 

In addition to the seven Disneyland Resort Paris Hotels described above, several third-party managed hotels having signed sales and marketing agreements with the Group are currently operating on the Resort Site. These hotels which benefit from the “Selected Hotel” or “Associated Hotel” designations, depending on their level of integration in the Resort, are as follows:

 

 

 

Designation

 

Category

 

Date opened

 

Number of Units

 

Hôtel Elysée Val d’Europe

 

Associated

 

3

*

June 02

 

154

 

My Travel Explorer

 

Selected

 

3

*

March 03

 

390

 

Kyriad

 

Selected

 

2

*

March 03

 

300

 

Pierre et Vacances Tourist Residence

 

Associated

 

3

*

April 03

 

291

 

Holiday Inn

 

Selected

 

4

*

June 03

 

396

 

Marriot Vacation Club

 

Associated

 

4

*

June 03

 

138

 

Mövenpick Dream Castle Hotel

 

Selected

 

4

*

July 04

 

405

 

Radisson SAS Hotel

 

Associated

 

4

*

December 05

 

250

 

Total

 

 

 

 

 

 

 

2,324

 

 

These hotels benefit from transport shuttles to and from the theme parks as well as free parking for their guests (Selected Hotels only), and are an important source of guest attendance at the Theme Parks. For certain of these hotels, the Group has access to blocks of rooms and receives commissions for selling those rooms to guests. Any revenues earned associated with these agreements is recorded in the “Other Revenue” line of the Resort segment. See Item 4 “Information of the Company - Section A.3.2. “Real Estate Development Segment” for a discussion of hotel capacity development projects currently in process.

 

Disney Village Operations

 

Disney Village consists of approximately 30,000 square meters of themed dining, entertainment and shopping facilities. It is a free-entrance venue (except for certain events), situated next to the Chessy-Marne-la-Vallée RER/TGV train station and between the Theme Parks and the Hotels.

 

14



 

The over-riding themes of Disney Village are “American Places” and “American Entertainment” in the spirit of a coast-to-coast trip from New York to Los Angeles. The largest of its facilities is an indoor arena seating more than 1,000 guests for dinner and a performance of Buffalo Bill’s Wild West Show. Other facilities include themed bars with music, themed restaurants, including Café Mickey, Planet Hollywood, Rainforest Café, Annette’s Diner, McDonald’s, and King Ludwig’s Castle, retail shops and a 15-screen multiplex Gaumont cinema with one of the largest screens in Europe. The Group manages certain of the facilities in the Disney Village, such as the Buffalo Bill’s Wild West Show, merchandise boutiques and bars. Certain restaurants are managed on behalf of the Group by Groupe Flo, a French catering company. In addition, certain of the facilities, such as the Planet Hollywood, McDonald’s, Rainforest Café and King Ludwig’s Castle restaurants, and the Gaumont cinema, are owned and managed by third parties.

 

A.3.1.3.      Food and beverage

 

The Group has 68 restaurants and bars throughout the Resort (four of which are operated by Groupe Flo on behalf of the Group). Restaurants are themed both in decoration and menu, based upon their location within the Resort, and offer guests a wide variety of dining experiences including quick service, cafeteria-style, table service (including convention catering), and sophisticated French cuisine. There are also food carts and kiosks located throughout the Resort which offer fast-food. The Group offers guests the option of a fixed-price menu in all of its table service restaurants. During fiscal years 2001 and 2002, the capacity of three Disney Village facilities was increased: Billy Bob’s Country Western Bar (+94 seats), The Steakhouse (+180 seats) and Annette’s Diner (+90 seats). In fiscal year 2003, the Rock’n Roll America was transformed into King Ludwig’s Castle, a 296-seat restaurant specializing in Bavarian cuisine.

 

A.3.1.4.      Merchandising

 

The Group’s merchandising facilities include 54 boutiques, 4 kiosks and a large number of mobile carts strategically located throughout the Resort, which mainly offer a wide range of Disney-themed goods. The product mix is constantly re-evaluated in an effort to better adapt to guest preferences and guest mix. New merchandise development focuses on Disney character products, such as the Mickey Sorcerer line and the Princesses line, which are popular with guests, and on more variety for the repeat guest. Other innovative merchandising options include photo locations at four attractions, Big Thunder Mountain, Space Mountain: Mission 2, Pirates of the Caribbean and Rock’n’Roller Coaster, which offer to its guests the opportunity to purchase candid photos taken of them during their ride. During fiscal year 2005, the Group completed major renovations at the Emporium and Constellations boutiques in Disneyland Park.

 

A.3.2.      Real Estate Development Segment

 

Real estate development segment

 

The Group’s activities include the planning and development of the 1,943 hectare site on which the Resort is located, in accordance with the Master Plan. Development activities include the conceptualization and planning of improvements and additions to the existing Resort, as well as other commercial and residential real estate projects to be located on the Resort Site, whether financed internally or through third-party partners.

 

The Group’s principal real estate development revenues are derived from conceptual design services related to third-party development projects on the Resort Site and from the sale of land development rights or from ground lease income from third-party developers. Such transactions not only provide a source of up-front cash inflows but also contribute to improving the potential of future Resort and real estate development projects and to increasing the potential local clientele for Disneyland Resort Paris.

 

The following table summarizes the financial impact of real estate development activities on the financial statements during the past five fiscal years:

 

 

(€ in millions)

 

2005

 

2004

 

2003

 

2002

 

2001

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Operating

 

28.7

 

11.8

 

23.6

 

27.3

 

37.2

 

Exceptional

 

 

 

0.1

 

 

0.4

 

Total Revenues

 

28.7

 

11.8

 

23.7

 

27.3

 

37.6

 

Costs and Expenses

 

(22.0

)

(10.1

)

(13.3

)

(15.2

)

(13.4

)

Net Income

 

6.7

 

1.7

 

10.4

 

12.1

 

24.2

 

 

15



 

Real estate development revenues are primarily related to the following projects:

 

The first phase of development between 1989 and 1997 was essentially devoted to the creation of the Resort destination. The second phase between 1998 and 2003 focused on the emergence of the development of an urban center located adjacent to the Resort (Val d’Europe). In addition to Walt Disney Studios Park, this second phase of development resulted in:

 

                  new infrastructure such as a second RER train station (Val d’Europe) on the Resort Site and a new interchange on the A4 motorway;

 

                  an International Shopping Mall at Val d’Europe, which comprises 103,000 square meters of retail space. The Group owns the land on which the mall is located and leases it to the developer under a 75-year ground lease;

 

                  development of the Val d’Europe town center, which currently includes residential, retail and commercial developments and the Elysées Val d’Europe hotel, which opened in June 2002 on land leased from the Group; and

 

                  a first phase of an international business park, which upon completion will comprise an area of 40 hectares, strategically positioned near the motorway. Construction and commercialization of the first nine hectares is currently being carried out by Arlington plc, a leading European developer of business parks.

 

Development plans for the coming years

 

A third phase of development was signed with the French Public Authorities on July 9, 2003 and covers the period 2004 through 2010. In this phase of development, the following is anticipated:

 

                  the expansion of Disney Village, the development of business tourism and additional hotel capacity, when needed;

 

                  the continuation of the Val d’Europe town center expansion (residential and office development);

 

                  the development of new public services such as the development of a high school (Lycée) in Serris with international sections, the development of an university center in Val d’Europe as well as a new module for the TGV station;

 

                  the continuation of the international business park development (second phase); and

 

                  other residential developments in the area surrounding the Val d’Europe golf course.

 

Hotel capacity developments

 

With the development of Walt Disney Studios Park, the Group also focused on the expansion of on-site Resort lodging capacity. A number of projects have been completed or are in various stages of progress with third-party international hotel developers/tour operators for the creation of additional hotels and vacation units. These projects have or will be constructed, owned and operated by third parties on land purchased from the Group or leased from the Group under long-term ground leases. In addition, the Group has and will earn conceptualization fees and other development service fees related to these transactions.

 

As a result of these projects, approximately 1,400 hotel/vacation units were opened on the Resort Site in fiscal year 2003, 457 units were opened in fiscal year 2004, and 41 units were opened in fiscal year 2005 bringing the total on-site capacity to approximately 7,800 total room units.

 

The agreements and projects currently in place will result in a total of approximately 300 hotel/vacation units being added on the Resort Site in the course of fiscal year 2006 (including 250 units at the Radisson SAS Hotel, which opened in December 2005).

 

Residential developments

 

The Group also sells land to third-party residential developers working on projects in the areas surrounding the Resort, including the commercially successful middle and high-end housing developments near the golf course in the communities of Magny-le-Hongre and Bailly-Romainvilliers.

 

To date, this residential development has been financed by third parties. The Group’s role has been limited to overseeing the master planning and architectural design of each development, and to selling to selected developers the land development rights necessary to realize the projects. The Group does not anticipate significant changes in its role for future residential development projects.

 

16



 

A.4.                          Marketing and Sales Strategy

 

A.4.1.                Marketing and Sales

 

Product Offer

 

Disneyland Paris Resort is the number one tourist destination in Europe in terms of guest visitation with a product offer that currently includes two theme parks, 7 themed Hotels (5,800 total rooms), two separate convention facilities (totaling 10,500 square meters), a dining, shopping and entertainment center and a 27-hole golf course.

 

With the opening of Walt Disney Studios Park, the Group’s package offers were modified to focus on 2-night, 3-day visits. During fiscal year 2003 the Group re-introduced a widely distributed 1-night, 2-day package to accommodate its guests desiring a shorter break. The Group’s Resort packages include “Park Hopper” tickets whereby guests can go back and forth freely between Disneyland Park and Walt Disney Studios Park, which were introduced during the course of fiscal year 2004.

 

Strategic Location

 

Disneyland Resort Paris is located approximately 32 kilometers (20 miles) east of Paris, France and benefits from access to a highly developed transportation network. In addition to service to Paris on the French suburban rail system, Disneyland Resort Paris has access to an extensive highway network that links it in less than one hour to both Paris and the two international airports serving the Paris area, and also makes it easily accessible to most other regions of France. In addition, the train station that is located on the Resort Site is one of the most active in France, with about forty high speed trains arriving per day and providing service to London in 3 hours by the Eurostar train, and to Brussels in 1 hour and 30 minutes and Amsterdam in 4 hours and 30 minutes by the Thalys train. The strategic geographic location allows access to a market of 17 million potential guests less than 2 hours away by road or rail transport and 320 million potential guests less than 2 hours away by plane.

 

 

17



 

Target Markets

 

The Group has six key proximate markets: France, the United Kingdom, Benelux (Belgium, Luxembourg, the Netherlands) Germany, Italy and Spain. Within these markets, its primary target market is families with children from 3-15 years old but secondary markets also include groups, young adults and convention planners. Each year, its success in marketing to specific countries and markets is impacted by a variety of strategic decisions, including its pricing policy and its package offers, as well as external factors such as the strength of local economies, exchange rates, cultural interests, and holiday and vacation timing. The introduction of the euro has eliminated exchange rate concerns in all key markets except the United Kingdom.

 

Based on internal surveys, during the past three Fiscal Years, the geographical breakdown of the Company’s theme park guest attendance is as follows:

 

 

 

2005

 

2004

 

2003

 

France

 

39

%

40

%

39

%

United Kingdom

 

20

%

19

%

22

%

Belgium, Luxembourg and the Netherlands

 

15

%

16

%

16

%

Spain

 

9

%

8

%

6

%

Germany

 

5

%

6

%

6

%

Italy

 

3

%

3

%

3

%

Other

 

9

%

8

%

8

%

Total

 

100

%

100

%

100

%

 

Distribution

 

The Group distributes its product offer through a wide variety of channels. Tour packages, which in many cases include transportation, lodging, food and theme park tickets are distributed through its call centers, on its internet site or through third-party distributors.

 

Theme park tickets are sold not only within these packages, but also through tourism intermediaries, directly at the gate and by various retail outlets (including the Disney Stores, FNAC, Virgin Megastores, Auchan, RATP, and at French, Belgian and Swiss railway stations, etc.).

 

Hotel bookings can be made by individual guests, either directly or through Euro Disney Vacances S.A.S., a French corporation (société par actions simplifiée), the Group’s in-house tour operator. The call centers, based at the Resort Site and in the United Kingdom, receive an average of approximately 6,100 calls per day from all over Europe. Apart from the United Kingdom, all other markets are serviced from the central reservation office at the Resort Site in Paris, with country-specific telephone numbers.

 

Euro Disney Vacances S.A.S. focuses on distribution of short-break packages, with offices in Paris and regional offices in Amsterdam, Brussels, Frankfurt, London, Milan and Madrid. These offices provide a local marketing presence and the necessary travel industry trade support. The Group also works with a select number of tour operators in its major markets.

 

In addition, the Group has established special travel alliance partnerships with the principal European transporters. Travel alliance agreements have been completed with Air France on a pan-European basis and with Eurostar and Thalys. These agreements provide carriers with the right to use Disneyland Resort Paris in their advertising campaigns and some with the right to special joint promotional packages. In return, the Group has the right to provide airline or train tickets in its short-break packages and to secure allotments. Guest visitation from the United Kingdom, Spain, Italy and Belgium reflects its relationship with these partners.

 

The Group’s internet site at www.disneylandparis.com is available in 7 languages and allows site visitors to learn about its Resort, order a brochure and make reservations. The Group is currently working on projects to expand its ability further to sell its products directly to guests on its internet site.

 

A.4.2.                Competition

 

The Group competes for guests throughout the year with theme parks as well as other European and international holiday destinations (including ski and seaside resorts) and with other leisure and entertainment activities (including museums and cultural activities) in the Paris region. The Group’s Hotels compete with other hotels on the Site and in the Paris region and convention centers all over Europe. The Resort also competes with major international tourist-attracting events and major sporting events, such as the soccer World Cup, the World Athletics Championships and the Olympic Games.

 

The theme park market in Europe has grown significantly over the last two decades. The largest European theme parks attracted approximately 38.8 million guests in 2005. The following table sets forth the attendance of each of these ten destinations.

 

18



 

Theme Parks in Europe(1)

(in millions)

 

 

 

 

 

Attendance

 

 

Theme Park

 

Location

 

2005

 

2004

 

2003

 

2002

 

Disneyland Resort Paris (fiscal year ended September 30)

 

France

 

12.3

 

12.4

 

12.4

 

13.1

 

Tivoli Gardens

 

Denmark

 

4.1

 

4.2

 

3.3

 

3.8

 

Europa Park

 

Germany

 

4.0

 

3.7

 

3.6

 

3.3

 

Port Aventura (formerly Universal’s Mediterrania)

 

Spain

 

3.8

 

3.5

 

3.0

 

3.2

 

De Efteling

 

Netherlands

 

3.3

 

3.3

 

3.2

 

3.0

 

Lieseberg

 

Sweden

 

3.2

 

3.0

 

2.7

 

3.1

 

Gardaland

 

Italy

 

3.1

 

3.1

 

3.0

 

2.9

 

Bakken

 

Denmark

 

2.6

 

2.5

 

2.7

 

2.5

 

Alton Towers

 

United Kingdom

 

2.4

 

2.4

 

2.5

 

2.5

 

 

 

 

 

38.8

 

38.1

 

36.4

 

37.4

 

 


(1)              Source: Amusement Business, PricewaterhouseCoopers, and individual company press releases. Excluding non-gated amusement parks.

 

A.5.                          Human Resources Management

 

To entertain its guests, the Group employed an average of approximately 12,250 employees during fiscal year 2005. The Group’s employees come from approximately 100 different countries and approximately 20% of them have been employed since Opening Day. The table below presents the average number of persons employed by the Group as well as the associated employee costs for each of the last five fiscal years:

 

Fiscal Year

 

Average Number
of 
Employees

 

Total Employee
Costs

 

 

 

 

 

(€ in millions)

 

2005

 

12,249

 

392.0

 

2004

 

12,162

 

366.0

 

2003

 

12,223

 

365.7

 

2002

 

12,467

 

352.0

 

2001

 

11,109

 

307.0

 

 

The seasonal nature of the business means that the need for employees is, to a certain extent, also seasonal. Accordingly, the Group has developed a system, used in both the theme parks and the Hotels, to optimize scheduling and automate labor exchange between operations. The system improves efficiency by automating both scheduling and the corresponding pay systems. In conjunction with this system, flexible working contracts have been negotiated with the employee representatives. Special part-time contracts such as four-day working weeks, 32-hour weeks or individually negotiated contracts, have been implemented. Over the past four fiscal years, many temporary jobs have been turned into flexible long-term contracts with Disneyland Resort Paris, facilitating job security and better training for employees. This new flexibility has helped management to better match the number of employees to the levels of customer demand.

 

In addition, based upon an assessment of current employment policies and practices within the Group, negotiations are in progress with employee labor representatives for the purpose of proposing a solution for certain difficulties in the implementation of required changes in the defined work hours, as well as the treatment of the working hours of management (cadre) employees. These negotiations are considered part of the normal evolution over time of the Group’s collective bargaining agreements with employee labor representatives, taking into account changes in the legal environment and the business activities of the Group.

 

An internal university provides permanent training for all employees in matters of service and entertainment. To improve quality, approximately 50,173 training days were provided to employees in 2005. To enhance the diversity of skills, training classes range from stress management to more specific subjects such as the welcoming of guests “Disney Style”. The Group is continually seeking to enhance its image as a “teaching” company, recognized for outstanding training techniques. As an example, in November 2000, the Group signed an agreement with certain of its labor unions for the creation of a new program aimed at providing employees with a new professional status called “Hôte d’Accueil Touristique” and thus a wider recognition of their skills on a national scale. Its objective is to develop the competencies of approximately 300 employees per year, over a period of fifteen months, through group training that permits them to earn four different professional competency certificates.

 

19



 

Seven French labor unions, the Confédération Générale du Travail (C.G.T.), the Confédération Française Démocratique du Travail (C.F.D.T.), the Confédération Française de l’EncadrementConfédération Générale des Cadres (C.F.E.- C.G.C.), Force Ouvrière (F.O.), the Confédération des Travailleurs Chrétiens (C.F.T.C.), the Syndicat Indépendant du Personnel Euro Disney (S.I.P.) and the Union Nationale des Syndicats Autonomes (U.N.S.A.), are represented at Disneyland Resort Paris. The Group complies with information and consultation requirements with respect to the unions and holds other periodic consultations with employee representatives. Since Opening day, there have been no significant strikes or work stoppages.

 

In June 1998, the French Government enacted a law to reduce the official work week from 39 to 35 hours. For companies that implemented the 35-hour week before July 1, 1999, the French government provided subsidies in the form of lower payroll taxes for each of the five years following the date of implementation and has since initiated other subsidy programs. The Group began operating on the basis of a 35-hour workweek on June 6, 1999 and is continuing to benefit from such subsidies, which are decreasing progressively each year.

 

The Group has made no distributions under its statutory profit sharing plan. However, since October 1, 1995, the Group has provided employees a supplemental profit sharing plan. Under the latest plan amendment signed March 10, 2003 applying to fiscal years 2003 and 2004, employees were eligible to receive a bonus of between 0.2% to 3.0% of their annual salary, if income before lease and net financial charges as presented in the Consolidated Financial Statements of the Group reached certain pre-defined thresholds.

 

The following table summarizes amounts paid under this profit sharing plan for each of the last five fiscal years:

 

 

 

Year ended September 30,

 

(€ in millions)

 

2005

 

2004

 

2003

 

2002

 

2001

 

Total Profit Sharing Expense

 

n/a

 

 

 

 

1.9

 

 

In addition, an employee savings plan exists in order to facilitate and encourage individual savings. The Company matches 30% of the first € 3,333 of each employee’s contribution to the plan each year.

 

In connection with the screening of new employees, criminal backgrounds were checked by an external firm to assist in ensuring the security of visitors to the Resort. This practice came to the attention of executive management of the Company in December 2004 and because it may constitute a violation under French law, has been suspended. While the Company might face fines or litigation based on these circumstances, the Company believes that these would not have a material adverse effect on its financial condition.

 

A.6.                          Significant Operating Contracts

 

A.6.1.                Agreements with French Governmental Authorities

 

On March 24, 1987, TWDC entered into a Master Agreement with the Republic of France, the Region of Ile-de-France, the Department of Seine-et-Marne, the EPA-Marne and the Suburban Paris Transportation Authority (“RATP”), for the development of the Resort and other various development phases for the 1,943 hectares of undeveloped land located 32 kilometers east of Paris in Marne-la-Vallée, France. The Group and certain other parties became parties to the Master Agreement after its signature by the original parties. In 1988, the EPA-France, which has responsibility for the development of the entirety of the Resort, was created pursuant to the Master Agreement, and became a party thereto.

 

The Master Agreement, as amended from time to time, determines the general outline of each phase of development as well as the legal and initial financial structure. It provides that loans with specific terms and conditions shall be granted. The significant components thereof are summarized below.

 

Development planning

 

The Master Agreement sets out a master plan for the development of the land and a general development program defining the type and size of facilities that the Group has the right to develop, subject to certain conditions, over a 30-year period ending no sooner than 2017. Before beginning any new development phase, the Group must provide EPA-France and several French public authorities with a proposal and other relevant information for approval. On the basis of the information provided, the Group and the authorities involved develop detailed development programs.

 

After having concluded negotiations for a detailed program for the second phase of Val d’Europe urban development on December 9, 1997, the Group and EPA-France concluded negotiations for a detailed program for the third phase of Val d’Europe urban development on July 9, 2003.

 

20



 

Financing of infrastructure

 

The Master Agreement specifies the infrastructure to be provided by the French authorities to the Resort. The relevant French public authorities have a continuing obligation to finance construction of the primary infrastructure, such as highway interchanges, primary roadways to access the Resort Site, water distribution and storage facilities, rain water and waste water treatment installations, waste treatment facilities, gas and electricity distribution systems, as well as telecommunication networks. The Master Agreement also specifies the terms and conditions of the Group’s contribution to the financing of certain infrastructure. Infrastructure provided by the French governmental authorities included the extension of the “A” line of the RER suburban rail link (which links Paris and its eastern and western suburbs to Disneyland Resort Paris with two stations), the construction of two interchanges linking the Resort directly to the A4 motorway, a TGV (high speed train) station linking the Resort to other major cities of Europe and the completion of an access road around the Resort Site.

 

Land rights

 

The Master Agreement provides for the right of the Group, subject to certain conditions, to acquire the land necessary for the expansion of Disneyland Resort Paris on the Marne-la-Vallée site. The exercise by the Group of these acquisition rights is subject to certain development deadlines, which if not met would result in the expiration of these rights. To date, all minimum development deadlines have been met and no land rights have expired unused. The next deadline for the expiration of land right options will be December 31, 2007. Management currently anticipates that this development deadline will be met and no options will expire.

 

In order to maintain the Group’s land acquisition rights for the remaining undeveloped land around the Resort (approximately 1,000 hectares), the Group is required to pay annual fees to EPA-France of approximately € 0.6 million.

 

Department of Seine-et-Marne tax guarantee

 

Pursuant to the Master Agreement, the Company, certain entities consolidated in the Company’s financial statements, and the Republic of France guaranteed a minimum level of tax revenues to the Department of Seine-et-Marne. If the Department’s tax revenues were less than the amount of charges borne by the Department for primary and secondary infrastructure during the period from 1992 to 2003 (which was the case), the Republic of France and the Group were each required to reimburse, in equal shares to the Department, the difference between the tax revenues collected and the charges borne, up to an aggregate amount of approximately € 45.0 million (after adjustment for inflation from 1986). Based upon the final assessment covering the entire period of the guarantee through December 31, 2003, the Group will be required to pay the Department € 20.3 million under the terms of the guarantee over a ten-year period in eight installments, the first of which is due in fiscal year 2007. This liability is recorded in the Group’s consolidated financial statements under “Accounts payable and other liabilities” as of September 30, 2005.

 

A.6.2.                Participant Agreements

 

The Group has entered into long-term participant agreements with companies that are leaders in their fields. 13 participant agreements with the following companies are currently in force: Coca-Cola, Esso, France Télécom and its subsidiary Orange, General Motors, Hasbro Inc., Hertz, Kellogg’s, Kodak, McDonald’s, Nestlé and its subsidiary Perrier-Vittel, and Visa. These participant agreements provide the Disneyland Resort Paris participants with the following rights in exchange for an individually negotiated fee: (i) a presence on the Resort Site through the sponsoring of one or more of Disneyland Park, Walt Disney Studios Park or Disney Village’s attractions, restaurants or other facilities; (ii) promotional and marketing rights with respect to the category of product that is covered by the participant agreement; and (iii) the status of privileged supplier of the Group. Each participant agreement terminates automatically in the event of termination of the License Agreement between The Walt Disney Company (Netherlands) B.V. and the Company (See Item 4 “Information of the Company - Section A.6.3. “Undertaking and Agreements with The Walt Disney Company and SubsidiariesLicense Agreement”).

 

A.6.3.                Undertakings and Agreements with The Walt Disney Company and Subsidiaries

 

Undertakings

 

In connection with the financing of Walt Disney Studios Park, TWDC has committed to the CDC to hold at least 16.67% of the common stock of the Company until 2027. In connection with the Restructuring, TWDC has agreed to hold directly or indirectly at least 39% of the common stock of the Company until 2016.

 

21



 

The Company and Euro Disneyland Participations S.A.S., an indirect wholly-owned subsidiary of TWDC (which is also a partner of the Phase IA Financing Company), have agreed to indemnify the partners of the Phase IA Financing Company as to all liabilities arising for the Company and the Phase IA Financing Company under the Master Agreement. To the extent the resources of the Company and the Phase IA Financing Company are insufficient to cover any such indemnity, TWDC, through a wholly-owned subsidiary, has agreed to indemnify the partners of the Phase IA Financing Company up to an additional € 76.2 million. In connection with the 1994 Financial Restructuring, EDA also undertook certain indemnification obligations in favor of the partners of the Phase IA Financing Company in respect of certain liabilities arising under the Master Agreement.  Excluding the amount relating to the tax guarantee given to the department of Seine-et-Marne (see above), the main remaining obligations to be executed by the Company under the Master Agreement consist in developing the Site. A non-fulfilment of these obligations for some parcels or others would result in a loss of the land rights given to the Company for these parcels.

 

Certain indirect, wholly owned subsidiaries of TWDC have liability as general partners of EDA, the Company’s operating subsidiary to which substantially all of the Company’s assets and liabilities were transferred as part of the Restructuring. These obligations consist notably in the full amount of the indebtedness relating to the Disneyland Park lease.

 

Development Agreement

 

Pursuant to the development agreement dated February 28, 1989 with the Group (the “Development Agreement”), Euro Disney S.A.S. provides and arranges for other subsidiaries of TWDC to provide a variety of technical and administrative services to the Company. These services are in addition to the services Euro Disney S.A.S. is required to provide as the Management Company and include, among other things, the development of conceptual designs for existing Theme Parks and future facilities and attractions, the manufacture and installation of specialized show elements, the implementation of specialized training for operating personnel, the preparation and updating of operations, maintenance and technical manuals, and the development of a master land use plan and real estate development strategy. Euro Disneyland Imagineering S.A.R.L., an indirect subsidiary of TWDC, was responsible for the management and administration of the overall design as well as the construction of the Theme Parks, including the design and procurement of the show-and-ride equipment. Most of the other facilities of the Resort were designed under its supervision with the administrative and technical assistance of affiliates of TWDC specialized in the development of hotels, resorts and other retail and commercial real estate projects in the United States, in accordance with the related servicing agreements.

 

The Group reimburses Euro Disney S.A.S. for all of its direct and indirect costs incurred in connection with the provision of services under the Development Agreement. These costs include, without limitation: (i) all operating expenses of Euro Disney S.A.S., including overhead and implicit funding costs; (ii) all costs incurred directly by Euro Disney S.A.S. or billed to it by third parties; and (iii) certain costs plus 10% billed to Euro Disney S.A.S. for services performed by TWDC or any of its affiliates. Such costs vary considerably from one fiscal year to another depending upon the projects under development.

 

The Development Agreement has an initial term of 30 years and can be renewed for up to three additional 10-year terms at the option of either party. The Development Agreement may be terminated by Euro Disney S.A.S. or by the Group under certain conditions, in particular in case of a change of control of the Company and of the Phase IA Financing Company, or in case either company were to be liquidated.

 

Phase II Development Fee

 

As part of the terms of the 1994 Financial Restructuring, the payment of a one-time development fee of € 182.9 million will be required upon the satisfaction of certain conditions, including conditions relating to Walt Disney Studios Park. In order to obtain the approval of the financing of Walt Disney Studios Park by the Group’s lenders and the lenders of the Financing Companies from which a substantial portion of the Group’s operating assets is leased, TWDC agreed in September 1999 to amend the terms for the development fee so that it will not be due unless and until future events occur, including the repayment of existing bank debt (as defined in the agreement) and the achievement of specified cash flow levels. The determination as to whether the specified cash flow levels have been achieved will be made on the date that the CDC loans for Walt Disney Studios Park will have been repaid and, in any case, no later than November 1, 2029.

 

License Agreement

 

Under the License Agreement, between The Walt Disney Company (Netherlands) B.V. and the Company, the Company was granted a license to use any present or future intellectual or industrial property rights of TWDC that may be incorporated into attractions and facilities designed from time to time by TWDC and made available to the Company. In addition, the License Agreement authorizes the sale, at the Resort, of merchandise incorporating or based on intellectual property rights owned by, or otherwise available to TWDC. This license granted to the Company is essential to the pursuit of its business activities, as such rights are indispensable to the continued operation of the Group. These intellectual property rights are registered in the name of TWDC, which is responsible for their protection in France. Royalties to be paid by the Company for the use of these rights were originally equal to:

 

(i)                                     10% of gross revenues (net of taxes) from rides, admissions and related fees (such as parking, tour guide and similar service fees) at all theme parks and attractions;

 

22



 

(ii)                                  5% of gross revenues (net of taxes) from merchandise, food and beverage sales in or adjacent to any theme park or other attraction, or in any other facility (with the exception of the Disneyland Hôtel), whose overall design concept is based predominantly on a TWDC theme;

 

(iii)                               10% of all fees paid by participants; and

 

 (iv)                           5% of gross revenues (net of taxes) from the exploitation of Hotel rooms and related revenues at certain Disney-themed accommodations. None of the Group’s currently existing Hotels at the Disneyland Resort Paris are considered Disney-themed as defined in the License Agreement, except the Disneyland Hotel, which is specifically excluded.

 

As part of the 1994 Financial Restructuring, TWDC amended the License Agreement and, as a result, no royalties were due for fiscal years 1994 through 1998. Starting in fiscal year 1999 until fiscal year 2003 (inclusive), the royalties payable by the Company were calculated at rates equal to 50% of the initial rates stated above. On March 28, 2003, The Walt Disney Company (Netherlands) B.V. agreed to conditionally waive royalties with respect to the last three quarters of fiscal year 2003 and to change the payment terms for fiscal year 2004 from quarterly to annually in arrears. Beginning in fiscal year 2004, the Company was responsible for the payment of 100% of the original royalty rates as presented above.

 

As part of the 2005 Restructuring, TWDC once again amended the license agreement to provide the Group the following unconditional and conditional payment deferrals (determined on an aggregate basis with management fees, which are described in Item 10 “Additional Information”, Section B.1. The Management Company (the Gérant)”):

 

                  € 25.0 million of management fees and royalties due in respect of each of fiscal years 2005 through 2009 were or will be unconditionally deferred and converted into a subordinated long-term debt obligation, bearing interest at an annual rate of 12-month EURIBOR (capitalized through January 1, 2017), payable after the Group’s senior debt and subordinated debt (other than the CDC Walt Disney Studios Park Loans) have been repaid, starting in 2023; and

 

                  additional management fees and, as necessary, royalties, in a maximum aggregate amount of € 25.0 million per year with respect to fiscal years 2007 through 2014, will be subject to a conditional deferral. For a full description of this deferral mechanism, see Item 5 “Operating and Financial Review and Prospects” – Section F.5. “Performance Indicator”.

 

The table below sets out the amount of royalties paid by the Company with respect to fiscal years 1992 through 2005, as stated in the Consolidated Financial Statements of the Group (in € millions):

 

Fiscal Year

 

Royalties

 

1992

 

30.0

 

1993

 

39.9

 

1994

 

(1)

1995

 

(1)

1996

 

(1)

1997

 

(1)

1998

 

(1)

1999

 

21.8

(2)

2000

 

21.5

(2)

2001

 

21.7

(2)

2002

 

23.9

(2)

2003

 

5.6

(2) (3)

2004

 

47.2

(4)

2005

 

34.4

(5)

 


(1)              In accordance with the terms of the 1994 Financial Restructuring, TWDC waived royalties in respect of fiscal years 1994 through 1998.

(2)              In accordance with the terms of the 1994 Financial Restructuring, from fiscal year 1999 through fiscal year 2003, inclusive the amount of royalties due by the Company was 50% of the amount originally provided for under the License Agreement.

(3)              In fiscal year 2003, €16.9 million of royalties were conditionally waived.

(4)              This amount was paid upon completion of the Share Capital Increase.

(5)              Total royalties expense recorded in fiscal year 2005 was € 48.7 million. Of this amount, € 34.4 million was paid in December 2005 and, in accordance with the terms of 2005 Restructuring, the payment of € 14.3 million was deferred and transferred to subordinated long-term borrowings. See Note 14(f) to the Consolidated Financial Statements in Item 17 “Financial Statements” for additional information.

 

The License Agreement gives TWDC substantial rights and discretion to approve, monitor and enforce the use of TWDC intellectual properties within the Resort. The License Agreement has an initial term of 30 years and can be renewed for up to three additional 10-year terms at the option of either party. The License Agreement may be terminated by TWDC upon the occurrence of certain events, including the removal or replacement of the Management Company (Gérant), a change in control, directly or indirectly, of the Company, certain affiliates and the Phase IA Financing Company, the liquidation of such companies, the imposition of laws or regulations that prohibit the Company, certain of its affiliates and the Phase IA Financing Company from performing any of their material obligations under the License Agreement or the imposition of taxes, duties or assessments that would materially impair the assets, surplus or distributable earnings of the Company or certain of its affiliates.

 

23



 

On March 28, 2003, the Group entered into agreements with the Management Company and The Walt Disney Company (Netherlands) B.V. to pay management fees and royalties on a fiscal year-end basis rather than quarterly for the second, third and fourth quarters of fiscal year 2003 and for all of fiscal year 2004. In addition, with respect to the last three quarters of fiscal year 2003, the combined royalties and management fees could not exceed the maximum amount that could be paid by the Company while maintaining compliance with the gross operating income covenant under certain of the Company’s debt agreements.

 

Any portion of the royalties or management fees not paid for fiscal year 2003 as a result of the foregoing may in the future become payable if and to the extent that income before lease and net financial charges excluding depreciation and amortization for any year from fiscal year 2004 through fiscal year 2008 were to exceed € 450 million.

 

B.                                    BUSINESS OVERVIEW

 

See above Section A. “History and Development of the Company and Business Overview”.

 

C.                                    ORGANISATIONAL STRUCTURE

 

C.1.                          Holding Company

 

Euro Disney S.C.A. (the “Company”)

 

Euro Disney S.C.A. is the holding company of the Group and is the listed company. The main asset of the Company is its investment in 82% of the share capital of its subsidiary, EDA. The general partner of the Company is EDL Participations S.A.S., a subsidiary of TWDC and the Management Company of the Company is Euro Disney S.A.S., also a subsidiary of TWDC.

 

The Company is a société en commandite par actions (“SCA” - similar in certain respects to a master limited partnership in the U.S.) organized under the laws of the Republic of France. The Company was originally organized and incorporated in Paris on December 17, 1985 under the name Mivas S.A., in the form of a French société anonyme (“SA” - similar to a U.S. corporation), which was closely held. In 1988, EDL Holding Company, a Delaware corporation wholly-owned by The Walt Disney Company and currently owner of approximately 39.8% of the shares of the Company’s common stock (40.6% at the end of fiscal year 2004), acquired 99% of the shares of Mivas S.A., whose corporate name was changed to Société d’Exploitation d’Euro Disneyland S.A. At an extraordinary meeting held in February 1989, the shareholders of Société d’Exploitation d’Euro Disneyland S.A. decided to modify its corporate form from an SA to an SCA and to change its corporate name to Euro Disneyland S.C.A. In November 1989, Euro Disneyland S.C.A. became a publicly held company as a result of a public offering of its common stock in France, the United Kingdom and Belgium. At the annual general meeting of shareholders on February 4, 1991, the Company’s present corporate name, Euro Disney S.C.A., was adopted.

 

C.2.                          Operating Companies

 

Euro Disney Associés S.C.A. (“EDA”)

 

Euro Disney Associés S.C.A. operates Disneyland Park and Walt Disney Studios Park, the Disneyland Hôtel, the Davy Crockett Ranch and the golf course and manages the real estate segment of the Group.

 

EDA is a direct subsidiary of the Company, which holds 82% of its share capital. The remaining 18% is held by two indirect subsidiaries of TWDC: EDL Corporation S.A.S. and Euro Disney Investments S.A.S. The general partners of EDA are Euro Disney Commandité S.A.S., a wholly-owned subsidiary of the Company (the controlling general partner), and Euro Disney Investments S.A.S. and EDL Corporation S.A.S., two indirectly wholly-owned subsidiaries of TWDC. The Management Company is Euro Disney S.A.S.

 

EDL Hôtels S.C.A.

 

EDL Hôtels S.C.A., a wholly-owned subsidiary of EDA, which operates all of the Hotels except the Disneyland Hôtel and the Davy Crockett Ranch, and also Disney Village, is structured as a French limited partnership (société en commandite par actions) governed by the same principles as EDA.

 

24



 

The general partner of EDL Hôtels S.C.A. is EDL Hôtels Participations S.A.S., a French simplified corporation (société par actions simplifiée) wholly-owned by the Company. The Management Company of EDL Hôtels S.C.A. is Euro Disney S.A.S., which is also the Management Company of the Company and EDA.

 

C.3.                          Financing Companies

 

Effective October 1, 2003 (first day of fiscal year 2004) the Financing Companies described below were included in the consolidated reporting group. See Item 5 “Operating and Financial Review and Prospects” – Section B.3. “Results of Operations for fiscal year 2004 compared with fiscal year 2003”.

 

Phase IA Financing Company

 

Euro Disneyland S.N.C. (the “Phase IA Financing Company”), a company incorporated as a French partnership (société en nom collectif) owns Disneyland Park and leases it to EDA.

 

The partners of the Phase IA Financing Company are various banks, financial institutions and companies holding an aggregate participation of 83%, and Euro Disneyland Participations S.A.S., a French simplified corporation (société par actions simplifiée) and an indirect wholly-owned subsidiary of TWDC, holding a participation of 17%. The Group has no ownership interest in the Phase IA Financing Company. The Company is jointly liable for a significant portion of the indebtedness of the Phase IA Financing Company (approximately two-thirds of the outstanding indebtedness due under the Phase IA Credit Facility, as described in Note 14b to the Consolidated Financial Statements in Item 17). The partners are subject to unlimited joint and several liabilities for the financial obligations of the Phase IA Financing Company. The banks that are parties to the Phase IA Credit Facility and the CDC with regards to CDC Prêts Participatifs, have effectively waived any recourse against the partners of the Phase IA Financing Company. The Phase IA Financing Company has generated tax losses due to interest charges during the construction period and depreciation expenses from Opening Day until December 31, 1996. The legal structure of the Phase IA Financing Company enabled its partners to take these French tax losses directly into their own accounts for French tax purposes. In return, the partners agreed to provide subordinated partner advances to the Phase IA Financing Company at an interest rate below the market rate.

 

The Phase IA Financing Company is managed by a management company, Société de Gérance d’Euro Disneyland S.A.S., a French simplified corporation (société par actions simplifiée) and an indirect wholly–owned subsidiary of TWDC.

 

Phase IB Financing Companies

 

Hôtel New York Associés S.N.C., Newport Bay Club Associés S.N.C., Sequoia Lodge Associés S.N.C., Cheyenne Hôtel Associés S.N.C., Hôtel Santa Fe Associés S.N.C. and Centre de Divertissements Associés S.N.C. are collectively the “Phase IB Financing Companies”, each of which: (i) rents the land on which the related hotel or Disney Village, as the case may be, is located, from EDL Hôtels S.C.A.; (ii) owns the related hotel or Disney Village, as the case may be and (iii) leases the related hotel or Disney Village, to EDL Hôtels S.C.A.; and (iv) is structured as a French limited partnership (société en nom collectif) governed by the same principles as the Phase IA Financing Company.

 

The partners of the Phase IB Financing Companies are various banks and financial institutions that are creditors of the Phase IB Financing Companies. The Group has no ownership interest in the Phase IB Financing Companies. EDL Hôtels S.C.A., an affiliate of the Company has guaranteed all the obligations of the Phase IB Financing Companies with respect to the loans extended by their lenders and partners. The partners of the Phase IB Financing Companies are normally subject to unlimited joint and several liabilities for the obligations of the Phase IB Financing Companies. However, the creditors of the Phase IB Financing Companies have waived any recourse against the partners of the Phase IB Financing Companies. The Phase IB Financing Companies have consistently generated tax losses primarily due to interest charges during the construction period and depreciation expense from Opening Day until December 31, 1995 with the exception of Centre de Divertissements Associés S.N.C., which generated tax losses until December 31, 1998. The legal structure of the Phase IB Financing Companies enabled their partners to take these French tax losses directly into their own accounts for French tax purposes. In return, the partners agreed to provide subordinated partner advances to the Phase IB Financing Companies at an interest rate below the market rate.

 

Pursuant to the respective by-laws of the Phase IB Financing Companies, the Management Company of each of the Phase IB Financing Companies is EDL Services S.A.S., a wholly–owned subsidiary of EDA.

 

Centre de Congrès Newport S.A.S.

 

Centre de Congrès Newport S.A.S., an indirect wholly-owned subsidiary of TWDC, entered into a ground lease with EDL Hôtels S.C.A. pursuant to which it financed and acquired the Newport Bay Club Convention Center and, when completed, leased it back to EDL Hôtels S.C.A.. EDL Hôtels S.C.A. has an option to repurchase such assets. See also Notes 1-2 and 25-1 to the Consolidated Financial Statements in Item 17 “Financial Statements”.

 

25



 

C.4.         Ownership Structure of the Group

 

The Group structure as of the date of this annual report on form 20-F is illustrated in the diagram set forth below.

 

 

26



 

D.            PROPERTY, PLANT AND EQUIPMENT

 

The Group’s resort-related facilities are comprised of the two theme parks (including related support buildings), the seven themed Hotels, Disney Village and the Golf Course. The Group leases all of these facilities except Walt Disney Studios Park, Disneyland Hôtel, Davy Crockett Ranch and the golf course, which the Group owns. See Item 4 “Information on the Company -Section C.3. “Financing Companies” for additional information on the Group’s leases. These facilities are all located in Marne-la-Vallée, France. The Company believes that the Group’s facilities are suitable and adequate for the conduct of its business.

 

The Master Agreement provides the Company with the right, subject to certain conditions, to acquire the land necessary for the realization of the Resort and the general availability of the 1,943 hectares Marne-la-Vallée site. The existing Resort facilities and related developments in progress, plus all associated public and private infrastructure works, are located on approximately 1,000 hectares of this land.

 

For a description of the Group’s capital expenditures during the past three fiscal years, See Item 5 “Operating and Financial Review and Prospects” – Section C “Liquidity and Capital Resources — Capital Investment”.

 

ITEM 5.                  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes thereto included in Item 17 “Financial Statements” herein and Item 3 “Key Information” – Section D “Risk Factors”. The Group’s Consolidated Financial Statements have been prepared in accordance with French GAAP, which differ in certain respects from U.S. GAAP. For a discussion of the principal differences between French GAAP and U.S. GAAP as they relate to the consolidated results of operations and financial position, See Note 29 to the Consolidated Financial Statements in Item 17 “Financial Statements”.

 

A.            GENERAL

 

Revenues increased 3% to a record € 1,076.0 million in fiscal year 2005, reflecting increased spending by theme park visitors and higher real estate development revenues, partially offset by reduced hotel guest spending. Hotel occupancy reached 80.7% and theme park attendance was 12.3 million.

 

Net loss (after allocation to minority interests) decreased by € 50.3 million from € 145.2 million in fiscal year 2004 to
€ 94.9 million in fiscal year 2005, primarily as a result of the Restructuring and reduced exceptional charges. Exceptional charges decreased in fiscal year 2005 due to a one-time gain from forgiveness of debt by TWDC in connection with the Restructuring compared to the prior-year write-off of equipment related to an attraction that is being replaced with Buzz Lightyear Laser Blast. Minority interest in losses increased in the current year due to TWDC’s increased investment in EDA under the terms of the Restructuring.

 

The Group’s loss before financial charges increased from € 23.9 million in fiscal year 2004 to € 26.9 million, reflecting increased operating costs, primarily due to increased labor costs, partially offset by revenue growth. Increased labor costs primarily reflected an increase in wages, including the impact of an increased French minimum wage and a reduction in subsidies related to the early implementation of the 35-hour work-week.

 

The Group generated € 18.4 million of operating cash flow in fiscal year 2005 despite the net loss, since a portion of the Group’s operating expenses consist of non-cash depreciation and amortization charges. In comparison to the prior year, operating cash flow decreased € 106.2 million, reflecting the cash payment of fiscal year 2004 royalties and management fees, as well as the payment of 2004 accrued interest on the CDC loans for Walt Disney Studios, both of which had been contractually deferred to fiscal year 2005.

 

27



 

B.            RESULTS OF OPERATIONS

 

FISCAL YEAR 2005 FINANCIAL RESULTS

 

CONSOLIDATED SUMMARY STATEMENTS OF INCOME

 

 

 

Fiscal Year

 

Fiscal Year

 

Variance

 

(€ in millions)

 

2005

 

2004

 

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

1,076.0

 

1,048.0

 

28.0

 

3

%

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

(1,102.9

)

(1,071.9

)

(31.0

)

(3

)%

 

 

 

 

 

 

 

 

 

 

Loss before Financial Charges

 

(26.9

)

(23.9

)

(3.0

)

(13

)%

 

 

 

 

 

 

 

 

 

 

Net financial charges

 

(87.9

)

(105.7

)

17.8

 

17

%

 

 

 

 

 

 

 

 

 

 

Loss before Exceptional Items

 

(114.8

)

(129.6

)

14.8

 

11

%

 

 

 

 

 

 

 

 

 

 

Exceptional items, net

 

0.4

 

(22.3

)

22.7

 

102

%

 

 

 

 

 

 

 

 

 

 

Income tax

 

(1.1

)

 

(1.1

)

n/m

 

 

 

 

 

 

 

 

 

 

 

Net Loss (before Allocation to Minority Interests)

 

(115.5

)

(151.9

)

36.4

 

24

%

 

 

 

 

 

 

 

 

 

 

Minority interests

 

20.6

 

6.7

 

13.9

 

207

%

 

 

 

 

 

 

 

 

 

 

Net Loss (after Allocation to Minority Interests)

 

(94.9

)

(145.2

)

50.3

 

35

%

 

SEGMENT ANALYSIS

 

 

 

Fiscal Year

 

Variance

 

(€ in millions)

 

2005

 

2004

 

Amount

 

%

 

Resort Segment

 

(33.6

)

(25.6

)

(8.0

)

(31

)%

Real Estate Segment

 

6.7

 

1.7

 

5.0

 

294

%

Loss before Financial Charges

 

(26.9

)

(23.9

)

(3.0

)

(13

)%

 

B.1.         Operating Statistics

 

The following table provides information regarding the key operating indicators of the Group:

 

 

 

Fiscal Year

 

Variance

 

 

 

2005

 

2004

 

Amount

 

%

 

Theme Park attendance (in millions) (1)

 

12.3

 

12.4

 

(0.1

)

(1

)%

Theme Park spending per guest (2) (in €)

 

44.3

 

42.7

 

1.6

 

4

%

Hotel occupancy rate (3)

 

80.7

%

80.5

%

 

 

0.2ppt

 

Hotel total spending per room (4)  (in €)

 

179.1

 

186.6

 

(7.5

)

(4

)%

 


(1)     Theme Park attendance is recorded on a “first click” basis, meaning that a person visiting both parks in a single day is counted as only one visitor.

(2)       Average daily admission price and spending on food, beverage and merchandise and other services sold in the Theme Parks, excluding VAT.

(3)     Average daily rooms sold as a percentage of total room inventory (total room inventory is approximately 5,800 rooms).

(4)     Average daily room price and spending on food, beverage and merchandise and other services sold in hotels, excluding VAT.

 

Theme Park spending per guest and hotel spending per room were affected by a fiscal year 2005 change in the allocation of total vacation package pricing between hotel rooms and theme park admissions, with the greater allocation being made to theme park admissions.

 

28



 

B.2.         Results of Operations for fiscal year 2005 compared with fiscal year 2004

 

Revenues

 

Revenues of the Group were generated from the following sources:

 

 

 

Fiscal Year

 

Variance

 

(€ in millions)

 

2005

 

2004

 

Amount

 

%

 

Theme Parks

 

549.7

 

531.3

 

18.4

 

3

%

Hotels and Disney Village

 

394.6

 

405.2

 

(10.6

)

(3

)%

Other

 

103.0

 

99.7

 

3.3

 

3

%

Resort Segment

 

1,047.3

 

1,036.2

 

11.1

 

1

%

 

 

 

 

 

 

 

 

 

 

Real Estate Segment

 

28.7

 

11.8

 

16.9

 

143

%

Total Revenues

 

1,076.0

 

1,048.0

 

28.0

 

3

%

 

Theme Park revenues increased 3 % to € 549.7 million from € 531.3 million in the prior year, as a result of higher per guest spending. The revenue growth reflected increased admissions, merchandise and food and beverage spending. Admissions spending was favorably impacted by modest changes in admissions pricing, including an increased allocation of total revenues from resort vacation packages.

 

Hotels and Disney Village revenues decreased 3 % to € 394.6 million from € 405.2 million in the prior year, reflecting a 4% decrease in average daily guest spending per room. The reduction in average daily guest spending per room includes the impact of a change in the allocation of resort vacation package pricing between hotel rooms and theme park admissions.

 

Other Revenues (which primarily include participant sponsorships, transportation and other travel services sold to guests) increased over the prior year by € 3.3 million to € 103.0 million, reflecting higher transportation and other travel services sold to guests, partially offset by slightly lower participant sponsorship revenues.

 

Real Estate Segment revenues increased from the prior year due to planned land sales for both residential and commercial purposes, including sales of land to third parties for housing near the Company’s golf course and additions to existing time share and shopping centre properties.

 

Costs and Expenses

 

Costs and expenses of the Group were composed of:

 

 

 

Fiscal Year

 

Variance

 

(€ in millions)

 

2005

 

2004 (1)

 

Amount

 

%

 

Direct operating costs (2)

 

697.6

 

663.5

 

34.1

 

5

%

Marketing and sales expenses

 

104.0

 

112.6

 

(8.6

)

(8

)%

General and administrative expenses

 

97.9

 

91.3

 

6.6

 

7

%

Depreciation and amortization

 

144.0

 

146.8

 

(2.8

)

(2

)%

Royalties and management fees

 

59.4

 

57.7

 

1.7

 

3

%

Total Costs and Expenses

 

1,102.9

 

1,071.9

 

31.0

 

3

%

 


(1)       Certain reclassifications* have been made to the fiscal year 2004 comparative amounts in order to conform to the fiscal year 2005 presentation.

(2)       Includes operating wages and employee benefits, cost of sales for merchandise and food and beverage, transportation services and real estate land sales and other costs such as utilities, maintenance, renovation expenses, insurance and operating taxes.

 

Costs and expenses for fiscal year 2005 increased 3%, reflecting higher direct operating costs and general and administrative expenses, partially offset by reduced marketing and sales costs. Direct operating costs increased € 34.1 million from the prior year, primarily reflecting the impact of higher labor costs and increased real estate cost of sales due to increased land sales, partially offset by a one-time benefit to business taxes due to the Restructuring.

 

General and administrative expenses were also higher due to increased labor costs. Marketing and sales expenses decreased € 8.6 million, reflecting reduced media spending primarily in the first half of fiscal year 2005.

 


*         These reclassifications are not significant.

 

29



 

Increased labor costs reflected an increase in wages, including the impact of an increased French minimum wage and a reduction in subsidies related to the early implementation of the 35-hour workweek. In fiscal year 2005, labor costs and related costs totaled € 427.3 million, an increase of 7% over the fiscal year 2004 amount of € 398.4 million.

 

Excluding labor costs and the cost of real estate sales, total operating costs decreased from the prior year by € 8.7 million, or 1%.

 

Net Financial Charges

 

Net financial charges were composed of:

 

 

 

Fiscal Year

 

Variance

 

(€ in millions)

 

2005

 

2004

 

Amount

 

%

 

 Financial income

 

3.9

 

2.8

 

1.1

 

39

%

 Financial expense

 

(91.8

)

(108.5

)

16.7

 

15

%

 Net Financial Charges

 

(87.9

)

(105.7

)

17.8

 

17

%

 

Net financial charges decreased € 17.8 million to € 87.9 million in fiscal year 2005. This decrease was primarily attributable to the conversion of debt owed by EDA to subsidiaries of TWDC into equity of EDA as part of the Company’s Restructuring and reduced effective interest expense.

 

Exceptional Income (Loss), net

 

Exceptional Items, Net improved by € 22.7 million compared to the prior year, reflecting a € 10.0 million gain relating to the portion of the line of credit from TWDC that was forgiven as part of the Company’s Restructuring and a € 9.2 million loss related to the write-off of equipment within Visionarium, an attraction in Disneyland Park, which was closed in fiscal year 2004 so that the building can house Buzz Lightyear Laser Blast, expected to open in April of 2006. The Group incurred costs in fiscal years 2005 and 2004 associated with the restructuring of the Group’s debt of € 8.6 million and € 12.6 million, respectively.

 

Income Tax Expense

 

Income tax expense reflects non-recurring taxes as a result of changes in the Group’s tax consolidation arising from the Restructuring. The Group’s unused tax loss carry-forwards approximate € 1 billion at September 30, 2005, and are available to be carried forward indefinitely to offset the tax effect of future income.

 

Minority Interests

 

Minority interests reflect the ownership of third parties in the financial results of the Company’s subsidiaries. For fiscal year 2004, the minority interests reflected the third-party ownership of the consolidated financing companies. For fiscal year 2005, minority interests reflect the ownership of the Financing Companies as well as the impact of the Restructuring.

 

As a result of the Company’s legal and financial restructuring, substantially all of the Company’s assets and liabilities were contributed to an 82% owned subsidiary, EDA. Subsidiaries of TWDC own the remaining 18% of EDA. The Restructuring was made effective October 1, 2004 in the Company’s consolidated accounts. Accordingly, the income statement reflects an allocation of 18% of the losses from EDA’s consolidated net results for the fiscal year 2005 to TWDC subsidiaries as the minority interests of EDA.

 

B.3.         Results of Operations for fiscal year 2004 compared with fiscal year 2003

 

Introduction

 

In fiscal year 2004, revenues increased slightly to total € 1,048.0 million, as increased spending by theme park visitors and Hotel guests was mostly offset by lower hotel occupancy rates, as well as an anticipated decline in real estate development revenues. Attendance at the theme parks in fiscal year 2004 remained stable compared to the prior year at approximately 12.4 million visitors.

 

30



 

The Group incurred an operating loss of € 23.9 million in fiscal year 2004, which was € 56.0 million below the € 32.1 million of pro-forma operating income recorded in the prior year (the pro-forma presentation reflects a change in accounting method that significantly affected the scope of consolidation in fiscal year 2004, as discussed below). The increased loss was primarily due to the resumption of accruing royalties at full rates and management fees, following the waiver by TWDC of royalties and management fees in the last three quarters of fiscal year 2003. Higher marketing and sales spending partially offset by reduced general and administrative expenses also affected the operating margin. Net loss increased from € 58.3 million (on a pro-forma basis, reflecting the change in accounting principle referred to below) in fiscal year 2003 to € 145.2 million in fiscal year 2004, as a result of the lower operating margin as well as significant exceptional items.

 

The Group generated €124.6 million of operating cash flow in fiscal year 2004 despite the net loss, since a portion of the Group’s operating expenses consist of non-cash depreciation and amortization charges, and the Group’s working capital requirements decreased as the increase in accrued royalties and management fees for fiscal year 2004 (which were not payable until fiscal year 2005), as well as accrued interest on the CDC loans for Walt Disney Studios Park (which was deferred under the terms of the relevant agreement), did not result in cash outlays. Under the terms of the Restructuring, the royalties and management fees for fiscal year 2004 were paid when the Restructuring was implemented.

 

Change in Accounting Principle

 

Effective October 1, 2003 (the first day of fiscal year 2004), the Group adopted new accounting rules mandated by Article 133 of the French Financial Security Law (Loi de Sécurité Financière) with respect to the consolidation of special purpose financing companies that are not legally controlled by the Group. Under these new rules, the financing companies from which the Group leases a substantial portion of its operating assets (the “Financing Companies”), have been included in the Group’s consolidated financial statements. Previously, lease payments to the Financing Companies were recorded as incurred, along with disclosure by the Group of the leasing arrangements, contractual commitments for lease rentals, and the related debt obligations of the Financing Companies. As a result of the application of new consolidation rules, these operating assets are now consolidated, resulting in increased assets and borrowings. The Group’s receivables from the Financing Companies have been eliminated in consolidation. In addition, shareholders’ equity has been reduced, reflecting primarily past depreciation charges related to the operating assets owned by the Financing Companies, which exceeded the lease payments expensed for the same periods. The accounting change also affects the classification and amount of costs on the income statement, with increased operating expenses and depreciation and reduced lease rental expense (consequently, the income statement line item formerly entitled “lease and net financial charges” has been renamed “net financial charges”). The accounting change does not affect the legal structure, financial position or cash flows of the members of the consolidated Group.

 

To enhance comparability, the Group has provided financial information on a pro-forma basis in addition to its as-reported results. The pro-forma information has been prepared as if the fiscal year 2004 change in accounting principle discussed above was in effect during all of fiscal year 2003 (See also Notes 2 and 29 to the Consolidated Financial Statements in Item 17 “Financial Statements”). The following table summarizes certain financial data derived from the Group’s historical and pro-forma consolidated financial statements.

 

31



 

CONSOLIDATED CONDENSED PRO-FORMA STATEMENTS OF INCOME

 

 

 

 

 

Fiscal Year 2003

 

Fiscal Year 2004/
Pro-Forma 2003

 

 

 

Fiscal Year
2004

 

Pro-
Forma

 

Accounting
Change

 

As
Reported

 

Variance

 

(€ in millions)

 

Amount

 

Percent

 

Revenues

 

1,048.0

 

1,046.8

 

(0.7

)

1,047.5

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

(1,071.9

)

(1,014.7

)

(99.6

)

(915.1

)

(57.2

)

(6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) before Financial Charges

 

(23.9

)

32.1

 

(100.3

)

132.4

 

(56.0

)

(175

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Financial Charges

 

(105.7

)

(111.2

)

89.1

 

(200.3

)

5.5

 

5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before Exceptional Items

 

(129.6

)

(79.1

)

(11.2

)

(67.9

)

(50.5

)

(64

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exceptional gain (loss), net

 

(22.3

)

12.0

 

0.1

 

11.9

 

(34.3

)

(286

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interests

 

6.7

 

8.8

 

8.8

 

 

(2.1

)

(24

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

(145.2

)

(58.3

)

(2.3

)

(56.0

)

(86.9

)

(149

)%

 

Certain reclassifications have been made to the 2003 comparative amounts in order to conform to the 2004 presentation.

 

Revenues

 

Revenues of the Group were generated from the following sources:

 

 

 

 

 

Fiscal Year 2003

 

Fiscal Year 2004/
Pro-Forma 2003

 

 

 

Fiscal Year
2004

 

Pro-
Forma

 

Accounting
Change

 

As-
Reported

 

Variance

 

(€ in millions)

 

Amount

 

Percent

 

Theme Parks

 

531.3

 

508.5

 

 

508.5

 

22.8

 

5

%

Hotels and Disney Village

 

405.2

 

416.7

 

 

416.7

 

(11.5

)

(3

)%

Other

 

99.7

 

98.0

 

(0.7

)

98.7

 

1.7

 

2

%

Resort Segment

 

1,036.2

 

1,023.2

 

(0.7

)

1,023.9

 

13.0

 

1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Development Segment

 

11.8

 

23.6

 

 

23.6

 

(11.8

)

(50

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

1,048.0

 

1,046.8

 

(0.7

)

1,047.5

 

1.2

 

 

 

Theme park revenues increased 5 % to € 531.3 million in fiscal year 2004 from € 508.5 million in the prior year as a result of higher per guest spending, coupled with stable attendance. The higher spending levels reflected three principal factors: an increase in average park admission prices, the introduction of the “park hopper” ticket (which permits guests to visit both theme parks for a single price that is € 9 higher than the single park price) and the elimination of low season reduced admission pricing. Merchandise and food and beverage revenues in the Theme Parks also increased.

 

Hotel and Disney Village revenues decreased 3 % to € 405.2 million in fiscal year 2004 from € 416.7 million in the prior year, reflecting the decrease in hotel occupancy due to increased competition from new on-site capacity at hotels owned and operated by third parties. These hotels are part of the Group’s overall development plan for the Resort, designed to increase overall hotel capacity to accommodate more visitors of the theme parks without requiring the Group itself to utilize capital to construct additional hotels. However, due to the soft demand environment, these new hotels had an adverse effect on occupancy at the Group’s Hotels. The impact on revenues of the decline in occupancy was partially offset by a 2 % increase in average daily guest spending per room.

 

Other revenues (which primarily include participant sponsorships, transportation and other travel services sold to guests) increased in fiscal year 2004 over the pro-forma prior year by € 1.7 million to € 99.7 million, reflecting an increase in transportation and other travel services sold to guests, partially offset by slightly lower participant sponsorship revenues.

 

32



 

Real Estate Development revenues decreased by € 11.8 million in fiscal year 2004 compared to the prior year, reflecting a planned reduction in development projects. Real Estate Development revenues in fiscal year 2004 included primarily commercial and residential land sale transactions. In addition, revenues included ground lease income and fees for services provided to third-party developers that have signed contracts to either purchase or lease land on the Resort Site for development. Given the successful completion of most of the additional hotel capacity projects in fiscal year 2003, the decrease reflected this planned reduction in development activity.

 

Costs and expenses

 

Costs and expenses of the Group were composed of:

 

 

 

 

 

Fiscal Year 2003

 

Fiscal Year 2004/
Pro-Forma 2003

 

 

 

Fiscal Year
2004

 

Pro-
Forma

 

Accounting
Change

 

As-
Reported

 

Variance

 

(€ in millions)

 

Amount

 

Percent

 

Direct operating costs (1)

 

664.8

 

655.2

 

15.7

 

639.5

 

9.6

 

2

%

Marketing and sales expenses

 

112.6

 

105.2

 

 

105.2

 

7.4

 

7

%

General and administrative expenses

 

90.0

 

96.7

 

 

96.7

 

(6.7

)

(7

)%

Depreciation and amortization

 

146.8

 

149.5

 

83.9

 

65.6

 

(2.7

)

(2

)%

Royalties and management fees

 

57.7

 

8.1

 

 

8.1

 

49.6

 

612

%

Total Costs and Expenses

 

1,071.9

 

1,014.7

 

99.6

 

915.1

 

57.2

 

6

%

 


(1)       Includes operating wages and employee benefits, cost of sales for merchandise and food and beverage, transportation services and real estate land sales and other costs such as utilities, maintenance, renovation expenses, insurance and operating taxes.

 

Direct operating costs increased € 9.6 million from the pro-forma prior year primarily reflecting the impact of higher labor costs. Marketing and sales expenses during fiscal year 2004 increased € 7.4 million from the prior year, reflecting increased advertising during the second half of the fiscal year, associated largely with the promotion of the popular new show, The Legend of the Lion King. General and administrative expenses incurred during fiscal year 2004 decreased € 6.7 million from the prior year, reflecting decreased labor expenses.

 

Royalties and management fees totaled € 57.7 million in fiscal year 2004, € 49.6 million higher than the previous year, reflecting the October 1, 2003 (first day of fiscal year 2004) resumption of royalties at full rates and management fees subsequent to the waiver by TWDC of these fees for the last three quarters of fiscal year 2003. In fiscal year 2004, royalties totaled € 47.2 million after reinstatement to full contractual rates (fiscal year 1999 through 2003 rates were reduced to half of their original levels as a result of the 1994 financial restructuring). The fiscal year 2004 charge reflects the accrual of the royalties and management fees for the year, although cash payment of these amounts was not due until fiscal year 2005.

 

Net Financial charges

 

Net financial charges were composed of:

 

 

 

 

 

Fiscal Year 2003

 

Fiscal Year 2004/
Pro-Forma 2003

 

 

 

Fiscal Year
2004

 

Pro-
Forma

 

Accounting
Change

 

As-
Reported

 

Variance

 

(€ in millions)

 

Amount

 

Percent

 

Lease rental expense

 

 

 

193.8

 

(193.8

)

 

 

Financial income

 

2.8

 

3.8

 

(45.1

)

48.9

 

(1.0

)

(26

)%

Financial expense

 

(108.5

)

(115.0

)

(59.6

)

(55.4

)

6.5

 

6

%

Net Financial Charges

 

(105.7

)

(111.2

)

89.1

 

(200.3

)

5.5

 

(5

)%

 

Lease rental expense represents payments under financial lease arrangements with the consolidated Financing Companies and approximates the related debt service payments and operating expenses of such Financing Companies. Upon consolidation of the Financing Companies, this expense is eliminated.

 

Financial income, before the consolidation of the Financing Companies, was principally composed of interest income earned on long-term loans provided to the Financing Companies (See Note 4 to the Consolidated Financial Statements in Item 17 “Financial Statements”) and interest income on cash and short-term investments, as well as net gains arising from foreign currency transactions. Since the consolidation of the Financing Companies, the interest income earned on the long-term loans to the Financing Companies is eliminated. Financial expense is principally composed of interest charges on the long-term borrowings of the Group (including the Financing Companies under the new consolidation method) and the net impact of interest rate hedging transactions.

 

33



 

Net financial charges decreased € 5.5 million to € 105.7 million in fiscal year 2004. This decrease was primarily attributable to the impact of lower variable interest rates and related hedging costs, partially offset by the resumption of full interest charges following the end of the interest waiver provisions of the 1994 financial restructuring as of September 30, 2003.

 

Exceptional Income (Loss), net

 

The fiscal year 2004 exceptional loss of € 22.3 million primarily includes € 12.6 million of fees and expenses incurred in connection with the Restructuring negotiations and a € 9.2 million loss related to the write-off of equipment within Visionarium, an attraction in Disneyland Park, which has been closed so that the building can house a new attraction expected to open in fiscal year 2006.

 

Exceptional income totaled € 11.9 million in fiscal year 2003. The Group sold three apartment developments used to provide housing to employees within close proximity to the site. The transaction generated € 34.1 million in net sale proceeds and a gain of € 11.0 million. The Group continues to operate the apartment developments under 9 to 14-year leases with the buyers, with the rental expense constituting part of the Group’s operating expenses.

 

Minority Interests

 

Minority interests reflect the owernship of third parties in the financial results of the Company's subsidiaries. For fiscal year 2004, the minority interests reflected the third-party ownership of the consolidated financing companies. For fiscal year 2005, minority interests reflect the ownership of the financing companies as well as the impact of the Restructuring.

 

As a result of the Company’s legal and financial restructuring substantially all of the Company’s assets and liabilities were contributed to an 82% owned subsidiary, EDA. Subsidiaries of TWDC own the remaining 18% of EDA. The Restructuring was made effective October 1, 2004 in the Company’s consolidated accounts. Accordingly, the income statement reflects an allocation of 18% of the losses from EDA’s consolidated net results for the fiscal year 2005 to TWDC subsidiaries as the minority interests of EDA.

 

C.            LIQUIDITY AND CAPITAL RESOURCES

 

Capital Investment

 

 

 

Fiscal Year

 

(€ in millions)

 

2005

 

2004

 

2003

 

 Resort Segment

 

94.8

 

28.7

 

23.0

 

 Real Estate Segment

 

 

0.6

 

1.8

 

 Capital Investment

 

94.8

 

29.3

 

24.8

 

 

Note: The figures presented are the amounts recorded in the Consolidated Financial Statements on an accrual basis.

 

Resort segment capital expenditures included primarily expenditures associated with the Group’s € 240 million multi-year development plan approved during the Restructuring. During fiscal year 2005, € 39.4 million was spent on the development and construction of theme park improvements including Buzz Lightyear Laser Blast attraction for Disneyland Park, Toon Studios and Tower of Terror for Walt Disney Studios. In addition, current year expenditures included the completion of Space Mountain: Mission 2 and Wishes, which were the highlight of this summer’s celebration of the 50th anniversary of the opening of Disneyland Park in California and other improvements to the existing asset base.

 

Fiscal year 2004 Resort segment capital expenditures included primarily the costs of developing and staging the new Legend of The Lion King stage show, which is presented several times daily on the Videopolis stage in the Disneyland Park, improvements to the Halloween and Christmas festivals and various other improvements to the existing asset base.

 

Cash Flows and Liquidity

 

 As presented in the Group’s Consolidated Statements of Cash Flows, cash and cash equivalents increased by € 156.4 million from the prior year to € 287.7 million as of September 30, 2005. Specifically, this increase in cash and cash equivalents resulted from:

 

- Cash Flows from Operating Activities

 

 

18.4

 

million

- Cash Flows used in Investing Activities

 

 

(72.7

)

million

- Cash Flows from Financing Activities

 

 

210.7

 

million

 

Cash flows generated by operating activities decreased € 106.2 million from the prior year to € 18.4 million, reflecting payment of fiscal year 2004 royalties and management fees in fiscal year 2005 and increased interest payments.

 

Cash flows used in investing activities totaled € 72.7 million reflecting capital investment expenditures related primarily to the projects discussed above under “Capital Investment”.

 

Cash flows generated by financing activities totaled € 210.7 million reflecting € 253.3 million of gross proceeds from the Company’s February 2005 equity rights offering, net of € 17.4 million of commissions and other equity raising costs paid to third-party financial institutions and advisors. Additionally, the Group repaid € 114.8 million in debt, including € 100.6 million paid through the transfer of debt security deposits held by the Group’s lenders and € 5.0 million paid on the Company’s previous line of credit with TWDC. The Group also paid € 14.4 million in costs related to the renegotiation of its debt agreements in connection with the Restructuring.

 

34



 

As of September 30, 2005, the Group had cash and cash equivalents of € 287.7 million, including € 48.3 million belonging to the consolidated financing companies. Based on existing cash, liquidity from the Company’s undrawn € 150.0 million line of credit from TWDC, and provisions for the unconditional and conditional deferral of certain royalties and management fees and interest charges pursuant to the Restructuring, management believes the Group has adequate cash and liquidity for the foreseeable future.

 

The Group has covenants under its debt agreements that limit its investment and financing activities. Beginning with fiscal year 2006, the Group must meet financial performance covenants that will necessitate earnings growth from, amoung other things, the impact of the Group's multi-year investment program discussed below. If revenue growth is not sufficient, the Group would have to appropriately reduce operating costs and/or curtail a portion of planned capital expenditures (outside those contained in the multi-year investment program). The Group could also seek assistance from TWDC or other parties as permitted under the loan agreements. While there can be no assurance that revenue growth, or abatement of operating costs or capital expenditure would be sufficient or that assistance would be available on acceptable terms, the Group currently anticipates that it will meet the covenant requirements through one or more of these means.

 

See Item 3 "Key Information" – Section D "Risk Factors" for a further discussion of the impact of a contravention of the financial performance covenants, including the consequences and courses of action that would be available to the Group.

 

Debt

 

The Group’s borrowings as of September 30, 2005 are detailed below (the various loans are presented in more detail in Item 4 “Operating and Financial Review and Prospects” – Section F.2 “The Group’s Financial Obligations”):

 

 

 

September

Fiscal Year 2005

September

 

(€ in millions)

 

2004

 

Increase

 

Decrease

 

2005

 

 CDC Senior Loans

 

127.5

 

125.0

 

(10.0

)

242.5

 

 CDC Subordinated Loans

 

783.8

 

59.8

 

(125.0

)

718.6

 

 Credit Facility – Phase IA

 

340.1

 

 

(66.6

)

273.5

 

 Credit Facility – Phase IB

 

150.5

 

 

(29.5

)

121.0

 

 Partner Advances – Phase IA

 

304.9

 

 

 

304.9

 

 Partner Advances – Phase IB

 

96.9

 

 

(3.7

)

93.2

 

 TWDC Loans

 

17.3

 

135.0

 

 

152.3

 

 TWDC Line of Credit

 

125.0

 

 

(125.0

)

 

 Sub-Total

 

1,946.0

 

319.8

 

(359.8

)

1,906.0

 

 Accrued Interest

 

106.8

 

23.8

 

(93.2

)

37.4

 

 Total Borrowings

 

2,052.8

 

343.6

 

(453.0

)

1,943.4

 

 

The Group’s principal indebtedness (excluding accrued interest) decreased € 40.0 million to € 1,906.0 million as of September 30, 2005 compared to € 1,946.0 million as of September 30, 2004, as a result of € 114.8 million of principal repayments, the forgiveness by TWDC of € 10 million of the expired € 167.7 million line of credit, partially offset by the increased borrowings associated with the € 59.8 million conversion of CDC Walt Disney Studios Loan accrued interest into subordinated long-term debt and the conversion of € 25 million of management fees and royalties payable into subordinated long-term debt.

 

Equity

 

Shareholders’ equity increased to € 295.7 million as of September 30, 2005 from a deficit of € 59.9 million as of September 30, 2004, which reflects the impacts of the Restructuring, partially offset by the net loss for the fiscal year.

 

As a result of the Restructuring, on February 23, 2005, substantially all of the Company’s assets and liabilities were contributed to EDA. As a result of this legal reorganization, Euro Disney S.C.A.’s increased interest in EDA was recorded as a reallocation between shareholders’ equity and minority interests for an amount of € 215.5 million.

 

Also in conjunction with the Restructuring, the Company completed an equity rights offering on February 23, 2005, which resulted in the issuance of 2.8 billion new shares at a price of € 0.09 each generating gross proceeds of € 253.3 million.

 

As of September 30, 2005, TWDC, through indirect wholly-owned subsidiaries, held 39.8 % of the Company’s shares 
(40.6 % as of September 30, 2004), and 10 % of the Company’s shares were owned by trusts for the benefit of Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud and his family (15.9% as of September 30, 2004). No other shareholder has indicated to the Group that it holds more than 5 % of the share capital of the Company. No dividend payment is proposed with respect to fiscal year 2005, and no dividends were paid with respect to fiscal years 2004, 2003 and 2002.

 

35



 

D.         OUTLOOK

 

The Group believes that the implementation of its development and growth strategy and the improved financial flexibility from the Restructuring give it a significant opportunity to improve its financial performance, in what the Group hopes will be a growing European theme park market.

 

As a result of the Restructuring, the Group benefited from a substantial improvement in its cash and liquidity position. In addition, the Group’s strategy to increase the number of visitors is intended to boost revenues, which should result in increased operating margin in the medium term. At the same time, the combined effect of full royalties, management fees and interest expense (which will continue to accrue despite being partially deferred on a cash basis) and depreciation and amortization resulting from the consolidation of the financing companies will continue to affect operating margin and net income. The Group anticipates that it will record net losses for at least the next several years.

 

In fiscal year 2006, management is seeking to improve both attendance and occupancy. It believes that its seasonal events and new investments, such as the addition in Disneyland Park of the new attraction Buzz Lightyear Laser Blast, as well as its integrated marketing, sales and pricing strategies, provide an opportunity to increase volumes and grow revenues.

 

The Group’s targeted revenue growth in fiscal year 2006, if it is achieved, will be used partially to cover an anticipated increase in operating expenses resulting primarily from increased labor expenses due to continued wage increases and reduction of subsidies related to the adoption of the 35-hour workweek.

 

The Group’s development strategy will result in part of the Group’s increased cash resources being devoted to increased capital expenditures and spending on major asset renovations. In fiscal year 2006, the Group expects to record a substantial increase in capital expenditures, which could total approximately € 150 million based on the Group’s current budget (compared to € 94.8 million in fiscal year 2005). The increase will result mainly from the completion of Buzz Lightyear Laser Blast in Disneyland Park in 2006 and the continued construction of additional new attractions scheduled to open in the coming years. The Group anticipates significant, but somewhat lower spending in 2007. A portion of ongoing capital expenditures will continue to be focused on enhancements at the theme parks and the hotels.

 

The information, assumptions and estimates that the Group has used to determine its objectives are subject to change or modification due to economic, financial and competitive uncertainties. In particular, attendance could be affected by a number of factors, some of which are beyond the Group’s control, including the state of the European travel and tourism industry (including the potential impact of increased oil prices), geopolitical considerations, factors affecting the French tourism market (such as weather conditions and the overall economy), the perceived attractiveness of the Resort compared to other travel destinations, and whether the Group is successful in implementing its development strategy and achieving the objectives of that strategy. Accordingly, the Group cannot give any assurance as to whether it will achieve the objectives described in this section, and it makes no commitment or undertaking to update or otherwise revise this information.

 

E.             OTHER MATTERS

 

E.1.         Tabular Disclosure of Contractual Obligations

 

See Item 5 “Operating and Financial Review and Prospects” – Section F.2 “2005 Financial Restructuring”— The Group’s Financial Obligations”and Note 24 to the Consolidated Financial Statements in Item 17 “Financial Statements”.

 

E.2.         Off-Balance Sheet Obligations — Contingent Commitments

 

See Item 5 “Operating and Financial Review and Prospects” – Section F.2 “2005 Financial Restructuring”— The Group’s Financial Obligations”.

 

E.3.         Accounting Policies and Estimates

 

The Group believes that the application of the following accounting policies are important to its financial position and results of operations, and require judgments and estimates on the part of management. For a summary of all of its accounting policies, See Note 2 to the Consolidated Financial Statements in Item 17 “Financial Statements”.

 

36



 

Revenue Recognition

 

The Company has revenue recognition policies for its operating segments, which are appropriate to the circumstances of each business or revenues flow. It records revenues for the Resort Segment as the related service is provided to guests. In addition, the Resort Segment includes revenues associated with long-term sponsorship contracts, which are recognized pro-rata over the term of the contracts. In its Real Estate Development Segment, the Group recognizes revenue on land sales upon closing of each transaction, while revenues related to service contracts and ground leases are recognized when the service is rendered.

 

Contingencies and Litigation

 

The Group is continually involved in certain legal proceedings and tax audits and, as required, has accrued its estimate of the probable costs for the resolution of these claims. The Group’s estimates are developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular annual period could be materially affected by changes in assumptions or the effectiveness of the Group’s strategies related to these proceedings.

 

E.4.         New Accounting Pronouncements

 

Implementation of International Financial Reporting Standards (“IFRS”) and other legal requirements

 

The Group currently prepares its financial statements in accordance with French GAAP and prepares a reconciliation of stockholders’ equity, net income and certain other disclosures to U.S. GAAP. In June 2002, the Council of Ministers of the European Union approved a new regulation proposed by the European Commission requiring all EU-listed companies, including the Group, to apply IFRS in preparing their financial statements for fiscal years beginning on or after January 1, 2005 (this means fiscal year 2006 for the Group).

 

As a result, the Group adopted International Financial Reporting Standards (“IFRS”) as of the beginning of fiscal year 2006. A transition report detailing the impact of the implementation on the Group’s opening balance sheet in IFRS and the restatement of fiscal year 2005 financial statements in IFRS is included as at Exhibit 15.2 in Item 19 “Financial Statements and Exhibits” to this 20F.

 

The adoption of IFRS will change certain line item classifications and disclosures in the Group’s financial statements. Additionally, the depreciation method for fixed assets will be changed to reflect the depreciable lives of predefined components. The Group will cease to accrue and expense the costs of major renovations in advance, but will instead recognize the capitalisable fixed asset components and non-capitalisable expenses of major renovations when incurred. With regard to the Group’s income statement for fiscal year 2006, the impact of the change to IFRS is not expected to be material.

 

F.             2005 Financial Restructuring

 

In this section, all financial statement items and other figures are as determined under French GAAP.

 

F.1. General Overview

 

The Company began negotiating in fiscal year 2003 the Restructuring in light of reduced revenues and increased losses that it incurred. The reduction in revenues was primarily the result of a prolonged downturn in European travel and tourism combined with challenging general economic and geopolitical conditions in key markets. While this was partially offset by the impact of the opening of Walt Disney Studios Park, the number of visitors and revenues generated by the new park were below expectations. The increased losses were a result of reduced revenues, as well as higher operating costs and marketing expenses in connection with the opening of the Walt Disney Studios Park.

 

As a result of this situation, the Company determined that it would not be able, in the absence of a new restructuring, to restore compliance with certain financial covenants contained in its credit agreements in the near term, or to meet certain of its financial obligations. The Company also determined that, absent such a restructuring, it would not have the financial resources or the authority under its credit agreements to invest in new attractions and improvements.

 

At the time it began negotiations with its lenders, the Company obtained limited waivers of certain covenant violations, which were successively renewed as the negotiations progressed.

 

37



 

In September 2004, the Company and certain companies of the Group signed a memorandum of agreement with the Group’s lenders and TWDC on a comprehensive restructuring of the Group’s financial obligations. The final conditions necessary to implement the Restructuring were completed in February 2005. The Restructuring provided new cash resources, reduced or deferred certain of the Group’s cash payment obligations and gave the Group more flexibility to invest in new attractions and in the development of the Resort and its surrounding areas.

 

The principal features of the Restructuring included the following:

 

      A share capital increase with gross proceeds of € 253.3 million, before deduction of equity issuance costs. The Company issued 2.8 billion new shares at a price of € 0.09 each.

 

      A new € 150 million credit line made available by TWDC to replace the expired € 167.7 million credit line. In addition, TWDC forgave € 10 million of the expired credit line and converted € 110 million of the remaining balance to subordinated long-term debt.

 

      Deferral of the Group’s debt service obligations partially on an unconditional basis and partially on a conditional basis (depending on the Company’s financial performance), and elimination of the obligation to maintain debt security deposits (the existing € 100.6 million debt security deposit was used to prepay debt), in exchange for which the Company will pay increased interest rates on some of its debt.

 

      Deferrals of a portion of the management fees and royalties payable to affiliates of TWDC over the coming years, partially on an unconditional basis (total € 125 million) and partially on a conditional basis (up to € 200 million), with the conditional portion depending on the Company’s financial performance.

 

      Avoidance of lease-related payments in the amount of € 292.1 million (plus € 16 million of interest that would have been payable) to EDA, to exercise the Company’s lease option to maintain its rights to the Disneyland Park and certain of its key attractions (which were previously leased from EDA). Instead, the Company acquired 82% of the share capital of EDA in exchange for the contribution of substantially all of the Company’s assets and liabilities (TWDC subsidiaries hold the remaining 18% of EDA and held 100% of EDA before the contribution).

 

      Bank authorization to implement a € 240 million plan to develop new Theme Park attractions and to expend more than in the previous years on maintaining and improving the existing asset base.

 

The Restructuring provided significant liquidity, including protective measures intended to mitigate the adverse impact of business volatility (through conditional deferrals of expenditures), as well as capital to invest in new rides and attractions.

 

F.2. The Group’s Financial Obligations

 

The operating assets of the Group are financed using equity, borrowings and financial lease contracts. The lessors under the financial lease contracts are special purpose financing companies, which have been consolidated in the Group’s consolidated financial statements since October 1, 2003 (the first day of fiscal year 2004). As a result, the liabilities under the lease contracts themselves are eliminated in the consolidation process, while the borrowings of the financing companies are reflected as debt in the Group’s consolidated balance sheet.

 

The Group’s financial obligations in respect of these borrowings were undertaken in several phases, corresponding generally to those described in Item 4 “Information on the Company – Section A.1 “History of the Group”. The Caisse de Dépôts et Consignations (“CDC”) is one of the principal lenders to the Group, holding both senior loans and subordinated loans (including loans extended in 1999 to finance the construction of Walt Disney Studios Park). The creditors in respect of other loans are bank syndicates. The Group also benefits from advances made by the partners of the special purpose financing companies from which the Group leases assets (those partners are mainly banks, as well as other financing entities). The Group also has use of a credit line granted by TWDC.

 

The Group’s obligations in respect of these loans and other commitments are described in more detail in Note 13, 14, 19b, 24 and 25 to the Group’s Consolidated Financial Statements in Item 17 “Financial Statements”. The table below sets out the debt and lease structure as well as other long-term obligations as of September 30, 2005, giving full effect to the terms of the Restructuring.

 

38



 

 

 

 

 

Principal Payments Due

 

(€ in millions)

 

September
2005

 

Less than
1 year

 

1-3 years

 

3-5 years

 

More than
5 years

 

CDC Loans

 

 

 

 

 

 

 

 

 

 

 

Phase I Loans

 

520.2

 

 

1.3

 

6.4

 

512.5

 

Walt Disney Studios Park Loans - Subordinated

 

440.9

 

 

 

 

440.9

 

 

 

961.1

 

 

1.3

 

6.4

 

953.4

 

Phase IA Asset Financing (primarily Disneyland Park)

 

 

 

 

 

 

 

 

 

 

 

Credit facility(1)

 

273.5

 

 

48.7

 

126.2

 

98.6

 

Partner advances

 

304.9

 

 

 

 

304.9

 

 

 

578.4

 

 

48.7

 

126.2

 

403.5

 

Phase IB Asset Financing (Hotels and Disney Village)

 

 

 

 

 

 

 

 

 

 

 

Credit facility(1)

 

121.0

 

 

10.1

 

40.4

 

70.5

 

Partner advances(1)

 

93.2

 

 

 

3.2

 

90.0

 

TWDC - Newport Bay Club Convention Centre

 

17.3

 

 

 

 

17.3

 

 

 

231.5

 

 

10.1

 

43.6

 

177.8

 

TWDC Loans

 

 

 

 

 

 

 

 

 

 

 

Subordinated loan – Deferral of expired line of credit

 

110.0

 

 

 

 

110.0

 

Subordinated loan – Deferral of management fees and royalties

 

25.0

 

 

 

 

25.0

 

 

 

135.0

 

 

 

 

135.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Borrowings

 

1,906.0

 

 

60.1

 

176.2

 

1,669.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent obligations(2)

 

207.5

 

 

 

24.6

 

182.9

 

Operating lease obligations(3)

 

65.2

 

11.2

 

18.5

 

12.9

 

22.6

 

Retirement indemnities obligation(4)

 

11.3

 

 

 

 

11.3

 

Purchase obligations(5)

 

1.6

 

1.1

 

0.5

 

 

 

Other long-term obligations(6)

 

20.3

 

 

1.4

 

3.5

 

15.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contractual Obligations(7)

 

2,211.9

 

12.3

 

80.5

 

217.2

 

1,901.9

 

 


(1)       Under French law, the Legally Controlled Group (the Company and its subsidiaries) is jointly liable or has guaranteed these obligations under the terms of the related credit agreements (see Note 24 to the Consolidated Financial Statements in Item 17 “Financial Statements”).

(2)     Includes € 24.6 million corresponding to TWDC waiver of royalties and management fee in fiscal year 2003  and € 182.9 million corresponding to TWDC development fees subject to conditions (see Notes 19b and 24 to the Consolidated Financial Statements in Item 17 “Financial Statements”).

(3)     Represents the operating lease commitments as described in Note 25-2 to the Consolidated Financial Statements in Item 17 “Financial Statements”.

(4)     Represents the actuarially calculated obligation for employee retirement indemnities. The entire obligation has been reported in the “More than 5 years” column as the Group does not expect a significant number of retirements in the next five fiscal years (see Notes 2 and 26 to the Consolidated Financial Statements in Item 17 “Financial Statements”).

(5)     Represents the maximum potential risk under purchase obligations with the Group’s sponsorship participants.

(6)     Represents a contractual obligation to the Seine-et-Marne Department (local governmental body) recorded on the line “Accounts payable and accrued liabilities” of the Consolidated Balance Sheet. (See Item 4 “Information on the Company, A.6 Significant Operating Contracts – Department of Seine-et-Marne tax guarantee.)

(7)     Comprised of the following (€ in millions):

 

Liabilities recorded on the balance sheet

 

1,926.3

Off-balance sheet obligations

 

285.6

 

 

2,211.9

 

In addition, the Group has provided certain other performance guarantees to contractual partners, which, depending on future events, may require the Group to pay an amount ranging from € 0 to € 31.5 million.

 

F.3.         Impact of the Restructuring on Group Cash Flow

 

The Restructuring improved the Group’s liquidity situation significantly by providing new financial resources and deferring payment obligations. The principal provisions impacting the Group’s cash included the following:

 

      the Group had available € 385.0 million in new financial resources in fiscal year 2005: € 235.0 million from the Share Capital Increase (after deducting underwriting commissions and other costs linked to this Share Capital Increase) and
€ 150.0 million from the TWDC New Credit Line. The amount of the TWDC New Credit Line will be reduced to € 100.0 million after September 30, 2009, and it will expire on  September 30, 2014;

 

39



 

      the Group has been authorized by its lenders to implement a multi-year development plan totaling € 240 million. During fiscal year 2005, development plan expenditures totaled € 39.4 million. Amounts budgeted for 2005 not used in 2005 will be used in future periods;

 

      the cash payments that the Group would have been required to make in fiscal year 2005 in respect of its credit agreements and the expired TWDC Credit Line (whose maturity date was initially June 10, 2004 and has been deferred as part of the Restructuring) were reduced by € 243.4 million (after taking into account the increased interest that the Group will be required to pay). In addition, the Group will realize reductions in cash outflow from similar deferrals through fiscal year 2009, as shown in the table below;

 

      the Group’s cash payments in respect of management fees and royalties due to TWDC subsidiaries will be reduced by € 25.0 million per year in fiscal years 2006 and 2007, by between € 25.0 million and up to € 50.0 million per year in fiscal years 2008, 2009 and 2010, depending on financial performance of the Group, and by up to € 25.0 million per year from fiscal years 2011 up to and including fiscal year 2015, depending on the financial performance of the Group; and

 

      as a result of legal restructuring under which EDA became a subsidiary of the Company, the Group will realize significant cash savings in respect of amounts it otherwise would have had to pay to EDA to exercise its option to maintain its rights to the Disneyland Park and to certain of its key attractions. These savings include € 78.7 million in cash that the Company would have had to pay over approximately a two-year period starting in June 2006 to exercise the option to maintain its rights in respect of the Disneyland Park. The cash savings also relate to € 213.4 million of lease-related payments that the Company would have had to make over an eight-year period starting in July 2007 to exercise the option to maintain its rights over the “ACP Assets,” which are certain attractions constructed after the opening of Disneyland Park (including Space Mountain), which the Company previously leased from EDA.

 

The following table sets out the impact of the Restructuring on the cash flows of the Group in comparison to its pre-Restructuring contractual obligations. The table includes the impact of increased interest rates on debt service as described below included in Note 14 to the Consolidated Financial Statements in Item 17 “Financial Statements”. For the sake of clarity, the table does not take into account the impact that deferrals of principal repayments, management fees and royalties and interest expenses will have on interest payments and interest income on cash balances. These deferrals will improve the Group’s liquidity situation and potentially create supplementary financial income, but will also have the effect of increasing the Group’s borrowings and interest expenses. In addition, the table does not take into account the capital investment expenditures in connection with the new development and investment plan, described in Item 5 “Operating and Financial Review and Prospects” – Section F.6. “Agreements with Lenders”.

 

40



 

SIGNIFICANT IMPACTS OF THE RESTRUCTURING ON GROUP CASH FLOW

 

Impacts: Positive / (Negative)

 

 

 

Fiscal year ending September 30,

 

 

 

 

 

(€ in millions)

 

2005

 

2006

 

2007

 

2008

 

2009

 

2010

 

2011

 

2012

 

2013

 

2014

 

2015

 

Thereafter

 

Net
Impact

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADDITIONAL CAPITAL AND CREDIT RESOURCES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share Capital Increase (1)

 

235.0

 

 

 

 

 

 

 

 

 

 

 

 

235.0

 

TWDC New Credit Line (2)

 

150.0

 

 

 

 

 

(50.0

)

 

 

 

 

(100.0

)

 

 

Payment of Exceptional Restructuring Costs

 

(14.5

)

 

 

 

 

 

 

 

 

 

 

 

(14.5

)

Sub-Total

 

370.5

 

 

 

 

 

(50.0

)

 

 

 

 

(100.0

)

 

220.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH SAVINGS AND ADDITIONAL COSTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings on Obligations Pursuant to Legal Reorganization (3)

 

 

13.9

 

91.3

 

26.7

 

26.7

 

26.7

 

26.7

 

26.7

 

26.7

 

26.7

 

 

 

292.1

 

Waiver by TWDC on Existing TWDC Credit Line

 

10.0

 

 

 

 

 

 

 

 

 

 

 

 

10.0

 

Waiver by CDC of certain Future Interest Expense

 

2.5

 

2.5

 

2.5

 

2.5

 

2.5

 

2.5

 

2.5

 

2.5

 

 

 

 

 

20.0

 

Impact of Increased Interest Rates (4)

 

(9.8

)

(9.7

)

(9.7

)

(9.3

)

(7.6

)

(5.7

)

(3.8

)

(1.8

)

(1.0

)

(0.9

)

(0.4

)

(3.5

)

(63.2

)

Sub-Total

 

2.7

 

6.7

 

84.1

 

19.9

 

21.6

 

23.5

 

25.4

 

27.4

 

28.2

 

25.8

 

(0.4

)

(3.5

)

258.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM DEFERRALS (5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rescheduling of Bank Debt Service Requirements

 

129.8

(6)

76.0

 

93.4

 

47.5

 

8.5

 

(35.1

)

(28.0

)

(54.3

)

(47.7

)

2.2

 

7.3

 

(199.6

)

 

Deferral of Repayment of Existing TWDC Credit Line

 

110.0

 

 

 

 

 

 

 

 

 

 

 

(110.0

)

 

Deferral of Management Fees and Royalties

 

 

25.0

 

25.0

 

25.0

 

25.0

 

25.0

 

 

 

 

 

 

(125.0

)

 

Deferral NBC Convention Center Lease Payments

 

0.9

 

1.2

 

1.2

 

1.4

 

1.4

 

0.5

 

0.5

 

0.5

 

0.5

 

0.5

 

0.5

 

(9.1

)

 

Sub-Total

 

240.7

 

102.2

 

119.6

 

73.9

 

34.9

 

(9.6

)

(27.5

)

(53.8

)

(47.2

)

2.7

 

7.8

 

(443.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Unconditional Impacts

 

613.9

 

108.9

 

203.7

 

93.8

 

56.5

 

(36.1

)

(2.1

)

(26.4

)

(19.0

)

28.5

 

(92.6

)

(447.2

)

479.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MAXIMUM CONDITIONAL DEFERRALS OF CASH EXPENDITURES (5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conditional Deferral of Management Fees and Royalties

 

 

 

 

25.0

 

25.0

 

25.0

 

25.0

 

25.0

 

25.0

 

25.0

 

25.0

 

(200.0

)

 

Conditional Deferral of CDC Interest

 

 

19.8

 

20.2

 

20.2

 

20.2

 

20.2

 

20.2

 

20.2

 

20.2

 

22.7

 

22.7

 

(206.6

)

 

Sub-Total

 

 

19.8

 

20.2

 

45.2

 

45.2

 

45.2

 

45.2

 

45.2

 

45.2

 

47.7

 

47.7

 

(406.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Unconditional and Conditional Impacts

 

613.9

 

128.7

 

223.9

 

139.0

 

101.7

 

9.1

 

43.1

 

18.8

 

23.7

 

76.2

 

(44.9

)

(853.8

)

479.4

 

 


(1)       After deduction of Share Capital Increase costs of € 18.3 million.

(2)       As of the date of this annual report, no amount  is outstanding on this line.

(3)       Excludes interest savings of approximately €16.0 million.

(4)       Represents cost of increased interest rates negotiated as part of the Restructuring using the post-restructuring maturity schedule, but excluding the impact that the creation of new debt from the deferrals will have on interest charges.

(5)       Excludes impact of annual interest on the deferred amounts, which will be added to borrowings and paid starting in fiscal year 2023.

(6)       Represents the net impact of the elimination of the debt security deposits (€ 100 million) and the deferrals of the debt repayments (net of the € 110 million prepayments) and the deferral of € 58 million of accrued interest.

 

F.4.         Impact of the Restructuring on the Group’s Financial Statements

 

The Restructuring significantly impacted the cash flows and financial position of the Group. Certain of the financial statement impacts were recorded immediately upon the completion of the Restructuring while others will be realized over a period of several years as follows:

 

      the Share Capital Increase provided the Group’s € 235.0 million additional cash and shareholders’ equity in fiscal year 2005;

 

      the deferrals of principal repayments and increases in the effective interest rates on certain tranches of the Group’s debt will increase interest charges over the remaining term of this debt (i.e. until 2023);

 

      the payment deferrals of management fees and royalties due to TWDC subsidiaries and CDC interest expense, will increase long-term subordinated debt, which will also increase annual interest expenses. However, these payment deferrals will not reduce the annual expenses recorded in the Group’s consolidated income statement for management fees, royalties and CDC interest expense, as the amount corresponding to these deferred amounts, even though they will have been deferred, will be accrued as expenses;

 

      the waiver of debts by certain creditors will increase the Group’s net results and cash flows; and

 

41



 

      the changes in the Group’s organizational structure relating to EDA increased retained earnings and resulted in a corresponding decrease in minority interests, in order to reflect the respective ownership interests of the Company and TWDC in EDA’s share capital following the completion of the reorganization. On the statement of income, the share of the Group’s net results attributable to minority interests will increase, reflecting TWDC’s ownership interest in EDA’s share capital.

 

F.5.         Performance Indicator

 

Certain of the financial obligations of the Group following the Restructuring will be affected by the Group’s financial performance as measured by a contractually defined performance indicator (the “Performance Indicator”) for each fiscal year, which is approximately equal to the Group’s earnings before interest, taxes, depreciation and amortization, adjusted for certain items. The Performance Indicator will be used to determine:

 

      the amount of interest on the CDC Walt Disney Studios Park Loans that is to be deferred in respect of each fiscal year;

 

      the amount of royalties and management fees payable to affiliates of TWDC that is to be deferred in respect of each fiscal year; and

 

      the Group’s compliance with its financial covenant requirements.

 

In each case, the relevant determination will be made by comparing the actual Performance Indicator for a given fiscal year to a Reference Performance Indicator for that year (the “Reference Performance Indicator”). There are three separate Reference Performance Indicators, one for each calculation. The Reference Performance Indicators have been established solely for purposes of the contractual obligations to which they apply, and do not reflect a prediction or forecast of the future operating performance of the Group.

 

The Performance Indicator for a given fiscal year will be equal to the Group’s consolidated net income (loss), after profit or loss allocated to minority interests, as reported in the consolidated audited financial statements for such fiscal year determined in accordance with generally accepted accounting principles and rules in France, consistently applied, after removing the effect of the following:

 

      minority interests as reported in the consolidated statement of income;

 

      income tax expense or benefit (current and deferred);

 

      income (loss) from affiliates accounted for under the equity method;

 

      the net impact of all waivers of debt or commercial or financial payables, etc. which may be granted by TWDC or its subsidiaries;

 

      the net impact (positive or negative) of depreciation and movements in reserves on tangible, intangible assets (including goodwill) and deferred charges as well as exceptional reserves and impairment charges on these asset categories;

 

      the net impact (positive or negative) of movements in: (i) current asset reserves (for example, receivables and inventories); (ii) provisions for risks and charges and (iii) provisions recorded in exceptional earnings;

 

      operating expenses related to actual expenditures for major fixed asset renovations;

 

      net gains and losses on the sale or abandonment of tangible or intangible assets;

 

      financial income net of financial charges, excluding charges related to bank card commissions;

 

      management fees and royalties payable to TWDC expensed for such fiscal year.

 

42



 

CDC Walt Disney Studios Park Loans

 

If the Performance Indicator for a given fiscal year is less than the Reference Performance Indicator set forth below for such fiscal year, then interest on the CDC Walt Disney Studios Park Loans will be deferred in an amount for such fiscal year equal to the excess of the Reference Performance Indicator over the Performance Indicator. For purposes of the conditional deferral of interest on the CDC Walt Disney Studio Park Loans, the Reference Performance Indicators are equal to € 230.6 million, € 263.9 million, € 257.5 million, € 280.4 million, € 288.1 million, € 292.2 million, € 315.6 million, € 327.7 million, € 340.8 million and € 355.6 million for each of fiscal years 2005 through 2014, respectively.

 

For fiscal year 2005, the Performance Indicator was  € 184.3 million which was less than the Reference Performance Indicator. Therefore, in accordance with the Restructuring agreement, € 19.8 million of CDC Walt Disney Studios Park loans interest payable on December 31, 2005 was deferred and converted to long-term subordinated borrowings.

 

Royalties and Management Fees

 

If the Performance Indicator for a given fiscal year (starting in fiscal year 2007) is less than the Reference Performance Indicator set forth below for such fiscal year, then royalties and management fees otherwise due to affiliates of TWDC will be deferred in an amount equal to the excess (up to a maximum of € 25.0 million) of the Reference Performance Indicator over the Performance Indicator. For purposes of the conditional deferral of royalties and management fees, the Reference Performance Indicators are € 282.5 million, € 305.4 million, € 313.1 million, € 317.2 million, € 340.6 million, € 352.7 million, € 365.8 million and € 380.6 million for each of fiscal years 2007 through 2014, respectively.

 

Financial Covenants

 

If the Performance Indicator for a given fiscal year from fiscal year 2006 through fiscal year 2014 is less than the Reference Performance Indicator set forth below, then the Group will be required to comply with the debt service coverage ratios described in Item 5 “Operating and Financial Review and Prospects” – Section F.6. “Agreements with Lenders”. For purposes of this financial covenant, the Reference Performance Indicators are €243.7 million, €237.3 million, €260.2 million, €267.9 million, €272.0 million, €295.4 million, €307.5 million, €318.1 million and €332.9 million for each of fiscal years 2006 through 2014, respectively.

 

Changes in Accounting Principles

 

In the event of a change in accounting principles and rules (in particular in connection with the implementation of IFRS beginning in fiscal year 2006) and/or changes in the scope of consolidation of the Group, the Performance Indicator and, if necessary, the Reference Performance Indicator will be adjusted to reflect the accounting change. The adjusted Performance Indicator in these situations (the “Pro-Forma Performance Indicator”) will replace the Performance Indicator.

 

F.6.         Agreements with Lenders

 

Payment Deferral Mechanism

 

The Restructuring provides for significant deferrals of payments in respect of the Group’s credit agreements. The debt related payment deferral mechanism put in place as a result of the Restructuring is as follows:

 

      Interest accrued from fiscal year 2005 through fiscal year 2014 under the CDC Walt Disney Studios Park Loans (in the aggregate, € 22.7 million of interest per fiscal year) will be subject to conditional deferral. The maximum amount of such conditional deferral will be € 20.2 million per year from fiscal years 2005 through 2012 (as € 2.5 million will be permanently forgiven in each of such fiscal years) and € 22.7 million per year for fiscal years 2013 and 2014.

 

      The amount of such conditional deferral will depend upon the Group’s operating performance as measured by a contractually defined Performance Indicator for the relevant fiscal year. For a detailed description of this deferral mechanism, see Item 5. F.5. “Performance Indicator”.

 

      Deferred interest will be converted into a long-term subordinated debt obligation, bearing interest at 5.15% per annum (interest being capitalized through January 1, 2017 and payable annually thereafter), payable after the Group’s senior debt and subordinated debt (other than the CDC Walt Disney Studios Park Loans) have been repaid in full, starting in 2023. See Item 5.F.5.”Performance Indicator” for a detailed discussion of the Performance Indicator.

 

For Fiscal Year 2005, the Performance Indicator was less than the Reference Performance Indicator, therefore, in accordance with the Restructuring agreement, € 19.8 million of interest payable in respect of the CDC Walt Disney Studios Park loans on December 31, 2005 was deferred and converted to long-term borrowings.

 

43



 

Debt Covenants

 

The Group’s debt agreements include covenants between the Group and the Lenders. These covenants primarily consist of restrictions on additional indebtedness and capital expenditures, the provision of certain financial information and compliance with a financial ratio threshold. In the case of non-compliance with these covenants, the Lenders can demand accelerated repayment of the debt (see Item 3 “Key Information” - Section “Risk Factors” ). Provided below is more detailed information on the significant aspects of the Group’s debt covenants:

 

      Financial Ratio Covenant

As a result of the Restructuring, the financial ratio covenant of the Group changed. The gross operating profit ratio was deleted and replaced by debt service coverage ratios (the DSCR and Forecast DSCR). From fiscal year 2006 through fiscal year 2014 inclusive, the debt service coverage ratio requirement will apply only if the Performance Indicator for a given fiscal year is below its annual reference level for purposes of this covenant, as described below in paragraph “Reference Performance Indicator for Financial Covenants”. From fiscal year 2015, the debt service coverage ratio will apply without regard to the Performance Indicator until the repayment in full of the CDC Walt Disney Studios Park Loans.

 

The debt service coverage ratio is defined as the ratio of: the Group’s Performance Indicator for a given fiscal year, less any royalties and management fees payable to affiliates of TWDC that are not deferred, less the amount of certain expenditures for major renovations and all other capital investments (excluding capitalized interest and the investments of the development plan described in item 4 “Information on the Company - Section “Strategic Overview”), less any corporate income tax paid, plus certain financial investment income, to the Group’s total debt service obligations.

 

For any fiscal year in which the debt service coverage ratio applies, the Group will be required to maintain a forecast ratio calculated on the basis of the projected debt service obligations for the immediately following year.  The forecasted results used for the Forecast DSCR are the lower of the actual management forecast for the following year or the current fiscal year results escalated at 3%.

 

The agreed required levels of DSCR and Forecast DSCR are set forth in the following table:

 

Debt service coverage ratios (DSCR and Forecast DSCR)

Minimum values charts to be achieved for each fiscal year

 

Financial Year

 

2005

 

2006

 

2007

 

2008

 

2009

 

2010

 

2011

 

2012

 

2013

 

2014

 

2015

 

2016

 

2017
and
there
after

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DSCR

 

 

1.80

 

2.35