1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File Number: 0-26976
PIXAR
(Exact name of registrant as specified in its charter)
California 68-0086179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 West Cutting Boulevard, Richmond, California 94804
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (510) 236-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common Stock as of
August 8, 1996 was 38,625,155.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIXAR
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1996 1995
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 64,943 $ 97,286
Short-term investments 81,819 47,002
Trade and other accounts receivable, net 6,138 2,753
Prepaid expenses and other current assets 454 309
Capitalized film production costs 1,428 1,446
--------- ---------
Total current assets 154,782 148,796
Property and equipment, net 2,468 1,552
Capitalized film production costs, net of current portion 1,267 2,170
Other assets 871 497
--------- ---------
Total assets $ 159,388 $ 153,015
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 424 $ 742
Note payable to the majority shareholder and accrued interest -- 2,373
Income taxes payable 295 --
Film production costs payable -- 3,324
Accrued liabilities 3,441 3,400
Unearned revenue 635 269
--------- ---------
Total current liabilities 4,795 10,108
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized and no
shares issued and outstanding -- --
Common stock, no par value; 100,000,000 shares authorized and
38,468,753 shares issued and outstanding 185,881 185,845
Unrealized gain (loss) on investments (101) 49
Deferred compensation (1,530) (2,261)
Accumulated deficit (29,657) (40,726)
--------- ---------
Total shareholders' equity 154,593 142,907
========= =========
Total liabilities and shareholders' equity $ 159,388 $ 153,015
========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-2-
3
PIXAR
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Software $ 1,734 $ 910 $ 2,645 $ 1,892
Commercials 799 575 1,584 1,105
Film 5,000 -- 5,076 --
Patent licensing 396 6,500 6,891 6,500
-------- -------- -------- --------
Total revenues 7,929 7,985 16,196 9,497
-------- -------- -------- --------
Cost of revenues:
Software 7 141 61 389
Commercials 785 277 1,501 662
Film 414 -- 423 --
-------- -------- -------- --------
Total cost of revenues 1,206 418 1,985 1,051
-------- -------- -------- --------
Gross margin 6,723 7,567 14,211 8,446
-------- -------- -------- --------
Operating expenses:
Research and development 1,592 998 2,715 1,731
Sales and marketing 614 409 1,061 945
General and administrative 1,396 770 2,574 1,017
-------- -------- -------- --------
Total operating expenses 3,602 2,177 6,350 3,693
-------- -------- -------- --------
Income from operations 3,121 5,390 7,861 4,753
-------- -------- -------- --------
Other income (expense), net 1,922 (38) 3,790 (74)
-------- -------- -------- --------
Income before income taxes 5,043 5,352 11,651 4,679
Income taxes 253 229 582 229
-------- -------- -------- --------
Net income $ 4,790 $ 5,123 $ 11,069 $ 4,450
======== ======== ======== ========
Net income per share (see Note 2) $ 0.10 $ 0.13 $ 0.24 $ 0.11
======== ======== ======== ========
Shares used in computing net income per share 47,002 39,671 47,028 39,669
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-3-
4
PIXAR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 11,069 $ 4,450
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred compensation 704 524
Non-cash revenue attributable to film overbudget (2,324) --
Provision for returns and doubtful accounts 12 --
Depreciation and amortization 251 224
Amortization of capitalized film production costs 423 --
Accrued interest payable -- 87
Licenses exchanged for equipment (891) --
Changes in operating assets and liabilities:
Trade and other accounts receivable (3,397) (343)
Prepaid expenses and other current assets (145) 97
Accounts payable (318) (348)
Income tax payable 295 229
Accrued liabilities 41 179
Unearned revenue 366 25
-------- --------
Net cash provided by operating activities 6,086 5,124
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (276) (536)
Maturities of investments in short-term securities 42,032 --
Purchases of short-term securities, net of unrealized losses (76,999) --
Capitalized film production costs (475) --
Change in other assets (374) (200)
-------- --------
Net cash used in investing activities (36,092) (736)
-------- --------
Cash flows from financing activities:
Repayment of note payable to shareholder (2,373) --
Proceeds from note payable to shareholder -- 2,225
Proceeds from exercised stock options 36 --
-------- --------
Net cash provided by (used in) financing activities (2,337) 2,225
-------- --------
Net increase (decrease) in cash and cash equivalents (32,343) 6,613
Cash and cash equivalents at beginning of period 97,286 41
-------- --------
Cash and cash equivalents at end of period $ 64,943 $ 6,654
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 305 $ --
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Credits used to purchase equipment $ 891 $ --
======== ========
Film overbudget reductions $ 3,324 $ --
======== ========
Film production costs capitalized $ 27 $ --
======== ========
Unrealized gain (loss) on investments $ (150) $ 30
======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-4-
5
PIXAR
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of Pixar's financial condition,
results of operations, and cash flows for the periods presented. These financial
statements should be read in conjunction with Pixar's audited financial
statements as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, including notes thereto, included in
Pixar's Annual Report on Form 10-K for the year ended December 31, 1995.
The results of operations for the three months ended June 30, 1996, and
the six months ended June 30, 1996 are not necessarily indicative of the
results expected for the current year or any other period.
(2) NET INCOME PER SHARE
Net income per share is computed using net income, and is based on the
weighted average number of shares of common stock outstanding and common
equivalent shares from stock options (under the treasury stock method, if
dilutive). In accordance with SEC Staff Accounting Bulletins, such computations
include all common and common equivalent shares issued within twelve months of
Pixar's initial public offering of common stock, ("IPO"), for all periods
presented prior to November 1995. Net income for the three months ended June 30,
1995 and the six months ended June 30, 1995 is presented on a pro forma basis,
and assumes C corporation income tax expense.
(3) PATENT LICENSING ARRANGEMENTS
For the six months ended June 30, 1996, fees of $6.9 million were
recognized with respect to the licensing of certain patents. The Company
delivered all rights to utilize the technology underlying the license to the
licensee, and received a non-refundable fixed-fee cash payment of $6.0 million
in cash and $5.0 million in the form of credits for products to be purchased
from the licensee by Pixar over the next four years. Following the release of
the rights to utilize the patents to the licensee, Pixar maintained no
significant vendor obligations to the licensee, so the Company recognized as
revenue the fixed and determinable amounts of the $6.0 million cash payment
received, plus $891,000 that represents the portion of the credits Pixar has
used in the last six months.
(4) FEATURE FILM AND CD-ROM PRODUCTION
FEATURE FILM AGREEMENT
In 1991, Pixar entered into an agreement with a film entertainment company
to develop and produce a computer animated feature film. The film entertainment
company has two successive options to extend the term of the agreement for up to
two additional feature films. The first feature film was in production as of
December 31, 1994 and released in November 1995, and the film entertainment
company exercised the option in July 1995 for the development and production of
a second feature film.
Pixar is entitled to receive compensation based on revenue from the
distribution of animated feature films and related products. The Company
recognized revenues on the first feature film of $5.1 million for the six months
ended June 30, 1996.
-5-
6
Pixar incurs film production costs that are reimbursed by the film
entertainment company, inclusive of salaries and overhead. All payments to Pixar
from the film entertainment company for costs of feature film production have
been recorded as cost reimbursements; accordingly, no revenues have been
recorded for such reimbursements; rather, Pixar has netted the reimbursements
against the related costs. Total film production costs reimbursed to Pixar for
the six months ended June 30, 1995 and June 30, 1996, were $1,794,000 and
$52,000, respectively, for the first motion picture, and $595,000 and
$3,597,000, respectively, for the second motion picture. The reimbursements
receivable from the film entertainment company for the first motion picture and
the second motion picture were $2,000 and $371,000, respectively, as of June 30,
1996.
CD-ROM AGREEMENT
Pixar has entered into an agreement with the above-mentioned film
entertainment company to develop and produce interactive CD-ROM titles based on
the first motion picture. The film entertainment company pays Pixar a
development fee for the development of the titles and Pixar is entitled to
receive a per-unit royalty on sales of the CD-ROM titles after a certain minimum
number of units has been sold. Pixar recognized $1,012,000 of royalties from
sales of the first CD-ROM title for the six months ended June 30, 1996. Amounts
required to develop the titles in excess of the development fees are funded by
Pixar and are recorded as research and development fees, unless the film
entertainment company agrees to provide additional fees. Total development fees
recorded as an offset in research and development pursuant to this agreement
were $2,182,000 for the six months ended June 30, 1996.
(5) SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed", development costs related to software products are expensed
as incurred until the technological feasibility of the product has been
established. After technological feasibility is established, additional costs
would be capitalized. To date, Pixar has not capitalized any software
development costs after technological feasibility has been established on its
software products since Pixar believes its process for developing software is
essentially completed concurrently with the establishment of technological
feasibility and costs incurred thereafter have not been material.
-6-
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's operating performance each quarter is subject to various
risks and uncertainties as discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 (the "Form 10-K"). The following discussion
should be read in conjunction with the sections entitled "Certain Factors
Affecting Business, Operating Results and Financial Condition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Form 10-K. In particular, the factors set forth below in "Factors Affecting
Operating Results" could affect the Company's operating results.
RESULTS OF OPERATIONS
REVENUES
Total revenues decreased by 1% to $7.9 million in the three months
ended June 30, 1996 from $8.0 million in the same period of the prior year, and
increased by 71% to $16.2 million in the six months ended June 30, 1996 from
$9.5 million in the same period of the prior year. Total revenue for the three
months ended June 30, 1995 included a one-time patent licensing fee of $6.5
million, which is compared to film and CD-ROM revenues of $5.0 million and $1.0
million, respectively, recognized in the three months ended June 30, 1996. The
increase in total revenues for the six months ended June 30, 1996 over the same
period in the prior year was primarily attributable to film revenue of $5.1
million and CD-ROM revenue of $1.0 million.
Software revenues include software license revenue, principally from
RenderMan, software development contract revenues and royalties received from
the April 1996 release of Pixar's first CD-ROM, Disney's Animated Storybook, Toy
Story, which was developed by Pixar's interactive division and marketed and
distributed by Disney Interactive, Inc., a subsidiary of the Walt Disney Company
(along with its subsidiaries hereinafter referred to as "Disney"). Software
revenues increased 91% to $1.7 million in the three months ended June 30, 1996
from $910,000 in the same period of the prior year, and increased by 40% to $2.6
million in the six months ended June 30, 1996 from $1.9 million in the same
period of the prior year. The increases in software revenues over the same
periods of the prior year resulted from CD-ROM royalty revenues of $1.0 million
in the three months ended June 30, 1996, and an increase in software license
revenue from RenderMan offset by a decline in revenue from software development
contracts and prepackaged software products other than RenderMan. In January
1996, Pixar raised the list price of RenderMan, which could adversely affect
sales of RenderMan. Further, due to Pixar's focus on content creation for
animated feature films and related products, Pixar expects that revenue derived
from software licenses may decline. In addition, in 1995, Pixar completed work
under all of the software development contracts that generated revenues in 1995,
and Pixar does not expect to recognize any further revenues under these
agreements nor does Pixar intend to pursue future software development work for
third parties.
Revenue attributable to animated television commercials increased 39%
to $799,000 in the three months ended June 30, 1996 from $575,000 in the same
period of the prior year, and increased 43% to $1.6 million in the six months
ended June 30, 1996 from $1.1 million in the same period of the prior year. Fees
for animated television commercials, which are fixed in advance, depend on the
relative complexity and length of each commercial as well as the market and
competitive conditions. The increases in commercial revenue over the same
periods of the prior year were due to an increase in the average fee charged due
to the increased complexity of the commercials produced. On July 8, 1996, Pixar
announced plans to substantially discontinue its production of commercials for
third parties after fulfilling its current commitments and to redirect the
talent in its television commercial group to animated feature films and related
products. Although most of the 18 employees in the commercial division have been
moved to other projects, Pixar expects some ongoing activity in this area due to
projects related to Pixar's films.
-7-
8
Patent licensing revenues of $396,000 in the three months ended June
30, 1996, and $6.9 million in the six months ended June 30, 1996 were
attributable to a patent license with Silicon Graphics, Inc., ("SGI"), whereby
Pixar granted to SGI and its subsidiaries a non-exclusive license to use certain
of Pixar's patents covering techniques for creating computer-generated
photorealistic images. Under the agreement, SGI will pay Pixar total
compensation of $11.0 million, of which $6.0 million is to be paid in cash and
$5.0 million is to be paid in the form of purchase credits for SGI hardware and
software over the next four years. Recognition of the $5.0 million in credits
will depend upon purchases and usage of the hardware and software to be obtained
from SGI in lieu of payment. In the six months ended June 30, 1996, Pixar
recognized revenue of $6.9 million, which included $6.0 million received in
cash, plus $891,000 representing the portion of the $5.0 million in hardware and
software credits actually used. The remaining $4.1 million will be recognized as
revenue in future periods as hardware and software credits are used. Patent
licensing revenues of $6.5 million for the three and six months ended June 30,
1995, were attributable to a one-time patent license with Microsoft Corporation,
("Microsoft").
Based on the terms of the feature film agreement ("the Feature Film
Agreement") between Pixar and Disney, film revenues of $5.0 and $5.1 million
were recognized for the three and six months ended June 30, 1996, respectively.
These amounts represented a portion of the total revenues Pixar expects to
receive from the November 1995 release of its first computer animated feature
film, Toy Story. Future film revenues may fluctuate significantly from quarter
to quarter, and may be higher or lower than amounts recognized in the three
months ended June 30, 1996.
In the three months ended June 30, 1996, and in the six months ended
June 30, 1996, Disney accounted for 77% and 38%, respectively, of Pixar's total
revenues. The revenues from Disney consisted primarily of film revenues and
CD-ROM royalties. SGI accounted for 43% of total revenues for the six months
ended June 30, 1996. In the three months ended June 30, 1995, and in the six
months ended June 30, 1995, Microsoft accounted for 81% and 68%, respectively,
of total revenues. The revenues from Microsoft and SGI were attributable to
one-time patent licenses, and Pixar expects that similar levels of patent
licensing revenue will not be generated on an ongoing and regular basis.
COST OF REVENUES
Cost of software revenues consists of the direct costs and
manufacturing overhead required to reproduce and package software products and
the cost of salaries and overhead associated with the software development
contracts. Cost of software revenues as a percentage of the related revenues
decreased to less than 1% in the three months ended June 30, 1996 from 15% in
the same period of the prior year and decreased to 2% in the six months ended
June 30, 1996 from 21% in the same period of the prior year. The decreases over
the same periods of the prior year were due to increased CD-ROM royalty revenues
which have no associated costs, a substantial reduction in revenue from software
development contracts, which have higher associated costs relative to
commercialized software costs, and to increased licensing of RenderMan, which
carries a higher gross margin than other software products. Cost of software
revenues includes no amortization of capitalized software development expenses.
Cost of commercial revenues consists of costs of production of
commercials, primarily salaries and benefits and, to a lesser extent, facility
expenses and department overhead costs. Cost of commercial revenues as a
percentage of the related revenues increased to 98% in the three months ended
June 30, 1996 from 48% in the same period of the prior year and increased to 95%
in the six months ended June 30, 1996 from 60% in the same period of the prior
year. The increases over the same periods of the prior year were primarily
attributable to the higher costs associated with the increased complexity of the
commercials produced and increased market competition, which resulted in lower
overall profitability.
Cost of film revenues consists primarily of the amortization of certain
film budget overages capitalized by Pixar. See "Capitalized Film Production
Costs." Cost of film revenues as a percentage of the related revenues was 8% for
each of the three and six months ended June 30, 1996.
-8-
9
There were no costs of revenue associated with patent licensing
revenues, which resulted in an abnormally high overall gross margin for all
periods presented, especially the three and six months ended June 30, 1995,
where patent licensing revenue accounted for approximately 81% and 68%,
respectively, of total revenues.
OPERATING EXPENSES
Pixar intends to increase operating expenses in a number of areas.
First, as a result of intense competition for animators, creative personnel and
technical directors, Pixar expects compensation for such personnel to increase
substantially. Pixar also plans to fund greater levels of research and
development, expand its administrative staff and facilities, expand other
operations and incur other significant costs related to being a public company.
To the extent that such expenses precede or are not subsequently followed by an
increase in revenues, Pixar's business, operating results and financial
condition will be materially adversely affected.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and
support for personnel conducting research and development for the RenderMan
product, for Pixar's proprietary Marionette and Ringmaster software and for
Pixar's interactive products. Research and development expenses increased 60% in
the three months ended June 30, 1996 to $1.6 million from $1.0 million in the
same period of the prior year, and increased 57% in the six months ended June
30, 1996 to $2.7 million from $1.7 million in the same period of the prior year.
The increases over the same periods of the prior year primarily resulted from
increased personnel, as well as deferred compensation charges of $135,000 and
$285,000 recorded in the three and six months ended June 30, 1996, respectively,
in connection with stock option grants. To date, all software development costs
have been expensed as incurred.
With respect to CD-ROM development, under the CD-ROM agreement with
Disney ("the CD-ROM Agreement"), development costs in excess of the budgeted
maximum amounts, unless reimbursed, will be recorded as research and development
expenses. Pixar has incurred over budget amounts in the development of the first
CD-ROM title, a portion of which Disney has reimbursed. Pixar believes that
research and development expenses will increase substantially in absolute
dollars in future periods, particularly in the areas of development of CD-ROM
titles and CD-ROM tools as well as the improvement and upgrading of Pixar's
Marionette, Ringmaster and RenderMan software systems.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and related
overhead, as well as advertising, technical support, public relations and trade
show costs required to support the software segment. Sales and marketing
expenses increased 50% in the three months ended June 30, 1996 to $614,000 from
$409,000 in the same period of the prior year, and increased 12% in the six
months ended June 30, 1996 to $1.1 million from $945,000 in the same period of
the prior year. The increases over the same periods of the prior year were due
to costs associated with being a public company such as public relations and
increased corporate marketing offset by a reduction in salaries and advertising
costs as Pixar focused on content creation, primarily for animated feature
films. Pixar believes that sales and marketing expenses may increase in absolute
dollars in future periods, particularly in the areas of corporate marketing and
public relations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries of
management and administrative personnel, insurance costs and professional fees.
All or a portion of the salaries of certain of Pixar's executives are charged as
film production costs and are reimbursed by Disney and are not included in
general and administrative expenses. General and administrative expenses
increased 81% in the three months ended June 30, 1996 to $1.4 million from
$770,000 in the same period of the prior year, and increased 153% in the six
months ended June 30, 1996 to $2.6 million from $1.0 million in the same period
of the prior year. The increases over the same periods of the prior year were
primarily due to deferred compensation expense recorded in connection with stock
option grants,
-9-
10
increased staffing, increased professional fees associated with the protection
of intellectual property and increased costs associated with being a public
company (such as expenses related to directors' and officers' insurance, and
increased professional fees). Pixar expects general and administrative expenses
to increase in absolute dollars in future periods as Pixar incurs additional
costs related to being a public company, continues amortization of deferred
compensation expense and expands its administrative staff and facilities.
OTHER INCOME (EXPENSE), NET
Other income, net was $1.9 million and $3.8 million in the three and
six months ended June 30, 1996, respectively, consisting primarily of interest
income on investments of the net proceeds from Pixar's IPO in November 1995.
Other expense, net was $38,000 and $74,000 in the three and six months ended
June 30, 1995, respectively, and was primarily attributable to interest expense
accrued on a promissory note issued by Pixar to its majority shareholder.
INCOME TAXES
Income tax expense for the three and six months ended June 30, 1996
reflects the alternative minimum tax liability after utilization of available
net operating loss carryforwards. Pixar elected to be treated as an S
corporation for federal income tax purposes as of January 1, 1992, whereby
income was taxed to the individual shareholder. In April 1995, the S corporation
status was terminated as a result of a recapitalization of Pixar. Accordingly,
Pixar was taxed as a C corporation after the recapitalization. Income tax
expense for the three and six months ended June 30, 1995, is presented on a pro
forma basis, and assumes C corporation income tax expense.
FACTORS AFFECTING OPERATING RESULTS
Pixar intends to generate a substantial majority of its future revenue
from the development and production of animated feature films and related
products. Pixar's annual and quarterly revenue will depend upon the timing and
market acceptance of the animated feature films and related products and upon
the costs to distribute and promote such films and 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, the availability of alternative forms
of entertainment and leisure time activities, critical reviews, unpredictable
public taste, the success of films released by competitors, general economic
conditions, and other tangible and intangible factors, all of which change and
cannot be predicted with certainty. 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. Accordingly, Pixar's annual and quarterly
revenues are and will continue to be extremely difficult to forecast. Moreover,
Pixar's expense levels are based in part on expectations regarding future
revenues and are, to a large extent, fixed. Pixar may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in revenue from Pixar's feature films and
related products in relation to Pixar's expectations would have an immediate
material adverse effect on Pixar's business, operating results and financial
condition. Pixar plans to increase its operating expenses to fund greater levels
of research and development, CD-ROM development and to expand operations. In
addition, as a result of intense competition for animators, creative personnel
and technical directors, Pixar expects compensation for such personnel to
increase substantially, along with corresponding increases in Pixar's operating
expenses and film production budgets. Since compensation for a substantial
number of Pixar's employees is reimbursed by Disney (within approved budgets)
under the Feature Film Agreement, if Pixar was not reimbursed or if the budget
for a project funded by Disney was exceeded, Pixar would experience a further
significant increase in operating expenses. To the extent that such expenses
precede or are not subsequently followed by increased revenues, Pixar's
business, operating results and financial condition will be materially adversely
affected.
Pixar expects to experience significant fluctuations in its future
annual and quarterly operating results that may be caused by many factors,
including the timing of the domestic and international releases of the animated
feature films, the success of the animated feature films (which can fluctuate
significantly from film to film), the timing of the release of related products
into their respective markets, the demand for the related products (which is
-10-
11
often a function of the success of the related animated feature film), Disney's
costs to distribute and promote the feature films and related products, Disney's
success at marketing the films and related products, the timing of receipt of
proceeds from the animated feature film and related products by Disney, the
timing of revenue recognition under the Feature Film Agreement, the timing of
revenue recognition under any distribution agreements for related products, the
introduction of new feature films or products by Pixar's competitors, the timing
of significant operating expenses and capital expenditures, the level of
unreimbursed film production and CD-ROM development costs in excess of budgeted
maximum amounts and general economic conditions. In particular, since Pixar's
compensation rate under the Feature Film Agreement escalates as the revenues
from each animated feature film and the related products increase, Pixar's
operating results are likely to fluctuate depending on the level of success of
its animated feature films and related products. As a result, Pixar believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful, and its annual and quarterly results of operations
should not be relied upon as any indication of future performance. Due to all of
the foregoing factors, it is likely that in some future period Pixar's operating
results will be below the expectations of public market analysts or investors.
In such event, the price of Pixar's Common Stock would likely be materially
adversely affected.
Under the Feature Film Agreement, Pixar's compensation rate for Toy
Story and its related products escalates as the revenues from Toy Story and the
related products increase. Under this formula, Pixar's compensation is
insignificant until such time as the revenues earned by Disney from distribution
of Toy Story and the related products are sufficient to cover specified costs
and distribution fees to Disney associated with Toy Story and the related
products. Once such costs and distribution fees have been covered, Pixar's
compensation rate escalates substantially. In particular, the production costs,
the general level of marketing and distribution costs and the timing of the
international theatrical and home video releases affect Pixar's compensation,
and many of these factors are controlled by and determined solely by Disney.
Disney's marketing and distribution costs for Toy Story were higher than
originally anticipated by Pixar which would have the effect of delaying the time
at which Pixar's compensation rate escalates. In addition, notwithstanding the
success of Toy Story in foreign markets, Pixar believes that the international
box office for Toy Story might be lower than originally anticipated. Pixar
further believes that these two factors, particularly the higher level of
Disney's marketing and distribution costs, will have a material adverse impact
on Pixar's compensation from Toy Story revenues and results of operations for
1997.
Because Pixar expects that revenues from RenderMan may not grow and may
even decline, that television commercial production will be substantially
discontinued, and that patent licensing revenues will not be generated on an
ongoing and regular basis, if Pixar does not receive significant compensation
under the Feature Film Agreement and the CD-ROM Agreement, Pixar's revenues and
net income will decline from historical levels, and Pixar's business, operating
results and financial condition will be materially adversely affected.
CAPITALIZED FILM PRODUCTION COSTS
Although Disney funded the entire production of Toy Story, Pixar
contractually guaranteed certain of the film budget overages and was liable to
Disney for these amounts under the Feature Film Agreement. Because these are
"production costs" under Statement of Financial Accounting Standards (SFAS) No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films,"
the costs were capitalized and amortized against film revenue. In the three and
six months ended June 30, 1996, $414,000 and $423,000 of these costs,
respectively, were amortized against film revenues. As of June 30, 1996, Pixar
had approximately $2.7 million of capitalized film production costs, consisting
primarily of costs related to Toy Story. As of March 31, 1996, Pixar had
approximately $3.2 million recorded as a liability for Pixar-related overages
paid by Disney. In the three months ended June 30, 1996, this liability was
reduced by $1.0 million as a result of a reduction in the final Toy Story budget
and the balance of $2.2 million was satisfied through a deduction from the
amount due from Disney to Pixar for Pixar's compensation, which is based on Toy
Story revenues. Pixar is entitled to recover any overages that it has funded,
through its compensation under the Feature Film Agreement, if Toy Story meets
certain predefined criteria.
-11-
12
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased $2.5 million to $146.8
million at June 30, 1996 from $144.3 million at December 31, 1995. Working
capital increased $11.3 million to $150.0 million at June 30, 1996 from $138.7
million at December 31, 1995.
Net cash provided by operations in the six months ended June 30, 1996
was primarily attributable to net cash received of $6.0 million from patent
licensing fees, and cash received from film and other operations. Net cash used
in investing activities in the six months ended June 30, 1996 was due primarily
to the purchase of short-term investments of $77.0 million less cash received
from maturities of $42.0 million. Net cash used in financing activities in the
six months ended June 30, 1996 was attributable to the repayment of the note
payable to Pixar's majority shareholder.
As of June 30, 1996, Pixar's principal source of liquidity was
approximately $146.8 million in cash and short-term investments. Pixar believes
that these funds together with cash flows expected to be generated from
operations will be sufficient to meet the Company's operating requirements
through the next twelve months. Thereafter, if cash generated by operations is
insufficient to satisfy Pixar's liquidity requirements, Pixar may sell
additional equity or debt securities or obtain credit facilities. The sale of
additional equity or convertible debt securities will result in additional
dilution to Pixar's shareholders. There can be no assurance that financing will
be available to Pixar in an amount and on terms acceptable to Pixar.
During the three months ended June 30, 1996, Pixar entered into a new
lease agreement to expand the total square footage of its corporate
headquarters by approximately 26,000 square feet. This agreement will result in
additional cash commitments for lease payments of approximately $528,000
beginning August 10, 1996, and continuing through July 10, 1999. Tenant
improvements and capital equipment purchases related to the expansion are
expected to total up to $800,000 for the year ended December 31, 1996.
-12-
13
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to the shareholders at the
Company's Annual Meeting of Shareholders held May 29, 1996. Each of these
matters was approved by a majority of shares present at the meeting.
1. The uncontested election of four directors to serve a one-year term
until their successors are duly elected and qualified. The following is a
summary of the nominees and voting results:
Votes For Votes Withheld
--------- --------------
Steven P. Jobs 36,657,492 48,139
Larry W. Sonsini 36,653,780 51,851
Skip M. Brittenham 36,653,072 52,559
Joseph A. Graziano 36,653,010 52,621
2. The ratification of the appointment of KPMG Peat Marwick LLP as the
independent auditors for the Company for the fiscal year ending
December 31, 1996. Results of the voting included 36,641,180 shares
for, 35,017 shares against and 29,434 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 Statement of Computation of Net Income Per Share.
27.1 Financial Data Schedule.
(a) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Pixar during the quarter
ended June 30, 1996.
ITEMS 1, 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
-13-
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PIXAR
Date: August 9, 1996 By: /s/ Lawrence B. Levy
--------------------------------------
Lawrence B. Levy,
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Officer)
-14-