Disney Profit Falls on Weak Park, TV Units

Entertainment giant Walt Disney Co. on Thursday said that its profit dropped sharply in the quarter ended in June because of continued soft ratings at the ABC network, losses from the box-office dud “Bad Company” and a drop in attendance at Disney theme parks that is expected to plague the company.

Separately, Disney Chairman Michael Eisner said the company is taking additional steps to address investors’ concerns about corporate governance and accounting practices amid scandals at such companies as Enron Corp. and WorldCom Inc.

Eisner promised that Disney will reduce the size of its 16-member board of directors, criticized frequently as being too passive in overseeing the firm. In an interview, Eisner said he has no number in mind for board seats, but the goal is to make investors “comfortable with the board and the independence of the board.”

Eisner also endorsed the idea of expensing the cost of stock options in company earnings statements, something investors have lobbied for at major firms in an effort to get a more honest picture of company profit. This week, General Electric Co. said it would expense options, after a similar move two weeks ago by Coca-Cola Co.

But Burbank-based Disney stopped short of adopting the policy. Eisner said the company wants the accounting industry’s rule makers--the Financial Accounting Standards Board and the International Accounting Standards Board--to first provide consistent, unambiguous regulations that all companies follow. Disney Chief Financial Officer Thomas Staggs added that the company will provide quarterly more detail on how stock options affect earnings than other companies do.

Patrick McGurn, vice president of investor consulting firm Institutional Shareholder Services, called Disney’s hesitation to immediately adopt the policy tepid when compared with GE’s more aggressive action.

“It’s a pretty Mickey Mouse move,” McGurn said. “It doesn’t give shareholders a great deal of confidence that Disney is blazing a trail in this area.”

Disney’s position on the issue is closely watched because it was one of the earliest and most aggressive entertainment companies to use stock options extensively to reward top executives, starting in 1984 when Eisner was hired to turn around the company.

At that time, Eisner agreed to a relatively low Disney salary of $750,000 that held until it was raised to $1 million two years ago, gambling that he would get rich off options. It paid off, with Eisner’s net worth estimated last year by Forbes at $720 million. In 1997, Eisner reaped $570 million from Disney stock options in one day.

For its third quarter, ended June 30, Disney reported that net income fell 31% to $364 million, or 18 cents a share, compared with $527 million, or 25 cents per share, a year ago.

The number from a year ago, however, was computed using new accounting rules governing intangible assets. Without that adjustment, Disney’s earnings would have fallen a smaller 7.1% from a year earlier.

Operating income fell 26% in the latest quarter, to $828 million. Revenue fell 3% to $5.8 billion.

The most dismal news came when Disney said that reservations have fallen about 10% at its U.S. theme parks, which doesn’t bode well for the company’s fourth-quarter results.

“The outlook at the moment is somber. The third quarter was OK, but the problem is the fourth-quarter outlook,” Merrill Lynch media analyst Jessica Reif Cohen said. She added that although advertising is picking up at Disney’s radio and TV stations, ABC and the theme parks remain under pressure.

For Disney’s theme parks, quarterly operating income fell 17% to $467 million as revenue dropped 5% to $1.8 billion. At the Media Networks unit, which includes ABC, operating income was off 40% to $288 million as revenue dipped 10% to $2.1 billion. At Disney’s studio, operating income plunged 66% to $22 million on a 3% drop in revenue, to $1.4 billion. Operating income at Disney’s consumer products division fell 16% to $51 million, with revenue falling 13% to $457 million.

Disney shares fell 90 cents to $16.83 on the New York Stock Exchange before the results were announced.

Times staff writer Claudia Eller contributed to this report.