Amendment No. 1 to Form S-4
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As filed with the Securities and Exchange Commission on April 3, 2006

Registration No. 333-131914


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 1 to

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


THE WALT DISNEY COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware   7990   95-454390

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)


500 South Buena Vista Street, Burbank, California 91521

(818) 560-1000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Alan N. Braverman

Senior Executive Vice President, General Counsel and Secretary

500 South Buena Vista Street, Burbank, California 91521

(818) 560-1000

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

Brian J. McCarthy, Esq.
Joseph J. Giunta, Esq.
Skadden, Arps, Slate, Meagher
& Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
(213) 687-5000
  Morton A. Pierce, Esq.
Gordon E. Warnke, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
(212) 259-8000
  Lois Scali
Executive Vice President
and General Counsel

Pixar
1200 Park Avenue
Emeryville, California 94608
(510) 752-3000
  Larry W. Sonsini, Esq.
Jose F. Macias, Esq.
Michael S. Ringler, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
(650) 493-9300

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions under the merger agreement described herein.

 

If the securities being registered on this form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨


CALCULATION OF REGISTRATION FEE


Title of Each Class of

Securities to be Registered(1)

   Amount to be
Registered(2)
   Proposed
Maximum
Offering Price
Per Unit
   Proposed
Maximum
Aggregate
Offering Price(3)
   Amount of
Registration
Fee(4)
 

Common Stock $0.01 par value per share

   317,568,291    N/A    $ 8,334,096,541    $ 891,748.33 (5)

(1) This Registration Statement relates to common stock, par value $0.01 per share of the registrant issuable to holders of common stock, without par value (“Pixar common stock”), of Pixar, a California corporation (“Pixar”), in the proposed merger of Lux Acquisition Corp., a California corporation and a wholly-owned subsidiary of the registrant, with and into Pixar.
(2) Based on the maximum number of shares to be issued in connection with the merger, calculated as the product of: (a) 138,073,170, the aggregate number of shares of Pixar common stock outstanding as of February 10, 2006 or issuable pursuant to the exercise of outstanding options prior to the date the merger is expected to be completed, and (b) an exchange ratio of 2.3 shares of the registrant’s common stock for each share of Pixar common stock.
(3) Estimated solely for purposes of calculation of the registration fee in accordance with Rules 457 (c) and (f) of the Securities Act of 1933, as amended, based upon the product of: (i) 138,073,170, the maximum number of shares of Pixar common stock that may be exchanged in the merger (the sum of (a) 120,253,773 shares of Pixar common stock outstanding as of February 10, 2006, and (b) 17,819,397 shares of Pixar common stock issuable upon the exercise of outstanding options as of February 10, 2006, and (ii) $60.36, the average of the high and low sale prices for shares of Pixar common stock as reported on the Nasdaq National Market on February 13, 2006.
(4) Calculated by multiplying the proposed maximum aggregate offering price for Pixar common stock by 0.00010700.
(5) Previously paid.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.



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The information in this proxy statement/prospectus is not complete and may be changed. Disney may not sell these securities until the registration statement filed with the Securities and Exchange Commission, of which this document is a part, is declared effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer, solicitation or sale is not permitted or would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Any representation to the contrary is a criminal offense.

Subject to completion, dated April 3, 2006

 

LOGO

 

To the Shareholders of Pixar:

 

You are cordially invited to attend a Special Meeting of Pixar shareholders to be held on May 5, 2006 at 10:00 A.M., local time, in the Wattis Theater at the San Francisco Museum of Modern Art located at 151 Third Street, San Francisco, California 94103. At the Special Meeting, Pixar shareholders will be asked to approve the principal terms of the Agreement and Plan of Merger that Pixar entered into as of January 24, 2006 with The Walt Disney Company (“Disney”) and Lux Acquisition Corp., a wholly-owned subsidiary of Disney, and to approve the merger contemplated by the merger agreement. If the principal terms of the merger agreement and the merger are approved, and the other conditions in the merger agreement are satisfied or waived, Lux Acquisition Corp. will merge with and into Pixar, and Pixar will become a wholly-owned subsidiary of Disney. Upon completion of the merger, each outstanding share of Pixar common stock will be converted into the right to receive 2.3 shares of Disney common stock.

 

Disney common stock is listed on the New York Stock Exchange under the trading symbol “DIS.” On March 31, 2006, the closing sale price of Disney common stock was $27.89.

 

Pixar’s board of directors has carefully reviewed and considered the terms and conditions of the merger agreement. Based on its review, Pixar’s board of directors has unanimously determined that the merger is advisable, fair to and in the best interests of Pixar and its shareholders and recommends that you vote for approval of the principal terms of the merger agreement and approval of the merger.

 

Your vote is very important. Pixar cannot complete the merger unless the principal terms of the merger agreement and the merger are approved by the affirmative vote of the holders of a majority of the outstanding shares of Pixar common stock entitled to vote at the Special Meeting. Whether or not you plan to attend the Special Meeting, please complete, sign, date and return the enclosed proxy card or submit your proxy by telephone or on the Internet as soon as possible. If you hold your shares in “street name,” you should instruct your broker how to vote in accordance with your voting instruction card. If you do not submit your proxy, instruct your broker how to vote your shares or vote in person at the Special Meeting, it will have the same effect as a vote against approval of the principal terms of the merger agreement and the merger.

 

The accompanying proxy statement/prospectus explains the merger agreement and proposed merger in detail and provides specific information concerning the Special Meeting. Please review this document carefully. In particular, you should carefully consider the matters discussed under “ Risk Factors” beginning on page 19 of this proxy statement/prospectus.

 

Sincerely,

 
Steven P. Jobs
Chairman and Chief Executive Officer

 

Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved the merger described in this proxy statement/prospectus or the Disney common stock to be issued in connection with the merger, or determined if this proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

 

This proxy statement/prospectus is dated                     , 2006 and is first being mailed to shareholders of Pixar on or about                     , 2006.


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LOGO

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 

To Be Held on May 5, 2006

 

To the Shareholders of Pixar:

 

Notice is hereby given that a Special Meeting of shareholders (the “Special Meeting”) of Pixar, a California corporation, will be held on May 5, 2006 at 10:00 A.M., local time, in the Wattis Theater at the San Francisco Museum of Modern Art located at 151 Third Street, San Francisco, California 94103, for the following purpose:

 

To consider and vote upon a proposal to approve the principal terms of the Agreement and Plan of Merger, dated as of January 24, 2006, by and among The Walt Disney Company (“Disney”), Lux Acquisition Corp., a wholly-owned subsidiary of Disney, and Pixar, pursuant to which Lux Acquisition Corp. will merge with and into Pixar, and Pixar will become a wholly-owned subsidiary of Disney, and to approve the merger, which we refer to as the merger proposal.

 

The merger proposal is more fully described in the accompanying proxy statement/prospectus, which you should read carefully in its entirety before voting.

 

Only holders of record of Pixar’s common stock at the close of business on March 16, 2006 (the “Record Date”) are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof. A majority of the shares of Pixar common stock outstanding on the Record Date must be voted in favor of the merger proposal in order for the merger to be completed. Therefore, your vote is very important. Your failure to vote your shares is the same as voting against the merger proposal.

 

Dissenters’ rights may be available under Chapter 13 of the California General Corporation Law in connection with the merger. In order to exercise dissenters’ rights, Pixar shareholders must deliver a written demand to Pixar no later than the date of the Special Meeting and must vote “AGAINST” the merger proposal. A copy of the applicable California statutory provisions is included as Annex D of the attached proxy statement/prospectus, and a summary of these provisions can be found under “Dissenters’ Rights” in the attached proxy statement/prospectus.

 

All Pixar shareholders are cordially invited to attend the Special Meeting in person. However, to assure your representation at the Special Meeting, please vote as soon as possible using one of the following methods: (1) by telephone by calling the toll-free number as instructed on the enclosed proxy card, (2) by using the Internet as instructed on the enclosed proxy card or (3) by mail by completing, signing, dating and returning the enclosed proxy card as promptly as possible in the postage-prepaid envelope enclosed for that purpose. Any shareholder attending the Special Meeting may vote in person even if he or she has voted using the Internet, telephone or proxy card.

 

The board of directors of Pixar unanimously recommends that you vote “FOR” the approval of the merger proposal.

 

By Order of the Board of Directors

 
Simon T. Bax
Executive Vice President, Chief Financial Officer and Secretary

 

Emeryville, California

                    , 2006

 

IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE VOTE BY (1) TELEPHONE, (2) USING THE INTERNET OR (3) COMPLETING AND PROMPTLY RETURNING THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED.


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TABLE OF CONTENTS

 

     Page

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

   1

SUMMARY

   5

The Companies

   5

The Merger

   6

Risk Factors

   7

Pixar Shareholders Entitled to Vote; Vote Required

   7

Recommendation of the Pixar Board of Directors

   8

Opinion of Pixar’s Financial Advisor

   8

Ownership of Disney Following the Merger

   8

Share Ownership of Pixar Directors and Executive Officers

   8

Interests of Executive Officers and Directors of Pixar in the Merger

   8

Listing of Disney Common Stock and Delisting and Deregistration of Pixar Common Stock

   9

Dissenters’ Rights

   9

Conditions to Completion of the Merger

   10

Regulatory Matters

   10

Pixar Is Prohibited From Soliciting Other Offers

   11

Termination of the Merger Agreement and Termination Fee

   11

Material United States Federal Income Tax Consequences of the Merger

   12

Accounting Treatment

   12

Comparison of Rights of Disney Stockholders and Pixar Shareholders

   12

SELECTED SUMMARY HISTORICAL FINANCIAL DATA OF DISNEY

   13

SELECTED SUMMARY HISTORICAL FINANCIAL DATA OF PIXAR

   15

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

   16

COMPARATIVE PER SHARE MARKET PRICE DATA

   18

RISK FACTORS

   19

Risk Factors Relating to the Merger

   19

Risk Factors Relating to Disney

   21

Risk Factors Relating to Pixar

   25

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

   41

THE PIXAR SPECIAL MEETING

   43

THE MERGER

   46

Background of the Merger

   46

Recommendation of the Pixar Board of Directors and Its Reasons for the Merger

   50

Opinion of Pixar’s Financial Advisor

   52

Disney’s Reasons for the Merger

   57

Interests of Executive Officers and Directors of Pixar in the Merger

   58

Material United States Federal Income Tax Consequences of the Merger

   61

Regulatory Matters

   62

Accounting Treatment

   63

Listing of Disney Common Stock

   64

Delisting and Deregistration of Pixar Common Stock after the Merger

   64

Dissenters’ Rights

   64

Restrictions on Sales of Shares of Disney Common Stock Received in the Merger

   67

 

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     Page

THE MERGER AGREEMENT

   68

The Merger

   68

Completion and Effectiveness of the Merger

   68

Conversion of Securities

   68

Treatment of Pixar Stock Options and Assumption of Pixar Stock Option Plan

   69

Fractional Shares

   69

Exchange Procedures

   69

Distributions with Respect to Unexchanged Shares

   70

Lost, Stolen and Destroyed Certificates

   70

Dissenting Shares

   70

Representations and Warranties

   71

Pixar’s Conduct of Business Before Completion of the Merger

   72

Disney’s Conduct of Business Before Completion of the Merger

   74

Pixar Is Prohibited From Soliciting Other Offers

   74

Obligation of Pixar Board of Directors with Respect to Its Recommendation and Holding of a Shareholder Meeting

   75

Regulatory Matters

   76

Reasonable Best Efforts to Complete the Merger

   76

Access to Information

   77

Director and Officer Indemnification and Insurance

   77

Employee Benefits; 401(k) Plan

   78

Directorship

   78

Feature Animation Management and Operations

   78

Grant of Equity Compensation Awards

   78

Conditions to Obligations to Complete the Merger

   79

Definition of Material Adverse Effect

   80

Termination; Termination Fee

   81

Miscellaneous

   83

THE VOTING AGREEMENT

   84

Agreement to Vote and Irrevocable Proxy

   84

Transfer Restrictions

   84

Termination

   84

MATERIAL CONTRACTS BETWEEN DISNEY AND PIXAR PRIOR TO THE MERGER

   85

Co-Production Agreement

   85

Distribution Letter Agreement

   89

COMPARISON OF SHAREHOLDER RIGHTS

   90

General

   90

Certain Differences Between the Rights of Stockholders of Disney and Shareholders of Pixar

   90

FUTURE PIXAR SHAREHOLDER PROPOSALS

   100

LEGAL MATTERS

   100

EXPERTS

   100

WHERE YOU CAN FIND MORE INFORMATION

   101

 

Annexes


    

Annex A

   Agreement and Plan of Merger

Annex B

   Voting Agreement between Disney and Steven P. Jobs

Annex C

   Opinion of Credit Suisse Securities (USA) LLC

Annex D

   Chapter 13 of the California General Corporation Law

 

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ADDITIONAL INFORMATION

 

This proxy statement/prospectus incorporates important business and financial information about Disney and Pixar from documents that each company has filed with the Securities and Exchange Commission but that have not been included in or delivered with this proxy statement/prospectus. For a listing of documents incorporated by reference into this proxy statement/prospectus, please see “Where You Can Find More Information” beginning on page 101 of this proxy statement/prospectus.

 

Disney will provide you with copies of such documents relating to Disney (excluding all exhibits unless Disney has specifically incorporated by reference an exhibit in this proxy statement/prospectus), without charge, upon written or oral request to:

 

The Walt Disney Company

500 South Buena Vista Street, MC 9722

Burbank, California 91521

Shareholder Services Department

(818) 553-7200

 

Pixar will provide you with copies of such documents relating to Pixar (excluding all exhibits unless Pixar has specifically incorporated by reference an exhibit in this proxy statement/prospectus), without charge, upon written or oral request to:

 

Pixar

1200 Park Avenue

Emeryville, California 94608

Attn: Investor Relations

(510) 752-3000

 

In order for you to receive timely delivery of the documents in advance of the Pixar Special Meeting, Disney or Pixar should receive your request no later than April 28, 2006.


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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

 

The following are some questions that you, as a shareholder of Pixar, may have regarding the merger and the Special Meeting of Pixar shareholders and brief answers to those questions. Pixar urges you to read carefully the remainder of this proxy statement/prospectus because the information in this section may not provide all the information that might be important to you with respect to the merger being considered at the Special Meeting. Additional important information is also contained in the annexes to, and the documents incorporated by reference in, this proxy statement/prospectus.

 

Q: Why am I receiving this proxy statement/prospectus?

 

A: Disney agreed to acquire Pixar under the terms of a merger agreement that is described in this proxy statement/prospectus. Please see “The Merger Agreement” beginning on page 68 of this proxy statement/prospectus. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A.

 

     In order to complete the merger, Pixar shareholders must approve the principal terms of the merger agreement and approve the merger, and all other conditions to the merger must be satisfied or waived. Pixar will hold a Special Meeting of its shareholders to obtain this approval.

 

     This proxy statement/prospectus contains important information about the merger, the merger agreement and the Special Meeting of the shareholders of Pixar, and you should read this proxy statement/prospectus carefully.

 

     Your vote is very important. We encourage you to vote as soon as possible. The enclosed voting materials allow you to vote your Pixar shares without attending the Special Meeting. For more specific information on how to vote, please see the questions and answers below.

 

Q: Why are Disney and Pixar proposing the merger?

 

A: We believe that combining the strengths of our two companies is in the best interests of each company and our respective shareholders. This acquisition combines Pixar’s creative and technological resources with Disney’s portfolio of world-class family entertainment, characters, theme parks and other franchises, which we expect will result in new creative output and technological innovation that can fuel future growth across the businesses. By combining Pixar with Disney, Pixar’s shareholders will participate in the benefits expected to be derived from the merger, such as a greater ability for Pixar to develop fully the creative assets previously developed by Pixar, the opportunity to leverage Disney’s numerous distribution channels and the benefits of combining the Disney and Pixar brands to more fully exploit their combined market potential. The merger will also enable the shareholders to participate in the success of the combined animation businesses of Pixar and Disney. To review the reasons for the merger in greater detail, see “The Merger—Recommendation of the Pixar Board of Directors and Its Reasons for the Merger” beginning on page 50 and “The Merger—Disney’s Reasons for the Merger” beginning on page 57 of this proxy statement/prospectus.

 

Q: How does the Pixar board of directors recommend that Pixar shareholders vote?

 

A: The Pixar board of directors unanimously recommends that Pixar shareholders vote “FOR” the proposal to approve the principal terms of the merger agreement and to approve the merger. The Pixar board of directors has determined that the merger agreement and the merger are advisable, fair to and in the best interests of Pixar and its shareholders. Accordingly, the Pixar board of directors has approved the merger agreement and the merger contemplated by the merger agreement. For a more complete description of the recommendation of the Pixar board of directors, see “The Pixar Special Meeting—Pixar Board of Directors’ Recommendation” beginning on page 43 of this proxy statement/prospectus and “The Merger—Recommendation of the Pixar Board of Directors and Its Reasons for the Merger” beginning on page 50 of this proxy statement/prospectus.

 

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Q: What will happen in the merger?

 

A: Pursuant to the terms of the merger agreement, Lux Acquisition Corp., a wholly-owned subsidiary of Disney, will merge with and into Pixar, and Pixar will survive and continue as a wholly-owned subsidiary of Disney.

 

Q: What consideration will Pixar shareholders receive in the merger?

 

A: Pixar shareholders will receive 2.3 shares of Disney common stock for each share of Pixar common stock they own. Each Pixar shareholder will receive cash for any fractional share of Disney common stock that such shareholder would be entitled to receive in the merger after aggregating all fractional shares to be received by such shareholder.

 

Q: When do Disney and Pixar expect the merger to be completed?

 

A: Disney and Pixar are working to complete the merger as quickly as practicable and currently expect that the merger could be completed promptly after the Special Meeting. However, we cannot predict the exact timing of the completion of the merger because it is subject to regulatory approvals and other conditions.

 

Q: What are the United States federal income tax consequences of the merger?

 

A: We expect the merger to qualify as a “reorganization” within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code. If the merger qualifies as a reorganization, Pixar shareholders generally will not recognize any gain or loss upon the receipt of Disney common stock in exchange for Pixar common stock in connection with the merger, except for cash received in lieu of a fractional share of Disney common stock.

 

Pixar shareholders are urged to read the discussion in the section entitled “The Merger—Material United States Federal Income Tax Consequences of the Merger” beginning on page 61 of this proxy statement/prospectus and to consult their tax advisors as to the United States federal income tax consequences of the merger, as well as the effects of state, local and non-United States tax laws.

 

Q: What vote of Pixar shareholders is required to approve the principal terms of the merger agreement and to approve the merger contemplated by the merger agreement?

 

A: Approval of the principal terms of the merger agreement and approval of the merger require the affirmative vote of the holders of a majority of the outstanding shares of Pixar common stock entitled to vote at the Special Meeting. Only holders of record of Pixar’s common stock at the close of business on March 16, 2006, the Record Date, are entitled to notice of and to vote at the Special Meeting. As of the Record Date, there were 120,839,373 shares of Pixar’s common stock outstanding and entitled to vote at the Special Meeting.

 

Q: Are there any risks related to the merger or any risks relating to owning Disney common stock?

 

A: Yes. You should carefully review the section entitled “Risk Factors” beginning on page 19 of this proxy statement/prospectus.

 

Q: Is there any shareholder already committed to vote in favor of the merger?

 

A: Yes. Pursuant to a voting agreement, Steven P. Jobs agreed to vote shares of Pixar common stock held by him on the Record Date of the Special Meeting representing 40% of the outstanding shares of Pixar in favor of the merger. For a more complete description of the voting agreement, see “The Voting Agreement” beginning on page 84 of this proxy statement/prospectus. The voting agreement is also attached to this proxy statement/prospectus as Annex B.

 

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Q: Am I entitled to dissenters’ rights?

 

A: If you are a Pixar shareholder, under California law, you may have the right to dissent from the merger and obtain payment in cash for the fair market value of your shares of common stock rather than shares of Disney common stock. In order to exercise dissenters’ rights, holders of at least 5% of the outstanding shares of Pixar must have filed a demand for payment under Chapter 13 of the California General Corporation Law. If you wish to exercise dissenters’ rights or preserve your right to do so, you must precisely comply with all of the procedures set forth in Chapter 13 of the California General Corporation Law, including voting “AGAINST” the approval of the principal terms of the merger agreement and approval of the merger and delivering a written demand to Pixar for purchase of your shares before the date of the Special Meeting. Chapter 13 of the California General Corporation Law is attached to this proxy statement/prospectus as Annex D.

 

     Holders of Disney common stock are not entitled to dissenters’ rights in connection with the issuance of Disney common stock in the merger.

 

Q: What will happen to Pixar’s outstanding options and restricted stock units in the merger?

 

A: Pixar’s outstanding options and restricted stock units will be assumed by Disney in the merger. Each option so assumed will thereafter represent an option to purchase a number of shares of Disney common stock equal to the number of shares of Pixar common stock subject to the option immediately prior to the merger (whether or not vested) multiplied by the exchange ratio, which is 2.3. Each restricted stock unit award so assumed will thereafter represent the right to receive a number of shares of Disney common stock equal to the number of shares of Pixar common stock subject to the restricted stock unit award immediately prior to the merger (whether or not vested) multiplied by the exchange ratio, which is 2.3. The assumed options and restricted stock units will have the same vesting and expiration provisions as the original Pixar options and restricted stock units, except for options held by an executive officer and non-employee directors, the vesting of which will accelerate. The exercise price per share for each assumed Pixar option will be equal to the exercise price per share of the original Pixar option divided by 2.3, rounded up to the nearest one-hundredth of a cent.

 

Q: When and where will the Special Meeting of Pixar’s shareholders be held?

 

A: The Special Meeting will take place in the Wattis Theater at the San Francisco Museum of Modern Art located at 151 Third Street, San Francisco, California 94103 on May 5, 2006, at 10:00 A.M. local time.

 

Q: Who can attend and vote at the Special Meeting?

 

A: All Pixar shareholders of record as of the close of business on March 16, 2006, the Record Date, are entitled to receive notice of and to vote at the Special Meeting.

 

Q: What should I do now in order to vote on the proposals being considered at the Special Meeting?

 

A: Pixar shareholders as of the Record Date may vote by proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope or by submitting a proxy over the Internet or by telephone by following the instructions on the enclosed proxy card. If you hold Pixar common stock in “street name,” which means your shares are held of record by a broker, bank or nominee, you must complete, sign, date and return the enclosed voting instruction form to the record holder of your shares with instructions on how to vote your shares. Please refer to the voting instruction form used by your broker, bank or nominee to see if you may submit voting instructions using the Internet or telephone.

 

    

Additionally, you may also vote in person by attending the Special Meeting. If you plan to attend the Special Meeting and wish to vote in person, you will be given a ballot at the Special Meeting. Please note,

 

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however, that if your shares are held in “street name,” and you wish to vote at the Special Meeting, you must bring a proxy from the record holder of the shares authorizing you to vote at the Special Meeting. Whether or not you plan to attend the Special Meeting, you should submit your proxy card or voting instruction form as described in this proxy statement/prospectus.

 

Q: Do I need to send in my Pixar stock certificates now?

 

A: No. You should not send in your Pixar stock certificates now. Following the merger, a letter of transmittal will be sent to Pixar shareholders informing them where to deliver their Pixar stock certificates in order to receive shares of Disney common stock and any cash in lieu of a fractional share of Disney common stock. You should not send in your Pixar common stock certificates prior to receiving this letter of transmittal.

 

Q: What will happen if I abstain from voting or fail to vote?

 

A: Your abstention or failure to vote or to instruct your broker to vote if your shares are held in “street name” will have the same effect as a vote against the proposal to approve the principal terms of the merger agreement and to approve the merger.

 

Q: Can I change my vote after I have delivered my proxy?

 

A: Yes. If you are a holder of record, you can change your vote at any time before your proxy is voted at the Special Meeting by:

 

    delivering a signed written notice of revocation to the Secretary of Pixar;

 

    signing and delivering a new, valid proxy bearing a later date;

 

    submitting another proxy by telephone or on the Internet (your latest telephone or Internet voting instructions will be followed); or

 

    attending the Special Meeting and voting in person, although your attendance alone will not revoke your proxy.

 

If your shares are held in “street name” you must contact your broker, bank or other nominee to change your vote.

 

Q: What should I do if I receive more than one set of voting materials for the Special Meeting?

 

A: You may receive more than one set of voting materials for the Special Meeting, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction forms. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction form for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction form that you receive.

 

Q: Who can help answer my questions?

 

A: If you have any questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card or voting instructions, you should contact:

 

Innisfree M&A Incorporated

501 Madison Avenue, 20th Floor

New York, New York 10022

Toll Free from within the United States and Canada: 877-456-3463

Banks and Brokers call collect: 212-750-5833

 

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SUMMARY

 

The following is a summary that highlights information contained in this proxy statement/prospectus. This summary may not contain all of the information that may be important to you. For a more complete description of the merger agreement and the merger contemplated by the merger agreement, we encourage you to read carefully this entire proxy statement/prospectus, including the attached annexes. In addition, we encourage you to read the information incorporated by reference into this proxy statement/prospectus, which includes important business and financial information about Disney and Pixar that has been filed with the Securities and Exchange Commission, referred to as the SEC. You may obtain the information incorporated by reference into this proxy statement/prospectus without charge by following the instructions in the section entitled “Where You Can Find More Information” beginning on page 101 of this proxy statement/prospectus.

 

The Companies

 

The Walt Disney Company

500 South Buena Vista Street

Burbank, California 91521

(818) 560-1000

 

The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company with operations in four business segments: Media Networks, Parks and Resorts, Studio Entertainment and Consumer Products.

 

The Media Networks segment is comprised of domestic broadcast television network, domestic television stations, cable/satellite networks and international broadcast operations, television production and distribution, domestic broadcast radio networks and stations and internet operations. As noted below, Disney recently entered into an agreement to combine its ABC radio business with Citadel Broadcast Corporation.

 

Disney owns and operates the Walt Disney World Resort and Disney Cruise Line in Florida, the Disneyland Resort in California and ESPN Zone facilities in several states. Disney manages and has effective ownership interests of 51% and 43%, respectively, in the Disneyland Resort Paris in France and Hong Kong Disneyland, which opened in September 2005. Disney also licenses the operations of the Tokyo Disney Resort in Japan. Disney’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions as well as resort properties.

 

The Studio Entertainment segment produces and acquires live-action and animated motion pictures, animated direct-to-video programming, musical recordings and live stage plays. Disney distributes produced and acquired films (including its film and television library and films produced by Pixar) to the theatrical, home entertainment, pay-per-view, video-on-demand, pay television and free-to-air television markets.

 

The Consumer Products segment partners with licensees, manufacturers, publishers and retailers throughout the world to design, promote and sell a wide variety of products based on existing and new Disney characters and other intellectual property. Disney also engages in retail, direct mail and online distribution of products based on its characters and films through The Disney Store, the Disney Catalog and DisneyDirect.com, respectively. Disney sold its North American Disney Store operations in November 2004, but continues to own and operate The Disney Store business outside of North America.

 

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Recent Developments

 

Unrelated to the merger of Disney and Pixar, on February 6, 2006, Disney and Citadel Broadcasting Corporation (“Citadel”) announced that their boards of directors approved a definitive agreement to combine ABC Radio assets, which include 22 radio stations and the ABC Radio Network, with Citadel. Disney stockholders would own approximately 52% of the new company and Disney would retain between $1.4 billion and $1.65 billion in cash depending on the market conditions at the date of closing. ESPN Radio and Radio Disney networks and stations are not included in the transaction. The transaction is valued at approximately $2.7 billion and is expected to be completed by the end of 2006, subject to regulatory approvals. However, there can be no assurance that the transaction will be completed or completed when expected or on the terms described here. The Citadel transaction and the merger of Disney and Pixar are separate and independent transactions and the occurrence or nonoccurrence of either transaction is not dependent on the occurrence or nonoccurrence of the other transaction.

 

Pixar

 

1200 Park Avenue

Emeryville, California 94608

(510) 752-3000

 

Pixar is a leading digital animation studio with the creative, technical and production capabilities to create animated feature films and related products. Pixar’s objective is to create, develop and produce computer-animated feature films with heartwarming stories and memorable characters that appeal to audiences of all ages. Through the creation of entertaining, enduring and successful films, Pixar seeks to maintain its position as a leading brand in animated feature films. To date, Pixar has created and produced six full-length computer-animated feature films, which were marketed and distributed by Disney. Pixar has won 20 Academy Awards® for its films and technical achievements, and Pixar’s six films have grossed an aggregate of more than $3.2 billion at the worldwide box office to date. Pixar’s next film, Cars, is scheduled for release on June 9, 2006. Pixar was incorporated in the state of California on December 9, 1985.

 

Recent Developments

 

On January 27, 2006, an action, titled Jonathan Levene v. Pixar et al., was filed in the Superior Court of the State of California for the County of Alameda, naming Pixar and all members of the Pixar board of directors as defendants. The complaint generally alleged that Pixar’s directors breached their fiduciary duties in approving the proposed merger between Pixar and Disney because they failed to maximize value for Pixar’s shareholders. The complaint sought class certification and certain forms of equitable relief, including enjoining the consummation of the proposed merger. The complaint did not seek compensatory damages. On January 30, 2006, the defendants removed the action to the United States District Court for the Northern District of California. On February 1, 2006, the plaintiff dismissed the action voluntarily.

 

The Merger

 

(see page 46)

 

Disney and Pixar agreed to the acquisition of Pixar by Disney under the terms of the merger agreement that is described in this proxy statement/prospectus. Pursuant to the merger agreement, Lux Acquisition Corp., a wholly-owned subsidiary of Disney, will merge with and into Pixar, with Pixar surviving the merger and continuing as a wholly-owned subsidiary of Disney. We have attached the merger agreement as Annex A to this proxy statement/prospectus. We encourage you to read carefully the merger agreement in its entirety because it is the legal document that governs the merger.

 

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Merger Consideration and the Treatment of Pixar Stock Options

 

Pixar shareholders will receive 2.3 shares of Disney common stock for each share of Pixar common stock they own. As a result, Disney expects to issue approximately 277.9 million shares of Disney common stock in the merger based on the number of shares of Pixar common stock outstanding on March 16, 2006. We refer to the stock to be issued to Pixar shareholders by Disney as the merger consideration. Each outstanding option to purchase Pixar common stock will be converted at the effective time of the merger into an option to acquire Disney common stock. Each option so assumed will thereafter represent an option to purchase a number of shares of Disney common stock equal to the number of shares of Pixar common stock subject to the option immediately prior to the merger (whether or not vested) multiplied by the exchange ratio, which is 2.3. The exercise price per share for each assumed Pixar option will be equal to the exercise price per share of the original Pixar option divided by 2.3.

 

For a full description of the merger consideration, see “The Merger Agreement—Conversion of Securities” beginning on page 68 of this proxy statement/prospectus. For a full description of the treatment of Pixar stock options, see “The Merger Agreement—Treatment of Pixar Stock Options and Assumption of Pixar Stock Option Plan” beginning on page 69 of this proxy statement/prospectus.

 

Fractional Shares

 

Disney will not issue fractional shares of Disney common stock in the merger. As a result, Pixar shareholders will receive cash for any fractional share of Disney common stock that they would otherwise be entitled to receive in the merger.

 

For a full description of the treatment of fractional shares, see “The Merger Agreement—Fractional Shares” beginning on page 69 of this proxy statement/prospectus.

 

Risk Factors

 

(see page 19)

 

In evaluating the merger agreement and the merger, you should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled “Risk Factors” beginning on page 19 of this proxy statement/prospectus.

 

Pixar Shareholders Entitled to Vote; Vote Required

 

(see page 43)

 

The Special Meeting of Pixar shareholders will be held on May 5, 2006 at 10:00 A.M., local time, in the Wattis Theater at the San Francisco Museum of Modern Art located at 151 Third Street, San Francisco, California 94103. At the Special Meeting, Pixar shareholders will be asked to approve the principal terms of the merger agreement and to approve the merger.

 

Only holders of record of Pixar’s common stock at the close of business on March 16, 2006, the Record Date, are entitled to notice of and to vote at the Special Meeting. As of the Record Date, there were 120,839,373 shares of Pixar’s common stock outstanding and entitled to vote at the Special Meeting.

 

Approval of the principal terms of the merger agreement and approval of the merger require the affirmative vote of the holders of a majority of the outstanding shares of Pixar common stock entitled to vote on the Record Date.

 

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Recommendation of the Pixar Board of Directors

 

(see page 50)

 

Pixar’s board of directors has unanimously determined that the merger is advisable, fair to and in the best interests of Pixar and its shareholders and recommends that you vote “FOR” approval of the principal terms of the merger agreement and approval of the merger.

 

Opinion of Pixar’s Financial Advisor

 

(see page 52)

 

Pixar’s financial advisor, Credit Suisse Securities (USA) LLC, delivered an opinion to the board of directors of Pixar to the effect that, as of January 24, 2006 and based upon and subject to the various considerations described in its written opinion, the exchange ratio was fair, from a financial point of view, to the holders of Pixar common stock, other than affiliates of Pixar.

 

The full text of the written opinion of Credit Suisse, which sets forth the assumptions made, procedures followed, matters considered, and qualifications and limitations on the review undertaken by Credit Suisse in rendering its opinion, is attached as Annex C to this proxy statement/prospectus. Holders of Pixar common stock are urged to, and should, read the opinion carefully and in its entirety. Credit Suisse provided its opinion for the information and assistance of the board of directors of Pixar in connection with its consideration of the merger. The Credit Suisse opinion addresses only the fairness, from a financial point of view, of the exchange ratio to the holders of Pixar common stock, other than affiliates of Pixar, as of the date of the Credit Suisse opinion. The Credit Suisse opinion does not address any other aspect of the proposed merger and does not constitute a recommendation as to how any holder of Pixar common stock should vote or act with respect to the merger or any other matter.

 

Ownership of Disney Following the Merger

 

Based on the number of shares of Pixar common stock outstanding as of March 16, 2006, Disney expects to issue approximately 277.9 million shares of Disney common stock in the merger. Based on the number of shares of Pixar common stock and the number of shares of Disney common stock outstanding on the Record Date, after completion of the merger, former Pixar shareholders will own approximately 12.62% of the then-outstanding shares of Disney common stock.

 

Share Ownership of Pixar Directors and Executive Officers

 

As of the Record Date, the directors and executive officers of Pixar beneficially owned and were entitled to vote 60,959,660 shares of Pixar common stock, which represent approximately 50.45% of Pixar common stock outstanding on that date. Concurrently with the execution and delivery of the merger agreement, on January 24, 2006, Disney entered into a voting agreement with Steven P. Jobs, the Chairman and Chief Executive Officer of Pixar. Approximately 48,335,749 shares, or 40%, of Pixar common stock outstanding on the Record Date are subject to the voting agreement. For more information regarding the voting agreement, see “The Voting Agreement” beginning on page 84 of this proxy statement/prospectus. The voting agreement is also attached to this proxy statement/prospectus as Annex B.

 

Interests of Executive Officers and Directors of Pixar in the Merger

 

(see page 58)

 

In considering the recommendation of the Pixar board of directors with respect to the merger agreement and the merger, Pixar shareholders should be aware that certain executive officers and directors of Pixar have

 

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interests in the merger that may be different from, or in addition to, the interests of Pixar shareholders generally. These interests include:

 

    the appointment of Pixar Chairman and Chief Executive Officer Steven P. Jobs to the board of directors of Disney following the merger;

 

    the grant of restricted stock units to Pixar President Edwin E. Catmull;

 

    the positions at Disney that certain Pixar executive officers are expected to hold upon completion of the merger;

 

    the acceleration of options and other potential benefits under Pixar Executive Vice President, Creative, John A. Lasseter’s employment contract as a result of the merger;

 

    the acceleration of options granted to non-employee directors as a result of the merger; and

 

    the continued indemnification and directors’ and officers’ insurance coverage of current Pixar directors and officers following the merger.

 

The Pixar board of directors was aware of these interests and considered them, among other matters, in making its recommendation.

 

Listing of Disney Common Stock and Delisting and Deregistration of Pixar Common Stock

 

(see page 64)

 

Application will be made to have the shares of Disney common stock issued in the merger approved for listing on the New York Stock Exchange. If the merger is completed, Pixar common stock will no longer be listed on the Nasdaq National Market and will be deregistered under the Securities Exchange Act of 1934, as amended, which is referred to as the Exchange Act, and Pixar will no longer file periodic reports with the SEC.

 

Dissenters’ Rights

 

(see page 64)

 

In the event that the holders of at least 5% of the outstanding shares of Pixar have filed a demand for payment under Chapter 13 of the California General Corporation Law, Pixar shareholders will have the right to have Pixar purchase their shares at the fair market value determined under Chapter 13 of the California General Corporation Law. The shares subject to such purchase are called “dissenting shares.” In general, to preserve their dissenters’ rights, Pixar shareholders who wish to exercise these rights must:

 

    vote their shares of Pixar common stock “AGAINST” approval of the principal terms of the merger agreement and approval of the merger;

 

    deliver a written demand to Pixar for purchase of their shares, which must be received by Pixar no later than the date of the Special Meeting;

 

    submit the dissenting shares for endorsement in accordance with Section 1302 of the California General Corporation Law; and

 

    comply with the other provisions of Chapter 13 of the California General Corporation Law, including continuously holding their shares of Pixar common stock from the date they make the demand through the completion of the merger.

 

The text of the California General Corporation Law governing dissenters’ rights is attached to this proxy statement/prospectus as Annex D. Your failure to comply with the procedures described in Annex D will result in the loss of your dissenters’ rights.

 

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Conditions to Completion of the Merger

 

(see page 79)

 

A number of conditions must be satisfied before the merger will be completed. These include, among others:

 

    the receipt of the approval of the principal terms of the merger agreement and approval of the merger by Pixar shareholders;

 

    the termination or expiration of all necessary waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1979, referred to as the HSR Act, and all other material antitrust laws, and the obtainment of all clearances and approvals that are strictly necessary for the completion of the merger, in each case, except as would not reasonably be expected to have a material adverse effect on the business and operations of the feature animation businesses of Disney and Pixar, taken as a whole, and the benefits that are expected to derive from the merger;

 

    the absence of any law or order that makes the consummation of the merger illegal in the United States or any foreign jurisdiction in which Disney or Pixar has substantial business and operations;

 

    the authorization for listing on the New York Stock Exchange of the shares of Disney common stock to be issued in the merger;

 

    the effectiveness of a registration statement on Form S-4 and no pending stop order relating thereto;

 

    the delivery of tax opinions of legal counsel to the effect that the merger will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended, which is referred to as the Internal Revenue Code;

 

    the representations and warranties of each party contained in the merger agreement being true and correct, except to the extent that breaches of such representations and warranties would not result in a material adverse effect on the representing party;

 

    the performance or compliance in all material respects of each party with all agreements and covenants contained in the merger agreement at the closing; and

 

    the absence of certain material adverse effects with respect to either party.

 

Each of Disney, Lux Acquisition Corp. and Pixar may waive the conditions to the performance of its respective obligations under the merger agreement and complete the merger even though one or more of these conditions have not been met. Neither Disney nor Pixar can give any assurance that all of the conditions to the merger will be either satisfied or waived or that the merger will occur.

 

Regulatory Matters

 

(see page 62)

 

The merger is subject to antitrust laws. Disney, Pixar and Steven P. Jobs have made all required filings under applicable U.S. antitrust laws with the Antitrust Division of the United States Department of Justice, referred to as the Antitrust Division, and the United States Federal Trade Commission, referred to as the FTC. The applicable waiting periods associated with those filings have expired. Disney and Pixar are also required to make applicable foreign antitrust filings. The applicable foreign antitrust filings have been made, but applicable foreign antitrust clearances, consents or approvals necessary for the completion of the merger have not yet all been obtained. Under the terms of the merger agreement, neither Disney nor Pixar would be required to enter into any consent arrangement that would be reasonably expected to have a material adverse effect on the feature animation businesses of Disney together with Pixar, taken as a whole, or the benefits that are expected to derive from the merger and other transactions contemplated by the merger agreement.

 

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Pixar Is Prohibited From Soliciting Other Offers

 

(see page 74)

 

The merger agreement contains detailed provisions that prohibit Pixar and its subsidiaries, officers, directors and representatives from taking any action to solicit or engage in discussions or negotiations with any person or group with respect to an acquisition proposal, as defined in the merger agreement, including an acquisition that would result in the person or group acquiring more than a 20% interest in Pixar’s total outstanding securities, a sale of more than 20% of Pixar’s assets or a merger or other business combination. The merger agreement does not, however, prohibit Pixar’s board of directors from considering and recommending to Pixar’s shareholders an unsolicited acquisition proposal from a third party if specified conditions are met.

 

Termination of the Merger Agreement and Termination Fee

 

(see page 81)

 

Under circumstances specified in the merger agreement, either Disney or Pixar may terminate the merger agreement. Subject to the limitations set forth in the merger agreement, the circumstances generally include if:

 

    Disney and Pixar mutually agree;

 

    the merger is not completed by September 30, 2006;

 

    any law has been enacted, entered, enforced or deemed applicable to the merger by a governmental entity that makes the consummation of the merger illegal in the United States or any foreign jurisdiction in which Disney or Pixar has substantial business and operations;

 

    a non-appealable final order is issued or granted by a governmental entity in the United States or any foreign jurisdiction in which Disney or Pixar has substantial business and operations that makes the merger illegal in the United States or any such foreign jurisdiction;

 

    the required approval of the shareholders of Pixar has not been obtained at its Special Meeting; or

 

    the other party commits a material breach of any representation, warranty, covenant or agreement that is not reasonably capable of being cured prior to September 30, 2006.

 

Under circumstances specified in the merger agreement, Disney may terminate the merger agreement if:

 

    Pixar’s board of directors withdraws (or modifies in a manner adverse to Disney in any material respect), or publicly proposes to withdraw (or modify in a manner adverse to Disney in any material respect), the adoption or recommendation by Pixar’s board of directors or any such committee thereof of the merger agreement or the merger or adopts or recommends, or proposes publicly to adopt or recommend, any acquisition proposal; or

 

    Pixar’s board of directors fails to reaffirm publicly its recommendation of the merger agreement and the merger within 10 business days following the commencement of a third-party tender or exchange offer for Pixar’s capital stock.

 

Under circumstances specified in the merger agreement, Disney or Pixar may also terminate the merger agreement if there has occurred a material adverse effect on the part of Pixar or Disney, as the case may be, due to the occurrence of certain events specified in the merger agreement.

 

Under circumstances specified in the merger agreement, Pixar may terminate the merger agreement in response to a superior proposal in compliance with the no solicitation provision discussed above, provided Disney has received the termination fee described below.

 

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Pixar has agreed to pay Disney $210 million as a termination fee if:

 

    the merger agreement is terminated by Disney because Pixar’s board of directors withdraws (or modifies in a manner adverse to Disney in any material respect), or publicly proposes to withdraw (or modify in a manner adverse to Disney in any material respect), the adoption or recommendation by Pixar’s board of directors or any such committee thereof of the merger agreement or the merger or adopts or recommends, or proposes publicly to adopt or recommend, any acquisition proposal;

 

    the merger agreement is terminated by Disney because Pixar’s board of directors fails to reaffirm publicly its recommendation of the merger agreement and the merger within 10 business days following the commencement of a third-party tender or exchange offer for Pixar’s capital stock;

 

    the merger agreement is terminated by Pixar in response to a superior proposal in compliance with the no solicitation provision discussed above; or

 

    all of the following three events have occurred: (i) prior to the Special Meeting, a qualified acquisition proposal has been made directly to Pixar’s shareholders or has become publicly known, or any person has publicly announced an intention to make a qualified acquisition proposal; (ii) thereafter the merger agreement is terminated by either Disney or Pixar because Pixar shareholder approval has not been obtained at a duly convened meeting; and (iii) within 12 months after such termination, Pixar enters into a definitive contract to consummate, or consummates, the transactions contemplated by such qualified acquisition proposal.

 

Material United States Federal Income Tax Consequences of the Merger

 

(see page 61)

 

Disney and Pixar expect that the merger will qualify as a “reorganization” within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code, and it is a condition to closing that each of Disney and Pixar receive opinions from legal counsel to the effect that the merger will so qualify. If the merger qualifies as a reorganization, Pixar shareholders generally will not recognize any gain or loss upon the receipt of Disney common stock in exchange for Pixar common stock in connection with the merger, except for cash received in lieu of a fractional share of Disney common stock.

 

Pixar shareholders are urged to read the discussion in the section entitled “The Merger—Material United States Federal Income Tax Consequences of the Merger” beginning on page 61 of this proxy statement/prospectus and to consult their tax advisors as to the United States federal income tax consequences of the merger, as well as the effect of state, local and non-United States tax laws.

 

Accounting Treatment

 

(see page 63)

 

In accordance with accounting principles generally accepted in the United States, Disney will account for the merger using the purchase method of accounting for business combinations.

 

Comparison of Rights of Disney Stockholders and Pixar Shareholders

 

(see page 90)

 

Pixar shareholders, whose rights are currently governed by the Pixar amended and restated articles of incorporation, the Pixar amended and restated bylaws and California law, will, upon completion of the merger, become stockholders of Disney and their rights will be governed by the Disney restated certificate of incorporation, the Disney amended and restated bylaws and Delaware law.

 

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SELECTED SUMMARY HISTORICAL FINANCIAL DATA OF DISNEY

 

The following selected financial data of Disney as of and for each of the five fiscal years in the period ended October 1, 2005 has been derived from Disney’s audited historical financial statements. The financial statements for those periods were audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The following unaudited selected financial data of Disney as of and for the three months ended December 31, 2005 and January 1, 2005 has been derived from Disney’s unaudited historical financial statements. The data below is only a summary and should be read in conjunction with Disney’s financial statements and accompanying notes, as well as management’s discussion and analysis of financial condition and results of operations, all of which can be found in publicly available documents, including those incorporated by reference into this proxy statement/prospectus. For a complete list of the documents incorporated by reference into this proxy statement/prospectus, please see “Where You Can Find More Information” beginning on page 101 of this proxy statement/prospectus.

 

    Three Months Ended

    Fiscal Year Ended

 
(In millions, except per share data)   December 31,
2005(1)


    January 1,
2005(2)


   

2005(3)


   

2004(4)


   

2003(5)


   

2002(6)


   

2001(7)


 

Statements of income

                                                       

Revenues

  $ 8,854     $ 8,666     $ 31,944     $ 30,752     $ 27,061     $ 25,329     $ 25,172  

Income before the cumulative effect of accounting change

    734       686       2,569       2,345       1,338       1,236       120  

Per common share

                                                       

Earnings before the cumulative effect of accounting change:

                                                       

Diluted

  $ 0.37     $ 0.33     $ 1.24     $ 1.12     $ 0.65     $ 0.60     $ 0.11  

Basic

    0.38       0.34       1.27       1.14       0.65       0.61       0.11  

Dividends

    0.27       0.24       0.24       0.21       0.21       0.21       0.21  

Balance sheets

                                                       

Total assets

  $ 53,667     $ 55,449     $ 53,158     $ 53,902     $ 49,988     $ 50,045     $ 43,810  

Borrowings

    13,203       13,714       12,467       13,488       13,100       14,130       9,769  

Shareholders’ equity

    25,351       26,336       26,210       26,081       23,791       23,445       22,672  

Statements of cash flows

                                                       

Cash provided (used) by:

                                                       

Operating activities

  $ 579     $ 156     $ 4,269     $ 4,370     $ 2,901     $ 2,286     $ 3,048  

Investing activities

    (109 )     (239 )     (1,691 )     (1,484 )     (1,034 )     (3,176 )     (2,015 )

Financing activities

    (374 )     207       (2,897 )     (2,701 )     (1,523 )     1,511       (1,257 )

(1) The three months ended December 31, 2005 results include a $57 million pre-tax gain on the sale of a cable television equity investment in Spain and a $13 million pre-tax gain the sale of the Discovery Magazine business. The diluted earnings per share impact of these gains was $0.02.
(2) The three months ended January 1, 2005 results include a $24 million benefit from the favorable resolution of certain income tax matters, partially offset by restructuring and impairment charges related to the sale of The Disney Store North America totaling $17 million, which had a net aggregate favorable impact of $0.01 per diluted share.
(3)

During fiscal 2005, Disney adopted Statement of Financial Accounting Standards No. 123R, Share Based Payment (SFAS 123R), which resulted in $253 million of pre-tax expense, or ($0.08) per diluted share. See Note 2 to the Consolidated Financial Statements in Disney’s 2005 Annual Report on Form 10-K incorporated herein by reference. In addition, as shown in the table on page 35 included in Item 7 of Disney’s 2005 Annual Report on Form 10-K incorporated herein by reference, the 2005 results include certain items which affected comparability. The impact on diluted earnings per share of these items was an

 

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aggregate favorable impact of $0.03 per share. The amounts do not reflect the cumulative effect of adopting Emerging Issues Task Force (EITF) Topic D-108, Use of the Residual Method to Value Acquired Assets Other Than Goodwill, which was a non-cash charge of $57 million ($36 million after-tax or $0.02 per diluted share). See Note 2 to the Consolidated Financial Statements in Disney’s Annual Report on Form 10-K incorporated herein by reference.

(4) During fiscal 2004, Disney adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46), and as a result, consolidated the balance sheets of Euro Disney and Hong Kong Disneyland as of March 31, 2004 and the income and cash flow statements beginning April 1, 2004, the beginning of Disney’s fiscal third quarter. Under FIN 46 transition rules, Euro Disney and Hong Kong Disneyland’s operating results continued to be accounted for on the equity method for the six-month period ended March 31, 2004. In addition, as shown in the table on page 35 included in Item 7 of Disney’s 2005 Annual Report on Form 10-K incorporated herein by reference, the 2004 results include certain items which affected comparability. The impact on diluted earnings per share of these items was an aggregate favorable impact of $0.04 per share.
(5) As shown in the table on page 35 included in Item 7 of Disney’s 2005 Annual Report on Form 10-K incorporated herein by reference, the 2003 results include certain items which affected comparability. The impact on diluted earnings per share of these items was an aggregate unfavorable impact of $0.01 per share. The amounts do not reflect the cumulative effect of adopting EITF 00-21, Revenue Arrangements with Multiple Deliverables, which was an after-tax charge of $71 million or ($0.03) per diluted share. See Note 2 to the Consolidated Financial Statements in Disney’s 2005 Annual Report on Form 10-K incorporated herein by reference.
(6) The 2002 results include a $216 million pre-tax gain on the sale of investments and a $34 million pre-tax gain on the sale of the Disney Stores in Japan. These items had a $0.06 and $0.01 impact on diluted earnings per share, respectively. During fiscal 2002, Disney acquired Fox Family Worldwide, Inc. for $5.2 billion. Effective at the beginning of fiscal 2002, Disney adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets and, accordingly, ceased amortization of goodwill and substantially all other intangible assets.
(7) The 2001 results include restructuring and impairment charges totaling $1.5 billion pre-tax. The charges were primarily related to the closure of GO.com, investment write downs and a work force reduction. The diluted earnings per share impact of these charges was ($0.52). The amounts do not reflect the cumulative effect of required accounting changes related to film and derivative accounting which were after-tax charges of $228 million and $50 million, respectively or ($0.11) and ($0.02) per diluted share, respectively.

 

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SELECTED SUMMARY HISTORICAL FINANCIAL DATA OF PIXAR

 

The following selected financial data of Pixar as of and for each of the five fiscal years in the period ended December 31, 2005, has been derived from Pixar’s audited historical financial statements. The financial statements for those periods were audited by KPMG LLP, an independent registered public accounting firm. The data below is only a summary and should be read in conjunction with Pixar’s financial statements and accompanying notes, as well as management’s discussion and analysis of financial condition and results of operations, all of which can be found in publicly available documents, including those incorporated by reference into this proxy statement/prospectus. For a complete list of the documents incorporated by reference into this proxy statement/prospectus, please see “Where You Can Find More Information” beginning on page 101 of this proxy statement/prospectus.

 

    Fiscal Year Ended

 
    2005

    2004

    2003

    2002

    2001

 
(In thousands, except per share data)                              

Statements of income

                                       

Revenues

  $ 289,116     $ 273,472     $ 262,498     $ 201,724     $ 70,223  

Net income

    152,938       141,722       124,768       89,950       36,217  

Earnings per common share(1)

                                       

Basic

  $ 1.29     $ 1.25     $ 1.15     $ 0.89     $ 0.38  

Diluted

    1.24       1.19       1.09       0.84       0.35  

Dividends

    —         —         —         —         —    

Balance sheets

                                       

Total assets

  $ 1,488,740     $ 1,275,037     $ 1,002,056     $ 732,066     $ 523,294  

Borrowings

    —         —         —         —         —    

Shareholders’ equity

    1,441,962       1,220,095       940,510       713,062       505,686  

Statements of cash flows

                                       

Cash provided (used) by:

                                       

Operating activities

  $ 156,353     $ 271,373     $ 124,803     $ (5,141 )   $ 60,116  

Investing activities

    (221,144 )     (374,752 )     (186,075 )     (85,231 )     (90,158 )

Financing activities

    41,497       83,720       65,161       78,514       23,090  

(1) Reflects the 2 for 1 stock split of Pixar common stock effected at the close of business on April 18, 2005.

 

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COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

 

The following table sets forth for Disney common stock and Pixar common stock certain historical, pro forma combined and pro forma combined equivalent per share financial information. The pro forma combined and pro forma combined equivalent income and dividend per share data reflects the merger as if it had been effective on October 1, 2004. The pro forma combined and pro forma combined equivalent net book value per share reflects the merger as if it had been effective on December 31, 2005.

 

The pro forma data in the tables assume that the merger is accounted for using the purchase method of accounting and represents a current estimate based on available information of the combined company’s results of operations for the periods presented. As of the date of this document, Disney has not completed the detailed valuation studies necessary to arrive at the required estimates of the fair market value of the Pixar assets to be acquired and liabilities to be assumed and the related allocations of purchase price, nor has it identified all the adjustments necessary to conform Pixar’s data to Disney’s accounting policies. However, Disney has made certain adjustments to the historical book values of the assets and liabilities of Pixar as of December 31, 2005 to reflect certain preliminary estimates of the fair values necessary to prepare the unaudited pro forma combined and pro forma combined equivalent data. The fair value adjustments included in the unaudited pro forma combined and pro forma combined equivalent data represent management’s estimate of these adjustments based upon currently available information. The preliminary purchase price allocation assigned value to certain identifiable intangible assets, including Pixar’s film library and the Pixar trademark and tradename. Actual results may differ from this pro forma combined data once Disney has determined the final purchase price for Pixar and has completed the detailed valuation studies necessary to finalize the required purchase price allocations and identified any necessary conforming accounting policy changes for Pixar. Accordingly, the final purchase price allocation, which will be determined subsequent to the closing of the merger, and its effect on results of operations, may differ materially from the pro forma combined amounts included in this section, although these amounts represent Disney management’s best estimates as of the date of this document.

 

The pro forma combined and pro forma combined equivalent data is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of Disney would have been had the merger occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position.

 

     Three Months
Ended
December 31,
2005


    Year
Ended
October 1,
2005


 

Disney historical data:

                

Income before cumulative effect of accounting change per basic share

   $ 0.38     $ 1.27  

Income before cumulative effect of accounting change per diluted share

   $ 0.37     $ 1.24  

Cash dividends per share

   $     $ 0.24  

Net book value per share(1)

   $ 13.19          

Pixar historical data:

                

Net income per basic share

   $ 0.26 (2)   $ 1.51 (3)

Net income per diluted share

   $ 0.25 (2)   $ 1.44 (3)

Cash dividends per share

   $ (2)   $ (3)

Net book value per share(1)

   $ 12.09          

Pro forma combined data(4):

                

Income before cumulative effect of accounting change per basic share(5)

   $ 0.34     $ 1.16  

Income before cumulative effect of accounting change per diluted share(5)

   $ 0.33     $ 1.14  

Cash dividends per share

   $     $ 0.24  

Net book value per share(1)

   $ 14.91          

 

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     Three Months
Ended
December 31,
2005


   Year
Ended
October 1,
2005


Pro forma combined equivalent data(6):

             

Income before cumulative effect of accounting change per basic share

   $ 0.78    $ 2.67

Income before cumulative effect of accounting change per diluted share

   $ 0.76    $ 2.62

Cash dividends per share

   $    $ 0.55

Net book value per share

   $ 34.29       

(1) The historical net book value per Disney and Pixar share is computed by dividing shareholders’ equity by the number of shares of Disney and Pixar common stock outstanding at December 31, 2005, respectively. The pro forma combined net book value per share is computed by dividing the pro forma combined shareholders’ equity by the pro forma number of shares of Disney common stock outstanding as of December 31, 2005, assuming the merger had occurred as of that date.

 

(2) The Pixar historical net income and cash dividends per share are shown for the three months ended December 31, 2005, and have been derived by subtracting (a) the unaudited statement of income of Pixar contained in its Form 10-Q for the nine months ended October 1, 2005 from (b) the audited statement of income of Pixar contained in its Annual Report on Form 10-K for the year ended December 31, 2005, which is incorporated by reference in this document.

 

(3) The Pixar historical net income and cash dividends per share are shown for the twelve months ended October 1, 2005 and have been derived by adding (a) the audited statement of income of Pixar contained in its Annual Report on Form 10-K for the year ended January 1, 2005 plus (b) the unaudited statement of income of Pixar contained in its Form 10-Q for the nine months ended October 1, 2005, and subtracting (c) the unaudited statement of income of Pixar contained in its Form 10-Q for the nine months ended October 2, 2004.

 

(4) The pro forma combined amounts for the three months ended December 31, 2005 have been developed from (a) the unaudited condensed consolidated financial statements of Disney contained in its Form 10-Q as of and for the three months ended December 31, 2005 and (b) the unaudited financial statements of Pixar as of and for the three months ended December 31, 2005 determined as described in Note 2 above. The pro forma combined amounts for the year ended October 1, 2005 were derived from (a) the audited consolidated financial statements of Disney contained in its Annual Report on Form 10-K as of and for the fiscal year ended October 1, 2005, which is incorporated by reference in this document and (b) the unaudited financial statements of Pixar as of and for the twelve months ended October 1, 2005 determined as described in Note 3 above.

 

(5) Shares used to calculate unaudited pro forma combined income per basic share were computed by adding 274 million shares assumed to be issued in the merger in exchange for the outstanding Pixar shares at December 31, 2005 to Disney’s weighted average shares outstanding for the respective periods. Shares used to calculate unaudited pro forma combined income per diluted share were computed by adding 274 million shares assumed to be issued in the merger and approximately 8 million common stock equivalents from Pixar stock options converted to Disney stock options (using the treasury stock method) to Disney’s weighted average shares outstanding.

 

(6) The pro forma combined equivalent data is calculated by multiplying the pro forma combined data amounts by the exchange ratio of 2.3 shares of Disney common stock for each share of Pixar common stock.

 

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COMPARATIVE PER SHARE MARKET PRICE DATA

 

Disney common stock trades on the New York Stock Exchange under the symbol “DIS.” Pixar common stock trades on the Nasdaq National Market under the symbol “PIXR.”

 

The following table sets forth the closing prices for Disney common stock and Pixar common stock as reported on the New York Stock Exchange and the Nasdaq National Market, respectively, on January 24, 2006, the last trading day before Disney and Pixar announced the merger, and March 31, 2006, the last trading day before the date of this proxy statement/prospectus. The table also includes the market value of Pixar common stock on an equivalent price per share basis, as determined by reference to the value of merger consideration to be received in respect of each share of Pixar common stock in the merger. These equivalent prices per share reflect the fluctuating value of the Disney common stock that Pixar shareholders would receive in exchange for each share of Pixar common stock if the merger was completed on either of these dates, applying the exchange ratio of 2.3 shares of Disney common stock for each share of Pixar common stock.

 

    

Disney

Common Stock


  

Pixar

Common Stock


  

Equivalent Value

of Pixar Common Stock


January 24, 2006

   $ 25.99    $ 57.57    $ 59.78

March 31, 2006

   $ 27.89    $ 64.14    $ 64.15

 

The above table shows only historical comparisons. These comparisons may not provide meaningful information to Pixar shareholders in determining whether to approve the principal terms of the merger agreement and to approve the merger. Pixar shareholders are urged to obtain current market quotations for Disney and Pixar common stock and to review carefully the other information contained in this proxy statement/prospectus or incorporated by reference into this proxy statement/prospectus, when considering whether to approve the principal terms of the merger agreement and to approve the merger. See “Where You Can Find More Information” beginning on page 101 of this proxy statement/prospectus.

 

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RISK FACTORS

 

In addition to the other information included in this proxy statement/prospectus, including the matters addressed in “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 41 of this proxy statement/prospectus, you should carefully consider the following risks before deciding whether to vote for approval of the principal terms of the merger agreement and approval of the merger. In addition, you should read and consider the risks associated with each of the businesses of Disney and Pixar because these risks will also affect the combined company.

 

Risk Factors Relating to the Merger

 

Although Disney and Pixar expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of various challenges.

 

Disney and Pixar believe that the merger will combine Pixar’s creative and technological resources with Disney’s portfolio of world-class family entertainment, characters, theme parks and other franchises, resulting in new creative output and technological innovation that can fuel future growth across the businesses of the combined company. Realizing the benefits anticipated from the merger will depend, in part, on the following:

 

    preserving the creative processes and culture of Pixar after the merger;

 

    retaining key employees;

 

    developing successful future feature films or sequels to existing feature films; and

 

    improving the overall performance of the feature animation businesses of the combined company.

 

The integration of a new company is a complex, costly and time-consuming process. This process may disrupt the business of either or both of the companies, and may not result in the full benefits expected by Disney and Pixar. We cannot assure you that the combination of Pixar with Disney will result in the realization of the anticipated benefits from the merger.

 

The issuance of shares of Disney common stock to Pixar shareholders in the merger will initially have a negative impact on the earnings per share of the combined company and will decrease the aggregate voting power of current Disney stockholders.

 

If the merger is completed, we expect that approximately 277.9 million shares of Disney common stock will be issued to Pixar shareholders based on the number of shares of Pixar common stock outstanding as of March 16, 2006. We expect that the merger will initially result in lower earnings per share than would have been earned by Disney in the absence of the merger. In addition, the issuance of shares in connection with the merger will decrease the aggregate voting power of Disney’s stockholders. We expect that over time the merger will yield benefits to the combined company such that the merger will ultimately be accretive to earnings per share. However, there can be no assurance that the increase in earnings per share expected in the long term will be achieved. In order to achieve increases in earnings per share as a result of the merger, the combined company will, among other things, need to effectively continue the successful operations of Pixar after the merger, develop successful sequels to previous Pixar productions, and improve the overall performance of the feature animation businesses of the combined company.

 

The price of Disney common stock may decline, which would decrease the value of the merger consideration to be received by Pixar shareholders in the merger.

 

The price of Disney common stock might decline from the $25.99 price per share at the close of trading on January 24, 2006, the last full trading day prior to the public announcement of the merger. Accordingly, if the price of Disney common stock declines prior to the completion of the merger, the value of the merger consideration to be received by Pixar shareholders in the merger will decrease as compared to the value on the date the merger was announced. See “The Merger Agreement—Conversion of Securities” beginning on page 68 of this proxy statement/prospectus.

 

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In addition, because the time that the merger is completed will be later than the time of the Special Meeting, Pixar shareholders will not know the exact value of the Disney common stock that will be issued in the merger at the time they vote on the merger proposal. As a result, if the market price of Disney common stock at the completion of the merger is lower than the market price at the time of the Special Meeting, the value of the Disney common stock that Pixar shareholders will receive as merger consideration will be less than the value on the date of the Special Meeting.

 

During the twelve-month period ending on March 31, 2006, the last trading day before the date of this proxy statement/prospectus, the closing price of Disney common stock varied from a low of $22.89 to a high of $29.00, and ended that period at $27.89. We encourage you to obtain current market quotations for Disney common stock before you vote your shares.

 

Disney and Pixar may be unable to obtain the regulatory approvals required to complete the merger.

 

The merger was subject to review by the Antitrust Division and the FTC under the HSR Act. Under the HSR Act, Disney, Pixar and Steven P. Jobs were required to make pre-merger notification filings and to await the expiration of the statutory waiting period prior to completing the merger. Disney, Pixar and Steven P. Jobs submitted the filings required by the HSR Act on February 6, 2006, and the statutory waiting period expired on March 8, 2006. The merger may also be subject to review by certain other governmental authorities under the antitrust laws of various other jurisdictions where Disney and Pixar conduct business.

 

While Disney and Pixar expect to obtain any remaining required regulatory clearances, consents and approvals, Disney and Pixar cannot be certain that any remaining required approvals will be obtained, nor can they be certain that the approvals will be obtained within the time contemplated by the merger agreement. A delay in obtaining any remaining required clearances, consents and approvals might delay and may possibly prevent the completion of the merger.

 

In addition, during or after the statutory waiting periods and clearance of the merger, and even after completion of the merger, either the Antitrust Division, the FTC, or other United States or foreign governmental authorities could challenge or seek to block the merger under the antitrust laws, as they deem necessary or desirable in the public interest. Moreover, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. Disney and Pixar cannot be sure that a challenge to the merger will not be made or that, if a challenge is made, Disney and Pixar will prevail. For a full description of the regulatory clearances, consents and approvals required for the merger, see “The Merger—Regulatory Matters” beginning on page 62 of this proxy statement/prospectus.

 

The merger agreement limits Pixar’s ability to pursue alternatives to the merger.

 

The merger agreement contains provisions that make it more difficult for Pixar to sell its business to a party other than Disney. These provisions include the general prohibition on Pixar soliciting any acquisition proposal or offer for a competing transaction, the requirement that Pixar pay a termination fee of $210 million if the merger agreement is terminated in specified circumstances and the requirement that Pixar submit the principal terms of the merger agreement and the merger to a vote of Pixar’s shareholders even if the Pixar board of directors changes its recommendation. See “The Merger Agreement—Termination; Termination Fee” beginning on page 81 of this proxy statement/prospectus, and “The Merger Agreement—Obligation of Pixar Board of Directors with Respect to Its Recommendation and Holding of a Shareholder Meeting” beginning on page 75 of this proxy statement/prospectus.

 

These provisions might discourage a third party that might have an interest in acquiring all of or a significant part of Pixar from considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per share market price than the current proposed merger consideration. Furthermore, the termination fee may result in a potential competing acquiror proposing to pay a lower per share price to acquire Pixar than it might otherwise have proposed to pay.

 

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Certain directors and executive officers of Pixar have interests in the merger that may be different from, or in addition to, the interests of Pixar shareholders.

 

When considering the Pixar board of directors’ recommendation that Pixar shareholders vote in favor of the proposal to approve the principal terms of the merger agreement and to approve the merger, Pixar shareholders should be aware that some directors and executive officers of Pixar have interests in the merger that may be different from, or in addition to, the interests of Pixar shareholders. These interests include the appointment of Pixar’s current Chairman and Chief Executive Officer to the Disney board of directors following completion of the merger, the grant of restricted stock units to Pixar President Edwin E. Catmull, the employment of certain Pixar executive officers at Disney, the acceleration of Pixar options granted to certain officers and directors and the right to continued indemnification and insurance coverage by Disney for acts or omissions occurring prior to the merger. As a result of these interests, these directors and officers could be more likely to vote to approve the principal terms of the merger agreement and to approve the merger contemplated by the merger agreement than if they did not hold these interests, and may have reasons for doing so that are not the same as the interests of other Pixar shareholders. For a full description of the interests of directors and executive officers of Pixar in the merger, see “The Merger—Interests of Executive Officers and Directors of Pixar in the Merger” beginning on page 58 of this proxy statement/prospectus.

 

Risk Factors Relating to Disney

 

For an enterprise as large and complex as Disney, a wide range of factors could materially affect future developments and performance. The most significant factors affecting Disney’s operations include the following:

 

Changes in U.S., global or regional economic conditions could adversely affect the profitability of any of Disney’s businesses.

 

A decrease in economic activity in the United States or in other regions of the world in which Disney does business could adversely affect demand for any of Disney’s businesses, thus reducing Disney’s revenue and earnings. A decline in economic conditions could reduce attendance and spending at one or more of Disney’s parks and resorts, purchase of or prices for advertising on Disney’s broadcast or cable networks or owned stations, prices that cable operators will pay for Disney’s cable programming, performance of Disney’s theatrical and home entertainment releases and purchases of Disney-licensed consumer products. In addition, an increase in price levels generally, or in price levels in a particular sector such as the energy sector, could result in a shift in consumer demand away from the entertainment and consumer products Disney offers, which could also adversely affect Disney’s revenues and, at the same time, increase Disney’s costs. Changes in exchange rates for foreign currencies may reduce international demand for Disney’s products, increase Disney’s labor or supply costs in non-United States markets or reduce the United States dollar value of revenue Disney receives from other markets.

 

Changes in public and consumer tastes and preferences for entertainment and consumer products could reduce demand for Disney’s entertainment offerings and products and reduce profitability.

 

Each of Disney’s businesses creates entertainment or consumer products whose success depends substantially on consumer tastes and preferences that change in often unpredictable ways. The success of Disney’s businesses depends on its ability to consistently create and distribute filmed entertainment, broadcast and cable programming, theme park attractions, resort facilities and consumer products that meet the changing preferences of the broad consumer market. Many of Disney’s businesses increasingly depend on worldwide acceptance of its offerings and products, and their success therefore depends on Disney’s ability to successfully predict and adapt to changing consumer tastes and preferences outside as well as inside the United States. Moreover, Disney must often invest substantial amounts in film production, broadcast and cable programming, theme park attractions or resort facilities before it learns the extent to which products will earn consumer acceptance. If Disney’s entertainment offerings and products do not achieve sufficient consumer acceptance, Disney’s revenue from advertising sales (which are based in part on ratings for the programs in which

 

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advertisements air) or subscription fees for broadcast and cable programming, from theatrical film receipts or home video sales, from theme park admissions, from sales of licensed consumer products or from sales of Disney’s other consumer products and services may decline and adversely affect the profitability of one or more of Disney’s businesses.

 

Changes in technology and in consumer consumption patterns may affect demand for Disney’s entertainment products or the cost of producing or distributing products.

 

The media and entertainment businesses in which Disney participates depend significantly on Disney’s ability to acquire, develop, adopt and exploit new technologies to distinguish Disney’s products and services from those of its competitors. In addition, new technologies affect the demand for Disney’s products and the time and manner in which consumers acquire and view some of Disney’s entertainment products. For example:

 

    the success of Disney’s offerings in the home entertainment market depends in part on consumer preferences with respect to home entertainment formats, including DVD players and personal video recorders, as well as the availability of alternative home entertainment offerings and technologies;

 

    technological developments offer consumers an expanding array of entertainment options and if consumers favor options Disney has not yet fully developed rather than the entertainment products Disney offers, Disney’s sales may be adversely affected.

 

The unauthorized use of Disney’s intellectual property rights may increase the cost of protecting these rights or reduce Disney’s revenues.

 

The success of Disney’s businesses is highly dependent on maintenance of intellectual property rights in the entertainment products and services Disney creates. New technologies such as peer-to-peer technology, high speed digital transmission (including digital distribution of theatrical films) and some features of digital video recorders have made infringement of Disney’s intellectual property in films and television programming easier and faster and enforcement of intellectual property rights more challenging. There is evidence that unauthorized use of intellectual property rights in the entertainment industry generally is a significant and rapidly growing phenomenon. These developments require Disney to devote substantial resources to protecting its intellectual property against unauthorized use and present the risk of increased losses of revenue as a result of sales of unauthorized products.

 

A variety of uncontrollable events may reduce demand for Disney’s products and services or impair Disney’s ability to provide or increase the cost of providing products and services.

 

Demand for Disney’s products and services, particularly its theme parks and resorts, is highly dependent on the general environment for travel and tourism. The environment for travel and tourism as well as demand for other entertainment products can be significantly adversely affected in the United States, globally or in specific regions as a result of a variety of factors beyond Disney’s control, including: adverse weather conditions or natural disasters (such as excessive heat or rain, hurricanes and earthquakes); health concerns; international, political or military developments; and terrorist attacks. These events, and others such as fluctuations in travel and energy costs and computer virus attacks or other widespread computing or telecommunications failures, may also damage Disney’s ability to provide its products and services. These events could therefore reduce Disney’s revenue or result in a reduction in demand for or ability to provide products and services or increase Disney’s costs to the extent damage is not covered by insurance or is subject to self-insurance.

 

Sustained increases in costs of pension and post-retirement medical and other employee health and welfare benefits may reduce Disney’s profitability.

 

With more than 133,000 employees, Disney’s profitability is substantially affected by costs of pension benefits and current and post-retirement medical benefits. In recent years, Disney has experienced significant increases in these costs as a result of macro-economic factors beyond Disney’s control, including increases in

 

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health care costs, declines in investment returns on plan assets and changes in discount rates used to calculate pension and related liabilities. At least some of these macro-economic factors may continue to put upward pressure on the cost of providing pension and medical benefits. Although Disney has actively sought to control increases in these costs, there can be no assurance that Disney will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of Disney’s businesses.

 

Changes in Disney’s business strategy or restructuring of Disney’s businesses may increase Disney’s costs or otherwise affect the profitability of Disney’s businesses.

 

As changes in Disney’s business environment occur Disney may need to adjust its business strategies to meet these changes or it may otherwise find it necessary to restructure its operations or particular businesses or assets. In addition, external events including acceptance of Disney’s theatrical offerings and changes in macro-economic conditions may impair the value of Disney’s assets. When these changes or events occur, Disney may incur costs to change its business strategy and may need to write down the value of assets. Disney may also need to invest in new businesses that have short-term returns that are negative or low and whose ultimate business prospects are uncertain. In any of these events, Disney’s costs may increase, it may have significant charges associated with the write-down of assets or returns on new investments may be lower than prior to the change in strategy or restructuring.

 

Macro-economic factors may impede access to or increase the cost of financing Disney’s operations and investments.

 

Changes in U.S. and global financial and equity markets, including market disruptions and significant interest rate fluctuations, may make it more difficult for Disney to obtain financing for Disney’s operations or investments or increase the cost of obtaining financing. In addition, Disney’s borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in significant part, on Disney’s performance as measured by credit metrics such as interest coverage and leverage ratios. A decrease in these ratings could increase Disney’s cost of borrowing or make it more difficult for Disney to obtain financing.

 

Increased competitive pressures may reduce Disney’s revenues or increase Disney’s costs.

 

Disney faces substantial competition in each of its businesses from alternative providers of the products and services it offers and from other forms of entertainment, lodging, tourism and recreational activities. Disney also must compete to obtain human resources, programming and other resources it requires in operating its business. For example:

 

    Disney’s broadcast and cable networks and stations compete for viewers with other broadcast, cable and satellite services as well as with home video products and Internet usage.

 

    Disney’s broadcast and cable networks and stations compete for the sale of advertising time with other broadcast, cable and satellite services, as well as newspaper, magazines, billboards and the Internet.

 

    Disney’s cable networks compete for carriage of their programming with other programming providers.

 

    Disney’s broadcast and cable networks compete for the acquisition of creative talent and sports and other programming with other broadcast and cable networks.

 

    Disney’s theme parks and resorts compete for guests with all other forms of entertainment, lodging, tourism and recreation activities.

 

    Disney’s studio operations compete for customers with all other forms of entertainment.

 

    Disney’s studio operations, broadcast and cable networks and publishing businesses compete to obtain creative and performing talent, story properties, advertiser support, broadcast rights and market share.

 

    Disney’s consumer products segment competes in the character merchandising and other licensing, publishing, interactive and retail activities with other licensors, publishers and retailers of character, brand and celebrity names.

 

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Competition in each of these areas may divert consumers from Disney’s creative or other products, or to other products or other forms of entertainment, which could reduce Disney’s revenue or increase Disney’s marketing costs. Competition for the acquisition of resources can increase the cost of producing Disney’s products and services.

 

Disney’s results may be adversely affected if long-term programming or carriage contracts are not renewed on sufficiently favorable terms.

 

Disney enters into long-term contracts for both the acquisition and the distribution of media programming and products, including contracts for the acquisition of programming rights for sporting events and other programs, and contracts for the distribution of Disney’s programming to cable and satellite operators. As these contracts expire, Disney must renew or renegotiate the contracts, and if Disney is unable to renew them on acceptable terms, it may lose programming rights or distribution rights. Even if these contracts are renewed, the cost of obtaining programming rights may increase (or increase at faster rates than Disney’s historical experience) or the revenue from distribution of programs may be reduced (or increase at slower rates than Disney’s historical experience). With respect to the acquisition of programming rights, particularly sports programming rights, the impact of these long-term contracts on Disney’s results over the term of the contracts depends on a number of factors, including the strength of advertising markets, effectiveness of marketing efforts and the size of viewer audiences. There can be no assurance that revenues from programming based on these rights will exceed the cost of the rights plus the other costs of producing and distributing the programming.

 

Changes in regulations applicable to Disney’s businesses may impair the profitability of Disney’s businesses.

 

Disney’s broadcast networks and television stations are highly regulated, and each of Disney’s other businesses is subject to a variety of United States and overseas regulations. These regulations include:

 

    United States FCC regulation of Disney’s television and radio networks and owned stations, including licensing of stations, ownership limits, prohibitions on “indecent” programming and restrictions on commercial time in children’s programming and regulation of Disney’s broadcasting businesses in non-United States markets.

 

    Environmental protection regulations.

 

    Federal, state and foreign privacy and data protection laws and regulations.

 

    Regulation of the safety of consumer products and theme park operations.

 

    Imposition by foreign countries of trade restrictions or motion picture or television content requirements or quotas.

 

    Domestic and international tax laws or currency controls.

 

Changes in any of these regulatory areas may require Disney to spend additional amounts to comply with the regulations, or may restrict Disney’s ability to offer products and services that are profitable.

 

Labor disputes may disrupt Disney’s operations and impair its profitability.

 

A significant number of employees in various of Disney’s businesses are covered by collective bargaining agreements, including employees of Disney’s theme parks and resorts as well as writers, directors, actors, production personnel and others employed in Disney’s media networks and studio operations. In addition, the employees of licensees who manufacture and retailers who sell Disney’s consumer products may be covered by collective labor agreements with their employers. A labor dispute involving Disney’s employees or the employees of Disney’s licensees or retailers who sell Disney’s consumer products may disrupt Disney’s operations and reduce Disney’s revenues, and resolution of disputes with Disney’s employees may increase Disney’s costs.

 

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Provisions in Disney’s corporate documents and Delaware state law could delay or prevent a change of control, even if that change would be beneficial to stockholders.

 

Disney’s restated certificate of incorporation contains a provision regulating the ability of stockholders to bring matters for action before annual and special meetings and authorizes Disney’s board of directors to issue and set the terms of preferred stock. The regulations on stockholder action could make it more difficult for any person seeking to acquire control of Disney to obtain stockholder approval of actions that would support this effort. The issuance of preferred stock could effectively dilute the interests of any person seeking control or otherwise make it more difficult to obtain control. In addition, Disney is subject to the anti-takeover provisions of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change of control in some circumstances.

 

The seasonality of certain of Disney’s businesses could exacerbate negative impacts on its operations.

 

Each of Disney’s businesses is normally subject to seasonal variations, as follows:

 

    Revenues in Disney’s Media Networks segment are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall.

 

    Revenues in Disney’s Parks and Resorts segment fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel. Peak attendance and resort occupancy generally occur during the summer months, when school vacations occur, and during early-winter and spring holiday periods.

 

    Revenues in Disney’s Studio Entertainment segment fluctuate based on the timing of theatrical motion picture, home entertainment and television releases. Release dates for theatrical, home entertainment and television products are determined by several factors, including timing of vacation and holiday periods and competition in the market.

 

    Revenues in Disney’s Consumer Products segment are influenced by seasonal consumer purchasing behavior and the timing of animated theatrical releases and generally peak in Disney’s first fiscal quarter due to the holiday season.

 

Accordingly, if a short term negative impact on Disney’s business occurs during a time of high seasonal demand (such as hurricane damage to Disney’s parks during the summer travel season), the effect could have a disproportionate effect on the results of that business for the year.

 

Risk Factors Relating to Pixar

 

Pixar’s operating results are primarily dependent on the success of its feature films, and forecasting is extremely difficult.

 

In 2006, Pixar’s revenue, operating results, and earnings per share will be largely dependent upon (1) the timing and amount of worldwide revenues and distribution costs for Cars, The Incredibles, Finding Nemo, and the titles in Pixar’s film library, (2) the timing, accuracy, and sufficiency of information Pixar receives from Disney to determine revenues and associated gross profits, (3) the timing and amount of non-film related revenues and expenses, (4) the accuracy of Pixar’s assumptions and judgments used to estimate certain revenues and associated gross profits, (5) the market price of Pixar’s common stock and related volatility and (6) domestic and international socioeconomic and political events that are beyond Pixar’s control.

 

Dependence on revenue from Pixar’s feature films.

 

Under the current Co-Production Agreement, which governs Pixar’s relationship with Disney regarding the five original computer-animated feature films to be produced under the Co-Production Agreement (the “Pictures”), Pixar and Disney share equally in the profits of Pixar’s animated feature films after Disney recovers

 

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its distribution fee and its marketing and distribution costs. Pursuant to the Distribution Letter Agreement, which governs Pixar’s relationship with Disney regarding its 2007 film Ratatouille, Pixar will receive all gross receipts of Ratatouille after Disney recovers its distribution fee and its marketing and distribution costs. Marketing and distribution costs include worldwide theatrical release costs, costs related to marketing and distribution of home videos in the United States and international markets, costs related to merchandise, and other distribution costs including third-party participations and residuals. Pixar remains dependent on the timing, accuracy, and sufficiency of information provided by Disney.

 

For Pixar’s business to be successful, its films must achieve box office success. While Pixar has been successful in the release of all six of its feature films, this level of success is highly unusual in the motion picture industry, and Pixar’s future releases may not achieve similar results. For fiscal year 2006, Pixar will be dependent primarily on the worldwide theatrical and worldwide home video releases and merchandising revenues of Cars, as well as the ongoing performance of Pixar’s other titles.

 

Forecasting film revenue and associated gross profits from Pixar’s feature films is extremely difficult.

 

Although Pixar has experienced a successful track record with the releases of its feature films, it is difficult to predict the worldwide box office success of Cars prior to its anticipated theatrical release on June 9, 2006. Even if Cars experiences a very successful worldwide theatrical run, it is difficult to predict the related home video, television licensing, merchandising and ancillary revenue streams. While customer acceptance of a film is initially measured by box office success, customer acceptance within each follow-on product category, such as home video, merchandise or television, depends on factors unique to each type of product, such as pricing, competitive products, and the time of year or state of the economy into which a product is released, among many other factors. In addition, Pixar has found that the degree of customer acceptance varies widely among foreign countries. While box office success is often a good indicator of general audience acceptance, the relative success of follow-on products is not always directly correlated, and the degree of correlation is difficult to predict.

 

It is also difficult to forecast the amount of revenues from The Incredibles, Finding Nemo and the titles in Pixar’s film library. The revenues generated from continued home video and merchandise sales can fluctuate due to various market factors. Because the revenues from films nearing the end of their life cycle tend to be relatively small, minor fluctuations can result in notable variances from Pixar’s forecast.

 

With respect to the difficulty of forecasting the timing of revenues, Disney distributes Pixar’s films and film-related products and therefore determines the timing of product releases. Although Pixar is moving towards a strategy to release its films theatrically worldwide within a narrower timeframe relative to its earlier films, the specific dates of the international releases for these films will depend on territory-specific factors, such as the local competitive environment, cultural events, and school holidays. Therefore, the timing of international revenues could span over several months, and the forecasting of such revenues is inherently more difficult.

 

In addition, the amount of revenue recognized in any given quarter or quarters from all of Pixar’s films depends on the timing, accuracy, and amount of information Pixar receives from Disney to determine revenues and associated gross profits. Although Pixar obtains from Disney the most current information available to recognize its share of revenue and to determine its film gross profit, Disney may make subsequent revisions to the information that it has provided, which could have a significant impact on Pixar in later periods. For instance, towards the end of the life cycle for a revenue stream, Disney may inform Pixar, and has in the past informed Pixar, of additional distribution costs to those previously forecasted. Such revisions have impacted and may continue to impact Pixar’s revenue share and film gross profit. In addition, through information it obtains from other sources, Pixar may make certain judgments and/or assumptions and adjust the information it receives from Disney. For example, Pixar makes adjustments to its home video revenues for estimates on return reserves that may differ from those reported by Disney. In determining its home video reserves, Pixar reviews information which includes Disney’s current return reserves, the historical returns for Pixar’s previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that is available. Disney has provided and may continue to provide Pixar with reserve information that may differ

 

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substantially from Pixar’s historical experience with its previous titles. Unless Disney provides a sufficient rationale as to why the market and sales performance are substantially different for a particular title, Pixar has and may continue to record reserves more consistent with its historical experience. The estimate for return reserves, whether based on historical information or more current information from Disney, is inherently subjective and may differ significantly from actual results. Pixar’s original estimates on reserves may be revised in future periods as new and additional information becomes available.

 

Pixar has utilized margin normalization, such as with merchandise or home video expenses, in accordance with the provisions of SOP 00-2. This may result in the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, rather than actual costs incurred if it is deemed to be a more accurate reflection of Pixar’s participation. Similar to return reserves, these expense estimates are reviewed and may be adjusted periodically to ensure the most accurate depiction of Pixar’s participation is reflected.

 

Any revisions to Pixar’s estimated reserves, margin normalization or updated information from Disney, as noted above, as well as findings from audit rights offered in accordance with the terms of the Co-Production Agreement, could have a material effect on Pixar’s financial statements in any given quarter or quarters.

 

With respect to capitalized film production costs, Pixar’s policy is to amortize these costs over the expected revenue streams as Pixar recognizes revenues from the associated films. The amount of film costs that will be amortized each quarter depends on how much future revenue Pixar expects to receive from each film. Unamortized film production costs are reviewed for indicators of impairment each reporting period on a film-by-film basis. If estimated remaining gross revenues are not sufficient to recover the unamortized film production costs, the unamortized film production costs will be written down to net realizable value. In any given quarter, if Pixar lowers its previous forecast with respect to total anticipated revenue from any individual feature film, it would be required to accelerate amortization of related film costs, resulting in lower gross margins. Such lower gross margins would adversely impact Pixar’s business, operating results, and financial condition.

 

Forecasting Pixar’s operating expenses is extremely difficult.

 

Pixar’s operating expenses will continue to be extremely difficult to forecast. Pixar budgets the direct costs of the Pictures with Disney and shares such costs equally (except with respect to Ratatouille). Pixar capitalizes its share of direct costs of film production in accordance with SOP 00-2. A substantial portion of all of Pixar’s other costs is incurred for the benefit of feature films (“Overhead”), including research and development expenses and general and administrative expenses. Portions of Pixar’s Overhead are included in the budgets for the Pictures under the Co-Production Agreement, and Pixar shares such costs equally with Disney under the Co-Production Agreement (except with respect to Ratatouille). With respect to the portion of Pixar’s Overhead that is not reimbursed by Disney, Pixar either (1) capitalizes such portion as film production costs, if required under SOP 00-2 or (2) charges it to operating expense in the period incurred. A substantial portion of Pixar’s Overhead is related to the Pictures produced pursuant to the Co-Production Agreement (except with respect to Ratatouille), and is therefore reimbursed by Disney. Since Pixar capitalizes other amounts in accordance with SOP 00-2, its reported operating expenses for the fiscal year ended December 31, 2005 have not reflected, and future reported operating expenses will not reflect, its true level of spending on the production of animated feature films, related products and Overhead. Further, as Pixar continues production of its films beyond the Co-Production Agreement, including Ratatouille, the production costs of which Pixar is financing in full, Pixar expects its operating expenses to continue to increase to the extent that they are not capitalized or shared with Disney.

 

Film production budgets may increase, and film production spending may exceed such budgets.

 

Pixar’s future film budgets may continue to increase due to factors including, but not limited to, (1) escalation in compensation rates of people required to work on current projects, (2) number of personnel required to work on current projects, (3) equipment needs, (4) the enhancement of existing, or the development of new, proprietary technology and (5) the expansion of facilities to accommodate the growth of the studio. The

 

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budgets for Cars and subsequent films and related products are expected to be greater than the budgets for Pixar’s previous films. Under the Co-Production Agreement, Pixar will continue to finance the budget for Cars equally with Disney. However, pursuant to the Distribution Letter Agreement, Pixar will finance all production costs of Ratatouille. Due to production exigencies, which are often difficult to predict, it is not uncommon for film production spending to exceed film production budgets, and Pixar’s current projects may not be completed within the budgeted amounts. In addition, when production of each film is completed, Pixar may incur significant carrying costs associated with transitioning personnel on creative and development teams from one project to another. These carrying costs increase overall production budgets and could have a material adverse effect on Pixar’s results of operations and financial condition.

 

Software revenue.

 

Pixar’s fiscal year 2006 earnings are expected to include revenues attributable to non-film related sources including software revenue; however, there can be no assurance as to the timing and amount of such revenues.

 

Other items affecting forecasting.

 

Pixar’s fiscal year 2006 earnings are expected to include other income and expenses such as interest income and tax expense. Interest income is difficult to predict and can fluctuate depending on cash, cash equivalents and investment balances as well as external factors beyond Pixar’s control, such as economic conditions and interest rates available to Pixar during the year. Pixar calculates its current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the tax implications are known. Pixar’s income tax rate for fiscal year 2005 was different from the U.S. statutory rate primarily due to state taxes, a tax benefit associated with certain income earned outside the United States, a tax deduction related to income attributable to domestic production activities, and certain tax exempt investment income. Pixar’s effective tax rate may fluctuate in future periods.

 

Changes in accounting pronouncements may also have a significant effect on Pixar’s results of operations. For example, in December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 123—Revised 2004 (“SFAS 123R), “Share-Based Payment,” which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such compensation expense in Pixar’s statements of income. Pixar will adopt SFAS 123R in the first quarter of fiscal year 2006. The pro forma disclosures, previously permitted under SFAS 123 and adopted by Pixar, no longer will be an alternative to financial statement recognition. Although Pixar has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, Pixar expects the adoption to increase its cost of revenues and operating expenses, and the adoption of SFAS 123R could make its net income less predictable in any given reporting period, could change the way Pixar compensates its employees, or may cause other changes in the way Pixar conducts its business.

 

Pixar’s operating results have fluctuated in the past, and such fluctuations are expected to continue.

 

Pixar’s revenues fluctuate significantly.

 

Pixar continues to expect significant fluctuations in its future quarterly and annual revenues because of a variety of factors, including the following:

 

    the timing of worldwide theatrical releases of its animated feature films;

 

    the success of its animated feature films;

 

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    the timing of the release of related products into their respective markets, such as home videos, television, and merchandising;

 

    the demand for such related products, which is often a function of the success of the related animated feature film;

 

    Disney’s costs to distribute and promote Pixar’s feature films and related products under the Co-Production Agreement;

 

    Disney’s success at marketing Pixar’s feature films and related products under the Co-Production Agreement;

 

    the timing and accuracy of information received from Disney and other sources on which Pixar bases estimates of revenue to be recognized from its animated feature films and related products;

 

    the timing and amount of non-film related revenues, such as the licensing of Pixar’s software;

 

    the competitive environment; and

 

    external socioeconomic and political events that are beyond Pixar’s control.

 

In particular, since Pixar’s revenue under the Co-Production Agreement and the Distribution Letter Agreement is directly related to the success of Pixar’s animated feature films, operating results are likely to fluctuate depending on the level of success of its animated feature films and related products. The revenues derived from the production and distribution of an animated feature film depend primarily on the film’s acceptance by the public, which cannot be predicted and does not necessarily bear a direct correlation to the production or distribution costs incurred. The commercial success of a motion picture also depends upon promotion and marketing, production costs and other factors. Further, the theatrical success of a feature film can be a significant factor in determining the amount of revenues generated from the sale of the related products.

 

Pixar’s operating expenses fluctuate.

 

Pixar expects continuing increases to its operating expenses to fund greater levels of research and development, to meet the demands of multiple films in production and to expand operations. In addition, Pixar expects its spending levels may increase significantly due to the following:

 

    continued investment in proprietary software systems;

 

    continued and potentially increasing competition costs for creative, technical and administrative talent;

 

    increased costs associated with the expansion of Pixar’s facilities;

 

    increased number of personnel required to support studio growth as Pixar has multiple films in parallel production;

 

    increased investment in creative development and Pixar-only financed films;

 

    increased proportion of operating expenses previously shared with Disney; and

 

    increased investment in administrative functions to support Pixar’s expanding operations.

 

A portion of Pixar’s operating expenses that are allocable to film productions is either capitalized by Pixar or reimbursed by Disney under the Co-Production Agreement. To the extent that Pixar does not capitalize (or Disney does not reimburse) the increases in expenses, its operating expenses will increase in fiscal year 2006. In addition, as Pixar increases the resources allocated to Ratatouille and other future productions, Pixar expects its operating expenses to increase significantly.

 

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Pixar’s scheduled successive releases of feature films will continue to place a significant strain on its resources.

 

Pixar has only produced and released six feature films to date and has limited experience with respect to producing more than one animated feature film at a time. Due to the strain on Pixar’s personnel from the effort required for the release of an upcoming film and the time required for creative development of future films, it is possible that Pixar would be unable to release a new film in successive years. In the past, Pixar has been required, and may continue to be required, to expand its employee base, increase capital expenditures and procure additional resources and facilities in order to accomplish the scheduled releases of its animated feature films. This growth and expansion has placed, and continues to place, a significant strain on Pixar’s resources. Pixar cannot provide any assurances that any future animated film will be released as scheduled or that this strain on resources will not have a material adverse effect on Pixar’s business, financial condition or results of operations. In addition, John A. Lasseter’s availability has been a key contribution to the successful completion of Pixar’s prior films. As Pixar moves towards releasing one film a year, there has been and will continue to be additional demands placed on his availability. In addition to Mr. Lasseter’s role as Pixar’s Executive Vice President, Creative, he is also the director of Cars, Pixar’s next feature film. A lack of his availability may adversely impact the success and timing of Pixar’s future films.

 

Pixar continuously implements a variety of new and upgraded operational and financial systems, procedures and controls, including improvement and maintenance of its accounting system, other internal management systems and backup systems. Pixar’s growth and these diversification activities, along with the corresponding increase in the number of employees and rapidly increasing costs, have resulted in increased responsibilities for Pixar’s management team. Pixar will need to continue to improve its operational, financial and management information systems, to hire, train, motivate and manage its employees, to integrate them into Pixar and to provide adequate facilities and other resources for them. Pixar cannot provide any assurance it will be successful in accomplishing all of these activities on a timely and cost-effective basis. Any failure to accomplish one or more of these activities on a timely and cost-effective basis would have a material adverse effect on Pixar’s business, financial condition and results of operations.

 

The Co-Production Agreement imposes several risks and restrictions on Pixar.

 

In 1997, Pixar and Disney entered into the Co-Production Agreement, pursuant to which Pixar agreed to produce the Pictures on an exclusive basis for distribution by Disney. This agreement generally provides that Pixar will be responsible for the development, pre-production and production of each Picture, while Disney will be responsible for the marketing, promotion, publicity, advertising and distribution of each Picture. On January 27, 2006, Pixar and Disney entered into a Distribution Letter Agreement regarding the distribution of an additional feature length animated film currently entitled Ratatouille. This agreement generally provides that Ratatouille will be deemed a “Picture” under and in accordance with the terms of the Co-Production Agreement, subject to certain exceptions discussed below in the section entitled “Material Contracts Between Disney and Pixar Prior to the Merger” beginning on page 85 of this proxy statement/prospectus. Pursuant to the Distribution Letter Agreement, the term of the Co-Production Agreement is extended until the delivery of Ratatouille to Disney, which is expected to occur in mid-2007.

 

Pixar is dependent on Disney for the distribution and promotion of Pixar’s feature films and related products.

 

The decisions regarding the timing of the theatrical release and related products, the marketing and distribution strategy, and the extent of promotional support are important factors in determining the success of Pixar’s motion pictures and related products. Under the terms of the Co-Production Agreement and Distribution Letter Agreement, Disney is required to market and distribute Pixar’s films in the same manner as Disney’s premier animated films, and Disney is required to consult with Pixar with respect to all major marketing and distribution decisions. While Disney is prohibited from distributing potential competing films within certain release collars, Pixar ultimately does not control (1) the manner in which Disney distributes Pixar’s animated feature films and related products, (2) the number of theaters to which Disney distributes Pixar’s feature films,

 

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(3) the specific timing of release of Pixar’s feature films and related products or (4) the specific amount or quality of marketing and promotional support of the feature films and related products as well as the associated promotional and marketing budgets. Because Disney co-finances the films developed and produced under the Co-Production Agreement (except for Ratatouille, which Pixar is solely financing under the Distribution Letter Agreement), distributes the films under the “Walt Disney Pictures” label and enjoys substantial financial benefits in the event that such films achieve significant box office revenues, Pixar believes that Disney desires such films to be successful. Nonetheless, Disney could make certain decisions as to marketing, distribution or promotion of the animated feature films or related products or the marketing and promotion of its own animated or other family films that could have a material adverse effect on Pixar’s business, operating results or financial condition. In addition, the costs for marketing, distribution and promotion of the films and related products are incurred well in advance of the release of such films and products, and Pixar experiences a delay in the receipt of proceeds from such films and products until after Disney recovers such costs. Pixar is also dependent on Disney for receiving accurate information on a timely basis on which Pixar bases estimates to recognize revenue and associated gross profit from the animated feature films and related products. If Pixar fails to receive accurate information from Disney, or fails to receive it on a timely basis, it could have a significant adverse effect on Pixar’s business, operating results or financial condition.

 

Disney has an exclusive arrangement with Pixar.

 

Pixar has agreed not to release or authorize the release of any of its feature length animated theatrical motion pictures, other than the Pictures, until twelve months from delivery of Ratatouille, which is currently scheduled for summer 2007.

 

Pixar also agreed not to develop or produce any rides or attractions for major theme parks not owned or operated by Disney. Except for Ratatouille, Pixar has agreed to give Disney a right to negotiate with respect to animated television productions or animated made-for-home video productions that Pixar proposes to produce during the term of the Co-Production Agreement. Disney, however, is not similarly restricted by the exclusivity provisions that bind Pixar under the Co-Production Agreement and, therefore, may develop, produce or distribute other feature length animated and theatrical motion pictures itself or enter into similar agreements with third parties. However, if Disney produces any derivative works of the Pictures (except for Ratatouille) without Pixar, Pixar is entitled to receive passive royalties pursuant to the terms of the Co-Production Agreement. See “Risk Factors Relating to Pixar—Pixar experiences intense competition with respect to its animated feature films, animation products, and software” beginning on page 33 of this proxy statement/prospectus.

 

Pixar has an obligation to finance production costs.

 

Pixar co-financed the first four films under the Co-Production Agreement, as well as Toy Story 2, and will continue to co-finance Cars and may co-finance or fully finance other related products to be developed and produced pursuant to the Co-Production Agreement. For example, Pixar has, in the past, elected to participate actively in various interactive games with Disney where Pixar funds half of the development costs of the games. Pixar also has approved for production and has begun financing Pixar-only financed films, including Ratatouille. If Pixar’s feature films and related products do not generate proceeds sufficient to more than offset its share of the production costs, Pixar’s business, operating results and financial condition will be materially adversely affected.

 

Disney retains the exclusive distribution and exploitation rights.

 

Disney retains the exclusive distribution and exploitation rights of each Picture, all characters and story elements of each Picture and all related products Pixar develops under the Co-Production Agreement (except for Ratatouille, which is subject to the terms and conditions of the Distribution Letter Agreement). Accordingly, except in certain specified circumstances, Pixar is not able to exploit or distribute any of its feature films or characters or elements of any of its feature films or related products developed under the Co-Production Agreement without a license from Disney. Pixar cannot provide any assurances that such a license would be available to it on commercially reasonable terms or at all.

 

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Disney can terminate the agreement under various circumstances.

 

Under the terms of the Co-Production Agreement, Disney may terminate the agreement under certain circumstances. For example, Disney is entitled to terminate the Co-Production Agreement in the event that certain types of competitors directly or indirectly acquire or control a 50% or greater ownership interest in Pixar or Pixar merges or consolidates into such a competitor. Disney would not lose any of its rights to distribute and exploit all feature films and all characters and elements of Pixar’s feature films and other products Pixar develops under the Co-Production Agreement. Further, in the event that Disney terminates the Co-Production Agreement, Pixar would be required to seek alternative channels for distribution of its animated feature films and related products. See “Material Contracts Between Disney and Pixar Prior to the Merger” beginning on page 85 of this proxy statement/prospectus.

 

There are significant risks associated with the motion picture industry.

 

The completion and commercial success of a motion picture is extremely unpredictable, and the motion picture industry involves a substantial degree of risk. Each motion picture is an individual artistic work, and its commercial success is primarily determined by audience reaction, which is unpredictable. The completion and commercial success of a motion picture also depends upon other factors, such as:

 

    talent and crew availability;

 

    financing requirements;

 

    distribution strategy, including the time of the year and the number of screens on which it is shown;

 

    the number, quality and acceptance of other competing films released into the marketplace at or near the same time;

 

    critical reviews;

 

    the availability of alternative forms of entertainment and leisure time activities;

 

    piracy and unauthorized recording, transmission and distribution of motion pictures;

 

    general socioeconomic conditions and political events;

 

    weather conditions; and

 

    other tangible and intangible factors.

 

All of these factors can change and cannot be predicted with certainty. In addition, motion picture attendance is seasonal, with the greatest attendance typically occurring during the summer and holidays. The release of a film during a period of relatively low theater attendance is likely to affect the film’s box office receipts adversely. Under the terms of the Co-Production Agreement, Pixar is guaranteed theatrical release either during the summer or holiday period. In addition, due to the expected release of a large number of family films by Disney and other movie studios in the next several years, it is possible that further saturation of the family film market, particularly computer graphics imagery (“CGI”) animated films, may adversely impact the commercial success of Pixar’s films, and therefore have a material adverse effect on Pixar’s business, financial condition and results of operations.

 

Motion picture piracy, which may intensify, could decrease the revenue Pixar receives from the exploitation of its films.

 

Piracy and the unauthorized recording, transmission and distribution of Pixar’s content are increasing challenges. Motion picture piracy is already prevalent outside of the United States, Canada and Western Europe and in countries where Pixar may have difficulty enforcing its intellectual property rights. Technological advances, such as the digital distribution of motion pictures, could increase the prevalence of piracy, including in the United States, because such advances simplify the creation, transmission and sharing of high quality

 

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unauthorized copies of motion pictures in theatrical release, on videotapes and DVDs, from pay-per-view through set top boxes and other devices and through unlicensed broadcasts on free TV and the Internet. The proliferation of unauthorized copies of Pixar’s products could have an adverse effect on its business, financial condition and results of operations and decrease the revenue Pixar receives from its legitimate products.

 

Motion picture trade associations such as the Motion Picture Association of America monitor the progress and efforts made by various countries to limit or prevent piracy. Some of these trade associations have initiated voluntary embargoes on motion picture exports to certain countries in the past to exert pressure on the governments of those countries to become more aggressive in preventing motion picture piracy. In addition, the U.S. government has publicly considered implementing trade sanctions against specific countries that, in its opinion, do not make appropriate efforts to prevent copyright infringements of U.S. produced motion pictures. There can be no assurance, however, that voluntary industry embargoes or U.S. government trade sanctions will be enacted or, if enacted, effective. If enacted, such actions could impact the amount of revenue that Pixar realizes from the international exploitation of motion pictures depending upon the countries subject to such action and the duration and effectiveness of such action. If embargoes or sanctions are not enacted or if other measures are not taken, Pixar may lose an indeterminate amount of additional revenue as a result of motion picture piracy.

 

In order for its feature films and related products to be successful, Pixar must develop appealing creative content.

 

The success of each animated feature film developed and produced by Pixar depends in large part upon its ability to develop and produce compelling stories and characters that will appeal to a broad audience. Traditionally, this process has been extremely difficult. While Pixar has enjoyed worldwide box office success with all of its feature films, there can be no assurance that similar levels of success will be achieved by its subsequent films, including Cars, Ratatouille and other future projects.

 

Pixar experiences intense competition with respect to its animated feature films, animation products, and software.

 

Animated Feature Films.

 

Pixar’s animated feature films compete and will continue to compete with family-oriented, animated and live action feature films and other family-oriented entertainment products produced by major movie studios, including Disney (as somewhat limited by the Co-Production Agreement), DreamWorks Animation SKG, Inc. (“DreamWorks”), Warner Bros. Entertainment (“Warner Bros.”), Sony Pictures Entertainment, Fox Entertainment Group Inc. (“Fox”), Paramount Pictures, Lucasfilm Ltd., Universal Studios, Inc., MGM/UA, and Studio Ghibli as well as numerous other independent motion picture production companies.

 

CGI is now the most prevalent form of animation among feature-length animated films, and the number of CGI-animated films released has been increasing significantly. Several movie studios have developed their own internal computer animation capability, which may be used for special effects in animated films and live action films in addition to creating CGI-animated feature films. For example, DreamWorks successfully produced and released Antz in 1998, Shrek in 2001, Shrek 2 and Shark Tale in 2004, and Madagascar in May 2005. Fox, through its subsidiary Blue Sky, successfully produced Ice Age, which was released in March 2002, and Robots, which was released in March 2005. Warner Bros. released The Polar Express in November 2004. Disney domestically distributed Valiant, a co-production with Vanguard Entertainment, in August 2005, and released Chicken Little, the first film produced by Disney’s new CGI feature animation department, in November 2005. Other movie studios may internally develop, license or sub-contract three-dimensional animation capability, or enter into co-production agreements with other studios capable of developing and producing three-dimensional CGI-animated films. Further, Pixar believes that continuing enhancements to commercially available computer hardware and software technology have lowered and will continue to lower barriers to entry for studios or special effects companies which intend to produce computer-animated feature films or other products.

 

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Pixar believes competition from animated feature films and family-oriented feature films will likely continue to intensify over the next several years. Primarily CGI-animated feature films currently expected to be released by major studios in 2006 include Ice Age 2, The Wild, Over the Hedge, Monster House, The Ant Bully, Open Season, Barnyard, Flushed Away, Happy Feet, and Meet the Robinsons, among others. Family oriented-feature films released or currently expected to be released by major studios in 2006 include The Shaggy Dog, Hoot, Garfield 2, Pirates of the Caribbean: Dead Man’s Chest, Flicka, Zoom, How to Eat Fried Worms, Santa Clause 3, Eragon and Charlotte’s Web, among others. Due to a potentially large number of CGI-animated feature films and family-oriented films scheduled for release over the next few years, it is possible that the market for these films will become further saturated.

 

Pixar’s films will continue to compete with the feature films of other movie studios for optimal release dates, audience acceptance, and exhibition outlets. In addition, Pixar competes and will continue to compete with other movie studios for the services of performing artists, and the services of other creative and technical personnel, particularly in the fields of animation and technical direction. Some of the other movie studios with which Pixar competes have significantly greater financial, marketing and other resources than Pixar does. In addition to box office and home video competition, other family-oriented films may continue to compete with The Incredibles, Finding Nemo, and the rest of Pixar’s film library, with respect to related television, merchandise, and other future revenue sources.

 

The Co-Production Agreement, as modified by the Distribution Letter Agreement, provides that Pixar will develop and produce six original computer-animated feature films. Because Disney co-finances the films developed and produced under the Co-Production Agreement (except for Ratatouille, which Pixar is financing in full under the Distribution Letter Agreement), distributes the films under the “Walt Disney Pictures” label, and enjoys financial benefits in the event that such films achieve significant box office revenues, Pixar believes that Disney desires such films to be successful. Nonetheless, during its long history, Disney has been a very successful producer and distributor of its own animated feature films. While the Co-Production Agreement imposes restrictions prohibiting Disney and its affiliates from releasing animated films or live action family films within certain release windows of Pixar’s films, including Ratatouille pursuant to the Distribution Letter Agreement, it is likely that other family-oriented motion pictures distributed by Disney or its affiliates will overlap in the market and compete with Pixar’s animated feature films. For example, Pirates of the Caribbean: The Curse of the Black Pearl, Spy Kids 3D: Game Over, and Freaky Friday competed directly with Finding Nemo for domestic theatrical market share during summer 2003. The home video releases of Pirates of the Caribbean: The Curse of the Black Pearl and Freaky Friday also competed with Finding Nemo in the worldwide home video market. The theatrical releases of Disney’s National Treasure and Miramax’s Finding Neverland in November 2004 competed with the worldwide theatrical release of The Incredibles, and the home video release of these films competed with The Incredibles in the worldwide home video market. Disney’s release of The Wild on April 14, 2006 and Pirates of the Caribbean: Dead Man’s Chest on July 7, 2006 will compete with Cars, which is scheduled for release on June 9, 2006. After Ratatouille, Disney may begin to release its movies during Pixar’s release windows. This could have an adverse impact on the commercial success required for Pixar to profit from future films. Pixar’s contractual arrangement with Disney also presents other risks. See “Risk Factors Relating to Pixar—The Co-Production Agreement imposes several risks and restrictions on Pixar” beginning on page 30 of this proxy statement/prospectus.

 

Computer Graphics Special Effects Firms.

 

Pixar also expects to compete with computer graphics special effects firms, including Industrial, Light & Magic (“ILM”), Rhythm & Hues, Tippett Studios, WETA Digital, Digital Domain, and Sony Pictures Imageworks. These computer graphics special effects firms may be capable of creating their own three-dimensional computer animated feature films or may produce such films for movie studios that compete with Pixar. For example, ILM has already created and produced three-dimensional character animation which was used for several central characters in live action films such as Star Wars Episode III: Revenge of the Sith. ILM has a royalty-free, paid-up license to use Pixar’s RenderMan® software and to obtain at no cost all enhancements and upgrades thereto. Other computer graphics special effects firms have licensed or may license RenderMan®. Accordingly, Pixar’s RenderMan®

 

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software may not provide it with a competitive advantage. Pixar also competes, or may in the future compete, with the above firms with respect to animation products other than feature films.

 

Software Publishers.

 

Pixar also experiences competition with respect to its RenderMan® software product. In particular, Pixar competes with makers of computer graphics imaging software, principally Mental Images GmbH sold as an OEM product through Alias, which was recently acquired by Autodesk, Discreet (a division of Autodesk), and Avid Technologies. In addition to Mental Images products, Autodesk also markets internally developed competing rendering software products at lower prices than the price at which Pixar offers RenderMan®. Under appropriate circumstances, Pixar has in the past elected and might in the future elect to license its rendering technology patents to other companies, some of which may compete with Pixar. In addition, as PCs become more powerful, software suppliers may also be able to introduce products for PCs that would be competitive with RenderMan® in terms of price and performance for professional users. In addition, there have been advances in graphics processing unit technology that may impinge on the market for software rendering solutions. Faster and lower cost graphic cards provide capability for users to produce pictures of higher complexity than previously available.

 

Pixar expects competition to persist, intensify and increase in each of its business areas in the future. Some of its current and potential competitors have longer operating histories, larger installed customer bases and significantly greater financial, technical, marketing and other resources than Pixar does. There can be no assurance that Pixar will be able to compete successfully against current or future competitors. Such competition could have a material adverse effect on Pixar’s business, operating results or financial condition.

 

Pixar’s success depends on certain key employees.

 

Pixar’s success depends to a significant extent on the performance of a number of senior management personnel and other key employees, especially its film directors, producers, animators, creative personnel and technical directors. In particular, Pixar is dependent upon the services of Steve Jobs, John A. Lasseter, Edwin E. Catmull, Simon Bax, and Lois Scali. Pixar does not currently have “key person” life insurance for any of its employees other than John A. Lasseter. Pixar has an employment agreement with Mr. Lasseter, however, such employment agreement does not necessarily assure the services of Mr. Lasseter. Moreover, although it is standard in the motion picture industry to rely on employment agreements as a method of retaining the services of key employees, Pixar has not required its employees, other than Mr. Lasseter, to enter into employment agreements. The loss of the services of any of Messrs. Jobs, Lasseter, Bax, Dr. Catmull, Ms. Scali or of other key employees, especially film directors, producers, animators, creative personnel and technical directors, could have a material adverse effect on Pixar’s business, operating results or financial condition.

 

Pixar’s Chief Executive Officer has divided responsibilities.

 

Pixar’s Chief Executive Officer and Chairman, Steve Jobs, is also Chief Executive Officer at Apple Computer, Inc. Although Mr. Jobs spends time at Pixar and is active in its management, he does not devote his full time and resources to Pixar.

 

To be successful, Pixar needs to attract and retain qualified personnel.

 

Pixar’s success continues to depend to a significant extent on its ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for the caliber of talent required to make films, particularly film directors, producers, animators, creative personnel and technical directors, will continue to intensify as more studios build their in-house CGI-animation or special effects capabilities. There can be no assurance that Pixar will be successful in identifying, attracting, hiring, training and retaining such personnel in the future. If Pixar was unable to hire, assimilate and retain qualified personnel in the

 

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future, particularly film directors, producers, animators, creative personnel and technical directors, such inability would have a material adverse effect on its business, operating results and financial condition.

 

Pixar faces various distribution risks with respect to its feature films.

 

Under the Co-Production Agreement, Disney is required to distribute the Pictures in a manner consistent with that of Disney’s premier animated films. Currently, distribution of Pixar’s films generally includes (1) worldwide theatrical exhibition, (2) worldwide home video sales, (3) worldwide television licensing, including video-on-demand, pay-per-view, pay television, network, basic cable and syndication, (4) non-theatrical exhibition, such as airlines, schools and armed forces facilities and (5) marketing of other rights of the picture, which may include licensing of merchandise, such as toys, interactive games and soundtrack recordings. Although the Co-Production Agreement provides Pixar with some protection, Pixar cannot provide any assurances that its feature films made under the Co-Production Agreement will be distributed through all of these outlets.

 

Although Pixar has enjoyed a tremendously successful track record with all six of its feature films, Pixar cannot provide any assurances that its future films will enjoy the same level of success. Currently, Disney shares the financial risks associated with the production of Pixar’s films under the Co-Production Agreement (except Ratatouille) by financing 50% of the production costs. In addition, under the Co-Production Agreement, Disney is responsible for financing 100% of the costs related to the marketing and distribution of the films. In the event that a film does not generate sufficient revenues to offset such costs, Pixar is not responsible for any losses Disney incurs. However, because Pixar anticipates financing 100% of the production costs of its future films, it expects to bear all of the financial risks associated with a future film’s production costs. In addition, Pixar cannot provide any assurances that future distribution agreements, if any, will provide Pixar with its current level of risk minimization related to the financing of marketing and distribution expenses. In addition, as additional entrants emerge in the animation marketplace, there may be increased competition for distribution partners.

 

Pixar has a limited operating history.

 

Until 1996, Pixar generated recurring revenue primarily from the license of its RenderMan® software, amounts received under software development contracts and fees for animated television commercial development. Pixar expects to generate a substantial majority of its future revenue from the development and production of animated feature films and related products, as it has since 1996. Pixar has, to date, developed, produced and released only six animated feature films. Accordingly, it has a limited operating history in implementing its business model upon which an evaluation of its prospects can be based. Pixar’s prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of a business enterprise, particularly companies in highly competitive markets. To address these risks, Pixar must, among other things, respond to changes in the competitive environment, continue to attract, retain and motivate qualified persons, and continue to upgrade its technologies. Pixar cannot provide any assurances that it will be successful in addressing such risks.

 

Pixar’s current and future commitments may have an adverse impact on its cash balances.

 

Pixar is currently co-financing Cars pursuant to the Co-Production Agreement and solely financing its other feature films including Ratatouille. The future production costs of Cars, Ratatouille and subsequent films, and any future expansion of its studio and headquarters in Emeryville, California, may have an adverse impact on Pixar’s cash and investment balances. As of December 31, 2005, Pixar had $1.0 billion in cash, cash equivalents and investments. Pixar believes that these funds, along with future cash provided by operating activities, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures, production costs for Cars and Ratatouille, as well as production and development costs for future films and development projects. To date, Pixar has chosen to use its existing cash resources to fund film production costs and construction costs. Pixar may continue to use its cash resources for such expenditures, or may choose to finance such capital expenditures through issuance of additional equity or debt securities, by obtaining a credit facility or by some

 

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other financing mechanism. The sale of additional equity or convertible debt securities would result in additional dilution to its shareholders. Moreover, Pixar cannot provide any assurances that it will be successful in obtaining future financing, or even if such financing is available, that it will obtain it on favorable terms or on terms providing it with sufficient funds to meet its obligations and objectives.

 

Pixar depends on its proprietary technology and computer systems for the timely and successful development of its feature films and related products.

 

Pixar cannot provide any assurances that it will not experience difficulties that could delay or prevent the successful development or production of future animated feature films or other related products. Among other things, because Pixar is dependent upon a large base of software and a large number of computers for the development and production of its animated feature films and related products, an error or defect in the software, a failure in the hardware or a failure of the backup processes could result in a significant delay in one or more productions in process which, in turn, could result in potentially significant delays in the release dates of feature films or other products. In the past, Pixar has experienced minor delays as a result of such matters. Significant delays in production and significant delays in release dates could have a material adverse effect on Pixar’s business, operating results or financial condition. Further, because it relies mostly on internally developed software, Pixar would not be able to rely upon assistance from third parties in the event that the software fails.

 

Pixar faces risks relating to the international distribution of its films and related products.

 

Because Pixar has historically derived a significant amount of its revenue from the exploitation of its films in territories outside of the United States, its business may be subject to risks inherent in international trade, many of which are beyond its control. These risks include:

 

    laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;

 

    differing cultural tastes and attitudes, including varied censorship laws;

 

    differing degrees of protection for intellectual property;

 

    financial instability and increased market concentration of buyers in foreign television markets, including European pay television markets;

 

    the instability of foreign economies and governments;

 

    fluctuating foreign exchange rates; and

 

    war and acts of terrorism.

 

A single shareholder owns a large percentage of Pixar’s outstanding stock.

 

Pixar’s Chief Executive Officer and Chairman, Steven P. Jobs, beneficially owned approximately 49.65% of Pixar’s outstanding common stock as of March 16, 2006. As a result, Mr. Jobs, acting alone, is virtually able to exercise sole discretion over all matters requiring shareholder approval, including the election of the entire board of directors and approval of significant corporate transactions, including an acquisition of Pixar. Such concentration of ownership may also have the effect of delaying or preventing a change in control of Pixar, impeding a merger, consolidation, takeover or other business combination involving Pixar, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of Pixar. Mr. Jobs entered into a voting agreement with Disney in connection with the proposed merger of Disney and Pixar. See “The Voting Agreement” beginning on page 84 of this proxy statement/prospectus.

 

Business interruptions could adversely affect Pixar’s operations.

 

Pixar’s operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond its control. Although Pixar has developed certain plans to respond in the event of a disaster, there can be no assurance that they will be effective in the event of a specific disaster. Its facilities in the

 

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State of California have in the past and may in the future be subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event of a short-term power outage, Pixar has installed UPS (uninterrupted power source) equipment to protect its RenderFarm and other sensitive equipment, along with two 1.5 Megawatt backup generators; however, a long-term power outage could disrupt operations. Prices for electricity have in the past risen dramatically and may increase in the future. An increase in prices would increase operating costs, which could in turn adversely affect Pixar’s profitability. Pixar does not carry earthquake insurance for earthquake related losses and although it carries business interruption insurance for other potential losses, there can be no assurance that such insurance will be sufficient to compensate it for losses that may occur. Any losses or damages incurred by Pixar could have a material adverse effect on its business and results of operations.

 

Terrorist activities and resulting military and other actions could adversely affect Pixar’s business.

 

The continued threat of terrorism within the United States and abroad, military action and heightened security measures in response to such threats, as well as other socioeconomic and political events, may cause significant disruption to commerce, including the entertainment industry, throughout the world. For example, the terrorist attacks in New York and Washington, D.C. on September 11, 2001 disrupted commerce throughout the United States and Europe. Such disruption in the future could have a material adverse effect on Pixar’s business and results of operations.

 

Work stoppages could adversely impact Pixar’s operations.

 

Although none of Pixar’s employees are represented by a labor union, it is common for film directors, producers, animators and actors at film production companies to belong to a union. There can be no assurance that Pixar’s employees will not join or form a labor union or that Pixar, for certain purposes, will not be required to become a union signatory. Pixar may be directly or indirectly dependent upon certain union members, and work stoppages or strikes organized by such unions could have a material adverse impact on its business, financial condition or results of operations. If a work stoppage occurs, it could delay the completion of Pixar’s films and have a material adverse effect on its business operating results or financial condition.

 

To be successful, Pixar will need to continuously enhance its existing proprietary technology and develop new technology.

 

Substantially all of Pixar’s revenues have been derived, and substantially all of its future revenues are expected to be derived, from the use and license of its proprietary technologies. Pixar expects that it will be required to enhance these technologies and to develop new technologies in order to be successful in its industry and in the licensing of its RenderMan® software. Pixar cannot provide any assurances that it will be successful in enhancing its existing technologies or in developing and utilizing new technologies, or that competitors will not develop technology that is equivalent or superior to Pixar’s technologies or that makes Pixar’s technologies obsolete. If Pixar is unable to develop enhancements to its existing technologies or new technologies as required, or if the costs associated with developing those technologies continue to increase, Pixar’s business, operating results or financial condition could be materially adversely affected.

 

There are various risks associated with Pixar’s proprietary rights.

 

Pixar’s efforts to protect its proprietary technologies may not succeed.

 

Pixar’s success and ability to compete is dependent in part upon its proprietary technology. While Pixar relies on a combination of patents, copyright and trade secret protection, nondisclosure agreements and cross-licensing arrangements to establish and protect its proprietary rights, Pixar believes that factors such as the technical and creative skills of its personnel are more essential to its success and ability to compete. Pixar currently has a number of patents in force in the United States and in foreign countries, as well as a number of patent applications pending in the United States and in foreign countries. Pixar cannot provide any assurances that patents will issue from any of these pending applications or that, if patents do issue, any claims allowed will

 

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be sufficiently broad to protect its technology. In addition, Pixar cannot provide any assurances that any patents that have been issued to it, or that it may license from third parties, will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide Pixar with any proprietary protection. Failure of the patents to provide protection of its technology may make it easier for Pixar’s competitors to offer technology equivalent to or superior to Pixar’s technology. Pixar generally enters into confidentiality or license agreements with its employees, consultants and vendors, and generally controls access to and distribution of its software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use Pixar’s proprietary information, products or technology without authorization, or to develop similar or superior technology independently. Policing unauthorized use of Pixar’s products is difficult and expensive. In addition, effective copyright, patent and trade secret protection may be unavailable or limited in certain foreign countries. Pixar generally relies on “electronically delivered” software licenses that include an electronic acceptance by the purchaser, which may be unenforceable under the laws of certain jurisdictions. Pixar cannot provide any assurances that the steps it takes will prevent misappropriation of its technology or that its confidentiality or license agreements will be enforceable.

 

Enforcing Pixar’s proprietary rights may require litigation.

 

Litigation may be necessary in the future to enforce Pixar’s intellectual property rights, to protect its trade secrets, to protect its patents, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on Pixar’s business, operating results or financial condition.

 

Others may assert infringement claims against Pixar.

 

One of the risks of the film production business is the possibility of claims that Pixar’s productions infringe on the intellectual property rights of third parties with respect to previously developed films, stories, characters or other entertainment. In addition, Pixar’s technology and software may be subject to patent, copyright or other intellectual property claims of third parties. Pixar has received, and is likely to receive in the future, claims of infringement of other parties’ proprietary rights. There can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against Pixar, or that any assertions or prosecutions will not have a material adverse effect on Pixar’s business, financial condition or results of operations. Irrespective of the validity or the successful assertion of such claims, Pixar would incur significant costs and diversion of resources with respect to the defense thereof, which could have a material adverse effect on its business, financial condition or results of operations. If any claims or actions are asserted against it, Pixar may seek to obtain a license under a third party’s intellectual property rights. Pixar cannot provide any assurances, however, that under such circumstances a license would be available on reasonable terms or at all.

 

Third-party technology licenses may not continue to be available to Pixar in the future.

 

Pixar also relies on certain technology that it licenses from third parties, including software that it integrates and uses with its internally developed software. Pixar cannot provide any assurances that these third-party technology licenses will continue to be available to it on commercially reasonable terms. The loss of, or inability to maintain any of these technology licenses could result in delays in feature film releases or product releases until equivalent technology could be identified, licensed and integrated. Any such delays in feature film releases or product releases could have a material adverse effect on Pixar’s business, operating results and financial condition.

 

The market price of Pixar’s common stock has been highly volatile in the past, and Pixar expects such volatility to continue.

 

The market price of Pixar’s common stock is highly volatile and is subject to wide fluctuations in response to a wide variety of factors, including the publication of box office results for its feature films and those of its

 

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competitors, fluctuations in its quarterly or annual results of operations, changes in financial estimates by securities analysts, announcements made by Pixar, Disney, or Pixar’s competitors, budget increases, delays in or cancellation of feature film or other product release dates, speculation about the negotiation of terms or conditions of Pixar’s next distribution arrangement, or socioeconomic, political or other factors. For example, since the beginning of fiscal year 2004 through March 31, 2006, Pixar’s common stock closed as low as $31.21 and as high as $65.92 per share. Moreover, in recent years, the stock market has experienced extreme price and volume fluctuations, some of which have been unrelated or disproportionate to the operating performances of the companies affected. These broad market and industry fluctuations may adversely affect the market price of Pixar’s common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. For instance, recently several purported securities class action lawsuits were filed against Pixar.

 

As described in “Risk Factors Relating to Pixar—Pixar’s operating results have fluctuated in the past, and such fluctuations are expected to continue” beginning on page 28 of this proxy statement/prospectus, Pixar believes that period-to-period comparisons of its results of operations may not be necessarily meaningful. Accordingly, you should not rely on Pixar’s annual and quarterly results of operations as any indication of future performance. In addition, it is possible that in some future period Pixar’s operating results will be below the expectations of public market analysts and investors or the guidance Pixar has provided. In such event, the price of Pixar’s common stock may be materially adversely affected.

 

While Pixar believes it currently has adequate internal control over financial reporting, Pixar is required to assess its internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in its financial reports and have an adverse effect on its stock price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (“Section 404”) and the rules and regulations promulgated by the SEC to implement Section 404, Pixar is required to include in its Form 10-K an annual report by its management regarding the effectiveness of its internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of Pixar’s internal control over financial reporting as of the end of its fiscal year. This assessment must include disclosure of any material weaknesses in Pixar’s internal control over financial reporting identified by management.

 

Management’s assessment of internal control over financial reporting requires management to make subjective judgments and, because this requirement to provide a management report is relatively new, some of management’s judgments will be in areas that may be open to interpretation. Therefore the management report may be uniquely difficult to prepare and Pixar’s auditors, who are required to issue an audit report covering Pixar’s internal control over financial reporting, may not agree with management’s assessment. While Pixar currently believes its internal control over financial reporting is effective, the effectiveness of its internal controls to future periods is subject to the risk that its controls may become inadequate because of changes in conditions, and, as a result, the degree of compliance of its internal control over financial reporting with the policies or procedures may deteriorate.

 

If Pixar is unable to assert that its internal control over financial reporting is effective in any future period (or if Pixar’s auditors are unable to express an opinion on the effectiveness of Pixar’s internal controls), Pixar could lose investor confidence in the accuracy and completeness of its financial reports, which may have an adverse effect on its stock price.

 

Pixar is subject to risks caused by the availability and cost of insurance.

 

Changing conditions in the insurance industry have affected most areas of corporate insurance. These changes have in the past and may in the future result in higher premium costs, higher deductibles and lower insurance coverage limits. Due to these factors, Pixar has elected to self-insure certain risks. For example, Pixar does not carry earthquake insurance due to its high cost.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

This proxy statement/prospectus and the other documents incorporated by reference into this proxy statement/prospectus contain or may contain “forward looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on Disney or Pixar’s current expectations about future events. Further, statements that include the words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. These forward-looking statements are found at various places throughout this proxy statement/prospectus and the other documents incorporated by reference. These forward-looking statements, including, without limitation, those relating to future actions, new projects, strategies, future performance, the outcome of contingencies such as future financial results, in each case relating to Disney or Pixar, respectively, wherever they occur in this proxy statement/prospectus or the other documents incorporated by reference herein, are necessarily estimates reflecting the best judgment of the respective managements of Disney and Pixar and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this proxy statement/prospectus and incorporated by reference into this proxy statement/prospectus. In addition to the risk factors identified elsewhere, important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation:

 

    the effects of adverse weather conditions or natural disasters;

 

    the impact of health concerns;

 

    the effect of changes in domestic and global economic conditions in general, and on the entertainment industry in particular;

 

    the effect of changes in consumer preferences;

 

    the ability of the combined company to compete successfully in the market for family-oriented entertainment products;

 

    the ability to obtain the approval of Pixar’s shareholders, to obtain or meet the closing conditions in the merger agreement, including applicable regulatory and tax requirements, and to otherwise complete the merger in a timely manner;

 

    the ability to develop successful future feature films or sequels to existing feature films;

 

    the performance of each company’s theatrical and home entertainment releases;

 

    the ability of each company to successfully execute its business strategies;

 

    the ability to timely and cost-effectively integrate the operations of Disney and Pixar;

 

    the ability to realize the synergies and other perceived advantages resulting from the merger;

 

    the ability to retain key personnel both before and after the merger;

 

    the ability to preserve the creative processes and culture of Pixar after the merger;

 

    the ability of each company to maintain, enforce and defend its patents and proprietary rights;

 

    the ability of each company to maintain or increase the demand for its products;

 

    changes in laws, including increased tax rates, regulations or accounting standards, third-party relations and approvals, and decisions of courts, regulators and governmental bodies; and

 

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    the ability of the combined company to control operating expenses and expenses of providing medical and pension benefits.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus or, in the case of documents incorporated by reference, as of the date of those documents. Neither Disney nor Pixar undertakes any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events, except as required by law.

 

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THE PIXAR SPECIAL MEETING

 

Date, Time and Place

 

The Special Meeting of Pixar shareholders will be held on May 5, 2006 at 10:00 A.M., local time, in the Wattis Theater at the San Francisco Museum of Modern Art located at 151 Third Street, San Francisco, California 94103.

 

Purpose; Other Matters

 

At the Special Meeting, Pixar shareholders will be asked to consider and vote upon a proposal to approve the principal terms of the merger agreement and to approve the merger. Upon completion of the merger, each outstanding share of Pixar common stock will be converted into the right to receive 2.3 shares of Disney common stock.

 

Pixar shareholders may also be asked to consider and vote upon such other business as may properly come before the Special Meeting, or any adjournment or postponement of the Special Meeting. Pixar is not aware of any business to be acted upon at the Special Meeting other than the proposal set forth in this proxy statement/prospectus. If, however, other matters incident to the conduct of the Special Meeting are properly brought before the Special Meeting, or any adjournment or postponement of the Special Meeting, the persons named as proxies will vote in accordance with their best judgment with respect to those matters. If you vote “AGAINST” the proposal, the proxies are not authorized to vote for any adjournments, postponements, continuations or reschedulings of the meeting, including for the purpose of soliciting additional proxies, unless you so indicate on the proxy card.

 

Pixar Board of Directors’ Recommendation

 

Pixar’s board of directors has carefully reviewed and considered the terms and conditions of the merger agreement. Based on its review, Pixar’s board of directors has unanimously determined that the merger is advisable, fair to and in the best interests of Pixar and its shareholders and recommends that you vote “FOR” the approval of the principal terms of the merger agreement and approval of the merger.

 

Record Date, Outstanding Shares and Voting Rights

 

Only holders of record of Pixar’s common stock at the close of business on March 16, 2006, the Record Date, are entitled to notice of and to vote at the Special Meeting. Such shareholders are entitled to cast one vote for each share of common stock held as of the Record Date on each matter properly submitted for the vote of shareholders at the Special Meeting. As of the Record Date, there were 120,839,373 shares of Pixar’s common stock outstanding and entitled to vote at the Special Meeting.

 

Quorum and Vote Required

 

The presence of the holders of a majority of the shares of common stock entitled to vote generally at the Special Meeting is necessary to constitute a quorum at the Special Meeting. Shareholders are counted as present at the Special Meeting if they are present in person or have voted by telephone, using the Internet or properly submitting a proxy card. Pixar intends to include abstentions and broker non-votes as present or represented for purposes of establishing a quorum for the transaction of business. A broker “non-vote” occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner.

 

The proposal to approve the principal terms of the merger agreement and to approve the merger requires the affirmative vote of the holders of a majority of the outstanding Pixar common stock entitled to vote on the Record Date. Because the required vote of Pixar shareholders is based upon the number of outstanding shares of Pixar common stock entitled to vote, rather than upon the shares actually voted, the failure by the holder of any such shares to submit a proxy or vote in person at the Special Meeting, including abstentions and broker non-votes, will have the same effect as a vote against approval of the principal terms of the merger agreement and approval of the merger.

 

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Voting by Pixar Directors and Executive Officers

 

As of the Record Date, the directors and executive officers of Pixar beneficially owned and were entitled to vote 60,959,660 shares of Pixar common stock, which represents approximately 50.45% of Pixar common stock outstanding on that date. Concurrently with the execution and delivery of the merger agreement, on January 24, 2006, Disney entered into a voting agreement with Steven P. Jobs, the Chairman and Chief Executive Officer of Pixar. Approximately 48,335,749 shares, or 40%, of Pixar common stock outstanding on the Record Date are subject to the voting agreement. For more information regarding the voting agreement, see “The Voting Agreement” on page 84 of this proxy statement/prospectus and the voting agreement attached as Annex B.

 

Adjournment and Postponement

 

Adjournments and postponements of the Special Meeting may be made for the purpose of, among other things, soliciting additional proxies. Pursuant to Pixar’s bylaws, the Special Meeting may be adjourned by the vote of a majority of the shares of Pixar common stock present in person or represented by proxy at the Special Meeting.

 

Voting of Proxies

 

Voting by telephone or using the Internet.

 

A shareholder may vote his or her shares by calling the toll-free number indicated on the enclosed proxy card and following the recorded instructions or by accessing the website indicated on the enclosed proxy card and following the instructions provided. When a shareholder votes by telephone or through the Internet, his or her vote is recorded immediately. Pixar encourages its shareholders to vote using these methods whenever possible.

 

Voting by proxy card.

 

All shares entitled to vote and represented by properly executed proxies received prior to the Special Meeting, and not revoked, will be voted at the Special Meeting in accordance with the instructions indicated on those proxies. If no instructions are indicated on a properly executed proxy, the shares represented by that proxy will be voted as recommended by Pixar’s board of directors. If any other matters are properly presented for consideration at the Special Meeting, the persons named in the enclosed proxy and acting thereunder will have discretion to vote on those matters in accordance with their best judgment. Pixar does not currently anticipate that any other matters will be raised at the Special Meeting.

 

Voting by attending the Special Meeting.

 

A shareholder may also vote his or her shares in person at the Special Meeting. If a shareholder attends the Special Meeting, he or she may submit his or her vote in person, and any previous votes that were submitted by the shareholder, whether by telephone, Internet or mail, will be superseded by the vote that such shareholder casts at the Special Meeting.

 

Revocability of Proxies

 

If a shareholder has voted by telephone, through the Internet or by returning a proxy card, such shareholder may change his or her vote before the Special Meeting.

 

A shareholder who has voted by telephone or through the Internet may later change his or her vote by making a timely and valid telephone or Internet vote, as the case may be, or by following the instructions in the next paragraph.

 

A shareholder may revoke any proxy given pursuant to this solicitation at any time before it is voted by (1) delivering to Pixar’s Corporate Secretary, at or before the taking of the vote at the Special Meeting, a written

 

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notice of revocation or a duly executed proxy, in either case dated later than the previously submitted proxy relating to the same shares, or (2) attending the Special Meeting and voting in person (although attendance at the Special Meeting will not of itself revoke a proxy). Any written notice of revocation or subsequent proxy must be received by Pixar’s Corporate Secretary prior to the taking of the vote at the Special Meeting. Such written notice of revocation or subsequent proxy should be hand-delivered to Pixar’s Corporate Secretary or sent to Pixar’s Corporate Secretary at 1200 Park Avenue, Emeryville, California 94608.

 

Solicitation of Proxies; Expenses

 

Pixar is soliciting proxies for the Special Meeting from Pixar shareholders. Pixar generally will bear all expenses in connection with the solicitation of proxies. Pixar may reimburse brokerage firms and other persons representing beneficial owners of shares for their reasonable expenses in forwarding solicitation materials to such beneficial owners. Pixar has also made arrangements with Innisfree M&A Incorporated to assist it in soliciting proxies. Pixar’s costs for such services will not be significant. Proxies may also be solicited by certain of Pixar’s directors, officers, and regular employees, without additional compensation, personally or by telephone, telegram, letter, electronic mail or facsimile.

 

Shareholders should not send stock certificates with their proxies. A letter of transmittal with instructions for the surrender of Pixar common stock certificates will be mailed to Pixar shareholders shortly after completion of the merger.

 

Assistance

 

If you need assistance in completing your proxy card or have questions regarding the Special Meeting, please contact Innisfree M&A Incorporated toll-free at 877-456-3463, or collect for banks and brokers at 212-750-5833.

 

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THE MERGER

 

The following is a description of the material aspects of the merger, including the merger agreement. While Disney and Pixar believe that the following description covers the material terms of the merger, the description may not contain all of the information that is important to you. Disney and Pixar encourage you to read carefully this entire proxy statement/prospectus, including the merger agreement attached to this proxy statement/prospectus as Annex A, for a more complete understanding of the merger.

 

Background of the Merger

 

The relationship between Pixar and Disney began in 1986, when Pixar and Disney worked together on several technical development projects. In May 1991, Pixar and Disney entered into a feature film agreement, which resulted in the development, production and distribution of Toy Story, Pixar’s first full-length feature animation film. In 1997, following the commercial success of Toy Story, Pixar and Disney extended their relationship by entering into the Co-Production Agreement, which currently remains in effect. This agreement generally provides that Pixar will be responsible for the development, pre-production and production of five original feature-length motion pictures, while Disney will be responsible for the marketing, promotion, publicity, advertising and distribution of the pictures. For more information regarding these agreements, see “Material Contracts Between Disney and Pixar Prior to the Merger” beginning on page 85 of this proxy statement/prospectus.

 

During the production of the final films covered by the Co-Production Agreement, Pixar and Disney at various times discussed whether to extend their production and distribution arrangement for Pixar’s animated films following the expiration of the Co-Production Agreement, and if so, under what terms. In January 2004, Pixar announced that it was ending discussions with Disney regarding the production and distribution of Pixar’s future animation films following the expiration of the Co-Production Agreement.

 

Subsequently, Pixar held preliminary discussions with several major motion picture studios regarding possible distribution arrangements for Pixar’s animated films. These discussions were exploratory in nature and did not develop into in-depth negotiations regarding the terms and conditions of any such arrangements.

 

In June 2005, Pixar and Disney resumed their discussions regarding the distribution of Pixar’s future animated films. In the subsequent months, Pixar and Disney held a number of discussions regarding the possible terms and conditions of a potential distribution arrangement for Pixar’s animated films following the expiration of the Co-Production Agreement.

 

At a regular meeting of the Disney board of directors on October 2–3, 2005, Robert A. Iger, President and Chief Executive Officer of Disney, along with other members of Disney’s management, made a presentation to the board regarding Disney’s studio business generally. In the course of this presentation, Mr. Iger addressed the strategic importance of the feature animation business to Disney, and outlined to the board several strategic options for enhancing the continuing contribution of feature animation to Disney’s business. At that meeting, Mr. Iger updated the Disney board on the status of discussions with Pixar and suggested that an acquisition transaction with Pixar was among the options that should be considered.

 

On October 12, 2005, Mr. Iger conveyed to Steven P. Jobs, Chairman and Chief Executive Officer of Pixar, that Disney was interested in exploring a potential business combination with Pixar. Mr. Iger and Mr. Jobs had preliminary discussions regarding the potential benefits of such a transaction at this time, but did not discuss the terms and conditions of the proposed transaction.

 

On October 25, 2005, Mr. Jobs met with Lawrence B. Levy, a member of Pixar’s board of directors, and Larry W. Sonsini, a member of Pixar’s board of directors and the Chairman of Wilson Sonsini Goodrich & Rosati, Pixar’s outside legal counsel, to discuss a potential business combination with Disney. During this

 

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meeting, Mr. Jobs, Mr. Levy and Mr. Sonsini discussed the potential benefits and various risks of the proposed transaction, as well as the importance of preserving Pixar’s unique culture, the manner in which the animation businesses of Pixar and Disney could be operated and managed on a combined basis and various other legal considerations for a transaction.

 

During October and November 2005, Mr. Iger and other members of Disney management and its advisors participated in a series of meetings with Mr. Jobs and other members of Pixar’s management, creative teams and advisors to discuss generally the two companies’ approaches to the feature animation business, the desirability of a proposed transaction and the operation and management of the feature animation business if such a transaction were to be consummated. During these meetings, the parties also discussed the possible timing of a proposed transaction and various due diligence matters. During these meetings, the parties did not discuss valuation or other terms and conditions of a proposed transaction.

 

At a regular meeting of the Disney board of directors on November 30, 2005 and December 1, 2005, Mr. Iger and other members of Disney’s management again discussed with the Disney board the strategic importance of the feature animation business to Disney and described the discussions with Pixar that had taken place since the October board meeting. In addition, members of Disney management presented to the board a preliminary analysis of the estimated value of Pixar and the potential contributions Pixar’s business could make to Disney’s business. The board agreed that it was appropriate for management to continue discussions with Pixar with respect to a possible transaction, and also requested that management investigate further Disney’s options for enhancing Disney’s feature animation business in the absence of a transaction.

 

On December 2, 2005, Mr. Iger and other members of Disney management met with Mr. Jobs, Edwin E. Catmull, President of Pixar, Mr. Levy and Mr. Sonsini and discussed a range of issues regarding a possible combination transaction, including the management and operation of the companies’ combined feature animation businesses, roles that specific officers would play in the event of a transaction and the importance of preserving and extending Pixar’s processes and culture in the feature animation business if a transaction occurred. The parties also discussed valuation concepts and assumptions and the form of consideration that would be paid in a transaction.

 

On December 9, 2005, Pixar’s board of directors held a regular meeting, which was attended by members of Pixar’s senior management and a representative of Wilson Sonsini Goodrich & Rosati. During this meeting, Mr. Jobs and Mr. Sonsini apprised the board of the discussions with Disney regarding a possible business combination with Disney. Mr. Jobs expressed his views regarding, among other things, the strategic considerations related to the proposed transaction, and Mr. Sonsini discussed various legal considerations related to the proposed transaction. The board then discussed various strategic, cultural, operational and legal considerations related to the proposed transaction, as well as certain internal organizational and management issues to be considered in connection with the proposed transaction. The board also discussed the various strategic alternatives available to Pixar, including remaining independent while further exploring a distribution arrangement with Disney or another partner for Pixar’s future animated films. Mr. Sonsini also reviewed the board’s fiduciary duties in considering a strategic transaction with Disney. After discussion, the board authorized Mr. Jobs and Pixar’s management to continue discussions with Disney regarding the proposed transaction and to engage financial advisors to assist the board in its evaluation and consideration of the proposed transaction.

 

From December 9, 2005 through December 21, 2005, management of and advisors to Disney engaged in a number of in-person and telephonic discussions with management of and advisors to Pixar to obtain further information regarding the operation of and prospects for each party’s businesses, and each company conducted further analyses of the other party’s business. During this period, the companies also had further telephonic discussions regarding a variety of issues related to a possible transaction.

 

On December 12, 2005, Pixar engaged Credit Suisse Securities (USA) LLC to act as its financial advisor in connection with a potential business combination of Disney and Pixar and, on December 21, 2005, Pixar’s board of directors engaged John Coffee, Professor of Law at Columbia Law School, to act as special outside counsel to the board regarding corporate governance and related legal issues in connection with the proposed transaction.

 

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On December 21, 2005, the Disney board of directors held a telephonic meeting to receive an update on the progress of discussions between the parties. Disney management described the discussions that had occurred, provided further analyses of the value of Pixar and contributions Pixar’s business could make to Disney’s businesses and outlined the risks of a transaction and the risks involved in seeking to enhance Disney’s feature animation business in the absence of a transaction. At the conclusion of the meeting, the board agreed that further discussions with Pixar were appropriate.

 

On December 23, 2005, Disney and Pixar entered into a non-disclosure agreement, effective as of December 1, 2005, relating to, among other things, the provision of nonpublic information for each party’s use in evaluating the proposed transaction. Thereafter and continuing until the execution of the merger agreement on January 24, 2006, the management teams of Disney and Pixar, together with their financial and legal advisors, held a series of meetings and telephonic discussions to perform additional due diligence on the other and to further develop estimates of the value of Pixar’s business on a stand-alone and combined basis.

 

On December 27, 2005, Disney delivered a draft term sheet for the proposed transaction to Pixar, and in various telephonic conferences thereafter through January 17, 2006, management of Disney and Pixar and their advisors discussed the terms of the proposed transaction reflected in the term sheet.

 

On December 28, 2005, Pixar’s board of directors held a telephonic meeting, which was attended by members of Pixar’s senior management, representatives of Credit Suisse and Wilson Sonsini Goodrich & Rosati, as well as Mr. Coffee. During this meeting, the board discussed Disney’s term sheet, with particular focus on valuation issues, the management, operational and organizational plan for Pixar following the closing of the proposed transaction and the voting agreement that Disney was seeking from Mr. Jobs. Representatives of Credit Suisse then reviewed with the board preliminary financial analyses of a potential business combination with Disney. Following this presentation, Mr. Coffee discussed the board’s fiduciary duties in connection with its consideration of the proposed transaction with Disney. The Pixar board then authorized Mr. Jobs and the company’s financial and legal advisors to continue their negotiations with Disney regarding the terms and conditions of the proposed transaction.

 

On January 12, 2006, Mr. Iger and other members of Disney’s management met with Mr. Jobs, Mr. Catmull, Mr. Levy, Mr. Sonsini and other members of Pixar’s management and Pixar’s advisors. At this meeting, Disney and Pixar discussed a variety of issues regarding the feature animation businesses of the parties following the proposed transaction, including those relating to the operation and management of the feature animation businesses, reporting structures and titles for certain officers of Pixar, strategies for preserving the processes and culture developed at Pixar, employee benefits and expectations regarding production schedules for animated films, and the parties reached preliminary agreement on a number of these items, subject to the approval of the parties’ respective boards of directors. The parties also discussed the exchange ratio that should be paid in a proposed transaction, but did not reach any agreement regarding the exchange ratio.

 

On January 14, 2006, the Disney board of directors met to receive a further update on the status of negotiations and to hear a presentation from Mr. Jobs, Mr. Catmull, John A. Lasseter, Executive Vice President, Creative, of Pixar and Mr. Sonsini regarding Pixar’s business and their views of a proposed transaction. After the representatives of Pixar left the meeting, members of Disney’s management provided an update regarding management’s evaluation of Pixar’s business on a stand alone and combined basis. At the conclusion of the meeting, the board agreed that management should continue its discussions with Pixar with a view to management presenting a recommendation at the board’s regularly scheduled meeting on January 22–23, 2006.

 

On January 15, 2006, Pixar’s board of directors held a special meeting, which was attended by members of Pixar’s senior management, representatives of Credit Suisse and Wilson Sonsini Goodrich & Rosati, as well as Mr. Coffee. Mr. Jobs and Mr. Sonsini began the meeting by updating the board on the status of their negotiations

 

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with Disney regarding the proposed transaction and their meeting with the Disney board the previous day. Representatives of Credit Suisse reviewed with the board revised preliminary financial analyses of the proposed transaction, and Mr. Coffee discussed the board’s fiduciary duties in connection with its consideration of the proposed transaction. The board then discussed various strategic merits and risks of the proposed transaction, as well as various management and operational plans for Pixar following the transaction. The board also discussed various strategic alternatives to the proposed transaction, including remaining independent and seeking a distribution partner for its future animated films, as well as expanding Pixar’s franchise and brand into other lines of business. After consideration of the foregoing, the board authorized Mr. Jobs and Mr. Sonsini to continue their negotiations with Disney regarding the proposed transaction.

 

On January 17, 2006, Disney delivered to Pixar drafts of the merger agreement and the voting agreement. Between January 18, 2006 through the execution of the merger agreement and the voting agreement on January 24, 2006, members of Disney and Pixar management, as well as their respective financial and legal advisors, had numerous telephonic meetings to negotiate the terms and conditions of the merger agreement and the voting agreement. Also during the week of January 17, 2006, Mr. Iger and Mr. Jobs discussed Pixar’s valuation and possible exchange ratios for the transaction if the parties determined to proceed, and on Saturday, January 21, 2006, they agreed that, subject to reaching agreement on the other material terms of the definitive agreements, they would be prepared to recommend to their respective boards a transaction pursuant to which Pixar’s shareholders would receive 2.3 shares of Disney common stock for each share of Pixar common stock they owned at the closing of the proposed transaction.

 

On January 22–23, 2006, the Disney board of directors met to consider management’s recommendation of the proposed transaction. Management presented its recommendation that a transaction be agreed to on the terms presented to the board, along with further information on management’s evaluation of Pixar’s business. At this meeting, counsel to Disney outlined the terms and conditions of the merger agreement and Mr. Jobs’ voting agreement for the transaction, as well as the board’s fiduciary duties in connection with its consideration of the proposed transaction. Goldman Sachs & Co. and Bear, Stearns & Co. Inc. presented to the Disney board their analyses of the fairness, from a financial point of view, of the proposed exchange ratio, and stated that they were each prepared to provide (and prior to execution of the merger agreement did provide) an opinion that, as of such date and based upon and subject to the factors and assumptions set forth in their respective opinions, the exchange ratio was fair, from a financial point of view, to Disney. Following discussion, the Disney board approved the transaction and authorized management to enter into the merger agreement and the voting agreement.

 

On January 24, 2006, Pixar’s board of directors held a telephonic meeting, which was attended by members of Pixar’s senior management, representatives of Wilson Sonsini Goodrich & Rosati and Credit Suisse, as well as Mr. Coffee. At this meeting, Mr. Jobs apprised the board of negotiations with Disney regarding the proposed transaction, and Mr. Sonsini outlined the terms and conditions of the merger agreement and the voting agreement, as well as the board’s fiduciary duties in connection with its consideration of the proposed transaction. Representatives of Credit Suisse then reviewed with the board certain financial analyses, and Credit Suisse rendered to the board its oral opinion, which opinion was subsequently confirmed by delivery of its written opinion dated January 24, 2006, that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the exchange ratio provided for in the merger agreement was fair, from a financial point of view, to the holders of Pixar common stock, other than affiliates of Pixar. After discussion and consideration of the foregoing, the board unanimously determined that the merger on the terms discussed at the meeting was fair to, and in the best interests of, Pixar and its shareholders and declared the merger to be advisable, approved the merger agreement, resolved to recommend that the shareholders of Pixar approve the transaction and directed that the merger agreement and merger be submitted to Pixar’s shareholders at a meeting of Pixar shareholders.

 

Following the meetings of the board of directors of each of Disney and Pixar, Disney and Pixar executed the merger agreement on January 24, 2006. Also on January 24, 2006, Mr. Jobs entered into the voting agreement with Disney. For a discussion of the merger agreement and the voting agreement, see the sections of this proxy

 

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statement/prospectus entitled “The Merger Agreement” beginning on page 68 and “The Voting Agreement” beginning on page 84.

 

After the stock market closed on January 24, 2006, Disney and Pixar issued a joint press release announcing the execution of the merger agreement and the merger.

 

Recommendation of the Pixar Board of Directors and Its Reasons for the Merger

 

The Pixar board of directors unanimously recommends that Pixar shareholders vote “FOR” the proposal to approve the principal terms of the merger agreement and to approve the merger. Pixar’s board of directors has determined that the proposed merger is advisable, fair to, and in the best interests of, Pixar and its shareholders and that Pixar should enter into the merger agreement. Pixar’s board of directors consulted with senior management, its legal counsel and its financial advisors in reaching its decision to approve the merger. Pixar’s board of directors took into account a number of factors in its deliberations concerning the merger, including, but not limited to, the following:

 

    By combining Pixar with Disney, Pixar’s shareholders will participate in the benefits of synergies expected to be derived from the merger. For example, following the merger:

 

    Pixar will have a greater ability to fully develop creative assets previously developed by Pixar (such as the character franchises from its film library), including potential feature animation sequels and other derivative properties;

 

    Pixar will have the opportunity to leverage Disney’s numerous distribution channels, including theme parks and network and cable television outlets, in order to expand the revenue streams from Pixar’s creative assets; and

 

    Pixar will enjoy the benefits of combining the Disney and Pixar brands to more fully exploit their combined market potential.

 

    By combining with Disney, Pixar’s shareholders will also benefit from the cost reductions expected to be derived from the merger. For example, following the merger:

 

    Pixar will no longer be required to pay distribution fees that it would have been required to pay to a third party if it had remained an independent company; and

 

    Pixar will no longer incur the expenses associated with operating as an independent public company.

 

    Following the merger, Pixar’s shareholders will have an opportunity to realize the benefits of Disney’s much larger, more diversified earnings stream and integrated portfolio of entertainment assets, thereby mitigating some of the potential risks Pixar has faced in the past by concentrating on a single line of business.

 

    By combining Pixar with Disney’s entertainment assets, Pixar’s shareholders will have an opportunity to participate in the future success of the combined animation businesses of Pixar and Disney. Pixar’s board of directors believes that the combined animation businesses of Pixar and Disney have greater potential than either business standing alone due to the opportunities to combine Pixar’s unique culture and animation talent with Disney’s animation talent and additional production capabilities. In considering this factor, Pixar’s board of directors took particular note of the fact that Disney is committed to preserving Pixar’s unique culture, animation talent and best practices, while leveraging these assets within Disney’s animation business. By doing so, Pixar’s shareholders will have an opportunity to participate in the future growth and success of the combined company’s animation businesses generated by increasing film output while preserving the quality for which Pixar’s films are well known. When considering the risks associated with this factor, Pixar’s board also took considerable note of the compatibility of management of the two companies and likelihood that such compatibility could contribute to the likelihood of success of the combined company’s animation businesses.

 

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    Pixar’s shareholders will no longer bear the risks attendant to Pixar’s ongoing search for a new distribution partner. Prior to announcing the merger, Pixar faced the difficult prospect of identifying a new distribution partner who was capable of successfully managing the distribution of Pixar’s upcoming films (including films in production), and negotiating a distribution arrangement with this new partner on reasonable terms. By combining with Disney, Pixar will be able to continue to exploit the Disney distribution operations that have contributed to the success of Pixar’s previous films, while eliminating the inherent conflicts that exist when negotiating a distribution arrangement with another company.

 

    The terms of the merger and the merger agreement are fair to Pixar’s shareholders in light of the following considerations:

 

    information regarding historical market prices and other information with respect to Pixar common stock and Disney common stock, and the financial performance and condition, assets, liabilities, business operations and prospects of each of Pixar and Disney;

 

    the prices paid in comparable transactions involving other media, entertainment and technology companies, as well as the trading performance for comparable companies in these industries;

 

    the belief that the terms of the merger agreement, including the parties’ mutual representations, warranties and covenants, and closing conditions, are reasonable and that the prospects for successful consummation of the transaction are high;

 

    the analyses of Pixar’s management, financial advisors and legal advisors, including information relating to the due diligence review that was conducted regarding Disney’s business; and

 

    the financial analyses of Credit Suisse reviewed with Pixar’s board of directors on January 24, 2006 and the opinion of Credit Suisse to the effect that, as of January 24, 2006, and based upon and subject to the various considerations set forth in the opinion, the exchange ratio in the merger was fair, from a financial point of view, to the holders of Pixar common stock other than affiliates of Pixar.

 

The Pixar board of directors also considered a number of potentially negative factors in its deliberations concerning the merger, including:

 

    the risk that the integration of the two companies’ management and cultures might not be accomplished quickly or smoothly;

 

    the possibility of cultural conflicts that could undermine the future growth and success of the combined company’s animation businesses;

 

    the general difficulties of integrating technologies, projects and companies;

 

    the potential loss of control over the future operations of Pixar following the merger;

 

    the interests of the officers and directors of Pixar in the merger, including the matters described under “The Merger—Interests of Executive Officers and Directors of Pixar in the Merger” beginning on page 58 of this proxy statement/prospectus and the impact of the merger on Pixar’s shareholders and employees;

 

    the potential loss of key Pixar and Disney employees critical to the ongoing success of Pixar’s and Disney’s businesses and to the successful integration of the two companies;

 

    the risk that the merger may not be completed in a timely manner, if at all;

 

    the fact that the voting agreement between Disney and Mr. Jobs and the “no solicitation” provisions and related provisions in the merger agreement would discourage third parties from seeking to negotiate a superior proposal for the acquisition of Pixar; and

 

    the other risks described above under “Risk Factors” beginning on page 19 of this proxy statement/prospectus.

 

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This discussion of information and factors considered by the Pixar board of directors is not intended to be exhaustive but is intended to summarize all material factors considered by the Pixar board of directors. In view of the wide variety of factors considered by the Pixar board of directors, the Pixar board of directors did not find it practicable to quantify or otherwise assign relative weights to the specific factors considered. However, Pixar’s board of directors concluded that the potential benefits of the merger outweighed the potential negative factors and that, overall, the proposed merger had greater potential benefits for Pixar’s shareholders than other strategic alternatives. After taking into account all of the factors set forth above, the Pixar board of directors unanimously agreed that the merger agreement and the merger were advisable and fair to, and in the best interests of, Pixar’s shareholders and that Pixar should enter into the merger agreement.

 

Opinion of Pixar’s Financial Advisor

 

Pixar retained Credit Suisse Securities (USA) LLC to act as its exclusive financial advisor in connection with the proposed merger. In connection with Credit Suisse’s engagement, Pixar requested that Credit Suisse evaluate the fairness, from a financial point of view, of the exchange ratio to the holders of Pixar common stock, other than affiliates of Pixar. On January 24, 2006, the Pixar board of directors met to review the proposed merger. During this meeting, Credit Suisse reviewed with the Pixar board of directors certain financial analyses, as described below, and rendered its oral opinion to the Pixar board of directors, which opinion was subsequently confirmed by delivery of a written opinion dated January 24, 2006, to the effect that, as of that date and based on and subject to the considerations described in the Credit Suisse opinion, the exchange ratio was fair, from a financial point of view, to the holders of Pixar common stock, other than affiliates of Pixar.

 

The full text of the Credit Suisse opinion, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of the review undertaken by Credit Suisse in rendering its opinion, is attached as Annex C to this proxy statement/prospectus and is incorporated by reference in its entirety. Holders of Pixar common stock are urged to, and should, read this opinion carefully and in its entirety.

 

The Credit Suisse opinion addresses only the fairness, from a financial point of view, of the exchange ratio to the holders of Pixar common stock, other than affiliates of Pixar. The Credit Suisse opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with respect to the merger or any other matter relating to the merger. The summary of the Credit Suisse opinion in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the Credit Suisse opinion.

 

In arriving at its opinion, Credit Suisse, among other things,

 

    reviewed the merger agreement and certain related documents;

 

    reviewed certain publicly available business and financial information relating to Pixar and Disney;

 

    reviewed certain other information relating to Pixar and Disney, including financial forecasts provided to or discussed with Credit Suisse by Pixar and Disney, and met with the managements of Pixar and Disney to discuss the business and prospects of Pixar and Disney, respectively;

 

    considered certain financial and stock market data of Pixar and Disney, and compared that data with similar data for other publicly held companies in businesses Credit Suisse deemed similar to those of Pixar and Disney;

 

    considered, to the extent publicly available, the financial terms of certain other business combinations and other transactions which have recently been effected or announced; and

 

    considered such other information, financial studies, analyses and investigations and financial, economic and market criteria which Credit Suisse deemed relevant.

 

In connection with its review, Credit Suisse did not assume any responsibility for independent verification of any of the foregoing information and relied on such information being complete and accurate in all material

 

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respects. With respect to the financial forecasts for Pixar that Credit Suisse reviewed, Pixar management advised Credit Suisse, and Credit Suisse assumed, that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of Pixar management as to the future financial performance of Pixar. With respect to the financial forecasts for Disney that Credit Suisse reviewed, Disney’s management advised Credit Suisse, and Credit Suisse assumed, that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of Disney’s management as to the future financial performance of Disney. In addition, Credit Suisse relied upon, without independent verification, the assessment of the managements of Pixar and Disney as to (i) their ability to retain key employees, (ii) the strategic benefits and potential cost savings and other synergies (including the amount, timing and achievability thereof) anticipated to result from the merger, (iii) the existing technology, products and services and the validity of, and risks associated with, the future technology products and services of Pixar and Disney, and (iv) their ability to integrate the businesses of Pixar and Disney. Pixar informed Credit Suisse, and Credit Suisse assumed, that the merger will be treated as a tax-free reorganization for U.S. federal income tax purposes. Credit Suisse also assumed, with Pixar’s consent, that in the course of obtaining any necessary regulatory or third party approvals, consents and agreements for the merger, no modification, delay, limitation, restriction or condition would be imposed that would have an adverse effect on Pixar or Disney or the contemplated benefits of the merger and that the merger would be consummated in accordance with the terms of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement therein. In addition, Credit Suisse was not requested to make, and did not make, an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Pixar or Disney, and Credit Suisse was not furnished with any such evaluations or appraisals. The Credit Suisse opinion addressed only the fairness, from a financial point of view, to the holders of Pixar common stock, other than affiliates of Pixar, of the exchange ratio and does not address any other aspect or implication of the merger or any other agreement, arrangement or understanding entered into in connection with the merger or otherwise. The Credit Suisse opinion was necessarily based upon information made available to Credit Suisse as of the date of its opinion and upon financial, economic, market and other conditions as they existed and could be evaluated on the date of its opinion. Credit Suisse did not express any opinion as to what the value of shares of Disney common stock actually will be when issued to the holders of Pixar common stock pursuant to the merger or the prices at which shares of Disney common stock will trade at any time. The Credit Suisse opinion did not address the relative merits of the merger as compared to other business strategies that might be available to Pixar, nor did it address the underlying business decision of Pixar to proceed with the merger. Credit Suisse was not requested to, and did not, solicit third party indications of interest in acquiring all or a part of Pixar.

 

In preparing its opinion to the Pixar board of directors, Credit Suisse performed a variety of financial and comparative analyses. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Credit Suisse made qualitative judgments with respect to the analyses and factors that it considered. Credit Suisse arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, Credit Suisse believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

 

In its analyses, Credit Suisse considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Pixar and Disney. No company, transaction or business used by Credit Suisse in its analyses as a comparison is identical to Pixar or the proposed merger, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed. The estimates contained in the analyses performed by Credit Suisse and the ranges of

 

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valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, the analyses performed by Credit Suisse are inherently subject to substantial uncertainty.

 

The opinion of Credit Suisse and its financial analyses were only one of many factors considered by the Pixar board of directors in its evaluation of the proposed merger and should not be viewed as determinative of the views of the Pixar board or management with respect to the merger or the merger consideration.

 

The following is a summary of the material financial analyses performed by Credit Suisse in connection with the preparation of its opinion and reviewed with the Pixar board of directors at a meeting of the Pixar board of directors on January 24, 2006. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by Credit Suisse, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Credit Suisse.

 

Discounted Cash Flow Analysis

 

Credit Suisse calculated the estimated present value of the standalone, unlevered, after-tax free cash flows that Pixar could generate over calendar years 2006 through 2015, based on estimates for the future financial performance of Pixar provided by Pixar’s management (“Base Case Estimates”). Credit Suisse then calculated a range of estimated terminal values based on perpetuity growth rates ranging from 5% to 6%. The estimated after-tax free cash flows and terminal values were then discounted to the present value using discount rates ranging from 11% to 13%. The following summarizes the range of exchange ratios implied by this analysis (based on the closing trading price of Disney common stock on January 23, 2006 of $25.52):

 

Implied Exchange Ratio

   1.093x – 1.468x

 

Credit Suisse also conducted several additional discounted cash flow analyses to calculate the sensitivity of the prices and exchange ratios implied by the discounted cash flow analysis summarized above to changes in certain assumptions used in the analysis regarding (i) the future financial performance of Pixar, (ii) terminal growth rates and (iii) and discount rates (“Sensitivity Cases”). For purposes of the Sensitivity Cases, Credit Suisse used four different assumptions for the future box office performance of Pixar films, two different assumptions for the number of Pixar films per year (1.0 and 1.5), discount rates ranging from 10% to 12% and perpetuity growth rates ranging from 4% to 5.5%. The following summarizes the range of exchange ratios implied by these sensitivity analyses (based on the closing trading price of Disney common stock on January 23, 2006 of $25.52):

 

Implied Exchange Ratio

   1.268x – 2.356x

 

Selected Companies Analysis

 

Using publicly available information, Credit Suisse compared certain financial information of Pixar with that of other public companies in the media and entertainment industries, including:

 

    The Walt Disney Company

 

    Time Warner Inc.

 

    News Corporation

 

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    Viacom Inc.

 

    CBS Corporation

 

    DreamWorks Animation SKG, Inc.

 

Such information included, among other things, observed trading multiples of fully-diluted aggregate value (calculated as fully-diluted equity value plus net debt) as a multiple of calendar year 2006 and calendar year 2007 estimated EBITDA. Financial data for the selected publicly held companies were based on publicly available information and research analyst estimates. All multiples were based on closing stock prices on January 23, 2006. From the observed trading multiples for the selected companies, Credit Suisse derived (i) a reference range of multiples of fully-diluted aggregate value to estimated EBITDA for calendar year 2006 of 20.0x to 25.0x and (ii) a reference range of multiples of fully-diluted aggregate value to estimated EBITDA for calendar year 2007 of 12.0x to 15.0x. Credit Suisse then used these derived reference ranges of multiples to calculate a range of implied prices per share of Pixar common stock and a range of implied exchange ratios using two different sets of estimates for Pixar EBITDA for calendar year 2006 and calendar year 2007—publicly available research analyst estimates (“Street Case Estimates”) and the Base Case Estimates prepared by Pixar’s management. The following table summarizes the range of exchange ratios that were implied by this analysis (based on the closing trading price of Disney common stock on January 23, 2006 of $25.52):

 

     Implied Exchange Ratio

Exchange Ratios implied using Street Case Estimates

   1.613x – 2.247x

Exchange Ratios implied using Base Case Estimates

   1.374x – 1.939x

 

You should be aware that no company considered in this analysis is identical to Pixar. In addition, mathematical analysis, such as determining the mean or the median, is not in itself a meaningful method of using comparable company or market trading data.

 

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Selected Acquisitions Analysis

 

Using publicly available information, Credit Suisse reviewed several financial metrics from the following 22 selected transactions in the media and entertainment industries:

 

Acquiror


 

Target


•      Viacom Inc.

 

•      DreamWorks LLC

•      Axel Springer Verlag AG

 

•      ProSeibenSat.1 Media AG

•      News Corporation

 

•      Fox Entertainment Group, Inc.

•      Sony Corporation

 

•      Metro-Goldwyn-Mayer Inc.

•      Comcast Holdings Corporation

 

•      The Walt Disney Company

•      National Broadcasting Company, Inc.

 

•      Vivendi Universal, S.A.

•      Liberty Media Corporation

 

•      QVC, Inc.

•      AOL Time Warner Inc.

 

•      Time Warner Entertainment Company, L.P.

•      Vivendi Universal, S.A.

 

•      USA Networks, Inc.

•      The Walt Disney Company

 

•      Fox Family Worldwide, Inc.

•      Vivendi Universal, S.A.

 

•      The Seagram Company Ltd.

•      America Online, Inc.

 

•      Time Warner Inc.

•      Viacom Inc.

 

•      CBS Corporation

•      The Seagram Company Ltd.

 

•      PolyGram N.V.

•      Time Warner Inc.

 

•      Turner Broadcasting System, Inc.

•      Westinghouse Electric Corporation

 

•      CBS Corporation

•      The Walt Disney Company

 

•      Capital Cities/ABC, Inc.

•      The Seagram Company Ltd.

 

•      MCA Inc.

•      Viacom Inc.

 

•      Paramount Communications Inc.

•      Matsushita Electric Industrial Co., Ltd.

 

•      MCA Inc.

•      Time Inc.

 

•      Warner Communications Inc.

•      Sony Corporation

 

•      Columbia Pictures Entertainment Inc.

 

For those selected precedent transactions for which sufficient financial information was publicly available, Credit Suisse calculated the fully-diluted aggregate value (calculated as fully-diluted equity value plus net debt) as a multiple of last twelve month (LTM) EBITDA. Multiples for the selected transactions were based on publicly available information at the time of announcement of the relevant transaction. From the observed multiples for the selected transactions, Credit Suisse derived (i) a reference range of multiples of fully-diluted aggregate value to calendar year 2005 estimated EBITDA of 20.0x to 30.0x and (ii) a reference range of multiples of fully-diluted aggregate value to calendar year 2007 estimated EBITDA of 15.0x to 18.0x. Credit Suisse then used these derived reference ranges of multiples to calculate a range of implied prices per share of Pixar common stock and a range of implied exchange ratios using the Base Case Estimates. The following table summarizes the range of exchange ratios that were implied by this analysis (based on the closing trading price of Disney common stock on January 23, 2006 of $25.52):

 

     Implied
Exchange Ratio


Exchange Ratios implied using reference range of multiples of estimated CY2005 EBITDA

   1.716x – 2.365x

Exchange Ratios implied using reference range of multiples of estimated CY2007 EBITDA

   1.939x – 2.242x

 

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No company or transaction considered in this analysis is identical to Pixar or the contemplated merger. Mathematical analysis, such as determining the mean or the median, is not in itself a meaningful method of using comparable market trading data.

 

Other Factors

 

In rendering its opinion, Credit Suisse also reviewed other factors, including:

 

    historical trading prices and trading volumes of Pixar common stock and Disney common stock and historical exchange ratios of trading prices of Pixar common stock to trading prices of Disney common stock;

 

    publicly available research analysts’ price targets and financial projections for Pixar and Disney;

 

    the mean and median premiums to one day share price paid in certain all-stock acquisitions with transaction values greater than $4 billion announced since January 1, 2004 and the premiums implied in the merger based on the exchange ratio and the closing price of Pixar common stock on various dates and the average closing price of Pixar common stock over various periods;

 

    the premiums to one day share price paid in 518 transactions greater than $500 million announced since 2000; and

 

    the potential pro forma effect of the merger on Disney’s estimated earnings per share for calendar years 2006, 2007 and 2008, based on publicly available research analyst estimates for Disney and Pixar.

 

Miscellaneous

 

Pixar selected Credit Suisse based on Credit Suisse’s qualifications, expertise and reputation. Credit Suisse is an internationally recognized investment banking and advisory firm. Credit Suisse, as part of its investment banking business, is continuously engaged in the valuation of businesses and securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes.

 

Pursuant to an engagement letter dated as of December 12, 2005, Pixar engaged Credit Suisse to provide financial advisory services to the Pixar board of directors in connection with the merger, including, among other things, rendering its opinion. Pursuant to the terms of the engagement letter, Credit Suisse will receive a customary fee for its services, a significant portion of which is contingent upon the consummation of the merger. Credit Suisse will also receive a fee for rendering its opinion. In addition, Pixar agreed to reimburse Credit Suisse for its out-of-pocket expenses, including the fees and expenses of legal counsel, and to indemnify Credit Suisse and certain related persons against certain liabilities and expenses arising out of or in conjunction with its rendering of services under its engagement, including liabilities arising under the federal securities laws.

 

Disney’s Reasons for the Merger

 

Disney believes that the creation of high quality feature animation is a key driver of success across many of its businesses and provides content useful across a variety of traditional and new platforms and throughout the world. The acquisition of Pixar thus supports Disney’s strategic priorities of creating the finest content, embracing leading-edge technologies and strengthening its global presence. In approving the transaction, the Disney board considered a variety of factors related to these strategic priorities, including the following material factors:

 

    Pixar’s success in feature animation films is expected to strengthen and extend Disney’s heritage in and reputation for high quality, family-oriented entertainment.

 

    The acquisition provides an opportunity to apply the successful creative processes, technology and culture developed at Pixar to feature animation produced by Disney.

 

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    Disney’s well-developed film distribution network and theme park, television and consumer products businesses provide a strong platform for extending the reach of the creative products produced by Pixar.

 

    The acquisition allows freer use of characters and settings developed for Pixar feature animation throughout Disney’s business, including in its theme parks and resorts and consumer products.

 

    The creative talent that produced original Pixar films will be able to direct the production of sequels to those films, which is likely to enhance the creative quality and success of those sequels and other ancillary works.

 

    As a result of the acquisition, Disney will retain 100% of the economic results of future films produced by Pixar.

 

    Pixar’s creative content is well suited to emerging digital entertainment platforms, including new video game technologies and mobile video.

 

Interests of Executive Officers and Directors of Pixar in the Merger

 

In considering the recommendation of the Pixar board of directors with respect to the merger, Pixar shareholders should be aware that certain executive officers and directors of Pixar have interests in the merger that may be different from, or in addition to, the interests of Pixar shareholders generally. The Pixar board of directors was aware of the interests described below and considered them, among other matters, when adopting the merger agreement and recommending that Pixar shareholders vote to approve the merger agreement and to approve the merger. These interests are summarized below.

 

Appointment of Steven P. Jobs to the Disney Board of Directors

 

Following the merger, Pixar Chairman and Chief Executive Officer Steven P. Jobs will be appointed to Disney’s board of directors as a non-independent member. Mr. Jobs will become the fourteenth director on Disney’s board of directors. Under existing Disney Corporate Governance Guidelines, Mr. Jobs would become entitled to receive the compensation paid by Disney to its non-employee directors (other than the chairman) currently consisting of: an annual retainer of $65,000; an annual retainer of $10,000 with respect to any board committee on which he served; an annual retainer of $15,000 with respect to any board committee of which he was chair; an annual deferred stock unit grant of $60,000; an annual stock option grant of 6,000 Disney shares; use of Disney products, attendance at Disney entertainment offerings and visits to Disney properties at Disney’s expense up to $15,000 in fair market value per calendar year plus reimbursement of associated tax liabilities; and reimbursement of certain travel expenses.

 

Grant of Equity Compensation Awards

 

Under the merger agreement, Pixar was required to grant performance unit awards pursuant to its 2004 Equity Incentive Plan to Pixar employees identified by Pixar and agreed to by Disney in such amounts as determined by Disney and Pixar. Disney and Pixar have agreed that Pixar could grant, and the compensation committee of the Pixar board of directors has approved the grant of, options to purchase shares of Pixar common stock, rather than performance unit awards, to certain non-executive Pixar employees identified by Pixar and agreed to by Disney in amounts determined by Disney and Pixar. Disney and Pixar believe that stock options are the most effective retention tool for these non-executive Pixar employees.

 

In addition, in connection with the merger agreement, the compensation committee of the Pixar board of directors has approved the grant of 400,000 restricted stock units of Pixar to Edwin E. Catmull, the President of Pixar. Such restricted stock units are equivalent to an equal number of shares of Pixar common stock. Fifty percent (50%) of the restricted stock units will vest on the second anniversary of the grant, and the remaining fifty percent (50%) of the restricted stock units will vest on the fourth anniversary of the grant. The restricted stock unit award will be assumed by Disney in the merger and will thereafter represent the right to receive upon vesting that number of shares of Disney common stock equal to the number of shares of Pixar common stock subject to the restricted stock unit award immediately prior to the merger (whether or not vested) multiplied by the exchange ratio, which is 2.3.

 

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Employment of Pixar Executive Officers by Disney after the Merger

 

Edwin E. Catmull, who is currently the President of Pixar, will serve as the President of the new Pixar and Disney animation studios, reporting to Robert A. Iger, President and Chief Executive Officer of Disney, and Richard Cook, Chairman of The Walt Disney Studios. In February 2006, the compensation committee of the Pixar board of directors approved an increase in Mr. Catmull’s salary to $1,000,000, effective as of, and retroactive to, January 1, 2006.

 

John A. Lasseter, who is currently the Executive Vice President, Creative, of Pixar, will be the Chief Creative Officer of the combined animation studios, as well as the Principal Creative Advisor at Walt Disney Imagineering, where he will provide his expertise in the design of new attractions for Disney theme parks around the world. Mr. Lasseter will report to Mr. Iger.

 

Acceleration of John A. Lasseter’s Options and Other Potential Benefits

 

Under the terms of John A. Lasseter’s employment agreement dated March 21, 2001, upon a change in control, the option to purchase 2,000,000 shares of Pixar common stock at the exercise price of $13.25 granted to Mr. Lasseter in December 2000 will become fully vested and exercisable. Without a change in control, this option would vest monthly over a period of ten years. Since the merger of Disney and Pixar constitutes a change in control for purposes of the employment agreement, Mr. Lasseter’s option to purchase 2,000,000 shares of Pixar common stock will be fully vested and exercisable following the completion of the merger.

 

The following table identifies the aggregate number of shares of Mr. Lasseter’s vested and unvested Pixar stock options, the aggregate number of shares subject to his outstanding unvested Pixar stock options that will become fully vested and exercisable in connection with the merger, the exercise price of his Pixar stock options that will be accelerated in the merger and the value of such accelerated options based on the difference between the exercise price and the market price of Pixar shares on March 16, 2006, the exercise price of his collective vested and unvested Pixar stock options, and the value of all options as of March 16, 2006.

 

Aggregate

Shares Subject

to Outstanding

Options(1)


  

Aggregate
Shares Subject

to Unvested

Options to be

Accelerated in

the Merger


  

Exercise Price of

Unvested

Options to be

Accelerated in

the Merger


  

Value of

Unvested

Options to be

Accelerated in

the Merger(2)


  

Exercise Price of
All Options


  

Value of All 

Options(3)


1,120,000    949,965    $13.25    $49,816,165    $13.25    $58,732,800

(1) Number does not include options that have already been exercised.
(2) Illustrates the economic value of all unvested options held by Mr. Lasseter assuming the acceleration of all such unvested options in the merger and the exercise of such options. Calculated by multiplying the shares subject to unvested options by the difference between the fair market value of shares of Pixar common stock on March 16, 2006 and the exercise price of such unvested options.
(3) Illustrates the economic value of all options held by Mr. Lasseter assuming the acceleration of all such options in the merger and the exercise of all such options immediately upon completion of the merger. Calculated by multiplying the shares subject to all options by the difference between the fair market value of shares of Pixar common stock on March 16, 2006 and the exercise price of such options.

 

In addition, in the event of a change in control, for any picture directed by Mr. Lasseter after the change in control, Mr. Lasseter is entitled to receive contingent bonuses based on the aggregate domestic theatrical box office gross receipts of such picture as reported in the Daily Variety. If Mr. Lasseter’s employment is terminated without cause, the contingent bonus will vest monthly at a percentage equal to the number of months he has performed service on such picture divided by the total number of months of pre-production, production and post-production (total number not exceeding 48 months). Notwithstanding the foregoing, if Mr. Lasseter’s services are terminated for any reason other than his breach or default of a material term or condition of his employment agreement, then the contingent compensation set forth above would be deemed fully vested if he has completed services for at least 75% of the total schedule as computed above.

 

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Acceleration of Non-Employee Director Options

 

All outstanding unvested options to purchase Pixar common stock held by non-employee directors will become fully vested and exercisable in connection with the merger. Under the terms of the Pixar 1995 Director Option Plan, in the event of a merger of Pixar with or into another corporation, outstanding options may be assumed or equivalent options may be substituted by the successor corporation. Following such assumption or substitution, if the optionee’s status as a director or director of the successor corporation is terminated other than upon a voluntary resignation, the option shall become fully exercisable, including as to shares for which it would not otherwise be exercisable.

 

In addition, the option agreements under the Pixar 2004 Equity Incentive Plan provide that upon a change in control, options shall be subject to the definitive agreement governing the change in control and that the vesting and exercisability of such options may be accelerated.

 

Pixar’s board of directors currently consists of the following non-employee directors: Skip Brittenham, Susan Decker, Joseph Graziano, Lawrence Levy, Joe Roth and Larry Sonsini. Each of these directors will serve on the board of Pixar, as a wholly-owned subsidiary of Disney, for a brief period of time following the merger in order that these directors can sell the Disney shares issuable to them upon exercise of Pixar options that they currently hold which will be assumed by Disney in the merger under a registration statement on Form S-8 to be filed by Disney. Upon their termination as directors of Pixar, their outstanding unvested options will accelerate and become fully vested and exercisable.

 

The following table identifies for each Pixar non-employee director as of March 16, 2006, the aggregate number of shares of his or her vested and unvested Pixar stock options, the aggregate number of shares subject to his or her outstanding unvested Pixar stock options that will become fully vested and exercisable in connection with the merger, the weighted average exercise price of his or her Pixar stock options that will be accelerated in the merger and the value of such accelerated options based on the difference between the exercise price and the market price of Pixar shares on March 16, 2006, the weighted average exercise price of his or her collective vested and unvested Pixar stock options, and the value of all such options.

 

Name


 

Aggregate

Shares Subject

to Outstanding

Options(1)


  

Aggregate

Shares Subject

to Unvested

Options to be

Accelerated in

the Merger


  

Weighted

Average

Exercise Price of

Unvested

Options to be

Accelerated in

the Merger


  

Value of

Unvested

Options to be

Accelerated in

the Merger(2)


  

Weighted
Average
Exercise Price of

All Options


  

Value of All

Options(3)


Skip Brittenham

  160,000    20,000    $ 43.90    $ 435,800    $ 26.47    $ 6,274,900

Susan Decker

  60,000    40,000    $ 34.35    $ 1,253,800    $ 34.35    $ 1,880,700

Joseph Graziano

  80,000    20,000    $ 43.90    $ 435,800    $ 35.89    $ 2,384,200

Lawrence Levy

  80,000    20,000    $ 48.21    $ 349,600    $ 32.46    $ 2,658,800

Joe Roth

  120,000    20,000    $ 49.91    $ 315,600    $ 27.76    $ 4,551,650

Larry Sonsini

  73,674    20,000    $ 45.59    $ 402,000    $ 33.07    $ 2,403,529

(1) Number does not include options that have already been exercised.
(2) Illustrates the economic value of all unvested options held by each non-employee director assuming the acceleration of all such unvested options in the merger and the exercise of such options. Calculated by multiplying the shares subject to unvested options by the difference between the fair market value of shares of Pixar common stock on March 16, 2006 and the weighted average exercise price of such unvested options.
(3) Illustrates the economic value of all options held by each non-employee director assuming the acceleration of all such options in the merger and the exercise of all options immediately upon completion of the merger. Calculated by multiplying the shares subject to all options by the difference between the fair market value of shares of Pixar common stock on March 16, 2006 and the weighted average exercise price of such options.

 

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Indemnification; Directors’ and Officers’ Insurance

 

Disney has agreed that, for a period of six years following completion of the merger, the indemnification obligations set forth in Pixar’s articles of incorporation and bylaws and any Pixar indemnification agreements will survive. To do so, Disney will cause the articles of incorporation and bylaws of Pixar after the merger to reflect provisions at least as favorable as the indemnification and exculpation provisions contained in Pixar’s current articles of incorporation and bylaws and, for a period of six years following completion of the merger, Disney will not amend, repeal or otherwise modify the articles of incorporation or bylaws in any manner that would adversely affect the indemnification rights of any individual who on or prior to completion of the merger was protected under indemnification provisions in any of these Pixar documents.

 

In addition, for a period of six years from the completion of the merger, Disney will cause Pixar’s existing policy of directors’ and officers’ liability insurance to be maintained, subject to certain limitations. Alternatively, subject to certain limitations, prior to the completion of the merger, Pixar is also permitted to purchase a six-year “tail” prepaid policy on its current policy of directors’ and officers’ liability insurance and, if Pixar elects to do so, Disney will maintain the policy in full force and effect.

 

Material United States Federal Income Tax Consequences of the Merger

 

The following is a summary of the material United States federal income tax consequences of the merger applicable to a holder of shares of Pixar common stock that receives Disney common stock in the merger. This discussion is based upon the Internal Revenue Code, Treasury Regulations, judicial authorities, published positions of the Internal Revenue Service, and other applicable authorities, all as currently in effect and all of which are subject to change or differing interpretations (possibly with retroactive effect). This discussion is limited to United States persons that hold their shares of Pixar common stock as capital assets for United States federal income tax purposes (generally, assets held for investment). This discussion does not address all of the tax consequences that may be relevant to a particular Pixar shareholder or to Pixar shareholders that are subject to special treatment under United States federal income tax laws and does not address the tax consequences to Pixar shareholders that own 5% or more of Pixar’s common stock or that are non-United States persons. In addition, this discussion does not address the tax consequences of the merger under state, local or foreign tax laws. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below.

 

HOLDERS OF SHARES OF PIXAR COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AS WELL AS THE EFFECTS OF STATE, LOCAL AND NON-UNITED STATES TAX LAWS.

 

Disney’s obligation to complete the merger is conditioned upon its receipt at closing of tax opinions from Skadden, Arps, Slate, Meagher & Flom LLP and Dewey Ballantine LLP that the merger will qualify as a “reorganization” within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code; provided that if Skadden, Arps, Slate, Meagher & Flom LLP or Dewey Ballantine LLP fails to render such opinion, the condition to Disney’s obligation to complete the merger nonetheless will be deemed satisfied if the other of such firms renders such opinion to Disney, and if neither of such firms renders such opinion to Disney, the condition to Disney’s obligation to complete the merger nonetheless will be deemed satisfied if Wilson Sonsini Goodrich & Rosati, Professional Corporation, renders such opinion to Disney. Pixar’s obligation to complete the merger is conditioned upon its receipt at closing of a tax opinion from Wilson Sonsini Goodrich & Rosati, Professional Corporation, that the merger will qualify as a “reorganization” within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code; provided that if Wilson Sonsini Goodrich & Rosati, Professional Corporation, fails to render such opinion, the condition to Pixar’s obligation to complete the merger nonetheless will be deemed satisfied if Skadden, Arps, Slate, Meagher & Flom LLP or Dewey Ballantine LLP renders such opinion to Pixar. These opinions will be based on factual representations and covenants made by Disney and Pixar (including

 

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those contained in tax representation letters to be provided by Disney and Pixar at the time of closing), and on customary factual assumptions. The tax opinions are not binding on the Internal Revenue Service or any court and do not preclude the Internal Revenue Service from asserting, or a court from sustaining, a contrary conclusion. In the event that the tax opinions cannot be delivered, the parties hereto shall negotiate in good faith to take additional actions in conjunction with and/or immediately following the merger to permit this condition to closing to be satisfied. Although the merger agreement allows Disney and Pixar to waive this condition to closing, neither Disney nor Pixar currently anticipates doing so. If either Disney or Pixar does waive this condition, you will be informed of this decision prior to being asked to vote on the merger.

 

The following material United States federal income tax consequences will result from qualification of the merger as a “reorganization” within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code:

 

    except for cash received in lieu of a fractional share of Disney common stock, Pixar shareholders will not recognize any gain or loss upon the receipt of Disney common stock in exchange for Pixar common stock in connection with the merger;

 

    a Pixar shareholder will have an aggregate tax basis in the Disney common stock received in the merger equal to the shareholder’s aggregate tax basis in its shares surrendered pursuant to the merger, reduced by the portion of the shareholder’s tax basis in its shares surrendered in the merger that is allocable to a fractional share of Disney common stock. If a Pixar shareholder acquired any of its shares of Pixar common stock at different prices or at different times, recently finalized Treasury Regulations provide guidance on how such shareholder may allocate its tax basis to shares of Disney common stock received in the merger. Pixar shareholders that hold multiple blocks of Pixar common stock are urged to consult their tax advisors regarding the proper allocation of their basis among shares of Disney common stock received under the final Treasury Regulations;

 

    the holding period of the Disney common stock received by a Pixar shareholder in connection with the merger will include the holding period of the Pixar common stock surrendered in connection with the merger; and

 

    cash received by a Pixar shareholder in lieu of a fractional share of Disney common stock in the merger will be treated as if such fractional share had been issued in connection with the merger and then redeemed by Disney, and Pixar shareholders will recognize capital gain or loss with respect to such cash payment, measured by the difference, if any, between the amount of cash received and the tax basis in such fractional share.

 

Regulatory Matters

 

The merger is subject to review by the Antitrust Division and the FTC under the HSR Act, and by foreign governmental authorities under the antitrust laws of various other jurisdictions where Disney and Pixar conduct business. Under the HSR Act, Disney, Pixar and Steven P. Jobs were required to make pre-merger notification filings and await the expiration of statutory waiting periods prior to completing the merger. Disney, Pixar and Steven P. Jobs have made the requisite pre-merger notification filings with the Antitrust Division and the FTC. The completion of the merger is also conditioned upon the expiration or termination of the HSR Act waiting period and all other material foreign antitrust waiting periods and receipt of all antitrust clearances, consents and approvals that are strictly necessary. Disney, Pixar and Steven P. Jobs submitted the filings required by the HSR Act on February 6, 2006 and the applicable waiting periods have expired. Disney and Pixar are also required to make applicable foreign antitrust filings, and have made such filings prior to the date hereof; not all of the notified foreign jurisdictions have completed their review of the filings, and some of these jurisdictions may have applicable waiting periods that have not yet expired.

 

Under the terms of the merger agreement, neither Disney nor Pixar shall be required to enter into any consent arrangement that would be reasonably expected to have a material adverse effect on the combined Disney and Pixar feature animation businesses or the benefits that are expected to derive from the merger and the

 

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merger agreement. Either Disney or Pixar may refuse to complete the merger if any such restrictions or conditions are required by governmental authorities as a condition to approving the merger. We do not expect that any such restrictions or conditions would be required by governmental authorities as a condition to approving the merger; however, if such restrictions or conditions were required following the Pixar shareholders’ approval of the principal terms of the merger agreement and approval of the merger and the parties agreed to complete the merger, additional shareholder approval could be required.

 

In addition, during or after the statutory waiting periods and clearance of the merger, and even after completion of the merger, either the Antitrust Division, the FTC, or other United States or foreign governmental authorities could challenge or seek to block the merger under the antitrust laws, as it deems necessary or desirable in the public interest. Moreover, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. Disney and Pixar cannot be sure that a challenge to the merger will not be made or that, if a challenge is made, Disney and Pixar will prevail.

 

Accounting Treatment

 

In accordance with accounting principles generally accepted in the United States, Disney will account for the merger using the purchase method of accounting for business combinations. Under this method of accounting, Disney will record the market value (based on an average of the closing prices of Disney common stock for a range of five trading days beginning two days before and ending two days after the date of the announcement of the merger, January 24, 2006) of its common stock issued in connection with the merger, the fair value of the Disney options exchanged for outstanding vested options to purchase shares of Pixar common stock assumed in connection with the merger and the amount of direct transaction costs associated with the merger as the estimated purchase price of acquiring Pixar. The estimated purchase price will be adjusted to include the effect of settling the existing contractual arrangement between Disney and Pixar by recording the difference between the value of the contractual terms and current market values for similar arrangements as a gain or loss at the date of the merger, as required under Emerging Issues Task Force Issue No. 04-1, “Accounting for Pre-existing Relationships between the Parties to a Business Combination”. Disney will allocate the estimated purchase price to the net tangible and intangible assets acquired based on their respective fair values at the date of the completion of the merger. Any excess of the estimated purchase price over those fair values will be recorded as goodwill.

 

Amortizable intangible assets will generally be amortized over useful lives not exceeding twenty years. Goodwill and the “Pixar” trademark and tradename intangible assets resulting from the business combination will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). The amount of the estimated purchase price allocated to goodwill, which is based on certain assumptions, is estimated to be in excess of $5 billion. If Disney management should change the assumptions used in connection with the final allocation of the purchase price, amounts allocated to amortizable intangible assets may increase or decrease significantly, which could result in a material increase or decrease in amortization of intangible assets.

 

If management determines that the value of goodwill or intangible assets with indefinite lives has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The amounts listed in the above paragraph are only preliminary estimates and actual amounts (which will be determined prior to the end of Disney’s fiscal year 2006) may differ from these estimates.

 

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Listing of Disney Common Stock

 

Application will be made to have the shares of Disney common stock issued in the merger approved for listing on the New York Stock Exchange, where Disney common stock currently is traded under the symbol “DIS.”

 

Delisting and Deregistration of Pixar Common Stock after the Merger

 

If the merger is completed, Pixar common stock will be delisted from the Nasdaq National Market and deregistered under the Exchange Act, and Pixar will no longer file periodic reports with the SEC.

 

Dissenters’ Rights

 

If the merger agreement and the merger are approved by the required vote of Pixar shareholders and the merger agreement is not abandoned or terminated, Pixar shareholders who voted against the merger may, by complying with Sections 1300 through 1312 of the California General Corporation Law, be entitled to dissenters’ rights as described therein. To exercise dissenters’ rights, a Pixar shareholder must comply with all of the procedures required by California law. Under California law, no dissenters’ rights are available for shares listed on the Nasdaq National Market, such as Pixar’s, unless there exists with respect to such shares any restriction on transfer imposed by Pixar or by any law or regulation, or unless demands for payment are filed by 5% or more of the outstanding shares of that class. We have included a copy of California General Corporation Law—Chapter 13—Dissenters’ Rights as Annex D to this proxy statement/prospectus. If a Pixar shareholder has a beneficial interest in shares of Pixar stock that are held of record in the name of another person, such as a trustee or nominee, and such shareholder desires to perfect any dissenters’ rights such beneficial shareholder may have, such beneficial shareholder must act promptly to cause the holder of record timely and properly to follow the steps summarized below. DISSENTERS’ RIGHTS CANNOT BE VALIDLY EXERCISED BY PERSONS OTHER THAN SHAREHOLDERS OF RECORD REGARDLESS OF THE BENEFICIAL OWNERSHIP OF THE SHARES.

 

The following discussion is not a complete statement of the California General Corporation Law relating to dissenters’ rights, and is qualified in its entirety by reference to Sections 1300 through 1312 of the California General Corporation Law, a copy of which is attached to this proxy statement/prospectus as Annex D and incorporated herein by reference. ANY PIXAR SHAREHOLDER WHO WISHES TO EXERCISE DISSENTERS’ RIGHTS OR WHO WISHES TO PRESERVE HIS OR HER RIGHT TO DO SO SHOULD REVIEW THIS SECTION AND ANNEX D (SECTIONS 1300 THROUGH 1312 OF THE CALIFORNIA GENERAL CORPORATION LAW) CAREFULLY, SHOULD CONSULT HIS OR HER LEGAL ADVISOR (SINCE FAILURE TO TIMELY COMPLY WITH THE PROCEDURES SET FORTH THEREIN WILL RESULT IN THE LOSS OF SUCH RIGHTS) AND SHOULD VOTE “AGAINST” APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER. IF YOU DECIDE TO EXERCISE YOUR DISSENTERS’ RIGHTS AND HAVE ALREADY SUBMITTED YOUR STOCK CERTIFICATES, YOU MUST NOTIFY DISNEY, AS THE EXCHANGE AGENT, AND YOUR STOCK CERTIFICATES WILL BE RETURNED TO YOU. IF YOU FAIL TO MAKE A PROPER ELECTION OR PERFECT THE STATUS OF YOUR DISSENTING SHARES, YOU WILL LOSE YOUR DISSENTERS’ RIGHTS ON SUCH SHARES.

 

Pixar stock must satisfy each of the following requirements to be perfected as dissenting shares under the California General Corporation Law:

 

    The Pixar stock must have been outstanding on March 16, 2006, the Record Date.

 

    The Pixar stock must have been voted “AGAINST” the merger proposal. A proxy that does not contain voting instructions will, unless revoked, be voted in favor of the merger proposal. Therefore, a Pixar shareholder who votes by proxy and who wishes to exercise dissenters’ rights must vote “AGAINST” the merger proposal.

 

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    The holder of such Pixar stock must make a written demand no later than the date of the Special Meeting that Pixar purchase the Pixar stock at fair market value (as described below).

 

    The holder of such Pixar stock must submit stock certificates for endorsement (as described below).

 

A VOTE IN FAVOR OF THE MERGER BY A PIXAR SHAREHOLDER WILL RESULT IN A WAIVER OF SUCH HOLDER’S RIGHT TO DISSENTERS’ RIGHTS.

 

A vote against the merger does not in and of itself constitute a demand for appraisal under the California General Corporation Law.

 

Pursuant to Sections 1300 through 1312 of the California General Corporation Law, holders of dissenting shares may require Pixar to purchase their dissenting shares at a price equal to the fair market value of such shares determined as of the day before the first announcement of the terms of the merger, excluding any appreciation or depreciation as a consequence of the proposed merger, but adjusted for any stock split, reverse stock split or stock dividend that becomes effective thereafter.

 

Within ten days following approval of the principal terms of the merger agreement and approval of the merger by the Pixar shareholders, Pixar is required to mail to each holder of dissenting shares a notice of the approval of the principal terms of the merger agreement and approval of the merger, a statement of the price determined by Pixar to represent the fair market value of dissenting shares (which will constitute an offer by Pixar to purchase such dissenting shares at such stated price) and a brief description of the procedure to be followed if the holders of dissenting shares desire to exercise their dissenters’ rights.

 

By no later than the Special Meeting, a dissenting shareholder must demand that Pixar purchase such shareholder’s dissenting shares in a statement setting forth the number and class of dissenting shares held of record that the dissenting shareholder demands that Pixar purchase and a statement of what the dissenting shareholder claims to be the fair market value of the dissenting shares as of the day before the announcement of the proposed merger. The statement of fair market value in such demand by the dissenting shareholder constitutes an offer by the dissenting shareholder to sell the dissenting shares at such price. Such holder must also, within 30 days after the date on which notice of the approval of the principal terms of the merger agreement and approval of the merger by Pixar shareholders is mailed to the holders of dissenting shares, submit to Pixar or its transfer agent certificates representing any dissenting shares that the dissenting shareholder demands Pixar purchase, so that such dissenting shares may either be stamped or endorsed with the statement that the shares are dissenting shares or exchanged for certificates of appropriate denomination so stamped or endorsed.

 

If the shares are owned of record by a person in a fiduciary capacity, such as a trustee, guardian or custodian, the demand should be executed in that capacity. If the shares are owned of record by more than one person as in a joint tenancy or tenancy in common, the demand should be executed by or on behalf of all owners.

 

An authorized agent, including an agent for two or more joint owners, may execute a demand for appraisal on behalf of a shareholder; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is acting as agent for such owner or owners. A record holder such as a broker who holds shares as nominee for several beneficial owners may exercise dissenters’ rights with respect to the shares held for one or more beneficial owners while not exercising these rights with respect to the shares held for one or more other beneficial owners. In this case, the written demand should set forth the number of shares as to which appraisal is sought, and where no number of shares is expressly mentioned the demand will be presumed to cover all shares held in the name of the record owner. SHAREHOLDERS WHO HOLD THEIR SHARES IN BROKERAGE ACCOUNTS OR OTHER NOMINEE FORMS AND WHO WISH TO EXERCISE DISSENTERS’ RIGHTS ARE URGED TO CONSULT WITH THEIR BROKERS TO DETERMINE APPROPRIATE PROCEDURES FOR THE MAKING OF A DEMAND FOR APPRAISAL BY SUCH NOMINEE.

 

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A Pixar shareholder who elects to exercise dissenters’ rights pursuant to Chapter 13 should deliver a written demand no later than the date of the Special Meeting to:

 

PIXAR ANIMATION STUDIOS

1200 PARK AVENUE

EMERYVILLE, CALIFORNIA 94608

ATTENTION: SECRETARY

 

If upon the surrender of the certificates representing the dissenting shares, Pixar and a dissenting shareholder agree upon the price to be paid for the dissenting shares and agree that such shares are dissenting shares, then the agreed price is required by law to be paid to the holder of the dissenting shares within the later of 30 days after the date of such agreement or 30 days after any statutory or contractual conditions to the consummation of the merger are satisfied or waived. The holders of dissenting shares are entitled to interest thereon at the legal rate on judgments from the date of the merger agreement.

 

If Pixar and a dissenting shareholder disagree as to the fair market value for such dissenting shares or disagree as to whether such shares are entitled to be classified as dissenting shares, such holder has the right to bring an action in the California superior court located in the proper county, within six months after the date on which the notice of the approval of the principal terms of the merger agreement and approval of the merger by Pixar shareholders is mailed, to resolve such dispute. In such action, the court will determine whether the shares of Pixar stock held by such shareholder are dissenting shares, the fair market value of such Pixar stock, or both. The California General Corporation Law provides, among other things, that a dissenting shareholder may not withdraw the demand for payment of the fair market value of dissenting shares unless Pixar consents to such request for withdrawal.

 

In the event that only the holders of less than 5% of the outstanding shares of Pixar have filed a demand for payment under Chapter 13 of the California General Corporation Law, Pixar shareholders will not have the right to have Pixar purchase their shares at the fair market value determined under Chapter 13 of the California General Corporation Law unless their shares are subject to a restriction on transfer imposed by Pixar or by any law or regulation.

 

If a Pixar shareholder fails to perfect his, her or its dissenting rights or effectively withdraws or loses such rights, such holder’s Pixar stock will thereupon be deemed to have been canceled and converted as set forth in the merger agreement at the effective time of the merger.

 

FAILURE TO FOLLOW THE STEPS REQUIRED BY CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW FOR PERFECTING DISSENTERS’ RIGHTS MAY RESULT IN THE LOSS OF DISSENTERS’ RIGHTS, IN WHICH EVENT YOU WILL BE ENTITLED TO RECEIVE THE CONSIDERATION WITH RESPECT TO YOUR DISSENTING SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT. IN VIEW OF THE COMPLEXITY OF THE PROVISIONS OF CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW, IF YOU ARE A PIXAR SHAREHOLDER AND ARE CONSIDERING EXERCISING YOUR DISSENTERS’ RIGHTS UNDER THE CALIFORNIA GENERAL CORPORATION LAW, YOU SHOULD CONSULT YOUR OWN LEGAL ADVISOR.

 

Subject to the provisions of Chapter 13 of the California General Corporation Law, Pixar shareholders who have exercised their dissenters’ rights will not have the right at law or in equity to attack the validity of the merger or to have the merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the merger had been legally voted in favor of the merger. In addition, if a Pixar shareholder initiates any action to attack the validity of the merger or to have it set aside or rescinded, the shareholder thereafter shall have no right to demand payment for his or her shares as a holder of dissenting shares.

 

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Except as expressly limited in Chapter 13 of the California General Corporation Law, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined.

 

Restrictions on Sales of Shares of Disney Common Stock Received in the Merger

 

The shares of Disney common stock to be issued in connection with the merger will be registered under the Securities Act of 1933 and will be freely transferable, except for shares of Disney common stock issued to any person who is deemed to be an “affiliate” of Pixar prior to the merger. Persons who may be deemed to be “affiliates” of Pixar prior to the merger include individuals or entities that control, are controlled by, or are under common control with Pixar prior to the merger, and may include officers and directors, as well as principal shareholders of Pixar prior to the merger.

 

Persons who may be deemed to be affiliates of Pixar prior to the merger may not sell any of the shares of Disney common stock received by them in connection with the merger except pursuant to:

 

    an effective registration statement under the Securities Act of 1933 covering the resale of those shares;

 

    an exemption under paragraph (d) of Rule 145 under the Securities Act of 1933; or

 

    any other applicable exemption under the Securities Act of 1933.

 

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THE MERGER AGREEMENT

 

The following summary describes the material provisions of the merger agreement. The provisions of the merger agreement are complicated and not easily summarized. This summary may not contain all of the information about the merger agreement that is important to you. The merger agreement is attached to this proxy statement/prospectus as Annex A and is incorporated by reference into this proxy statement/prospectus, and we encourage you to read it carefully in its entirety for a more complete understanding of the merger agreement.

 

The Merger

 

The merger agreement provides for the merger of Lux Acquisition Corp., a newly formed, wholly-owned subsidiary of Disney, with and into Pixar. Pixar will survive the merger as a wholly-owned subsidiary of Disney.

 

Completion and Effectiveness of the Merger

 

Disney and Pixar will complete the merger when all of the conditions to completion of the merger contained in the merger agreement, which are described in the section entitled “The Merger Agreement—Conditions to Obligations to Complete the Merger” beginning on page 79 of this proxy statement/prospectus, are satisfied or waived, including approval of the principal terms of the merger agreement and approval of the merger by the shareholders of Pixar. The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of California.

 

Disney and Pixar are working to complete the merger as quickly as possible. Because completion of the merger is subject to certain conditions that are beyond our control, we cannot predict the exact timing, although absent any unanticipated delay, we expect to close the merger promptly following the Special Meeting.

 

Conversion of Securities

 

Upon completion of the merger, each share of Pixar common stock outstanding immediately prior to the effective time of the merger will be canceled and extinguished and automatically converted into the right to receive 2.3 shares of Disney common stock, upon surrender of the certificate representing such share of Pixar common stock in the manner provided in the merger agreement. Upon completion of the merger, Disney also will assume outstanding options to purchase Pixar common stock. For more information see “The Merger Agreement—Treatment of Pixar Stock Options and Assumption of Pixar Stock Option Plan” beginning on page 69 of this proxy statement/prospectus.

 

The exchange ratio in the merger (i.e., 2.3 shares of Disney common stock for each share of Pixar common stock) will be appropriately and equitably adjusted to reflect fully the effect of any stock split, reverse stock split, reclassification, recapitalization, consolidation, exchange or like change with respect to Disney common stock or Pixar common stock or any extraordinary dividend or distribution with respect to Disney common stock, in each case, occurring (or having a record date) after the date of the merger agreement and prior to the effective time of the merger.

 

Each share of Pixar common stock held as treasury shares by Pixar, Disney or any of Disney’s subsidiaries immediately prior to the merger will be automatically canceled and retired and cease to exist, and no securities of Disney or other consideration will be delivered in exchange for those shares.

 

Based on the exchange ratio and the number of shares of Pixar common stock outstanding as of March 16, 2006, a total of approximately 277.9 million shares of Disney common stock will be issued. In addition, based on the number of Pixar options outstanding as of March 16, 2006, a total of approximately 39.7 million shares of Disney common stock will be reserved for issuance upon the exercise of options to purchase Pixar common stock assumed by Disney in connection with the merger. As more fully described below under “The Merger Agreement—Treatment of Pixar Stock Options and Assumption of Pixar Stock Option Plan” beginning on page 69 of this proxy statement/prospectus, however, the exact number of shares of Disney common stock to be reserved for issuance upon exercise of the assumed options will not be known until the completion of the merger.

 

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After the merger, Disney stockholders will continue to own their existing shares of Disney common stock. Accordingly, Disney stockholders will hold the same number of shares of Disney common stock that they held immediately prior to the merger. However, because Disney will be issuing new shares of Disney common stock to Pixar shareholders in the merger, each outstanding share of Disney common stock immediately prior to the merger will represent a smaller percentage of the total number of shares of Disney common stock outstanding after the merger. It is expected that Disney stockholders before the merger will hold approximately 87.38% of the total Disney common stock outstanding upon completion of the merger.

 

Treatment of Pixar Stock Options and Assumption of Pixar Stock Option Plans

 

When the merger is completed, Disney will assume each outstanding option to purchase shares of Pixar common stock and convert it into an option to purchase that number of shares of Disney common stock equal to the number of shares of Pixar common stock subject to the original Pixar option multiplied by 2.3, rounded down to the nearest whole share. The exercise price per share for each assumed Pixar option will be equal to the exercise price per share of the original Pixar option divided by 2.3, rounded up to the nearest one-hundredth of a cent. Each assumed option will be subject to all other terms and conditions that were applicable to the original Pixar option. As of the Record Date, options to purchase an aggregate of approximately 17,243,797 shares of Pixar common stock were outstanding under Pixar’s stock option plans.

 

Disney has agreed to file, no later than the day the merger is completed, a registration statement on Form S-8 with the SEC to register the sale of shares of Disney common stock issuable in connection with the assumed options, and to cause the registration statement to become and remain effective until the later of (i) the date on which all assumed options are no longer outstanding and (ii) the date on which all shares of Disney common stock issuable pursuant to the assumed options are freely tradable without regard to the volume restrictions of Rule 144 of the Securities Act of 1933. In addition, Disney will take such further actions as may be reasonably necessary to include under such registration statement shares of Disney common stock issuable pursuant to assumed options that are held by persons who are directors of Pixar immediately prior to the completion of the merger.

 

At the effective time of the merger, Disney will assume Pixar’s 1995 Stock Plan, 1995 Director Option Plan and 2004 Equity Incentive Plan.

 

Fractional Shares

 

Disney will not issue any fractional shares of common stock in connection with the merger. Instead, each holder of Pixar common stock who would otherwise be entitled to receive a fraction of a share of Disney common stock will receive cash, without interest, in an amount equal to the fraction multiplied by the average of the daily volume weighted average sales price of one share of Disney common stock for the five trading days immediately preceding the closing date of the merger on the New York Stock Exchange (determined after aggregating all of the Pixar common stock held by each such holder and multiplying such shares by the exchange ratio).

 

Exchange Procedures

 

At or promptly after the effective time of the merger, Disney, as the exchange agent for the merger, will establish an exchange fund to hold the merger consideration to be paid to Pixar shareholders in connection with the merger. The exchange fund will consist of stock certificates representing shares of Disney common stock and cash to be issued in lieu of fractional shares of Disney common stock and, if required pursuant to the merger agreement, any dividends or other distributions on Disney common stock with a record date occurring after the completion of the merger.

 

Promptly after the effective time of the merger, Disney will mail to each record holder of Pixar common stock a letter of transmittal and instructions for surrendering the record holder’s stock certificates in exchange for

 

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shares of Disney common stock issuable to each such holder pursuant to the merger. Upon proper surrender of a Pixar stock certificate, in accordance with the exchange agent’s instructions, the holder of such Pixar stock certificate will be entitled to receive (1) a certificate representing the shares of Disney common stock issuable to such holder pursuant to the merger, (2) cash in lieu of any fractional share of Disney common stock issuable to such holder and (3) dividends or other distributions, if any, to which such holder is entitled under the terms of the merger agreement. The surrendered certificates representing Pixar common stock will be canceled. After the effective time of the merger, each certificate representing shares of Pixar common stock that has not been surrendered will represent only the right to receive shares of Disney common stock issuable pursuant to the merger and cash in lieu of any fractional share of Disney common stock to which the holder of any such certificate is entitled. After the effective time of the merger, Pixar will not register any transfers of Pixar common stock on its stock transfer books.

 

Holders of Pixar common stock should not send in their Pixar stock certificates until they receive a letter of transmittal from Disney with instructions for the surrender of Pixar stock certificates.

 

Distributions with Respect to Unexchanged Shares

 

Holders of Pixar common stock are not entitled to receive any dividends or other distributions on Disney common stock until the merger is completed. After the merger is completed, holders of Pixar common stock will be entitled to dividends and other distributions declared or made after completion of the merger with respect to the number of whole shares of Disney common stock that they are entitled to receive upon exchange of their Pixar common stock. Such holders will not be entitled to receive these dividends or distributions, however, until they surrender their Pixar common stock certificates to Disney in accordance with Disney’s instructions.

 

Lost, Stolen and Destroyed Certificates

 

If a Pixar stock certificate is lost, stolen or destroyed, the holder of such certificate must deliver an affidavit of that fact prior to receiving any merger consideration and, if required by Disney, may also have to provide an indemnity bond prior to receiving any merger consideration.

 

Dissenting Shares

 

In the event that the holders of at least 5% of the outstanding shares of Pixar have filed demand payments under Chapter 13 of the California General Corporation Law, Pixar shareholders will have the right to have Pixar purchase their shares at the fair market value determined under Chapter 13 of the California General Corporation Law. The shares subject to such purchase are called “dissenting shares.” In general, to preserve their dissenters’ rights, Pixar shareholders who wish to exercise these rights must:

 

    vote their shares of Pixar common stock “AGAINST” approval of the principal terms of the merger agreement and approval of the merger;

 

    deliver a written demand to Pixar for purchase of their shares, which must be received by Pixar no later than the date of the Special Meeting;

 

    submit the dissenting shares for endorsement in accordance with Section 1302 of the California General Corporation Law; and

 

    comply with the other provisions of Chapter 13 of the California General Corporation Law, including continuously hold their shares of Pixar common stock from the date they make the demand through the completion of the merger.

 

For a full description of the rights of Pixar shareholders to dissent from the merger, see “The Merger—Dissenters’ Rights” beginning on page 64, as well as Annex D of this proxy statement/prospectus. A Pixar shareholder’s failure to comply with the procedures described in Annex D will result in the loss of dissenters’ rights for such a shareholder.

 

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Representations and Warranties

 

The merger agreement contains general representations and warranties made by each of Disney and Lux Acquisition Corp. on the one hand, and Pixar on the other, regarding aspects of their respective businesses, financial condition and structure, as well as other facts pertinent to the merger. These representations and warranties are subject to materiality, knowledge and other similar qualifications in many respects and expire at the effective time of the merger. The representations and warranties of each of Disney and Pixar have been made solely for the benefit of the other party and those representations and warranties should not be relied on by any other person. In addition, those representations and warranties may be intended not as statements of actual fact, but rather as a way of allocating risk between the parties, may have been modified by the disclosure schedules attached to the merger agreement, are subject to the materiality standard described in the merger agreement, which may differ from what may be viewed as material by you, and were made only as of the date of the merger agreement or another date as is specified in the merger agreement.

 

Pixar made a number of representations and warranties to Disney in the merger agreement, including representations and warranties relating to the following matters:

 

    corporate organization, qualifications to do business and corporate standing;

 

    capital structure and the absence of restrictions or encumbrances with respect to the capital stock of Pixar;

 

    corporate organization, qualifications to do business and corporate standing of subsidiaries;

 

    ownership of, and absence of restrictions or encumbrances with respect to, the capital stock of subsidiaries;

 

    corporate authorization to enter into and carry out the obligations contained in the merger agreement;

 

    the vote of the shareholders required to complete the merger;

 

    governmental and regulatory approvals required to complete the merger;

 

    absence of any conflict or violation of the corporate charter and bylaws of Pixar and its subsidiaries, any applicable legal requirements, or any agreements with third parties, as a result of entering into and carrying out the obligations contained in the merger agreement;

 

    maintenance of books and records;

 

    SEC filings and the financial statements contained in those filings;

 

    internal accounting controls and disclosure controls and procedures;

 

    absence of certain changes or events from January 1, 2005 through January 24, 2006;

 

    absence of undisclosed liabilities;

 

    benefit plans, employees and employment practices;

 

    compliance with employment/labor contracts and laws;

 

    absence of collective bargaining arrangements and labor controversies;

 

    material contracts and the absence of breaches of material contracts;

 

    litigation;

 

    compliance with applicable law by Pixar, its subsidiaries and its officers and directors;

 

    taxes and tax returns;

 

    environmental matters;

 

    inapplicability of state takeover statutes;

 

    intellectual property;

 

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    disclosure of, access to and condition of library films and library film materials;

 

    disclosure of and distribution of films in progress and development projects;

 

    absence of indemnifiable claims;

 

    receipt of a fairness opinion of financial advisor;

 

    board approval;

 

    entitlements to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by the merger agreement; and

 

    accuracy of the information supplied for this proxy statement/prospectus.

 

Disney and Lux Acquisition Corp. each made a number of representations and warranties to Pixar in the merger agreement, including representations and warranties relating to the following subject matters:

 

    corporate organization, qualifications to do business and corporate standing;

 

    capital structure and the absence of restrictions or encumbrances with respect to the capital stock of Disney and Lux Acquisition Corp.;

 

    corporate authorization to enter into and carry out the obligations contained in the merger agreement;

 

    governmental and regulatory approvals required to complete the merger;

 

    absence of any conflict or violation of the corporate charter and bylaws of Disney and its subsidiaries, any applicable legal requirements, or any agreements with third parties, as a result of entering into and carrying out the obligations contained in the merger agreement;

 

    SEC filings and the financial statements contained in those filings;

 

    internal accounting controls and disclosure controls and procedures;

 

    absence of undisclosed liabilities;

 

    litigation;

 

    compliance with applicable law by Disney and Lux Acquisition Corp., their subsidiaries and their officers and directors;

 

    absence of certain changes or events from October 1, 2005 through January 24, 2006;

 

    entitlements to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by the merger agreement;

 

    receipt of a fairness opinion of financial advisor;

 

    board approval;

 

    accuracy of the information supplied for this proxy statement/prospectus; and

 

    interim operations of Lux Acquisition Corp.

 

Pixar’s Conduct of Business Before Completion of the Merger

 

Under the merger agreement, Pixar has agreed, until the completion of the merger, except under certain circumstances or as consented to in writing by Disney (which consent will not be unreasonably withheld, delayed or conditioned), to:

 

    conduct its business in the ordinary course;

 

    use its reasonable best efforts to preserve intact its business organizations and relationships with third parties and to keep available the services of its present officers and employees; and

 

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    use its reasonable best efforts to protect its intellectual property to the end that Pixar’s and its subsidiaries’ goodwill and ongoing business will not be impaired in any material respects as of the completion of the merger.

 

In addition, Pixar has agreed, until the completion of the merger, except as described above, that it will not (and will not permit its subsidiaries to):

 

    pay dividends, reclassify stock or commence any stock repurchases;

 

    issue securities, subject to certain exceptions, including option grants not to exceed 2.5 million shares;

 

    amend its articles of incorporation or bylaws;

 

    make any acquisitions by merger or consolidation;

 

    dispose of any assets, other than dispositions of assets with an aggregate fair market value of less than $2.5 million;

 

    engage in “green-lighting” or commit to acquire, develop or finance any film or enter into any distribution, co-ownership, co-production, co-financing or co-branding agreement;

 

    make investments or incur indebtedness, subject to certain exceptions, including those in the ordinary course of business not to exceed $2.5 million in the aggregate;

 

    change accounting methods, except (i) as disclosed in Pixar’s SEC documents filed prior to the date of the merger agreement, (ii) as required by a governmental entity, (iii) as required by GAAP or Regulation S-X of the Exchange Act (as agreed to with Pixar’s independent public accountants), or (iv) as may be required by a change in applicable law;

 

    commence new capital expenditures, except additional capital expenditures made in the ordinary course of business and in an aggregate amount not to exceed $1.0 million;

 

    take actions that would be reasonably likely to prevent or materially delay the consummation of the merger;

 

    discharge any liabilities, other than the payment, in the ordinary course of business consistent with past practice or in accordance with their terms of liabilities (i) disclosed in the most recent financial statements included in Pixar’s SEC documents and (ii) incurred since the date of such financial statements in the ordinary course of business;

 

    make any material changes to, or waive any material rights under, certain material contracts or enter into any new material contract, except in the ordinary course of business not to exceed $1.0 million per contract and $5.0 million in the aggregate for all contracts;

 

    sell, license or fail to maintain any of Pixar’s intellectual property; grant new rights or enter into new contracts with respect to Pixar’s intellectual property;

 

    make changes in employee benefits, subject to certain limited exceptions;

 

    fail to timely file tax returns or timely pay taxes;

 

    engage in transactions with affiliates;

 

    engage in any liquidation, dissolution, merger or similar transaction;

 

    engage in discussions or negotiations regarding any agreement providing for the distribution, co-ownership, co-production, co-financing or co-branding of any films produced or to be produced by Pixar or its subsidiaries; or

 

    authorize any of, or announce an intention or agree to take any of the foregoing actions.

 

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Disney’s Conduct of Business Before Completion of the Merger

 

Under the merger agreement Disney has agreed, until the completion of the merger, except under certain circumstances or as consented to in writing by Pixar (which consent will not be unreasonably withheld, delayed or conditioned), to conduct its business in the ordinary course.

 

In addition, Disney has also agreed, until the completion of the merger, except as described above, that it will not (and will not permit its subsidiaries to):

 

    take any action, or omit to take any action, pursuant to which Disney would be required under applicable law to include any historical or pro forma financial data or other information in this proxy statement/prospectus;

 

    take any action, or omit to take any action, that would reasonably be expected to prevent or materially delay the consummation of the merger;

 

    amend its certificate of incorporation or bylaws except in connection with the issuance of preferred stock;

 

    change accounting methods, except (i) as disclosed in Disney’s SEC documents filed prior to the date of the merger agreement, (ii) as required by a governmental entity, (iii) as required or, if immaterial, permitted by GAAP or Regulation S-X of the Exchange Act (as agreed to with Disney’s independent public accountants), or (iv) as may be required by a change in applicable law; or

 

    authorize any of, or announce an intention or agree to take any of, the foregoing actions.

 

Pixar Is Prohibited From Soliciting Other Offers

 

Under the terms of the merger agreement, subject to certain exceptions described below, Pixar has agreed that it will not, directly or indirectly:

 

    solicit, initiate or knowingly encourage or facilitate any acquisition proposal;

 

    enter into, continue or participate in any discussions or negotiations regarding, or furnish any person any information on any acquisition proposal; or

 

    allow Pixar or any of its subsidiaries to enter into any letter of intent, memorandum of understanding or other similar contract related to any acquisition proposal.

 

In addition, Pixar has agreed that it will not authorize or permit any of its subsidiaries, directors, officers, employees, agents or representatives (including any retained investment banker, attorney or accountant), to do any of the foregoing.

 

An acquisition proposal is any inquiry, or offer relating to the acquisition by any person, or for a merger, business combination, or any other transaction involving Pixar or any of its subsidiaries, which would directly or indirectly result in any person acquiring:

 

    20% or more of the outstanding capital stock of Pixar;

 

    20% or more of the aggregate outstanding voting securities of Pixar;

 

    20% or more of the fair market value, immediately prior to such transaction, of the assets (including capital stock of Pixar’s subsidiaries) of Pixar and its subsidiaries, taken as a whole; or

 

    any combination of the foregoing.

 

Notwithstanding the foregoing, at any time prior to obtaining the approval of the principal terms of the merger agreement and approval of the merger by the Pixar shareholders, in response to a bona fide written acquisition proposal that was made after the date of the merger agreement and which the board of directors of

 

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Pixar determines in good faith (after consultation with outside counsel and a financial advisor of nationally recognized reputation) constitutes, or is reasonably likely to lead to, a superior proposal, Pixar may (i) furnish any information to the person making such acquisition proposal (and its representatives) pursuant to a customary confidentiality agreement, provided that all such information has previously been provided to Disney or is provided to Disney prior to or substantially concurrent with the time it is provided to such person, and (ii) enter into, continue or otherwise participate in any discussions or negotiations with the person making such acquisition proposal (and its representatives) regarding such acquisition proposal.

 

Additionally, Pixar is obligated to promptly advise Disney orally and in writing of any acquisition proposal, the material terms and conditions of any such acquisition proposal (including any changes thereto) and the identity of the person making any such acquisition proposal. Pixar will (i) keep Disney reasonably informed in all material respects of the status and details (including any change to the terms thereof) of any acquisition proposal, and (ii) provide to Disney as soon as practicable after receipt or delivery thereof copies of all correspondence and other written material sent or provided to Pixar or any of its subsidiaries from any person that describes any of the terms or conditions of any acquisition proposal.

 

A superior proposal is a bona fide written acquisition proposal (with all of the provisions in the definition of acquisition proposal adjusted to increase the percentages referenced therein to 100%) that Pixar’s board of directors determines in good faith (after consultation with its financial advisors) to be more favorable to the shareholders of Pixar as compared to the transactions provided for in the merger (including any revisions to the merger agreement made or proposed in writing by Disney) and any alternative transaction proposed in writing by Disney in accordance with the merger agreement, taking into account, among other things:

 

    the person making such acquisition proposal;

 

    the likelihood that the transaction contemplated by such acquisition proposal will be consummated and the timing thereof;

 

    the terms and conditions of the merger agreement and such acquisition proposal, including any conditions relating to financing, regulatory approvals or other events or circumstances beyond the control of the party invoking the condition; and

 

    any revisions to the merger agreement made or proposed in writing by Disney prior to the time of determination and any alternative transaction proposed in writing by Disney in accordance with the merger agreement.

 

Obligation of Pixar Board of Directors with Respect to Its Recommendation and Holding of a Shareholder Meeting

 

The Pixar board of directors has agreed (i) not to withdraw or adversely and materially modify, or publicly propose to withdraw or adversely and materially modify, its recommendation of the merger agreement and the merger and (ii) not to adopt, or recommend, or propose publicly to adopt or recommend any acquisition proposal.

 

Notwithstanding the obligations described above, at any time prior to the effective time of the merger, Pixar’s board of directors may withdraw or adversely and materially modify, or publicly propose to withdraw or adversely and materially modify, its recommendation of the merger agreement and the merger, if Pixar’s board of directors determines in good faith after consulting with its outside counsel that the failure to take such action would be reasonably expected to be a breach of its fiduciary duties under applicable law.

 

At any time prior to obtaining the approval by Pixar shareholders of the principal terms of the merger agreement and approval of the merger, in response to an acquisition proposal of the type described above that did not result from a breach of the merger agreement and that is determined by the Pixar board of directors, in good faith after consulting with outside counsel and a financial advisor of nationally recognized reputation, to constitute a superior proposal, the board of directors of Pixar may (i) withdraw or adversely and materially

 

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modify, or publicly propose to withdraw or adversely and materially modify, its recommendation of the merger and the merger agreement, or adopt, or recommend, or propose publicly to adopt or recommend an acquisition proposal or (ii) cause Pixar to terminate the merger agreement and concurrent with or after such termination enter into an acquisition agreement relating to such superior proposal, provided however, that Pixar has provided Disney with five business days prior written notice of its intention to take such action, specifying in the notice the material terms and conditions of the superior proposal. In determining whether to exercise its rights described above, Pixar’s board of directors has agreed to take into account any changes to the financial terms of the merger agreement proposed by Disney.

 

Nothing contained in the merger agreement prohibits Pixar from (i) taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a) under the Exchange Act or Rule 14a-9 under the Exchange Act or (ii) making any disclosure to the shareholders of Pixar if the board of directors of Pixar determines in good faith (after consultation with its outside counsel) that the failure to make such disclosure would be reasonably expected to be a breach of its duty of candor under applicable law.

 

Under the terms of the merger agreement, Pixar’s board of directors has agreed to call, hold and convene a meeting of its shareholders as promptly as practicable following the execution of the merger agreement subject to its rights described above. The Pixar board of directors has agreed to recommend the approval of the principal terms of the merger agreement and approval of the merger to its shareholders. Pixar’s obligation to hold such a meeting shall not be affected by (i) the commencement, public proposal, public disclosure or communication to Pixar of any acquisition proposal or (ii) the withdrawal or modification by the board of directors of Pixar or any committee thereof of its approval or recommendation of the merger agreement or merger.

 

Regulatory Matters

 

The merger is subject to review by the Antitrust Division and the FTC under the HSR Act, and by foreign governmental authorities as more fully described in the section “The Merger—Regulatory Matters” beginning on page 62 of this proxy statement/prospectus.

 

Under the terms of the merger agreement, neither Disney nor Pixar will be required to enter into any consent arrangement that would be reasonably expected to have a material adverse effect on the combined Disney and Pixar feature animation businesses or the benefits that are expected to derive from the merger and the merger agreement.

 

Reasonable Best Efforts to Complete the Merger

 

Under the terms of the merger agreement, each of Disney and Pixar has agreed to use its reasonable best efforts to take all actions and to assist and cooperate with the other party in doing all things necessary, proper or advisable to complete the merger in the most expeditious manner practicable, including:

 

    preparing and filing as soon as practicable all forms, registrations and notices required to be filed to consummate the transactions contemplated by the merger agreement and taking such reasonable actions as are necessary to obtain any requisite approvals, consents, orders, exemptions or waivers by any third party or governmental entity, including filings pursuant to the HSR Act with the FTC and the Antitrust Division;

 

    defending any lawsuits or other legal proceedings, whether judicial or administrative, challenging the merger agreement or the consummation of the merger, including seeking to have any stay or temporary restraining order entered by any court or other governmental entity vacated or reversed until the issuance of a final, non-appealable order; and

 

    using reasonable best efforts to cause the satisfaction of all conditions to the completion of the merger.

 

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Notwithstanding the above, none of Disney, Lux Acquisition Corp. and Pixar is required to enter into any consent arrangement that would be reasonably expected to have a material adverse effect on (i) the feature animation businesses of Disney and Pixar after the merger, taken as a whole, or (ii) the benefits that are expected to derive from the merger and the other transactions contemplated by the merger agreement.

 

In addition, each of Disney and Pixar has agreed to consult with the other with respect to, provide any necessary information with respect to and provide the other (or its counsel) copies of, all filings made by such party with any governmental entity or any other information supplied by such party to a governmental entity in connection with the merger agreement and the transactions contemplated by the merger agreement.

 

Access to Information

 

Under the merger agreement, Pixar agrees to, and will cause each of its subsidiaries to, afford to Disney and its officers, employees, accountants, counsel, agents and other representatives reasonable access to all of the properties, personnel, books and records of Pixar and its subsidiaries (including tax returns filed and those in preparation, workpapers and other items relating to taxes) and all information concerning the business, properties and personnel of Pixar and its subsidiaries as Disney may reasonably request (any such access will be conducted under the supervision of personnel of Pixar and in a manner that does not interfere with the normal operations of Pixar).

 

Notwithstanding the obligations described above, Pixar is not required to disclose any information that, in its sole and absolute discretion, it is not legally permitted to disclose or the disclosure of which would contravene any applicable law or binding order (including any antitrust law) or the disclosure of which would be reasonably likely to cause the loss of any attorney-client or other legal privilege.

 

Director and Officer Indemnification and Insurance

 

Under the terms of the merger agreement, Disney has agreed to honor all obligations of Pixar contained in any indemnification agreement in effect prior to completion of the merger between Pixar or its subsidiaries and any of its current or former directors or officers for a period of six years after completion of the merger. Also, for six years following completion of the merger, Disney and its subsidiaries will cause the articles of incorporation and bylaws of Pixar after the merger to contain provisions with respect to indemnification and exculpation that are at least as favorable as the indemnification and exculpation provisions contained in the articles of incorporation or bylaws of Pixar and its subsidiaries in effect prior to completion of the merger, and Disney and its subsidiaries will not amend, repeal or otherwise modify such documents in any respect, except as required by law.

 

For six years from completion of the merger, Disney has also agreed to maintain the existing policy of Pixar’s directors’ and officers’ liability insurance in respect of acts or omissions occurring at or prior to the effective time of the merger on terms with coverage and amounts no less favorable than those in effect on the date of the merger agreement. However, Disney will not be required to pay annual premiums in excess of 250% of the amount paid by Pixar for coverage for its last full fiscal year (which Pixar represents to be $958,000). If the annual premiums of such insurance coverage exceed such amount, Disney will be obligated to obtain a policy with the greatest coverage available for a cost not exceeding 250% of $958,000, or $2,395,000. Prior to completion of the merger, Pixar may request that Disney purchase a six-year “tail” prepaid policy on the directors’ and officers’ insurance and if Disney rejects such request, Pixar may purchase such “tail” policy on the directors’ and officers’ insurance on terms and conditions no less advantageous than the directors’ and officers’ insurance, provided that the amount paid by Pixar for such “tail” policy will not exceed six times $958,000, or $5,748,000, and provided further that Pixar and Disney will coordinate with each other in good faith to optimize the terms and prices of such “tail” policy. In the event that Pixar purchases such a “tail” policy prior to the effective time of the merger, Disney and Pixar after the merger will maintain such “tail” policy in full force and effect, in lieu of all other obligations of Disney and Pixar after the merger under the merger agreement for so long as such “tail” policy will be maintained in full force and effect.

 

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Employee Benefits; 401(k) Plan

 

Under the terms of the merger agreement, Disney has agreed to maintain a severance pay practice for the benefit of each Pixar employee that is no less favorable than the disclosed severance pay practice, starting on the closing date of the merger, for a period ending on the date one year after the closing date of the merger.

 

Pixar has agreed to take, prior to the effective time of the merger, such actions as Disney may reasonably request so as to enable Pixar after the merger to effect such actions relating to Pixar’s 401(k) plan as Disney may deem necessary or appropriate (after reasonable consultation with Pixar), including terminating Pixar’s 401(k) plan prior to the effective time of the merger, subject to Pixar’s 401(k) plan and applicable law and provided that such action does not preclude the immediate participation of Pixar employees in any successor plan.

 

Directorship

 

Disney has agreed to increase the size of the Disney board of directors by one member, effective upon completion of the merger, and to appoint Steven P. Jobs to fill such vacancy.

 

Feature Animation Management and Operations

 

Under the merger agreement, Disney has agreed to take such sufficient action to adopt and implement immediately following the effective time of the merger the policies, practices and management structure described below with respect to the feature animation businesses of Disney and Pixar after the merger. These policies are set forth as a schedule to the merger agreement that is attached to this proxy statement/prospectus as Annex A. The specified policies and principles are explicitly subject to the authority of the Disney Chief Executive Officer to take such actions as are in the best interests of the stockholders of Disney.

 

After the completion of the merger, Edwin E. Catmull will be the President of Pixar and Disney Animation, heading the combined animation businesses of Disney and Pixar, reporting directly to Robert A. Iger and Richard Cook jointly.

 

John A. Lasseter will be the Chief Creative Officer of the combined animation studios as well as the Principal Creative Advisor at Walt Disney Imagineering, reporting to Robert A. Iger. John A. Lasseter will have “green-lighting” authority for Disney and Pixar feature animation productions, subject to final approval by Disney’s Chief Executive Officer.

 

Upon the effective date of the merger, a committee will be immediately established to help provide oversight to the feature animation businesses of Disney and Pixar. The principal objectives of the committee are: (i) to help maintain the Pixar “culture,” (ii) to help supervise Pixar and Disney feature animation, (iii) to oversee Pixar compensation practices and (iv) to approve the film budgets of Pixar, all subject to final approval by Disney’s Chief Executive Officer. The Committee will initially consist of the following members: Edwin E. Catmull, John A. Lasseter, Robert A. Iger, Richard Cook, Thomas O. Staggs and Steven P. Jobs.

 

In addition, Pixar will retain its existing compensation philosophies and practices, including not using employment contracts, granting employee stock options, and maintaining employee bonus plans and employee medical benefits and other fundamental human resource policies and practices for at least five years or such shorter period as the committee may decide. Pixar will continue to be called “Pixar,” the branding of Pixar’s previous films and products will not be altered, and future films produced by Pixar will be branded Disney Pixar.

 

Grant of Equity Compensation Awards

 

Under the merger agreement, Pixar agreed to grant, promptly following the signing of the merger agreement, performance unit awards pursuant to its 2004 Equity Incentive Plan to Pixar employees identified by Pixar and agreed to by Disney in such amounts as determined by Disney and Pixar. Disney and Pixar have agreed

 

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that Pixar could grant, and the compensation committee of the Pixar board of directors has approved the grant of, options to purchase shares of Pixar common stock, rather than performance unit awards, to certain non-executive Pixar employees identified by Pixar and agreed to by Disney in amounts determined by Disney and Pixar. Disney and Pixar believe that stock options are the most effective retention tool for these non-executive Pixar employees.

 

In addition, in connection with the merger agreement, the compensation committee of the Pixar board of directors has approved the grant of 400,000 restricted stock units of Pixar to Edwin E. Catmull, the President of Pixar. Such restricted stock units are equivalent to an equal number of shares of Pixar common stock. Fifty percent (50%) of the restricted stock units will vest on the second anniversary of the grant, and the remaining fifty percent (50%) of the restricted stock units will vest on the fourth anniversary of the grant. The restricted stock unit award will be assumed by Disney in the merger and will thereafter represent the right to receive upon vesting that number of shares of Disney common stock equal to the number of shares of Pixar common stock subject to the restricted stock unit award immediately prior to the merger (whether or not vested) multiplied by the exchange ratio, which is 2.3.

 

Conditions to Obligations to Complete the Merger

 

The respective obligations of Disney and Lux Acquisition Corp., on the one hand, and Pixar, on the other, to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following conditions:

 

    the approval of the principal terms of the merger agreement and approval of the merger by the holders of a majority of the outstanding shares of Pixar common stock will have been obtained;

 

    all necessary waiting periods (and all extensions thereof) applicable to the merger under the HSR Act and all other material antitrust laws will have terminated or expired, and all clearances, consents, approvals, orders and authorizations that are strictly necessary for the completion of the merger will have been obtained, except as would not reasonably be expected to have a material adverse effect on the business and operations of the feature animation businesses of Disney and Pixar after the merger, taken as a whole, and the benefits that are expected to derive from the merger and the other transactions contemplated hereby;

 

    no law will have been enacted or deemed applicable to the merger by a governmental entity that makes the consummation of the merger illegal in the United States or any foreign jurisdiction in which Disney or Pixar has substantial business and operations;

 

    no order issued or granted by any governmental entity in the United States or any foreign jurisdiction in which Disney or Pixar has substantial business and operations making the consummation of the merger illegal in the United States or any such foreign jurisdiction will be in effect;

 

    the shares of Disney common stock issuable to the shareholders of Pixar and to holders of Pixar options as contemplated by the merger agreement will have been approved for listing on the New York Stock Exchange, subject to official notice of issuance;

 

    the registration statement of which this proxy statement/prospectus is a part will have been declared effective by the SEC under the Securities Act of 1933 and no stop order suspending the effectiveness of such registration statement will have been issued by the SEC and no SEC proceeding for that purpose will have been initiated by the SEC; and

 

    Disney and Pixar will each have received an opinion from Skadden, Arps, Slate, Meagher & Flom LLP and/or Dewey Ballantine LLP and/or Wilson Sonsini Goodrich & Rosati, Professional Corporation, each dated as of the effective time of the merger, and each to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code.

 

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In addition, the respective obligations of Disney and Lux Acquisition Corp., on the one hand, and Pixar, on the other, to effect the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of the following additional conditions:

 

    the representations and warranties of the other party will have been true and correct (without giving any effect to any qualification as to materiality or material adverse effect contained in any specific representation or warranty) as of the closing date of the merger as if made at and as of that time, except:

 

    for changes contemplated or permitted by the merger agreement;

 

    to the extent the representations and warranties of the other party address matters only as of a particular date, they must be true and correct only as of that date;

 

    where any failures of such representations and warranties to be true and correct would not reasonably be likely to have, individually or in the aggregate, a material adverse effect on the other party, as described below;

 

    the other party will have performed or complied in all material respects with all of its agreements and covenants required by the merger agreement to be performed or complied with by it before completion of the merger; and

 

    no material adverse effect, as described below, with respect to the other party will have occurred since the date the merger agreement was signed (i.e., January 24, 2006) and be continuing.

 

Definition of Material Adverse Effect

 

Under the terms of the merger agreement, a material adverse effect on either Disney or Pixar means any fact, event or circumstance which is materially adverse to the business, properties, assets, condition (financial or otherwise) or results of operations of Disney and any of its subsidiaries, taken as a whole, or Pixar and any of its subsidiaries, taken as a whole, as the case may be. However, under the terms of the merger agreement, none of the following will be deemed to constitute, nor will any of the following be taken into account in determining whether there has been or will or could be, a material adverse effect:

 

    any changes resulting from or arising out of general market, economic or political conditions (including any changes arising out of acts of terrorism or war, weather conditions or other force majeure events), provided that such changes do not have a substantially disproportionate impact on Disney and its subsidiaries, taken as a whole, or Pixar and its subsidiaries, taken as a whole, as the case may be;

 

    any changes resulting from or arising out of general market, economic or political conditions in the industries in which Disney or Pixar or any of their subsidiaries conduct business (including any changes arising out of acts of terrorism or war, weather conditions or other force majeure events), provided that such changes do not have a substantially disproportionate impact on Disney and its subsidiaries, taken as a whole, or Pixar and its subsidiaries, taken as a whole, as the case may be;

 

    any changes resulting from or arising out of actions taken pursuant to (and required by) the merger agreement or at the request of the other party or the failure to take any actions due to restrictions set forth in the merger agreement;

 

    any changes in the price or trading volume, in and of itself, of Disney’s or Pixar’s stock, as the case may be, provided that such exclusion will not apply to any underlying fact, event or circumstance that may have caused or contributed to such change in market price or trading volume;

 

    any failure by Disney or Pixar, as the case may be, to meet published revenue or earnings projections, in and of itself, provided that such exclusion will not apply to any underlying fact, event or circumstance that may have caused or contributed to such failure to meet published revenue or earnings projections; and

 

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    any changes or effects arising out of or resulting from any legal claims or other proceedings made by any of Disney’s stockholders or Pixar’s shareholders (on their own behalf or on behalf of Disney or Pixar), as the case may be, arising out of or related to the merger agreement, the merger or any other transactions contemplated by the merger or the merger agreement.

 

A material adverse effect with respect to Disney and any of its subsidiaries, in addition to encompassing the above definition of material adverse effect, also includes the loss of the services of Robert A. Iger (which is referred to as a “parent MAE proviso”).

 

A material adverse effect with respect to Pixar and any of its subsidiaries, in addition to encompassing the above definition of material adverse effect, also includes any of the following events (each of which is referred to as to as a “company MAE proviso”):

 

    the loss of the services of either or both of the following Pixar employees by reason of death, disability or otherwise or the receipt of notice by Pixar or its subsidiaries that either of them intends to terminate his employment with Pixar or its subsidiaries after the merger: Edwin E. Catmull and John A. Lasseter; or

 

    the loss of the services of a majority of the following Pixar employees by reason of death, disability or otherwise (other than as a result of a voluntary leave of absence) or the receipt of notice by Pixar or its subsidiaries that a majority of the following Pixar employees intend to terminate their employment with Pixar or its subsidiaries after the merger or any combination of the aforementioned loss of services or notice of termination for the following Pixar employees: Andrew Stanton, Pete Docter, Brad Bird, Bob Peterson, Lee Unkrich, Brenda Chapman and Gary Rydstrom.

 

Termination; Termination Fee

 

Termination

 

The merger agreement may be terminated in accordance with its terms at any time prior to completion of the merger, whether before or after approval of the principal terms of the merger agreement and approval of the merger by Pixar shareholders:

 

    by mutual written consent of Disney, Lux Acquisition Corp. and Pixar, duly authorized by the Disney and Pixar boards of directors;

 

    by Disney or Pixar:

 

    if the merger is not completed by September 30, 2006, provided that neither Disney nor Pixar may terminate the merger agreement on this basis if such party has breached its obligations under the merger agreement provided that such breach has been a principal cause of, or resulted in, the failure of the merger to be consummated on or before that date;

 

    if any law has been enacted, entered, enforced or deemed applicable to the merger by a governmental entity that makes the consummation of the merger illegal in the United States or any foreign jurisdiction in which Disney or Pixar has substantial business and operations;

 

    if any governmental entity in the United States or any foreign jurisdiction in which Disney or Pixar has substantial business and operations has issued any order making the merger illegal in the United States or any such foreign jurisdiction and such order has become final and non-appealable; or

 

    if approval of the principal terms of the merger agreement and approval of the merger have not been obtained at a shareholder meeting duly convened therefor or at any adjournment or postponement thereof;

 

   

by Disney (provided it is not then in material breach of any of its obligations under the merger agreement), if there is any continuing inaccuracy in the representations and warranties of Pixar set forth

 

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in the merger agreement, or Pixar is then failing to perform any of its covenants or other agreements set forth in the merger agreement, in either case (i) such that the conditions to Disney’s obligation to effect the merger would fail to be satisfied at the time of such termination and (ii) such inaccuracy or breach is not reasonably capable of being cured by Pixar prior to September 30, 2006;

 

    by Pixar (provided it is not then in material breach of any of its obligations under the merger agreement), if there is any continuing inaccuracy in the representations and warranties of Disney and Lux Acquisition Corp. set forth in the merger agreement, or Disney or Lux Acquisition Corp. are then failing to perform any of their respective covenants or other agreements set forth in the merger agreement, in either case such that (i) the conditions to Pixar’s obligation to effect the merger would fail to be satisfied at the time of such termination and (ii) such inaccuracy or breach is not reasonably capable of being cured by Disney and Lux Acquisition Corp. prior to September 30, 2006;

 

    by Disney,

 

    if either Pixar’s board of directors or any committee thereof (i) withdraws (or modifies in a manner adverse to Disney in any material respect), or publicly proposes to withdraw (or modify in a manner adverse to Disney in any material respect), the adoption or recommendation by Pixar’s board of directors or any committee thereof of the merger agreement or the merger or (ii) adopts or recommends, or proposes publicly to adopt or recommend, any acquisition proposal; or

 

    if Pixar’s board of directors fails to publicly reaffirm its recommendation of the merger agreement and the merger within ten (10) business days following the date upon which a third party first commences a tender or exchange offer for shares of Pixar capital stock;

 

    by Pixar, pursuant to and in accordance with the terms and subject to the conditions discussed above with respect to a superior proposal, provided that not later than the day of such termination, Disney has received the termination fee discussed below;

 

    by Disney, if there has occurred a company MAE proviso discussed above, provided, however, that, prior to the termination of the merger agreement, Disney will, in good faith:

 

    discuss with Pixar the occurrence of the events upon which Disney is terminating the merger agreement and the impact of such events on the future operations of Disney, Pixar and their subsidiaries and the benefits that are expected to derive from the merger and the other transactions contemplated by the merger agreement; and

 

    after such discussions, determine in good faith that such events materially and adversely affect, in the sole judgment of Disney, the benefits that are expected to derive from the merger and the other transactions contemplated by the merger agreement; provided, further, however, that such discussions and the determination made thereafter by Disney will not limit the right of Disney to terminate the merger agreement or create any legally binding obligations on Disney with respect to the consummation of the transactions contemplated by the merger agreement; or

 

    by Pixar, if there has occurred a parent MAE proviso discussed above, provided, however, that, prior to the termination of the merger agreement, Pixar will, in good faith:

 

    discuss with Disney the occurrence of the events upon which Pixar is terminating the merger agreement and the impact of such events on the future operations of Disney, Pixar and their subsidiaries and the benefits that are expected to derive from the merger and the other transactions contemplated by the merger agreement; and

 

    after such discussions, determine in good faith that such events materially and adversely affect, in the sole judgment of Pixar, the benefits that are expected to derive from the merger and the other transactions contemplated by the merger agreement; provided, further, however, that such discussions and the determination made thereafter by Pixar will not limit the right of Pixar to terminate the merger agreement or create any legally binding obligations on Pixar with respect to the consummation of the transactions contemplated by the merger agreement.

 

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Termination Fee

 

Under the terms of the merger agreement, Pixar must pay Disney a termination fee equal to $210 million in the event that:

 

    the merger agreement is terminated by Disney because:

 

    either Pixar’s board of directors or any committee thereof (i) withdraws (or modifies in a manner adverse to Disney in any material respect), or publicly proposes to withdraw (or modify in a manner adverse to Disney in any material respect), the adoption or recommendation by Pixar’s board of directors or any committee thereof of the merger agreement or the merger or (ii) adopts or recommends, or proposes publicly to adopt or recommend, any acquisition proposal; or

 

    Pixar’s board of directors fails to publicly reaffirm its recommendation of the merger agreement and the merger within ten (10) business days following the commencement of a third-party tender or exchange offer for Pixar’s capital stock;

 

    the merger agreement is terminated by Pixar in response to a superior proposal in compliance with the provisions of the merger agreement prohibiting Pixar from soliciting other offers; or

 

    all of the following three events have occurred:

 

    prior to the Special Meeting, a qualified acquisition proposal (an acquisition proposal which would directly or indirectly result in any person acquiring a majority or more of Pixar’s outstanding capital stock, outstanding voting securities, the fair market value of Pixar’s and its subsidiaries’ assets taken as a whole or any combination of the foregoing) has been made directly to Pixar’s shareholders or has become publicly known, or any person has publicly announced an intention to make such a qualified acquisition proposal;

 

    thereafter the merger agreement is terminated by either Disney or Pixar because Pixar shareholder approval has not been obtained; and

 

    within 12 months after such termination, Pixar enters into a definitive contract to consummate, or consummates, the transactions contemplated by such qualified acquisition proposal.

 

Miscellaneous

 

Amendment and Waiver

 

The merger agreement may be amended by Disney, Pixar and Lux Acquisition Corp., only by action taken by or on behalf of their respective boards of directors, at any time prior to (but not following) the completion of the merger; provided, however, that notwithstanding the foregoing, after Pixar’s shareholders have approved the principal terms of the merger agreement and approved the merger, the merger agreement may not be amended without approval by the shareholders of Pixar.

 

Expenses Generally

 

All fees and expenses incurred in connection with the merger (including (a) all fees and expenses of agents, representatives, counsel, financial advisors and accountants and (b) all fees and expenses incurred in connection with the preparation and filing of this proxy statement/prospectus and other appropriate registration statements) will be paid by the party incurring the fees or expenses, whether or not the merger is completed.

 

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THE VOTING AGREEMENT

 

Concurrently with the execution and delivery of the merger agreement, on January 24, 2006, Disney entered into a voting agreement with Steven P. Jobs, the Chairman and Chief Executive Officer of Pixar. Approximately 48,335,749 shares, or 40%, of Pixar common stock outstanding on the Record Date are subject to the voting agreement. We refer to these shares as the “Covered Shares.”

 

The following is a summary description of the voting agreement, which is attached as Annex B to this proxy statement/prospectus and is hereby incorporated by reference into this proxy statement/prospectus.

 

Agreement to Vote and Irrevocable Proxy

 

Mr. Jobs granted to Disney an irrevocable proxy and irrevocably appointed Disney and any individual designated by Disney as Mr. Jobs’ proxy and attorney-in-fact to vote the Covered Shares at the Special Meeting of Pixar shareholders (and any adjournment or postponement thereof) as follows:

 

    in favor of approval of the principal terms of the merger agreement and approval of the merger;

 

    against any action, proposal, transaction or agreement which would reasonably be expected to result in a breach of any covenant, representation or warranty or any other obligation or agreement of Pixar under the merger agreement or of Mr. Jobs under the voting agreement; and

 

    against any action, proposal, transaction or agreement that would reasonably be expected to compete with or would reasonably be expected to interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the merger or any of the other transactions contemplated by the merger agreement.

 

Notwithstanding the foregoing, Mr. Jobs will remain free to vote the Covered Shares with respect to any matter not covered by the foregoing in any manner he deems appropriate, provided that such vote (or action by written consent) would not reasonably be expected to interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the merger. Mr. Jobs is free to vote any shares of Pixar common stock that are not Covered Shares in any manner he deems appropriate. Nothing in the voting agreement limits or restricts Mr. Jobs from acting in his capacity as a member of the board of directors of Pixar.

 

Transfer Restrictions

 

In addition, Mr. Jobs has agreed to certain restrictions on the transfer of the Covered Shares. For a period beginning on January 24, 2006 and continuing until the earlier of the effective time of the merger or the termination of the voting agreement in accordance with its terms, Mr. Jobs may not transfer, or enter into any agreement with respect to a transfer of, any of the Covered Shares or any interest therein. Mr. Jobs has agreed not to (i) grant any proxies, options or rights of first offer or refusal with respect to any of the Covered Shares, (ii) permit any such shares to become subject to any pledges, liens, preemptive rights or (iii) enter into any voting agreement, voting trust or other voting arrangement with respect to any of the Covered Shares. Notwithstanding the foregoing, Mr. Jobs may take any action described in the previous two sentences, so long as the other party to such transfer or other arrangement executes the voting agreement (or a joinder thereto in a form reasonably satisfactory to Disney) and agrees to be bound by its terms.

 

Termination

 

The voting agreement terminates upon the earlier of (i) the effective time of the merger, (ii) the termination of the merger agreement pursuant to its terms or (iii) at any time upon notice by Disney to Mr. Jobs.

 

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MATERIAL CONTRACTS BETWEEN DISNEY AND PIXAR PRIOR TO THE MERGER

 

Pixar and Disney have enjoyed a long relationship that dates back to 1986, when Pixar and Disney entered into a joint technical development effort that resulted in the Computer Assisted Production System (“CAPS”), a production system owned and used by Disney in some of its two-dimensional cel-based animated feature films. Disney first used CAPS for The Rescuers Down Under and has continued to use it for its subsequent animated feature films, such as The Lion King and Tarzan. In 1992, certain employees of Pixar and Disney were jointly awarded an Academy Award® for Scientific and Engineering Achievement for the development of CAPS.

 

In May 1991, Pixar and Disney entered into a feature film agreement, which provided for the development, production and distribution of up to three feature-length motion pictures (the “Feature Film Agreement”). Toy Story was the only film developed, produced and distributed under the Feature Film Agreement. In 1997, Pixar and Disney extended their existing relationship by entering into the Co-Production Agreement, pursuant to which Pixar agreed to produce, on an exclusive basis, five original computer-animated feature films (the “Pictures”) for distribution by Disney. This agreement generally provides that Pixar will be responsible for the development, pre-production and production of each Picture, while Disney will be responsible for the marketing, promotion, publicity, advertising and distribution of each Picture. Under the Co-Production Agreement, profits from the Pictures are shared equally between Pixar and Disney after Disney recovers a distribution fee and pre-agreed distribution costs. On January 27, 2006, Pixar and Disney extended the Co-Production Agreement by entering into a Distribution Letter Agreement regarding the distribution of Ratatouille. This agreement generally provides that Ratatouille will be deemed a “Picture” under and in accordance with the terms of the Co-Production Agreement, subject to certain exceptions as described below. Pursuant to the Distribution Letter Agreement, the term of the Co-Production Agreement is extended until the delivery of Ratatouille to Disney, which is expected to occur in mid-2007.

 

Co-Production Agreement

 

The following is a summary of the Co-Production Agreement, which was filed as an exhibit to Pixar’s Annual Report on Form 10-K for the year ended December 31, 1996 (the “1996 Form 10-K”). The following summary is not complete, and reference is made to the Co-Production Agreement filed as an exhibit to the 1996 Form 10-K. This summary is qualified in all respects by such reference.

 

Overview

 

On February 24, 1997, Pixar entered into the Co-Production Agreement with Disney pursuant to which Pixar, on an exclusive basis, agreed to produce the Pictures for distribution by Disney. Under the Co-Production Agreement, Pixar and Disney agreed to co-finance the production costs of the Pictures, co-own the Pictures (with Disney having exclusive distribution and exploitation rights), co-brand the Pictures and share equally in the profits of each Picture and any related merchandise and other ancillary products, after recovery of all marketing and distribution costs (which are financed by Disney), a distribution fee paid to Disney and any other fees or costs, including any third-party participations and residuals. The Co-Production Agreement generally provides that Pixar is responsible for the production of each Picture and that Disney is responsible for the marketing, promotion, publicity, advertising and distribution of each Picture. The first four original Pictures under the Co-Production Agreement were A Bug’s Life, Monsters, Inc., Finding Nemo and The Incredibles, which were released in November 1998, November 2001, May 2003 and November 2004, respectively. Toy Story 2, the theatrical sequel to Toy Story, was released in November 1999, and is also governed by the Co-Production Agreement, although it does not count towards the Pictures because it was a sequel. Cars, which is scheduled to be released in June 2006, is the fifth original Picture under the Co-Production Agreement. Pursuant to the Distribution Letter Agreement, Ratatouille will be deemed a “Picture” under and in accordance with the terms of the Co-Production Agreement, subject to certain exceptions described below. The Co-Production Agreement contemplates that with respect to theatrical sequels, made-for-home video sequels, television productions, interactive media products and other derivative works related to the Pictures (except for Ratatouille), Pixar will

 

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have the opportunity to co-finance and produce such products or to earn passive royalties on such products. Pixar will not share in any theme park revenues generated as a result of the Pictures.

 

Production

 

The Co-Production Agreement provides a green-lighting mechanism for the five films to be developed and produced as Pictures. Cars was the fifth film to be green-lit. Once the film has been green-lit, Pixar has final control over the production of the Picture. Disney is entitled to designate a representative at Pixar to monitor the production and production costs of the Pictures (except for Ratatouille).

 

Financing of Development and Production

 

Pixar and Disney share equally in the production costs of the Pictures, except for Ratatouille, which Pixar is financing 100%. Production costs are defined in the Co-Production Agreement to mean all costs and expenses Pixar incurs directly related to or fairly allocable to the creation, development, pre-production, production, post-production and delivery to Disney of the Pictures. Production costs, whether capitalized as film costs or expensed as incurred, include, among other things, all carrying costs Pixar incurs for retention of employees for production purposes and their associated overhead expenses, the costs of all treatments Pixar prepares for submission to Disney, all costs of computer hardware and software used to develop the Pictures, and fair allocations of all costs and expenses Pixar incurs that are associated with or benefiting the Picture, including research and development, general and administrative and overhead expenses. The Co-Production Agreement provides mechanisms for the establishment of production budgets for each Picture (except for Ratatouille). Pixar may not exceed these contractually established production budgets without Disney’s written approval, subject to certain limited exceptions.

 

Distribution

 

Disney is solely responsible for financing the costs and expenses of the marketing, promotion, publicity, advertising and distribution of each Picture, subject to certain requirements, and has final control over all related decisions. Disney is obligated to consult with Pixar regarding all such major marketing and distribution decisions, and Pixar is entitled to designate a representative to monitor marketing and distribution of the Pictures. As the films under the Co-Production Agreement have been approved for production, Disney has committed initially to release each Picture within certain windows and not to release other Disney family films during certain windows. Further, each Picture is to be distributed and marketed under the Walt Disney Pictures brand (or the then current Disney brand for premier Disney movies) and is to be distributed and marketed by Disney in all markets and media and on a worldwide basis in a manner similar to that in which Disney then currently distributes and markets its premier animated movies. In addition, the costs for marketing, distribution and promotion of the films and related products are incurred well in advance of the release of such films and products, and consequently, Pixar experiences a delay in the receipt of cash proceeds from such films and products until after Disney recovers such costs.

 

Division of Gross Receipts

 

Pixar and Disney are entitled to share equally in all gross receipts of the Pictures (except for Ratatouille, as described below) that are remaining after deduction of (1) a distribution fee to Disney, (2) mutually agreed participations (payments to third parties such as actors, composers and other artists contingent upon the success of the Pictures), if any, paid by either Disney or Pixar, and (3) Disney’s distribution costs. Gross receipts include all revenues or other consideration received by Disney from the exploitation of the Pictures and any related merchandise, books, soundtracks and other tangible personal property based upon the Pictures, as more specifically provided in the Co-Production Agreement (collectively, “Merchandise”), subject to certain exceptions relating primarily to receipts from Disney’s affiliates. Distribution costs for the Pictures (except for Ratatouille) are broadly defined in the Co-Production Agreement to include out-of-pocket costs paid (or in

 

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certain instances, accrued for payment) to a third party (or in certain instances, to Disney’s affiliates) by Disney or certain of its affiliates, provided that such out-of-pocket costs are directly related or fairly allocable to the distribution of the Pictures and Merchandise. Pursuant to the Co-Production Agreement, Pixar receives statements and payments of its share of gross receipts monthly within 45 days after the end of each calendar month for the first three years after the film’s release then quarterly thereafter, subject to certain exceptions, and Pixar has the right to audit Disney’s books and records relating to the Pictures and Merchandise.

 

Derivative Works

 

Subject to certain exceptions, Disney and Pixar have mutual control of the decision to develop, produce or otherwise exploit any derivative works of the Pictures, except for derivative works of Ratatouille, as described below, or to transfer or license any rights to exploit any derivative works during the term of the Co-Production Agreement or thereafter. Derivative works include theatrical sequels such as Toy Story 2, made-for-home video sequels, television productions such as Buzz Lightyear of Star Command, interactive media products such as Monsters, Inc., Finding Nemo and The Incredibles interactive games, and other derivative works as more specifically provided in the Co-Production Agreement (collectively, “Derivative Works”). Except in certain very limited circumstances, in the event of a disagreement over whether to proceed with a Derivative Work, Disney’s decision governs. Pixar is to be given the option to co-finance and produce, or to participate on a passive financial basis with respect to, a Derivative Work that is (1) a theatrical motion picture, (2) a made-for-home video production, (3) a television production, (4) location-based entertainment that uses unique characters or other elements from any of the Pictures or Toy Story as its primary theme, or (5) an interactive product such as a CD-ROM, DVD, video game or arcade game (collectively, “Interactive Products”).

 

If Pixar elects to co-finance and produce a Derivative Work, the Co-Production Agreement provides for the following:

 

(1) with respect to theatrical motion pictures and made-for-home video productions, the terms and conditions of the Co-Production Agreement are to be extended to cover such Derivative Works, subject to certain exceptions;

 

(2) with respect to (A) location-based entertainment using characters or other elements from a Picture or Toy Story as its primary theme and (B) television productions, Pixar and Disney are to agree mutually upon the terms and the conditions under which such work will be financed, produced and distributed, subject to certain specified requirements in the case of television productions; and

 

(3) with respect to Interactive Products, Disney and Pixar are to agree mutually upon the terms and conditions under which such Interactive Products will be financed, produced and distributed, subject to certain commitments by Disney with respect to marketing and distribution and provided that there will be no distribution fee payable to Disney.

 

For live entertainment such as stage plays or ice shows, Pixar is entitled to participate on a passive financial basis as specified in the Co-Production Agreement. For all other Derivative Works except theme parks, Pixar is entitled to participate on a passive financial basis in such work and to receive a reasonable royalty to be mutually agreed upon if the work is a revenue-producing work. Disney has the sole and exclusive right in perpetuity to use, without compensation to Pixar, each Picture, the characters therefrom and any story elements thereof in theme parks, location-based entertainment for which Picture or Toy Story characters or elements are not the primary theme and cruise ships.

 

A Derivative Work that is a theatrical motion picture does not count towards the five Pictures under the Co-Production Agreement. Accordingly, Toy Story 2 did not count as one of the five Pictures to be produced. Under the Co-Production Agreement, all provisions applicable to the original five Pictures apply to Toy Story 2 as well.

 

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Creative Controls

 

Pixar has full creative control of the production of Cars and Ratatouille. The Co-Production Agreement provides for certain dispute resolution procedures in the event of a disagreement.

 

Brand/Credit

 

The Co-Production Agreement sets forth Disney’s and Pixar’s intent that the Pixar brand be established as an equal brand to the Disney brand in connection with the Pictures, Merchandise and Derivative Works. The Co-Production Agreement provides that the Pixar logo, animated logo and credit will be used in a manner that is perceptually equal to the Disney logo, animated logo and credit, subject to certain specific requirements.

 

Exclusivity

 

Under the terms of the Co-Production Agreement and the Distribution Letter Agreement, Pixar agreed not to release or authorize the release of any feature-length animated theatrical motion picture Pixar produces, other than the Pictures and Derivative Works Pixar produces under the Co-Production Agreement and the Distribution Letter Agreement, until twelve months from delivery of Ratatouille. Pixar further agreed that Pixar would not enter into any agreement with any third party for the development, production or distribution of any feature-length animated theatrical motion picture until after Pixar delivered the third Picture, Finding Nemo, to Disney under the Co-Production Agreement, which occurred in April 2003. Pixar also agreed that it will not develop or produce any rides or attractions for major theme parks not owned or operated by Disney and, except for Ratatouille, to give Disney a right to negotiate with respect to animated television productions or animated made-for-home video productions that Pixar proposes to produce during the term of the Co-Production Agreement. Disney, however, is not similarly restricted by the exclusivity provisions that bind Pixar under the Co-Production Agreement and, therefore, may develop, produce, or distribute other feature-length animated and computer-animated theatrical motion pictures itself or enter into similar agreements with third parties.

 

Proprietary Rights

 

Under the Co-Production Agreement, the copyrights, trademarks and other intellectual property rights in and to the Pictures, all new and unique characters and story elements thereof and the audio-visual images thereof, and ancillary rights relating thereto (except with respect to Ratatouille), are jointly owned by Disney and Pixar on an undivided 50/50 basis, subject to Pixar’s ownership rights in the technology and excluding any intellectual property rights previously owned by Pixar or Disney. Disney has the exclusive distribution and exploitation rights with respect to the Pictures, Derivative Works and ancillary rights relating thereto. Under the Feature Film Agreement, Disney owns all of the proprietary rights associated with the first Toy Story film, and under the Distribution Letter Agreement, Pixar owns all of the proprietary rights associated with Ratatouille. Notwithstanding the foregoing, Pixar owns the copyright and all other intellectual property rights in and to all computer programs and other technology Pixar develops or discovers before, during or after the term of the Co-Production Agreement.

 

Term and Termination

 

The term of the Co-Production Agreement, as amended by the Distribution Letter Agreement, continues until the delivery to Disney of Ratatouille unless earlier terminated. For example, Disney is entitled to terminate the Co-Production Agreement in the event that certain types of competitors directly or indirectly acquire or control a 50% or greater ownership interest in Pixar or Pixar merges or consolidates into a competitor. Upon termination by Disney pursuant to the example above, Disney has certain rights to compel Pixar to complete works in production. In the event of termination, the Co-Production Agreement provides that its terms and conditions continue to apply with respect to Pictures, Merchandise and Derivative Works that Pixar has delivered to Disney or which Disney elects to have completed, as well as all future Merchandise and future Derivative Works relating thereto, but otherwise terminates.

 

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Effect on Prior Agreements

 

All Derivative Works based on Toy Story including Toy Story 2 are to be governed by the Co-Production Agreement and not the original Feature Film Agreement. The original Feature Film Agreement now applies only to the rights and obligations of Disney and Pixar relating to the financial participation in, and the production and distribution of, the theatrical motion picture Toy Story and the financial participation in certain Merchandise related to Toy Story (unless gross receipts in any given month exceed a certain amount, in which case they will be subject to the Co-Production Agreement), subject to certain exceptions, and otherwise has no further force or effect. Additionally, under the Feature Film Agreement, Disney owns all of the proprietary rights associated with the first Toy Story film.

 

Distribution Letter Agreement

 

Pixar entered into the Distribution Letter Agreement with Disney on January 27, 2006, regarding the distribution of Ratatouille. Pursuant to the Distribution Letter Agreement, Ratatouille will be deemed a “Picture” under and in accordance with the terms of the Co-Production Agreement, subject to certain exceptions, including but not limited to those noted below.

 

The Distribution Letter Agreement provides that the term of the Co-Production Agreement shall be extended until delivery to Disney of Ratatouille. In addition, Pixar shall finance all production costs and receive all gross receipts of Ratatouille after deduction of (1) a distribution fee paid to Disney, (2) any participations paid to third parties and (3) Disney’s distribution costs. Pixar shall have creative control and control of production for Ratatouille and shall own all rights to derivative works based on Ratatouille, except that Disney shall own theme park rights to Ratatouille in perpetuity.

 

Under the Distribution Letter Agreement, Pixar shall have sole ownership of copyrights, trademarks and other intellectual property rights in and to Ratatouille. In addition, Disney’s exclusive distribution and exploitation rights with respect to Ratatouille shall be for a period of 10 years from initial theatrical exhibition of Ratatouille or 11 years from delivery of Ratatouille, whichever is earlier.

 

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COMPARISON OF SHAREHOLDER RIGHTS

 

General

 

Disney is incorporated under the laws of the State of Delaware and, accordingly, the rights of its stockholders are governed by the Delaware General Corporation Law. Pixar is incorporated under the laws of the State of California and accordingly, the rights of its shareholders are governed by the California General Corporation Law. Before the completion of the merger, the rights of Pixar shareholders are also governed by the Pixar articles of incorporation and the Pixar bylaws. Upon completion of the merger, Pixar shareholders will receive Disney common stock in exchange for their shares of Pixar common stock. As a result, upon completion of the merger, the rights of Pixar shareholders who become Disney stockholders in the merger will be governed by the Delaware General Corporation Law, the Disney certificate of incorporation, and the Disney bylaws.

 

Certain Differences Between the Rights of Stockholders of Disney and Shareholders of Pixar

 

The following is a summary of material differences between the current rights of Disney stockholders and the current rights of Pixar shareholders. While we believe that this summary covers the material differences between the two, this summary may not contain all of the information that is important to you. This summary is not intended to be a complete discussion of the respective rights of Disney stockholders and Pixar shareholders and it is qualified in its entirety by reference to the Delaware General Corporation Law, the California General Corporation Law and the various documents of Disney and Pixar to which we refer in this summary. In addition, the identification of some of the differences in the rights of these stockholders and shareholders as material is not intended to indicate that other differences that are equally important do not exist. We urge you to carefully read this entire proxy statement/prospectus, the relevant provisions of the Delaware General Corporation Law and the California General Corporation Law and the other documents to which we refer in this proxy statement/prospectus for a more complete understanding of the differences between being a Disney stockholder and being a Pixar shareholder. Disney and Pixar have filed with the SEC their respective documents referenced in this summary of shareholder rights and will send copies of these documents to you, without charge, upon your request. See “Where You Can Find More Information” beginning on page 101 of this proxy statement/prospectus.

 

    

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Authorized Capital Stock    The authorized capital stock of Disney consists of (i) 3,600,000,000 shares of common stock, par value $0.01 per share, (ii) 1,000,000,000 shares of common stock designated “go.com common stock,” par value $0.01 per share and (iii) 100,000,000 shares of preferred stock, par value $0.01 per share. No shares of the go.com common stock or preferred stock are outstanding other than shares of preferred stock held by wholly-owned subsidiaries of Disney.    The authorized capital stock of Pixar consists of (i) 200,000,000 shares of common stock, no par value and (ii) 5,000,000 shares of preferred stock, no par value. No shares of preferred stock are outstanding.

Number of

Directors

  

The Disney certificate of incorporation and bylaws provide that the Disney board of directors will consist of not less than 9 nor more than 21 directors, the exact number of directors to be determined from time to time by the Disney board of directors. The Disney board of directors currently consists of 13 directors.

 

Upon completion of the merger, the Disney board of directors will be expanded by one

   The Pixar bylaws provide that the Pixar board of directors will consist of not less than 6 nor more than 11 directors, with the exact number being 8 until changed by amending the bylaws.

 

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     member, which position will be filed by Steven P. Jobs, Chairman and Chief Executive Officer of Pixar.     

Cumulative

Voting

   The Disney certificate of incorporation does not provide for cumulative voting and accordingly, Disney stockholders do not have cumulative voting rights in connection with the election of directors.    The Pixar bylaws do not permit cumulative voting and accordingly, Pixar shareholders do not have cumulative voting rights in connection with the election of directors.

Classification of

Board of

Directors

   Disney has one class of directors and Disney’s certificate of incorporation does not provide for a classified board of directors. Disney’s directors are elected for a term of one year.    The Pixar articles of incorporation and bylaws do not classify the Pixar board of directors into separate classes with staggered terms. Pixar’s directors are elected for a term of one year.
     Section 141(k) of the Delaware General Corporation Law provides that any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of shares then entitled to vote at an election of directors.   

Sections 302, 303 and 304 of the California General Corporation Law provide that Pixar directors may be removed:

Removal of

Directors

   Neither the Disney certificate of incorporation nor the bylaws provide otherwise.   

   by the board of directors, if a director has been declared of unsound mind by an order of court or convicted of a felony;
         

   by the shareholders, if approved by the affirmative vote of a majority of the Pixar outstanding shares entitled to vote, with or without cause; or
         

 

   by a court, if holders of at least 10% of the Pixar outstanding shares sue to remove any director for fraudulent or dishonest acts or gross abuse of authority or discretion with reference to Pixar.

Vacancies on the Board of

Directors

  

The Disney certificate of incorporation provides that any newly created directorship resulting from any increase in the authorized number of directors may only be filled by a majority of the directors then in office, provided there is a quorum, and that any other vacancy on the Disney board of directors may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director.

 

The Disney bylaws provide that any vacancy on the Disney board of directors, howsoever resulting, may be filled by a majority of the

  

The Pixar bylaws provide that vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order, however, may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority

of the required quorum), or by the

 

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directors then in office, even if less than a quorum, or by a sole remaining director.

 

Any director elected to fill a vacancy will hold office until the next annual election of directors unless sooner displaced.

   unanimous written consent of all shares entitled to vote. Each director so elected will hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified.
          The Pixar bylaws also provide that shareholders may elect a director at any time to fill any vacancy not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, will require the consent of the holders of a majority of the outstanding shares entitled to vote.

Shareholder

Action by

Written Consent

   Disney’s bylaws allow stockholder action by written consent.    The Pixar bylaws provide that any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted.
Amendment to Certificate of Incorporation   

The Disney certificate of incorporation provides that Disney reserves the right to repeal, alter, amend or rescind any provision contained in the Disney certificate of incorporation in the manner prescribed by statute. Under Section 242 of the Delaware General Corporation Law, amendment to the Disney certificate of incorporation generally requires approval of the majority of the Disney board of directors and the holders of a majority of the Disney common stock entitled to vote.

 

But to amend, alter or repeal the provisions described beginning on page 98 as “Vote on Certain Fundamental Issues” of the Disney certificate of incorporation relating to certain business combinations, the Disney certificate of incorporation provides that the affirmative vote of the owners of 4/5 of the outstanding common stock entitled to vote will be required.

   Section 902 of the California General Corporation Law generally provides that Pixar’s articles of incorporation may be amended if approved by the board of directors and the majority of the outstanding shares entitled to vote, either before or after approval by the board of directors.

 

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Amendment of

Bylaws

   The Disney certificate of incorporation and bylaws provide that the Disney bylaws may be altered, amended or repealed, in whole or in part, or that new bylaws may be adopted by either the holders of 66 2/3% of the outstanding capital stock entitled to vote thereon or by the board of directors.    The Pixar bylaws provide that new bylaws may be adopted or the current bylaws may be amended or repealed by the vote or written consent of a majority of the outstanding shares entitled to vote. Furthermore, the Pixar board of directors may adopt, amend or repeal the bylaws other than to change the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors).

Special Meeting

of Shareholders

   The Disney certificate of incorporation and bylaws provide that special meetings of stockholders may be called by the board of directors, the chairman of the board of directors, or the president. Special meetings of stockholders may not be called by any other person.    The Pixar bylaws provide that a special meeting of the shareholders may be called at any time by the board of directors, the chairman of the board, the president, or by one or more shareholders holding at least 10% of the shares entitled to vote at such meeting. If a special meeting is called by a qualified shareholder, such shareholder must make a written request to a specified Pixar officer specifying the time of such meeting and the general nature of the business proposed to be transacted. The officer receiving the written request must give notice to the other shareholders that a meeting will be held not less than 35 days or more than 60 days after the receipt of the request.

Notice of

Shareholder

Meetings

   The Disney bylaws require that written notice of an annual meeting or special meeting stating the place, date and time of the meeting, and in the case of special meetings, the purpose for which the meeting was called, be given to each Disney stockholder entitled to vote at the meeting. For special meetings, such notice must be delivered not less than 10 nor more than 60 days before the date of the meeting. Only the business stated in such notice may be acted upon at the special meeting.    The Pixar bylaws provide that notice of meetings of shareholders must specify the place, date, and hour of the meeting, and in the case of special meetings or certain transactions as required by the California General Corporation Law, the general nature of the business to be transacted. Only the business specified in the notice may be transacted upon at the special meeting. The notice must be sent not less than 10 days (or 30 days if sent by third-class mail) or more than 60 days before the date of the meeting.

Delivery and

Notice

Requirements of Shareholder Nominations and Proposals

  

The Disney bylaws provide that, to be properly brought before an annual meeting, business must be either:

 

•      specified in the notice of annual meeting or any supplement to the notice given by or at the direction of the Disney board of directors;

   Pixar bylaws have no comparable provisions regarding delivery and notice requirements of shareholder nominations and proposals.

 

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•      otherwise brought before the meeting by or at the direction of the Disney board of directors; or

 

•      otherwise properly brought before the meeting by a Disney stockholder.

 

To be timely, a Disney stockholder’s notice of business to be conducted at the annual meeting must be delivered to or mailed and received at the principal executive offices of Disney:

 

•      not less than 90 nor more than 120 days before the first anniversary of the previous year’s annual meeting; or

 

•      if the date of the annual meeting is more than 30 days before or 70 days after the anniversary date of the previous year’s annual meeting, not less than 120 days before the annual meeting nor 10 days after public announcement by Disney of the date of the meeting.

 

Notwithstanding the above, in the event that the number of directors to be elected at the annual meeting is increased and there is no public announcement by Disney naming the additional nominees at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice with respect to nominees for the additional directorships will be considered timely if delivered to Disney’s principal executive offices no later than 10 days after Disney’s public announcement.

 

A Disney stockholder’s written notice must set forth:

 

•      as to any nominee, all information required to be disclosed in solicitations for proxies for election of directors in an election contest or otherwise required by federal securities laws;

 

•      as to any proposed business, a brief description of the business together with the reasons for conducting the business and any material interest of the Disney stockholder in the business; and

    

 

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•      as to the Disney stockholder making the nomination or proposal and as to any Disney stockholder on whose behalf the nomination or proposal is made, (A) the name and address of the Disney stockholder, (B) the class and number of shares of Disney capital stock owned by such Disney stockholder, (C) a representation that the Disney stockholder is a Disney stockholder and is entitled to vote at the meeting, and (D) a representation as to whether the Disney stockholder intends to distribute a proxy statement and/or solicit proxies in support of the nomination or proposal.

 

Disney may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of the nominee to serve as a Disney director.

 

The Disney bylaws further provide that nominations of persons for election to the Disney board of directors may be made at a special meeting of Disney stockholders:

 

•      by or at the direction of the Disney board of directors; or

 

•      if the Disney board of directors has specified in its notice of meeting that directors will be elected at the meeting, by any Disney stockholder who provides notice that complies with the notice procedures described above for annual meetings.

 

If the facts warrant, the chairman of the meeting will determine and declare that the nomination or proposed business was not properly made in accordance with the procedures summarized above. If the chairman of the meeting makes this determination, the nomination or proposed business will be disregarded or the proposed business will not be transacted, as the case may be.

    
Proxy    The Disney bylaws provide that each Disney stockholder represented at a meeting of Disney stockholders will be entitled to vote in person or by proxy.    The Pixar bylaws provide that each Pixar shareholder entitled to vote at a shareholder meeting has the right to vote in person or by proxy. A proxy will

 

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          continue in full force and effect unless revoked by the proxy maker or Pixar receives written notice of the death or incapacity of the proxy maker. No proxy will be valid after 11 months of the date of the proxy, unless otherwise provided in the proxy.

Preemptive

Rights

   The Disney certificate of incorporation does not grant any preemptive rights.    The Pixar articles of incorporation do not grant any preemptive rights.
Dividends   

The Disney certificate of incorporation states that subject to any preferences and relative, participating, optional or other special rights of any outstanding series of preferred stock and any qualifications or restrictions on the common stock or any class thereof created thereby, dividends may be declared and paid upon each class of common stock, upon the terms, with respect to each such class, and subject to the limitations provided for in the certificate of incorporation, as the board of directors may determine.

 

Under Section 170 of the Delaware General Corporation Law, Disney directors may, subject to any restrictions contained in its certificate of incorporation, declare and pay dividends upon the shares of its capital stock either

 

•      out of its surplus, as defined in and computed in accordance with Sections 154 and 244 of the Delaware General Corporation Law; or

 

•      in case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

  

Under Section 500 of the California General Corporation Law, Pixar may distribute dividends to its shareholders if:

 

•      the amount of Pixar’s retained earnings immediately prior to the distribution equals or exceeds the amount of the distribution; or

 

•      immediately after the distribution, (i) the sum of Pixar’s assets, exclusive of certain items, would be at least 1 1/4 times its liabilities, exclusive of certain items, and (ii) Pixar’s current assets would be at least equal to its current liabilities (but if the average of Pixar’s earnings for the two preceding fiscal years was less than the average of the interest expense, then at least equal to 1 1/4 times its current liabilities).

 

The Pixar articles of incorporation do not provide for any restrictions on the payment of dividends.

Limitation of

Personal

Liability of

Directors

   The Disney certificate of incorporation eliminates a Disney director’s personal liability to Disney or Disney’s stockholders for breach of fiduciary duty as a director, to the fullest extent permitted under the Delaware General Corporation Law. If the above provision is repealed or modified, the rights of directors will not be adversely affected with respect to any act or omission occurring prior to such repeal or modification.    The Pixar articles of incorporation eliminate a Pixar director’s personal liability for monetary damages to the fullest extent permitted under California law.

 

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Indemnification

of Officers and Directors

   The Disney certificate of incorporation and bylaws provide that Disney will indemnify to the full extent authorized or permitted by law any person made, or threatened to be made, a defendant or witness to any action, suit or proceeding by reason of the fact that such person is or was a director or officer of Disney or such director or officer was acting at the request of Disney. No amendment or repeal of the above provision will affect any rights to indemnification with respect to acts or omissions occurring prior to the amendment or repeal.    The Pixar articles of incorporation and bylaws provide that Pixar will, to the maximum extent permitted by the California General Corporation Law, indemnify each of its directors and officers against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that such person is or was an agent of Pixar.

Dissenters’

Rights

   The Disney stockholders are not entitled to appraisal or dissenters’ rights under Section 262 of the Delaware General Corporation Law in connection with the merger because Disney is not a constituent corporation in the merger.    Pixar shareholders will be entitled to dissenters’ rights in the merger if the holders of at least 5% of the outstanding Pixar shares make demand requests under Chapter 13 of the California General Corporation Law. See “The Merger—Dissenters’ Rights” beginning on page 64 of this proxy statement/prospectus.
Certain Business Combination Restrictions   

Section 203 of the Delaware General Corporation Law protects publicly-traded Delaware corporations, such as Disney, from hostile takeovers, and from actions following the takeover, by prohibiting some transactions once an acquirer has gained a significant holding in the corporation.

 

A corporation may elect not to be governed by Section 203 of the Delaware General Corporation Law. Neither the Disney certificate of incorporation nor the Disney bylaws contains the election not to be governed by Section 203 of the Delaware General Corporation Law. Therefore, Disney is governed by Section 203 of the Delaware General Corporation Law. This provision does not apply to Disney in the merger.

   There is no equivalent provision to Section 203 of the Delaware General Corporation Law under California law. However, the California General Corporation Law does provide that, except where the fairness of the terms and conditions of the transaction have been approved by the California Commissioner of Corporations and except in a “short-form” merger (the merger of a parent corporation with a subsidiary in which the parent owns at least 90% of the outstanding shares of each class of the subsidiary’s stock), if the surviving corporation or its parent corporation owns, directly or indirectly, shares of the target corporation representing more than 50% of the voting power of the target corporation prior to the merger, the nonredeemable common stock of a target corporation may be converted only into nonredeemable common stock of the surviving corporation or its parent corporation, unless all of the shareholders of the class consent. The effect of this provision is to prohibit a cash-out merger of minority shareholders, except where the majority

 

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          shareholders already own 90% or more of the voting power of the target corporation and could, therefore, effect a short-form merger to accomplish such a cash-out of minority shareholders.
Vote on Certain Fundamental Issues   

The Disney certificate of incorporation provides that certain proposed business combinations between Disney and an interested person (defined as an owner, of record or beneficially, of 5% or more of any class of Disney voting securities) be approved by four-fifths (4/5) of the outstanding stock of Disney entitled to vote.

 

Business combinations subject to these provisions include: (i) any merger or consolidation to which Disney, or any of its subsidiaries, and an interested person are parties; (ii) any sale or other disposition by Disney, or any of its subsidiaries, of all or substantially all of its assets to an interested person; (iii) any purchase or other acquisition by Disney, or any of its subsidiaries, of all or substantially all of the assets or stock of an interested person; and (iv) any other transaction with an interested person which requires the approval of the stockholders of Disney under the Delaware General Corporation Law.

 

This requirement does not apply to any transaction described above if: (i) such transaction is approved by resolution of Disney’s board of directors, provided that a majority of the members of the board of directors voting for the approval of such transaction were duly elected and acting members of the board of directors prior to the date that the person, firm or corporation, or any group thereof, with whom such transaction is proposed, became an interested person; or (ii) the requirement of a 4/5 vote is prohibited by the Delaware General Corporation Law.

   The Pixar articles of incorporation and bylaws have no comparable provision regarding voting on certain fundamental issues.

 

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Certain Share Repurchases    Disney’s bylaws prevent it from acquiring any of its voting equity securities at a price exceeding the greater of the then–current market price of such securities or the average market price of such securities for the preceding thirty trading days from any person or group who or that is the beneficial owner of more than 2% of Disney’s voting securities, unless the acquisition of such securities is (a) effected pursuant to the same offer and on terms extended to all holders of securities of such class and to all holders of any other class from or into which such securities may be converted, or (b) approved by a vote of a majority of the shares cast, excluding those owned by the beneficial owner whose shares are being acquired by Disney. However, Disney’s bylaws do not restrict it from acquiring shares in other circumstances, including: (i) reacquiring shares in the open market or in block trades pursuant to a stock repurchase program approved by the board of directors, in each case in accordance with the requirements of SEC Rule 10b-18 or any successor rule or (ii) reacquiring shares pursuant to the terms of a stock option plan that has been approved by a vote of a majority of the shares of common stock.    The Pixar articles of incorporation and bylaws have no comparable provision regarding share repurchases.

 

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FUTURE PIXAR SHAREHOLDER PROPOSALS

 

Pixar will hold a 2006 annual meeting of shareholders only if the merger is not completed. Any proposal of a shareholder of Pixar that is intended to be presented by such shareholder at Pixar’s 2006 annual meeting of shareholders (if it is held) must be received by Pixar no later than March 13, 2006, in order for such proposal to be considered for inclusion in Pixar’s proxy statement and form of proxy relating to such meeting.

 

LEGAL MATTERS

 

Skadden, Arps, Slate, Meagher & Flom LLP will pass upon the validity of the shares of Disney offered by this proxy statement/prospectus.

 

Certain United States federal income tax consequences of the merger will be passed upon by Skadden, Arps, Slate, Meagher & Flom LLP and/or Dewey Ballantine LLP and/or Wilson Sonsini Goodrich & Rosati, Professional Corporation for Disney and Pixar.

 

EXPERTS

 

The financial statements and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal Control over Financial Reporting) incorporated in this proxy statement/prospectus by reference to The Walt Disney Company’s Current Report on Form 8-K dated February 16, 2006 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

 

The financial statements of Pixar as of December 31, 2005 and January 1, 2005, and for each of the years in the three-year period ended December 31, 2005, and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, have been incorporated by reference herein and in the registration statement of which this proxy statement/prospectus is a part in reliance upon the reports of KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.

 

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WHERE YOU CAN FIND MORE INFORMATION

 

Disney and Pixar file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy these reports, statements or other information filed by either Disney or Pixar at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC filings of Disney and Pixar are also available to the public from commercial document retrieval services and at the website maintained by the SEC at www.sec.gov.

 

Disney has filed a registration statement on Form S-4 to register with the SEC the Disney common stock to be issued to Pixar shareholders in the merger. This proxy statement/prospectus is a part of that registration statement and constitutes a prospectus of Disney, in addition to being a proxy statement of Pixar for its Special Meeting. The registration statement, including the attached annexes, exhibits and schedules, contains additional relevant information about Disney, Disney common stock and Pixar. As allowed by SEC rules, this proxy statement/prospectus does not contain all the information you can find in the registration statement or the exhibits to the registration statement.

 

The SEC allows Disney and Pixar to “incorporate by reference” information into this proxy statement/prospectus. This means that Disney and Pixar can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be a part of this proxy statement/prospectus, except for any information that is superseded by information that is included directly in this proxy statement/prospectus or incorporated by reference subsequent to the date of this proxy statement/prospectus. Neither Disney nor Pixar incorporate the contents of their websites into this proxy statement/prospectus.

 

This proxy statement/prospectus incorporates by reference the documents listed below that Disney and Pixar have previously filed with the SEC. They contain important information about Disney and Pixar and their financial condition. The following documents, which were filed by Disney with the SEC, are incorporated by reference into this proxy statement/prospectus:

 

    Disney’s annual report on Form 10-K for the fiscal year ended October 1, 2005, filed with the SEC on December 7, 2005;

 

    Disney’s quarterly report on Form 10-Q for the quarterly period ended December 31, 2005, filed with the SEC on February 6, 2006;

 

    Disney’s current report on Form 8-K dated December 30, 2005, filed with the SEC on January 3, 2006;

 

    Disney’s current report on Form 8-K dated January 24, 2006, filed with the SEC on January 26, 2006;

 

    Disney’s current report on Form 8-K dated February 6, 2006, filed with the SEC on February 6, 2006;

 

    Disney’s current report on Form 8-K dated February 6, 2006, filed with the SEC on February 10, 2006;

 

    Disney’s current report on Form 8-K dated February 16, 2006, filed with the SEC on February 17, 2006;

 

    Disney’s current report on Form 8-K/A dated December 1, 2005, filed with the SEC on March 14, 2006;

 

    Disney’s current report on Form 8-K dated February 22, 2006, filed with the SEC on April 3, 2006; and

 

    the description of Disney’s common stock contained in its registration statement on Form 8-A filed with the SEC on November 17, 1999 and any amendment or report filed with the SEC for the purpose of updating the description.

 

The following documents, which were filed by Pixar with the SEC, are incorporated by reference into this proxy statement/prospectus:

 

    Pixar’s annual report on Form 10-K for the fiscal year ended December 31, 2005, filed with the SEC on March 7, 2006;

 

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    Pixar’s current report on Form 8-K dated January 24, 2006, filed with the SEC on January 24, 2006;

 

    Pixar’s current report on Form 8-K dated January 24, 2006 filed with the SEC on January 26, 2006;

 

    Pixar’s current report on Form 8-K dated January 27, 2006 filed with the SEC on February 2, 2006;

 

    Pixar’s current report on Form 8-K dated February 27, 2006 filed with the SEC on March 3, 2006; and

 

    the description of Pixar’s common stock contained in its registration statement on Form 8-A filed with the SEC on October 10, 1995 and any amendment or report filed with the SEC for the purpose of updating the description.

 

In addition, Disney and Pixar incorporate by reference additional documents that either may file with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of this proxy statement/prospectus and the date of the Special Meeting. These documents include periodic reports, such as annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, excluding any information furnished pursuant to Item 7.01 or Item 8.01 of any current report on Form 8-K solely for purposes of satisfying the requirements of Regulation FD under the Exchange Act, as well as proxy statements.

 

Disney and Pixar also incorporate by reference the merger agreement attached to this proxy statement/prospectus as Annex A and the voting agreement attached to this proxy statement/prospectus as Annex B.

 

Disney has supplied all information contained in or incorporated by reference into this proxy statement/prospectus relating to Disney, and Pixar has supplied all information contained in or incorporated by reference into this proxy statement/prospectus relating to Pixar.

 

You can obtain any of the documents incorporated by reference into this proxy statement/prospectus through Disney or Pixar, as the case may be, or from the SEC through the SEC’s website at www.sec.gov. Documents incorporated by reference are available from Disney and Pixar without charge, excluding any exhibits to those documents, unless the exhibit is specifically incorporated by reference as an exhibit in this proxy statement/prospectus. Disney stockholders and Pixar shareholders may request a copy of such documents by contacting the applicable department at:

 

The Walt Disney Company

500 South Buena Vista Street, MC9722

Burbank, California 91521

(818) 553-7200

Attn: Shareholder Services Department

  

Pixar

1200 Park Avenue

Emeryville, California 94608

(510) 752-3000

Attn: Investor Relations

 

In addition, you may obtain copies of the information relating to Disney, without charge, by sending an e-mail to investor.relations@disneyonline.com.

 

You may obtain copies of the information relating to Pixar, without charge, by sending an e-mail to ir@pixar.com.

 

IN ORDER FOR YOU TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE PIXAR SPECIAL MEETING, DISNEY OR PIXAR SHOULD RECEIVE YOUR REQUEST NO LATER THAN APRIL 28, 2006.

 

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We have not authorized anyone to give any information or make any representation about the merger or our companies that is different from, or in addition to, that contained in this proxy statement/prospectus or in any of the materials that we have incorporated into this proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this proxy statement/prospectus or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this proxy statement/prospectus does not extend to you. The information contained in this proxy statement/prospectus is accurate only as of the date of this document unless the information specifically indicates that another date applies, and neither the mailing of this proxy statement/prospectus to shareholders nor the issuance of Disney common stock in the merger should create any implication to the contrary.

 

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ANNEX A

 

EXECUTION COPY

 


 

AGREEMENT AND PLAN OF MERGER

 

by and among

 

THE WALT DISNEY COMPANY,

 

LUX ACQUISITION CORP.

 

and

 

PIXAR

 

Dated as of January 24, 2006

 


 


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          Page

ARTICLE I DEFINITIONS

   A-1

ARTICLE II THE MERGER

   A-9

Section 2.1

   The Merger    A-9

Section 2.2

   Closing    A-9

Section 2.3

   Effective Time    A-9

Section 2.4

   Effects of the Merger    A-9

Section 2.5

   Articles of Incorporation and By-Laws    A-9

Section 2.6

   Directors and Officers    A-10

Section 2.7

   Additional Actions    A-10

ARTICLE III MERGER CONSIDERATION; EXCHANGE PROCEDURES

   A-10

Section 3.1

   Effect on Company Common Stock    A-10

Section 3.2

  

No Fractional Shares; Treasury Stock and Parent-Owned Company Common Stock

   A-10

Section 3.3

   Dissenting Shares    A-10

Section 3.4

   Options    A-11

Section 3.5

   Exchange Agent    A-12

Section 3.6

   Exchange Procedures    A-12

Section 3.7

   Taking of Necessary Action; Further Action    A-13

Section 3.8

   Capital Stock of Merger Sub    A-13

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY

   A-13

Section 4.1

   Organization    A-13

Section 4.2

   Capitalization    A-14

Section 4.3

   Subsidiaries    A-14

Section 4.4

   Authority    A-15

Section 4.5

   Consents and Approvals; No Violations    A-15

Section 4.6

   Books and Records    A-16

Section 4.7

   SEC Reports and Financial Statements    A-16

Section 4.8

   Absence of Company Material Adverse Effect    A-17

Section 4.9

   No Undisclosed Liabilities    A-17

Section 4.10

   Benefit Plans; Employees and Employment Practices    A-17

Section 4.11

   Employment/Labor    A-20

Section 4.12

   Contracts    A-21

Section 4.13

   Litigation    A-21

Section 4.14

   Compliance with Applicable Law    A-21

Section 4.15

   Taxes and Tax Returns    A-22

Section 4.16

   Environmental Matters    A-23

Section 4.17

   State Takeover Statutes    A-23

Section 4.18

   Intellectual Property    A-23

Section 4.19

   Library Films; Library Film Materials    A-25

Section 4.20

   Films in Progress; Development Projects    A-26

Section 4.21

   Absence of Indemnifiable Claims, etc.    A-26

Section 4.22

   Opinion of Financial Advisor    A-26

Section 4.23

   Board Approval    A-26

Section 4.24

   Voting Requirements    A-26

Section 4.25

   Brokers and Finders    A-26

Section 4.26

   Information Supplied    A-26

 

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          Page

ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

   A-27

Section 5.1

   Organization    A-27

Section 5.2

   Capitalization    A-27

Section 5.3

   Authority    A-27

Section 5.4

   Consents and Approvals; No Violations    A-28

Section 5.5

   SEC Reports and Financial Statements    A-28

Section 5.6

   No Undisclosed Liabilities    A-29

Section 5.7

   Litigation    A-29

Section 5.8

   Compliance with Applicable Law    A-30

Section 5.9

   Absence of Parent Material Adverse Effect    A-30

Section 5.10

   Brokers and Finders    A-30

Section 5.11

   Opinion of Financial Advisor    A-30

Section 5.12

   Board Approval    A-30

Section 5.13

   Information Supplied    A-30

Section 5.14

   Interim Operations of Merger Sub    A-31

ARTICLE VI COVENANTS

   A-31

Section 6.1

   Covenants of the Company    A-31

Section 6.2

   Covenants of the Parent    A-33

Section 6.3

   No Solicitation    A-34

Section 6.4

   Company Board Recommendation; Termination Right for Superior Proposal    A-35

Section 6.5

   Company Shareholder Meeting    A-35

Section 6.6

   Form S-4 and Proxy Statement    A-36

Section 6.7

   Access to Information    A-36

Section 6.8

   Reasonable Best Efforts    A-37

Section 6.9

   State Takeover Statutes    A-37

Section 6.10

   Indemnification and Insurance    A-37

Section 6.11

   Certain Litigation    A-39

Section 6.12

   Notification of Certain Matters    A-39

Section 6.13

   Affiliate Letters    A-39

Section 6.14

   Employee Benefits; 401(k) Plan    A-39

Section 6.15

   Directorship    A-40

Section 6.16

   Feature Animation Management and Operations    A-40

Section 6.17

   Tax Matters    A-40

Section 6.18

   Certain Plans    A-40

Section 6.19

   Section 16 Matters    A-40

Section 6.20

   Grant of Performance Unit Awards    A-40

ARTICLE VII CONDITIONS

   A-41

Section 7.1

   Conditions to Each Party’s Obligation to Effect the Merger    A-41

Section 7.2

   Conditions to Parent and Merger Sub’s Obligation to Effect the Merger    A-41

Section 7.3

   Conditions to the Company’s Obligation to Effect the Merger    A-42

ARTICLE VIII TERMINATION AND AMENDMENT

   A-42

Section 8.1

   Termination    A-42

Section 8.2

   Effect of Termination    A-44

Section 8.3

   Termination Fees    A-44

Section 8.4

   Amendment    A-44

Section 8.5

   Extension; Waiver    A-45

 

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ARTICLE IX MISCELLANEOUS

   A-45

Section 9.1

  

Nonsurvival of Representations and Warranties; Survival of Certain Covenants and Agreements

   A-45

Section 9.2

   Notices    A-45

Section 9.3

   Interpretation    A-46

Section 9.4

   Counterparts    A-46

Section 9.5

   Entire Agreement; No Third Party Beneficiaries    A-46

Section 9.6

   Governing Law    A-47

Section 9.7

   Publicity    A-47

Section 9.8

   Assignment    A-47

Section 9.9

   Enforcement    A-47

Section 9.10

   Incorporation of Exhibits    A-47

Section 9.11

   Severability    A-47

Section 9.12

   Expenses    A-47

 

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AGREEMENT AND PLAN OF MERGER

 

AGREEMENT AND PLAN OF MERGER (this “Agreement”) dated as of January 24, 2006, by and among The Walt Disney Company, a Delaware corporation (“Parent”), Lux Acquisition Corp., a California corporation and a direct wholly owned subsidiary of Parent (“Merger Sub”), and Pixar, a California corporation (the “Company”).

 

WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have approved this Agreement and the transactions contemplated hereby, and each has determined that the Merger (as defined in Section 2.1) is in the best interests of their respective companies and stockholders or shareholders and, accordingly, have each agreed to effect the Merger provided for herein upon the terms and subject to the conditions set forth herein; and

 

WHEREAS, concurrently with the execution hereof, in order to induce Parent to enter into this Agreement, Mr. Steven P. Jobs (the “Principal Shareholder”) is entering into a voting agreement, dated as of the date hereof, between the Principal Shareholder and Parent pursuant to which the Principal Shareholder has agreed to vote a number of his shares of Company Common Stock (as defined in Article I), representing forty percent (40%) of the shares of the Company Common Stock outstanding and entitled to vote on the record date for any vote of shareholders of the Company on this Agreement and the transactions contemplated hereby, in favor of the approval of the principal terms of this Agreement and the Merger.

 

WHEREAS, for United States federal income tax purposes, it is intended that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and that this Agreement will be, and is hereby, adopted as a plan of reorganization for purposes of Section 368(a) of the Code.

 

NOW, THEREFORE, in consideration of the representations, warranties and covenants set forth in this Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and subject to the conditions set forth herein, the parties hereto agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

Capitalized and certain other terms used in this Agreement have the meanings set forth below. Unless the context otherwise requires, such terms shall include the singular and plural and the conjunctive and disjunctive forms of the terms defined.

 

Acquisition Agreement” shall have the meaning set forth in Section 6.3(a).

 

Acquisition Proposal” shall mean any inquiry, proposal or offer relating to (i) the acquisition by any Person after the date hereof of twenty percent (20%) or more of the outstanding shares of capital stock or twenty percent (20%) or more of the aggregate outstanding voting securities of the Company, (ii) a merger, consolidation, business combination, reorganization, share exchange, recapitalization, liquidation, dissolution or similar transaction involving the Company or any of its Subsidiaries which would result in any Person owning twenty percent (20%) or more of the outstanding shares of capital stock or twenty percent (20%) or more of the aggregate outstanding voting securities of the Company, (iii) a merger, consolidation, business combination, reorganization, share exchange, sale of substantially all assets, recapitalization, liquidation, dissolution or similar transaction which would result in any Person acquiring twenty percent (20%) or more of the fair market value, immediately prior to such transaction, of the assets (including capital stock of the Company’s Subsidiaries) of the Company and its Subsidiaries, taken as a whole, (iv) any other transaction which would, directly or indirectly, result in a Person acquiring twenty percent (20%) or more of the fair market value, immediately prior to such

 

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transaction, of the assets (including capital stock of the Company’s Subsidiaries) of the Company and its Subsidiaries, taken as a whole, (whether by purchase of assets, acquisition of stock of a Subsidiary or otherwise), or (v) any combination of the foregoing.

 

Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under the Exchange Act.

 

Affiliate Letter” shall have the meaning set forth in Section 6.13.

 

Agreement” shall have the meaning set forth in the Preamble hereto.

 

Audit” means any audit, assessment, or other examination relating to Taxes by any Tax Authority or any judicial or administrative proceedings relating to Taxes.

 

Bankruptcy and Equity Exception” shall have the meaning set forth in Section 4.4.

 

Benefit Plan” shall have the meaning set forth in Section 4.10(a).

 

Business Day” shall mean any day, other than a Saturday, Sunday and any day which is a legal holiday under the Laws of the State of California or New York or is a day on which banking institutions located in such States are authorized or required by Law or other governmental action to close.

 

Certificate of Merger” shall have the meaning set forth in Section 2.3.

 

CGCL” shall mean the California General Corporation Law.

 

Closing” shall have the meaning set forth in Section 2.2.

 

Closing Date” shall have the meaning set forth in Section 2.2.

 

Code” shall have the meaning set forth in the Recitals.

 

Company” shall have the meaning set forth in the Preamble hereto.

 

Company 401(k) Plan” shall have the meaning set forth in Section 6.14(b).

 

Company Adverse Recommendation Change” shall have the meaning set forth in Section 6.4(a).

 

Company Affiliates” shall have the meaning set forth in Section 6.13.

 

Company Certificate” shall have the meaning set forth in Section 3.5.

 

Company Common Stock” shall mean the common stock of the Company, no par value per share.

 

Company Contract” shall have the meaning set forth in Section 4.12(a).

 

Company Disclosure Schedule” shall have the meaning set forth in Article IV.

 

Company Employees” shall mean the employees of the Company or its Subsidiaries as of the Effective Time.

 

Company Financial Advisor” shall have the meaning set forth in Section 4.22.

 

Company Intellectual Property” shall have the meaning set forth in Section 4.18(a).

 

Company MAE Proviso” shall have the meaning set forth in the definition of “Company Material Adverse Effect” in Article I hereof.

 

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Company Material Adverse Effect” shall mean a fact, event or circumstance which is materially adverse to the business, properties, assets, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that none of the following shall be deemed to constitute or be taken into account in determining whether that has been or will or could be, a “Company Material Adverse Effect”: (A) any changes resulting from or arising out of general market, economic or political conditions (including any changes arising out of acts of terrorism or war, weather conditions or other force majeure events), provided that such changes do not have a substantially disproportionate impact on the Company and its Subsidiaries, taken as a whole, (B) any changes resulting from or arising out of general market, economic or political conditions in the industries in which the Company or any of its Subsidiaries conduct business (including any changes arising out of acts of terrorism, or war, weather conditions or other force majeure events), provided that such changes do not have a substantially disproportionate impact on the Company and its Subsidiaries, taken as a whole, (C) any changes resulting from or arising out of actions taken pursuant to (and required by) this Agreement or at the request of Parent or the failure to take any actions due to restrictions set forth in this Agreement, (D) any changes in the price or trading volume of the Company’s stock, in and of itself, provided that such exclusion shall not apply to any underlying fact, event or circumstance that may have caused or contributed to such change in market price or trading volume, (E) any failure by the Company to meet published revenue or earnings projections, in and of itself, provided that such exclusion shall not apply to any underlying fact, event or circumstance that may have caused or contributed to such failure to meet published revenue or earnings projections, and (F) any changes or effects arising out of or resulting from any legal claims or other proceedings made by any of the Company’s shareholders (on their own behalf or on behalf of the Company) arising out of or related to this Agreement, the Merger or any other transactions contemplated hereby; provided, further, however, that for purposes of Section 7.2(c), a “Company Material Adverse Effect” shall include (any of the following being referred to as the “Company MAE Proviso”) (1) the loss of the services of either or both of the Company Employees identified on Section 7.2(c)(i) of the Parent Disclosure Schedule by reason of death, disability or otherwise, (2) the loss of the services of a majority of the Company Employees identified on Schedule 7.2(c)(ii) of the Parent Disclosure Schedule by reason of death, disability or otherwise (other than as a result of a voluntary leave of absence), (3) receipt of notice by the Company and/or its Subsidiaries from (a) either or both of the Company Employees identified on Section 7.2(c)(i) of the Parent Disclosure Schedule and/or (b) a majority of the Company Employees identified on Schedule 7.2(c)(ii) of the Parent Disclosure Schedule, in either case, that they intend to terminate their employment with the Company or its Subsidiaries after the Effective Time, and (4) any combination of the foregoing clauses (2) and (3) with respect to the Company Employees identified on Schedule 7.2(c)(ii) of the Parent Disclosure Schedule.

 

Company Option” shall have the meaning set forth in Section 3.4(b).

 

Company Permits” shall have the meaning set forth in Section 4.14(a).

 

Company Preferred Stock” shall have the meaning set forth in Section 4.2(a).

 

Company SEC Documents” shall have the meaning set forth in Section 4.7(a).

 

Company Shareholder Approval” shall have the meaning set forth in Section 4.4.

 

Company Shareholder Meeting” shall have the meaning set forth in Section 4.24.

 

Company Stock Plans” shall mean the Company’s 1995 Stock Plan, 1995 Director Option Plan and 2004 Equity Incentive Plan.

 

Contract” shall mean any note, bond, mortgage, indenture, lease, license, permit, concession, franchise, contract, agreement or other instrument or obligation.

 

D&O Insurance” shall have the meaning set forth in Section 6.10(b).

 

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Development Projects” means all Films other than Library Films and Films in Progress that are being developed, produced or acquired (by license or otherwise), or that have been proposed to be developed, produced or acquired, by or on behalf of the Company or any of its Subsidiaries for which pre-production has not commenced, regardless of the stage of development of such work or project and including any abandoned or “turnaround” works or projects.

 

DGCL” shall mean the Delaware General Corporation Law.

 

Dissenting Shares” shall have the meaning set forth in Section 3.3(a).

 

Effective Time” shall have the meaning set forth in Section 2.3.

 

Elements” shall mean the following physical embodiments of or relating to a Film or its elements wherever located (including in any film laboratory or storage facility), in any video, audio or other format (including PAL, NTSC and high definition) and whether existing on film, print, tape, disc or other media: (i) all positive, negative, fine grain and answer prints; (ii) all exposed or developed film, pre-print materials (including positives, interpositives, negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices and all other forms of pre-print elements which may be necessary or useful to produce prints or other copies or additional pre-print elements, whether now known or hereafter devised), subtitles, special effects, cutouts, stock footage, outtakes, tabs and trims; (iii) all sound and music tracks, audio and video recordings of all types and gauges (whether analog, digital or otherwise) in all languages and (iv) all cells, drawings, storyboards, models, sculptures, puppets, bibles, outlines, scripts, screenplays, marketing and publicity materials and other physical properties of every kind and nature relating to a Film or its elements in whatever state of completion.

 

Environmental Claim” shall mean any claim, action, cause of action, investigation or notice (written or oral) by any person or entity alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (i) the presence, or release into the environment, of any Material of Environmental Concern at any location, whether or not owned or operated by the Company or any Company Subsidiary or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law.

 

Environmental Laws” shall mean all federal, state, local and foreign Laws and regulations and common laws relating to pollution, protection of human health or worker safety (as such matters relate to Materials of Environmental Concern) or the environment (including ambient air, surface water, ground water, land surface or subsurface strata, and natural resources), including Laws relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern.

 

ERISA” shall have the meaning set forth in Section 4.10(a).

 

ERISA Affiliate” shall have the meaning set forth in Section 4.10(c).

 

Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

Exchange Agent” shall have the meaning set forth in Section 3.5.

 

Exchange Ratio” shall have the meaning set forth in Section 3.1.

 

Exchange Fund” shall have the meaning set forth in Section 3.5.

 

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Exploit” shall mean, with respect to the Films, to release, reproduce and distribute, perform, display, exhibit, broadcast or telecast, license, or sell, market, create merchandising or otherwise commercially exploit by any and all known or new or changed (i) technology, (ii) uses, (iii) media, (iv) formats, (v) modes of transmission and (vi) methods of distribution, dissemination or performance. The meaning of the term “Exploitation” shall be correlative to the foregoing.

 

Films” shall mean all motion pictures (including features, shorts and trailers), television, cable or satellite programming (including on-demand and pay-per-view programming), Internet programming, direct-to-video/DVD programming or other live action, animated, filmed, taped or recorded entertainment of any kind or nature, known or unknown, and all components thereof, including titles, themes, content, dialogue, characters, plots, concepts, scenarios, characterizations, elements and music (whether or not now known or recognized) as to which the Company or any of its Subsidiaries owns or controls any right, title or interest, including: (i) completed and released works or projects; (ii) works or projects in any stage of progress, including works or projects in development and/or pre-production, in principal photography and/or post-production, and completed but not released as of the Closing Date; (iii) “turnaround” works or projects; (iv) copyright and other intellectual property or proprietary rights in and to the literary, dramatic and musical and other material associated with or related to or necessary to the Exploitation of the works or projects referred to in the foregoing clauses (i) through (iii); (v) to the extent related to the works or projects referred to in the foregoing clauses (i) through (iii), sequel, prequel and remake rights and other derivative production rights, including all novelization, merchandising, character, serialization, game and interactive rights; (vi) all other allied, ancillary, subsidiary and derivative rights (including theme park rights), known and unknown, throughout the world related to the works and projects referenced in the foregoing clauses (i) through (v); and (vii) all contractual and other rights associated with or related to such works or projects referenced in the foregoing clauses (i) through (v), whether in any media now known or hereafter developed. For the avoidance of doubt, the term “Films” shall include all Library Films, Films in Progress and Development Projects.

 

Films In Progress” shall have the meaning set forth in Section 4.20.

 

Foreign Plan” shall have the meaning set forth in Section 4.10(m).

 

Form S-4” shall have the meaning set forth in Section 6.6.

 

GAAP” shall mean accounting principles generally accepted in the United States of America.

 

Governmental Entity” shall mean any governmental body, court, agency, official or regulatory or other authority, whether federal, state, local or foreign.

 

HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

 

Indemnified Parties” shall have the meaning set forth in Section 6.10(a).

 

Intellectual Property” shall have the meaning set forth in Section 4.18(a).

 

IP Contracts” shall have the meaning set forth in Section 4.18(a).

 

IRS” shall mean the Internal Revenue Service.

 

Knowledge” or any similar formulation of knowledge shall mean the actual knowledge (after reasonable inquiry) of those members of senior management of the Company or Parent, as the case may be, whose duties would, in the normal course of the Company’s or Parent’s affairs, as the case may be, result in such member or members having such knowledge.

 

Law” shall mean any statute, law, ordinance, rule, regulation or other enforceable requirement of any Governmental Entity.

 

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Library Films” shall mean any and all Films that have been completed and/or acquired, delivered, and for which the Exploitation has commenced on or prior to the date of this Agreement, and any and all additional Films that have been completed and/or acquired, delivered, and for which the Exploitation has commenced after the date of this Agreement, but on or prior to the Closing Date. For the avoidance of doubt, the term “Library Films” shall include all Films other than Films In Progress and Development Projects.

 

Liens” shall mean, with respect to any asset, pledges, mortgages, title defects or objections, claims, liens, charges, encumbrances and security interests of any kind or nature.

 

Materials of Environmental Concern” shall mean chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products, asbestos or asbestos-containing materials or products, polychlorinated biphenyls, lead or lead-based paints or materials, radon, fungus or mold.

 

Maximum Annual Premium” shall have the meaning set forth in Section 6.10(b).

 

Merger” shall have the meaning set forth in Section 2.1.

 

Merger Consideration” shall have the meaning set forth in Section 3.1.

 

Merger Sub” shall have the meaning set forth in the Preamble hereto.

 

NASD” shall mean the National Association of Securities Dealers.

 

Non-Competition Agreement” shall mean a Contract that prohibits or materially restricts the ability of the Company or any of its Subsidiaries to operate in any geographical area or compete or operate in any line of business in which the Company or such Subsidiary, as applicable, presently is engaged, other than (a) provisions relating to geographic exclusivity and/or exclusivity by medium or manner of Exploitation contained in agreements for the Exploitation of Films or Intellectual Property licenses or (b) channel distribution restrictions.

 

Non-Owned Intellectual Property” shall have the meaning set forth in Section 4.18(a).

 

Notice of Superior Proposal” shall have the meaning set forth in Section 6.4(c).

 

NYSE” shall mean the New York State Exchange.

 

Order” shall mean any judgment, order, writ, preliminary or permanent injunction or decree of any Governmental Entity.

 

Owned Intellectual Property” shall have the meaning set forth in Section 4.18(a).

 

Parent” shall have the meaning set forth in the Preamble hereto.

 

Parent Closing Share Price” shall mean the average of the daily volume weighted average sale price of one share of Parent Common Stock for the five trading days immediately preceding the Closing Date on the NYSE.

 

Parent Common Stock” shall mean the common stock of Parent, par value $0.01 per share.

 

Parent Disclosure Schedule” shall have the meaning set forth in Article V.

 

Parent Financial Advisors” shall have the meaning set forth in Section 5.10.

 

Parent IP” shall have the meaning set forth in Section 4.18(a).

 

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Parent MAE Proviso” shall have the meaning set forth in the definition of “Parent Material Adverse Effect” in Article I hereof.

 

Parent Material Adverse Effect” shall mean a fact, event or circumstance which is materially adverse to the business, properties, assets, condition (financial or otherwise) or results of operations of Parent and its Subsidiaries, taken as a whole; provided, however, that none of the following shall be deemed to constitute or be taken into account in determining whether that has been or will or could be, a “Parent Material Adverse Effect”: (A) any changes resulting from or arising out of general market, economic or political conditions (including any changes arising out of acts of terrorism, or war, weather conditions or other force majeure events), provided that such changes do not have a substantially disproportionate impact on Parent and its Subsidiaries, taken as a whole, (B) any changes resulting from or arising out of general market, economic or political conditions in the industries in which Parent or any of its Subsidiaries conduct business (including any changes arising out of acts of terrorism, or war, weather conditions or other force majeure events), provided that such changes do not have a substantially disproportionate impact on Parent and its Subsidiaries, taken as a whole, (C) any changes resulting from or arising out of actions taken pursuant to (and required by) this Agreement or at the request of the Company or the failure to take any actions due to restrictions set forth in this Agreement, (D) any changes in the price or trading volume of Parent’s stock, in and of itself, provided that such exclusion shall not apply to any underlying fact, event or circumstance that may have caused or contributed to such change in market price or trading volume, (E) any failure by Parent to meet published revenue or earnings projections, in and of itself, provided that such exclusion shall not apply to any underlying fact, event or circumstance that may have caused or contributed to such failure to meet published revenue or earnings projections, and (F) any changes or effects arising out of or resulting from any legal claims or other proceedings made by any of Parent’s stockholders (on their own behalf or on behalf of Parent) arising out of or related to this Agreement, the Merger or any other transactions contemplated hereby provided, further, however, that for purposes of Section 7.3(c), a “Parent Material Adverse Effect” shall include (the following being referred to as the “Parent MAE Proviso”) the loss of the services of the individual identified on Section 7.3(c) of the Company Disclosure Schedule as indicated on Section 7.3(c) of the Company Disclosure Schedule.

 

Parent Permits” shall have the meaning set forth in Section 5.8(a).

 

Parent Preferred Shares” shall have the meaning set forth in Section 5.2(a).

 

Parent SEC Documents” shall have the meaning set forth in Section 5.5(a).

 

Patents” shall have the meaning set forth in Section 4.18(a).

 

Pension Plans” shall have the meaning set forth in Section 4.10(a).

 

Person” shall mean an individual, corporation, limited liability company, partnership, association, trust or any other entity or organization, including any Governmental Entities.

 

Principal Shareholder” shall have the meaning set forth in the Recitals hereto.

 

Proxy Statement” shall have the meaning set forth in Section 4.5(a).

 

Qualified Acquisition Proposal” shall have the meaning set forth in Section 8.3(a).

 

Release” shall mean any release, pumping, pouring, emptying, injecting, escaping, leaching, migrating, dumping, seepage, spill, leak, flow, discharge, disposal or emission.

 

Representatives” shall have the meaning set forth in Section 6.3(a).

 

Reinstated Recommendation” shall have the meaning set forth in Section 6.5.

 

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Sarbanes-Oxley Act” shall have the meaning set forth in Section 4.7(a).

 

SEC” shall mean the United States Securities and Exchange Commission or the staff thereof.

 

Secretary of State” shall have the meaning set forth in Section 2.3.

 

Securities Act” shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

Separate Film” shall have the meaning set forth in Section 4.18(b).

 

Software Products” shall have the meaning set forth in Section 4.18(b).

 

Subsidiary” of any Person shall mean (i) a corporation more than 50% of the combined voting power of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one of more other Subsidiaries of such Person or by such Person and one or more other Subsidiaries thereof, (ii) a partnership of which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, is the general partner and has the power to direct the policies, management and affairs of such partnership, (iii) a limited liability company of which such Person or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, is the managing member and has the power to direct the policies, management and affairs of such company or (iv) any other Person (other than a corporation, partnership or limited liability company) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof.

 

Superior Proposal” shall mean a bona fide written Acquisition Proposal (with all of the provisions in the definition of Acquisition Proposal adjusted to increase the percentages referenced therein to one hundred percent (100%)) which the Company’s Board of Directors determines in good faith (after consultation with its financial advisors) to be more favorable to the shareholders of the Company as compared to the transactions provided for herein (including any revisions to this Agreement made or proposed in writing by Parent) and any alternative transaction proposed in writing by Parent in accordance with Section 6.4(c) hereof, taking into account, among other things, (i) the Person making such Acquisition Proposal, (ii) the likelihood that the transaction contemplated by such Acquisition Proposal will be consummated and the timing thereof, (iii) the terms and conditions of this Agreement and such Acquisition Proposal, including any conditions relating to financing, regulatory approvals or other events or circumstances beyond the control of the party invoking the condition and (iv) any revisions to this Agreement made or proposed in writing by Parent prior to the time of determination and any alternative transaction proposed in writing by Parent in accordance with Section 6.4(c) hereof.

 

Surviving Corporation” shall have the meaning set forth in Section 2.1.

 

Tax” or “Taxes” means all Federal, state, local, and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto, imposed by any Tax Authority.

 

Tax Authority” means the IRS and any other domestic or foreign governmental authority responsible for the administration of any Taxes.

 

Tax Opinions” shall have the meaning set forth in Section 6.17.

 

Tax Returns” mean all federal, state, local, and foreign tax returns, declarations, statements, reports, schedules, forms, and information returns and any amendments thereto.

 

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Termination Date” shall have the meaning set forth in Section 8.1(b)(i).

 

Termination Fee” shall have the meaning set forth in Section 8.3(a).

 

Trade Secrets” shall have the meaning set forth in Section 4.18(a).

 

WARN Act” shall mean the Worker Adjustment and Retraining Notification Act of 1988, as amended.

 

Welfare Plans” shall have the meaning set forth in Section 4.10(a).

 

ARTICLE II

 

THE MERGER

 

Section 2.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the CGCL, on the Closing Date, Merger Sub shall be merged with and into the Company at the Effective Time (the “Merger”). Following the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation (the “Surviving Corporation”) and shall succeed to and assume all the rights, properties, liabilities and obligations of Merger Sub in accordance with the CGCL.

 

Section 2.2 Closing. The closing of the Merger (the “Closing”) shall take place at 8:00 a.m., Pacific time, on a date to be specified by the parties (the “Closing Date”), which shall be no later than the third business day after satisfaction or waiver (to the extent permitted hereunder) of all of the conditions set forth in Article VII of this Agreement, other than those conditions that by their nature cannot be satisfied until the Closing (but subject to the satisfaction of those conditions at the Closing), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Suite 1100, Palo Alto, California 94301, unless another time, date or place is agreed to in writing by the parties hereto.

 

Section 2.3 Effective Time. Concurrently with the Closing, the parties hereto shall file this Agreement together with the related officers’ certificates required by Section 1103 of the CGCL, in a customary form (the “Certificate of Merger”), with the Secretary of State of the State of California (the “Secretary of State”). The parties hereto shall make all other filings, recordings or publications required by the CGCL in connection with the Merger. The Merger shall become effective at the time specified in the Certificate of Merger (the time at which the Merger becomes effecti