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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999.
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, 94804
CALIFORNIA
(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
November 11, 1999 was 46,473,300.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIXAR
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 2, JANUARY 2,
1999 1999
---------- ----------
ASSETS
Cash and cash equivalents................................... $ 21,298 $ 29,557
Short-term investments...................................... 167,167 119,491
Receivables, net............................................ 10,549 3,885
Prepaid expenses and other assets........................... 4,479 4,884
Deferred income taxes....................................... 13,117 988
Capitalized film production costs........................... 60,553 60,841
Property and equipment, net................................. 50,852 31,160
-------- --------
Total assets...................................... $328,015 $250,806
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 300 $ 2,615
Income taxes payable........................................ 24,752 97
Payable to Disney........................................... 202 3,363
Accrued liabilities......................................... 10,000 8,396
Unearned revenue............................................ 829 1,188
-------- --------
Total liabilities................................. 36,083 15,659
-------- --------
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;
46,401,078 and 45,335,770 shares issued and outstanding
as of October 2, 1999 and January 2, 1999,
respectively........................................... 238,228 220,397
Accumulated other comprehensive income (loss)............... (529) 249
Deferred compensation....................................... -- (104)
Retained earnings........................................... 54,233 14,605
-------- --------
Total shareholders' equity........................ 291,932 235,147
-------- --------
Total liabilities and shareholders' equity........ $328,015 $250,806
======== ========
See accompanying notes to financial statements.
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PIXAR
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
---------- ------------- ---------- -------------
Revenue:
Software.................................... $ 1,738 $ 1,214 $ 4,553 $ 2,740
Animation services........................ 185 -- 408 171
Film...................................... 77,312 1,260 91,195 8,208
Patent licensing.......................... -- -- -- 120
------- ------- ------- -------
Total revenue..................... 79,235 2,474 96,156 11,239
------- ------- ------- -------
Cost of revenue:
Software.................................. 136 302 567 438
Animation services........................ 120 -- 274 38
Film...................................... 21,552 -- 25,399 --
------- ------- ------- -------
Total cost of revenue............. 21,808 302 26,240 476
------- ------- ------- -------
Gross profit...................... 57,427 2,172 69,916 10,763
------- ------- ------- -------
Operating expenses:
Research and development.................. 1,597 928 4,263 2,740
Sales and marketing....................... 338 311 989 963
General and administrative................ 1,761 1,731 4,703 5,276
------- ------- ------- -------
Total operating expenses.......... 3,696 2,970 9,955 8,979
------- ------- ------- -------
Income (loss) from continuing
operations...................... 53,731 (798) 59,961 1,784
Other income, net........................... 1,913 1,924 5,571 6,487
------- ------- ------- -------
Income from continuing operations
before income taxes............. 55,644 1,126 65,532 8,271
Income tax expense.......................... 23,370 259 25,984 1,903
------- ------- ------- -------
Net income from continuing
operations...................... 32,274 867 39,548 6,368
Income from discontinued operations, net of
taxes..................................... 13 -- 80 374
------- ------- ------- -------
Net income........................ $32,287 $ 867 $39,628 $ 6,742
======= ======= ======= =======
Basic net income per share from continuing
operations................................ $ 0.70 $ 0.02 $ 0.86 $ 0.14
Basic net income per share from discontinued
operations................................ 0.00 -- 0.00 0.01
------- ------- ------- -------
Basic net income per share.................. $ 0.70 $ 0.02 $ 0.86 $ 0.15
======= ======= ======= =======
Shares used in computing basic net income
per share................................. 46,355 44,519 45,975 43,836
======= ======= ======= =======
Diluted net income per share from continuing
operations................................ $ 0.63 $ 0.02 $ 0.77 $ 0.12
Diluted net income per share from
discontinued operations................... 0.00 -- 0.00 0.01
------- ------- ------- -------
Diluted net income per share................ $ 0.63 $ 0.02 $ 0.77 $ 0.13
======= ======= ======= =======
Shares used in computing diluted net income
per share................................. 51,223 51,733 51,253 51,227
======= ======= ======= =======
See accompanying notes to financial statements.
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PIXAR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
OCTOBER 2, SEPTEMBER 26,
1999 1998
---------- -------------
Cash flows from operating activities:
Net income.................................................. $ 39,628 $ 6,742
Adjustments to reconcile net income to net cash provided
by (used in) continuing operating activities:
Discontinued operations............................... (80) (374)
Depreciation and amortization......................... 5,128 4,577
Loss on disposition of property and equipment......... -- 258
Amortization of capitalized film production costs..... 25,398 --
Credits from patent licensing, net of expense items... -- (114)
Deferred income tax................................... 2,034 --
Changes in operating assets and liabilities:
Receivables........................................ (6,664) (306)
Prepaid expenses and other assets.................. (105) (424)
Accounts payable................................... (2,315) 546
Income taxes payable............................... 24,655 217
Payable to Disney.................................. (3,161) (2,152)
Accrued liabilities................................ 1,604 (1,940)
Unearned revenue................................... (359) (450)
--------- ---------
Net cash provided by continuing operations....... 85,763 6,580
Net cash provided by discontinued operations..... 80 374
--------- ---------
Net cash provided by operating activities........ 85,843 6,954
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (25,803) (8,751)
Proceeds from sale of equipment........................... 994 247
Proceeds from sale of short-term securities............... 110,529 103,066
Investments in short-term securities...................... (158,983) (164,693)
Capitalized film production costs......................... (24,507) (23,846)
--------- ---------
Net cash used in investing activities................. (97,770) (93,977)
--------- ---------
Cash flows from financing activities:
Proceeds from exercised stock options..................... 3,668 2,150
--------- ---------
Net cash provided by financing activities............. 3,668 2,150
--------- ---------
Net decrease in cash and cash equivalents................... (8,259) (84,873)
Cash and cash equivalents at beginning of period............ 29,557 101,847
--------- ---------
Cash and cash equivalents at end of period.................. $ 21,298 $ 16,974
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes............ $ -- $ 1,796
========= =========
Supplemental disclosure of non-cash investing and financing
activities:
Value of common stock issued and liabilities assumed for
purchase of PEI........................................ $ -- $ 3,000
========= =========
Loss on equipment disposals capitalized as film
production costs....................................... $ (603) $ --
========= =========
Credits from patent licensing........................... $ -- $ 120
========= =========
Unrealized gain (loss) on investments................... $ (778) $ 396
========= =========
Tax benefit from disqualifying dispositions............. $ 14,163 $ --
========= =========
See accompanying notes to financial statements.
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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 the audited financial statements as of
January 2, 1999 and for each of the years in the three-year period ended January
2, 1999, including notes thereto, incorporated by reference into Pixar's Annual
Report on Form 10-K for the year ended January 2, 1999.
The results of operations for the three and nine months ended October 2,
1999 are not necessarily indicative of the results expected for the current year
or any other period.
Certain amounts reported in previous periods have been reclassified to
conform to the 1999 financial statement presentation.
(2) FISCAL YEAR
Effective in fiscal year 1998, Pixar adopted a 52 or 53-week fiscal year,
changing the year end date from December 31 to the Saturday nearest December 31.
As a result, fiscal year 1998 ended on January 2, 1999 and consisted of 53
weeks. The third quarter of 1999 represents the thirteen-week period ended
October 2, 1999, and fiscal year 1999 will end on January 1, 2000 and consist of
52 weeks.
(3) EARNINGS PER SHARE CALCULATION
Basic net income per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive common
equivalent shares outstanding during the period, using the treasury stock method
for options and warrants.
Reconciliation of basic and diluted net income per share (in thousands,
except per share amounts):
QUARTER ENDED
------------------------------------------------------
OCTOBER 2, 1999 SEPTEMBER 26, 1998
------------------------- -------------------------
NET NET
INCOME SHARES EPS INCOME SHARES EPS
------- ------ ---- ------ ------ -----
Basic net income per share............. $32,287 46,355 $.70 $867 44,519 $0.02
Effect of dilutive shares:
Warrants/options..................... -- 4,868 -- 7,214
------- ------ ---- ------
Diluted net income per share........... $32,287 51,223 $.63 $867 51,733 $0.02
======= ====== ==== ======
NINE MONTHS ENDED
------------------------------------------------------
OCTOBER 2, 1999 SEPTEMBER 26, 1998
------------------------- -------------------------
NET NET
INCOME SHARES EPS INCOME SHARES EPS
------- ------ ---- ------ ------ -----
Basic net income per share............. $39,628 45,975 $.86 $6,742 43,836 $0.15
Effect of dilutive shares:
Warrants/options..................... -- 5,278 -- 7,391
------- ------ ------ ------
Diluted net income per share........... $39,628 51,253 $.77 $6,742 51,227 $0.13
======= ====== ====== ======
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PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) FEATURE FILM AND CO-PRODUCTION AGREEMENTS
Feature Film Agreement
In 1991, Pixar entered into a feature film agreement with Walt Disney
Pictures, a wholly owned subsidiary of The Walt Disney Company (together with
its subsidiaries and affiliates collectively referred to herein as "Disney") to
develop and produce up to three computer-animated feature films (the "Feature
Film Agreement"). Pixar is entitled to receive compensation based on the revenue
from the distribution of these films and related products. In 1995, Pixar
released its first feature film under the terms of the Feature Film Agreement,
Toy Story. Based on the individual film forecast method, all significant Toy
Story film production costs were fully amortized by the year ended December 31,
1997.
Co-Production Agreement
In February 1997, Pixar and Disney entered into a new co-production
agreement (the "Co-Production Agreement") which governs five original films made
by Pixar after Toy Story. Under the Co-Production Agreement, Pixar, on an
exclusive basis, agreed to produce five original computer-animated theatrical
motion pictures (the "Pictures") for distribution by Disney. Pixar's first film
produced under this agreement was A Bug's Life. Films in development or
production at Pixar as of October 2, 1999, which include Toy Story 2 and Pixar's
fourth film (with the working title "Monsters, Inc.") are also governed by this
agreement. A Bug's Life and Monsters, Inc. count toward the five Pictures,
whereas Toy Story 2 is a derivative work that will not count towards the
Pictures. However, Pixar and Disney have agreed that all provisions of the
Co-Production Agreement applicable to the Pictures will also apply to Toy Story
2. Pixar and Disney co-own, co-brand and co-finance the production costs of the
Pictures, and share equally in the profits of each Picture and any related
merchandise and other ancillary products, after recovery of all of Disney's
marketing, distribution and other predefined fees and costs. The Co-Production
Agreement generally provides that Pixar will produce each Picture and Disney
will control decisions relating to film marketing and distribution.
(5) INCOME TAXES
Pixar's tax rate of 42% for the three months ended October 2, 1999 reflects
Pixar's expected tax rate for fiscal year 1999. In the second quarter, Pixar
recorded a non-recurring tax benefit related to the reversal of certain deferred
tax asset valuation allowances which has lowered Pixar's effective tax rate for
the nine months ended October 2, 1999 to 40%. Prior to the second quarter, Pixar
believed that there was sufficient uncertainty regarding the realizability of
its deferred tax assets to warrant the valuation allowances. Pixar believes that
it has sufficient confidence in the amount and timing of its anticipated
participation revenues from A Bug's Life and the amount and timing of certain
offsetting tax-related expenses in the foreseeable future to project that a
portion of these deferred tax assets will be realized, and thus a favorable
adjustment for such has been recognized on Pixar's balance sheet and in its tax
rate in the second quarter.
(6) DISCONTINUED OPERATIONS
In March 1997, Pixar determined to discontinue its business of producing
CD-ROM and other interactive products. Pixar immediately discontinued these
operations and reassigned all employees of this division. Since the measurement
date and the disposal date were virtually simultaneous, no income or loss was
measured for the intervening period. Pixar recorded income from discontinued
operations of $374,000 and $80,000, net of income taxes, for the nine months
ended September 26, 1998 and October 2, 1999, respectively, due to royalty
income received for the Toy Story CD-ROM products. Pixar does not expect to
receive significant Toy Story CD-ROM royalty income in future periods.
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PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) SEGMENT REPORTING
Pixar adopted the provisions of SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. Pixar's chief operating decision-maker is
considered to be Pixar's Chief Executive Officer ("CEO"). The CEO reviews
financial information accompanied by disaggregated information about film
revenue for purposes of making operating decisions and assessing financial
performance, which is summarized as follows (in thousands):
NINE MONTHS ENDED
--------------------------------------
OCTOBER 2, 1999 SEPTEMBER 26, 1998
---------------- -------------------
Film revenue:
Toy Story................................................. $ 4,073 $8,208
A Bug's Life.............................................. 87,122 --
------- ------
Total film revenue..................................... $91,195 $8,208
======= ======
The financial information reviewed by the CEO is identical to the
information presented in the accompanying statements of operations and Pixar has
no foreign operations. Therefore, the Company operates as a single operating
segment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about Pixar's industry, management's beliefs, and
assumptions made by management. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Dependence on Toy Story,
A Bug's Life, Toy Story 2 and Monsters, Inc.," and "Risks Associated with
Adequacy of Cash Balances," as well as those noted in the section entitled "Risk
Factors" in Pixar's Annual Report on Form 10-K for the year ended January 2,
1999 (the "Form 10-K"). Particular attention should be paid to the cautionary
language in the section in the Form 10-K entitled "Risk Factors -- Our
Dependence on Toy Story, Our Dependence on A Bug's Life and Our Dependence on
Toy Story 2 and Film Four," "-- Risks Associated with Adequacy of Cash
Balances," "-- Risks Associated with Scheduled Successive Release of Films" and
"-- Risks Associated with Co-Production Agreement." Unless required by law,
Pixar undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Pixar's operating performance each quarter is subject to various risks and
uncertainties as discussed in the Company's Form 10-K. The following discussion
should be read in conjunction with the sections entitled "Risk Factors" 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
"Risk Factors" could affect the Company's operating results and financial
condition.
CO-PRODUCTION AGREEMENT
In February 1997, Pixar and Walt Disney Pictures, a wholly owned subsidiary
of The Walt Disney Company (together with its subsidiaries and affiliates
collectively referred to herein as "Disney"), entered into a co-production
agreement (the "Co-Production Agreement") pursuant to which Pixar, on an
exclusive basis, agreed to produce five original computer-animated
feature-length theatrical motion pictures (the "Pictures") for distribution by
Disney over approximately ten years. 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 Disney finances), a distribution fee paid to Disney and any other fees or
costs, including participations provided to talent and the like. The
Co-Production Agreement generally provides that Pixar will produce each Picture
and that Disney will control all decisions relating to marketing, promotion,
publicity, advertising and distribution of each Picture. Pixar's second feature
film, A Bug's Life, was released on November 25, 1998 and is the first Picture
under the Co-Production Agreement. The Co-Production Agreement also 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, Pixar has 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. Pursuant to the
Co-Production Agreement, in addition to co-financing the production costs of the
Pictures, Disney will reimburse Pixar for its share of certain general and
administrative costs and certain research and development costs that benefit the
productions.
In February 1998, Pixar and Disney agreed to produce a theatrical motion
picture sequel to Toy Story, entitled "Toy Story 2." Toy Story 2 will be Pixar's
third feature film and is scheduled for release on November 24, 1999. Because
Toy Story 2 is a derivative work of the original Toy Story, it will not be
counted toward the five Pictures to be produced under the Co-Production
Agreement. However, for all other purposes, Toy Story 2 will be treated as a
Picture under the Co-Production Agreement. Accordingly, Toy Story 2 has
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been added to the definition of Pictures produced and financed under the
Co-Production Agreement and all the provisions applicable to the other five
Pictures apply.
In May 1999, Pixar began production of its fourth theatrical film (with the
working title "Monsters, Inc."). This film will be produced and distributed
under the Co-Production Agreement and will count as the second of the five
original films to be produced under the Co-Production Agreement. Pixar is
targeting the release of Monsters, Inc. in 2001.
RESULTS OF OPERATIONS
Revenue
Total revenue for the three and nine months ended October 2, 1999 was $79.2
million and $96.2 million, respectively, compared to $2.5 million and $11.2
million in the corresponding periods of the prior year. The increases were
primarily due to revenue from the theatrical and home video releases of A Bug's
Life and related merchandise.
Software revenue includes software license revenue, principally from
RenderMan. Software revenue increased 43% to $1.7 million for the quarter ended
October 2, 1999 from $1.2 million in the corresponding prior year period and
increased 66% to $4.6 million in the nine months ended October 2, 1999 from $2.7
million in the corresponding prior year period. The increase in software revenue
resulted from a general increase in RenderMan software licensing. Due to Pixar's
focus on content creation for animated feature films and related products, Pixar
has not increased the time and resources necessary to generate significantly
higher RenderMan sales. Therefore, Pixar expects ongoing variability in revenues
derived from software licenses and that such revenue will remain flat or
possibly decline. All historical and future royalty income associated with
Pixar's discontinued CD-ROM division is now and will continue to be excluded
from software revenue and will be presented in results of discontinued
operations. See "Results of Discontinued Operations."
Animation services revenue includes revenue generated from short projects
related to Pixar's films. Animation services revenue was $185,000 for the
quarter ended October 2, 1999. No revenue from animation services was recognized
in the corresponding prior year period. Animation services revenue increased to
$408,000 for the nine months ended October 2, 1999 from $171,000 in the
corresponding prior year period. Pixar expects that revenue in this area will
continue to vary significantly from quarter to quarter due to the sporadic
nature of this business and the need to utilize animation services employees on
other productions. For example, as occurred with A Bug's Life, Pixar transferred
substantially all of its animation services employees to assist in the
completion of Toy Story 2. There can be no assurance that Pixar will generate
any animation services revenues during periods in which its animation services
employees are devoted to feature films or other projects.
Film revenue for the quarter ended October 2, 1999 was $77.3 million
compared with $1.3 million in the corresponding prior year period. Film revenue
for the nine months ended October 2, 1999 was $91.2 million compared with $8.2
million in the corresponding prior year period. Under the Co-Production
Agreement, Pixar and Disney share equally in the profits of A Bug's Life after
Disney recovers its distribution costs and its distribution fee. Therefore,
Pixar's film revenue of $91.2 for the nine months ended October 2, 1999 resulted
primarily from A Bug's Life domestic home video revenue, theatrical revenues
from A Bug's Life, and related merchandise, offset by Disney's distribution
costs and its distribution fee. Distribution costs reported to date primarily
include worldwide theatrical distribution costs, and the majority of domestic
home video distribution costs. Pixar's film revenue for the three months ended
October 2, 1999 of $77.3 million was derived primarily from domestic home video
sales of A Bug's Life, offset by Disney's distribution costs and fees. Also
included in film revenue for the three and nine months ended October 2, 1999 was
revenue from Toy Story, primarily from related merchandising, of $3.5 million
and $4.1 million, respectively. Film revenue of $1.3 million for the three
months ended September 26, 1998 primarily represented proceeds from Toy Story
merchandise sales. Film revenue of $8.2 million for the nine months ended
September 26, 1998 consisted of proceeds from Toy Story television airings,
merchandise and home video sales.
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Patent licensing revenue of $120,000 for the nine months ended September
26, 1998 consisted primarily of purchase credits related to an agreement with
Silicon Graphics, Inc. ("SGI"). As of the end of 1998, Pixar had used
substantially all of the related credits and does not expect patent licensing
revenue to be generated on an on-going basis.
For the three and nine months ended October 2, 1999, Disney accounted for
98% and 95%, respectively, of Pixar's total revenue. The revenue from Disney
consisted primarily of film revenue. Due to the Co-Production Agreement, Disney
is expected to continue to represent significantly in excess of 10% of Pixar's
revenue in 1999 and for the foreseeable future. A portion of the Disney revenue
for the quarter was included in receivables and represented 71% of the balance
at October 2, 1999. For the three and nine months ended September 26, 1998,
Disney accounted for 70% and 79%, respectively, of Pixar's total revenue,
primarily from film and animation services revenue.
Cost of Revenue
Cost of software revenue consists of the direct costs and manufacturing
overhead required to reproduce and package Pixar's software products, as well as
amortization of purchased technology. Cost of software revenue includes no
amortization of capitalized software development expenses. Cost of software
revenue as a percentage of the related revenue was 8% and 12% for the three and
nine months ended October 2, 1999, compared to 25% and 16% for the three and
nine month corresponding prior year periods. The percentage decrease for the
nine months ended October 2, 1999 was due to increased revenue and a decrease in
amortization of purchased technology associated with the June 1998 acquisition
of Physical Effects, Inc. ("PEI"). Approximately $2.7 million of the PEI
purchase price was assigned to purchased technology, which PEI licensed to a
third party. As a result of the ongoing amortization of this purchased
technology, it is likely that Pixar's total software gross profit will be
substantially lower during the next few years as compared to software gross
profit prior to the acquisition. In addition, if Pixar determines that the
license revenue generated by the purchased technology will be lower than
expected and that all or part of the purchased technology asset may not be
recoverable, Pixar would, at that point, be required to write off all or a
significant portion of the unamortized purchased technology.
Cost of animation services revenue consists of production costs, which
include salaries, benefits, facility expenses and department overhead costs.
Cost of animation services revenue as a percentage of related revenue increased
to 67% for the nine months ended October 2, 1999 from 22% in the prior year
period. Animation services projects are negotiated individually and depending on
the complexity of the project, profit margins vary significantly from project to
project.
Cost of film revenue represents amortization of capitalized film costs
associated with A Bug's Life and represented 29% of A Bug's Life revenue in the
three and nine months ended October 2, 1999. See "Capitalized Film Production
Costs." Due to higher than expected Toy Story film revenue, which resulted in
Pixar's amortizing all Toy Story related film costs by December 31, 1997, there
was no cost of revenue associated with the Toy Story revenue for the nine months
ended October 2, 1999 or September 26, 1998.
Under the agreement between Pixar and Disney that governs Toy Story, all
payments to Pixar from Disney for Pixar's efforts in the development and
production of Toy Story were recorded as cost reimbursements, which offset most
of Pixar's related costs. Since Pixar co-finances production costs under the
terms of the Co-Production Agreement, amortized film production costs for A
Bug's Life and future feature films will be significantly higher, and the
related gross profit margins will be substantially lower than those achieved on
Toy Story.
There is no cost of revenue associated with patent licensing revenue.
Operating Expenses
Total operating expenses for the three and nine months ended October 2,
1999 increased as compared to the prior year, and Pixar intends to continue to
increase its spending levels in a number of areas. As a result of competition
for animators, creative personnel, technical directors and certain
administrative personnel, Pixar
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has had to pay higher salaries to attract new creative, technical and other
personnel, and compensation for such personnel may continue to increase. In
addition, Pixar expects increases in systems and facilities costs and to expand
other operations.
Under the Co-Production Agreement, Disney reimburses Pixar for its share of
certain general and administrative costs and certain research and development
costs that benefit the productions. The funding received from Disney is treated
as operating expense reimbursements. Further, a portion of Pixar's general and
administrative overhead costs which benefit the productions are capitalized by
Pixar. In addition, because Disney is responsible for paying all film marketing
costs under the Co-Production Agreement, to the extent that Pixar incurs film
marketing costs, Disney is responsible for reimbursing Pixar for such costs. To
the extent that personnel, facilities and other expenditures are not capitalized
by Pixar nor allocated to and paid for by Disney, and precede or are not
subsequently followed by an increase in revenue, Pixar's business, operating
results and financial condition will be materially adversely affected.
Research and development expenses consist primarily of salaries and support
for personnel conducting research and development for the RenderMan product and
for Pixar's proprietary Marionette and Ringmaster animation software, for
production management software, for short film projects, for creative
development efforts and for other projects. Research and development expenses
increased 72% to $1.6 million in the three months ended October 2, 1999 from
$928,000 in the corresponding prior year period and increased 56% to $4.3
million in the nine months ended October 2, 1999 from $2.7 million in the
corresponding prior year period. The increases are due to Pixar's continued
investment in proprietary technology, short film development projects, and
creative development. Pixar is now spending an increasing amount of time and
dedicating certain key resources to developing creative concepts for future
films. Such very early stage concept development is expensed as incurred.
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 software sales and complement film activities.
Sales and marketing expenses increased by 9% to $338,000 for the three months
ended October 2, 1999 from $311,000 in the corresponding prior year period and
increased 3% to $989,000 for the nine months ended October 2, 1999 from $963,000
in the corresponding prior year period.
General and administrative expenses consist primarily of salaries of
management and administrative personnel, insurance costs and professional fees.
General and administrative expenses increased 2% to $1.8 million for the three
months ended October 2, 1999 from $1.7 million in the corresponding prior year
period and decreased 11% to $4.7 million for the nine months ended October 2,
1999 from $5.3 million in the corresponding prior year period. Pixar expects
general and administrative expenses to increase in future periods as Pixar
incurs additional costs to expand its administrative staff and facilities.
Other Income, Net
Other income, net consists primarily of interest income on Pixar's
short-term investments. Other income, net was $1.9 million and $5.6 million for
the three and nine months ended October 2, 1999, respectively, and $1.9 million
and $6.5 million for the three and nine months ended September 26, 1998,
respectively. The decrease is primarily due to a decline in Pixar's average cash
and short-term investment balances.
Income Taxes
Income tax expense from continuing operations for the nine months ended
October 2, 1999 reflects Pixar's federal and state income tax liability after
recognition of a non-recurring tax benefit recorded in the second quarter of
1999. This one-time adjustment reflected Pixar's sufficient confidence in
anticipated revenue from A Bug's Life such that Pixar will realize the benefit
of certain tax assets. Pixar's tax rate for the three months ended October 2,
1999 was 42%, reflecting its expected statutory rate, and the combined rate for
the nine months ended October 2, 1999 was 40%.
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Results of Discontinued Operations
Pixar determined in March 1997 to discontinue its business of producing
CD-ROM and other interactive products and redirected all employees in that
division to film and related projects within Pixar. Pixar recorded income from
discontinued operations of $80,000 and $374,000, net of income taxes, for the
nine months ended October 2, 1999 and September 26,1998, respectively. This
income is due to royalty income received from the Toy Story CD-ROM products.
Pixar does not expect to receive significant CD-ROM royalty income in future
periods, if any.
RISK FACTORS
The following is a discussion of certain factors that currently impact or
may impact Pixar's business, operating results and/or financial condition.
Anyone making an investment decision with respect to Pixar's capital stock or
other securities is cautioned to carefully consider these factors, along with
the factors discussed in Pixar's Form 10-K under the section entitled "Risk
Factors."
DEPENDENCE ON TOY STORY, A BUG'S LIFE, TOY STORY 2 AND MONSTERS, INC.
DEPENDENCE ON A BUG'S LIFE FOR THE BALANCE OF 1999 AND THE FIRST HALF OF 2000
For the balance of 1999 and the first half of 2000, Pixar's revenue and
operating results will be largely dependent upon (1) Pixar's share of revenue
from foreign home video sales of A Bug's Life and to a lesser extent from
domestic home video sales of A Bug's Life and related merchandise, (2) residual
revenues from Toy Story, if any, and (3) Pixar's software and animation services
revenue, from which Pixar expects limited revenue.
A Bug's Life Revenue
A Bug's Life was released in November 1998, and for the three and nine
months ended October 2, 1999, Pixar received a significant share of film
revenues. Under the Co-Production Agreement, Pixar and Disney share equally in
the profits of A Bug's Life after Disney recovers its distribution costs and its
distribution fee. Correspondingly, Pixar's film revenue for the nine months
ended October 2, 1999 resulted primarily from the domestic and foreign
theatrical revenues from A Bug's Life (most of which have already been reported
by Disney), domestic home video revenue and related merchandise licensing,
offset by Disney's distribution costs and its distribution fee. Distribution
costs reported to date include the majority of worldwide theatrical marketing
and distribution costs, and the majority of Disney's costs to distribute A Bug's
Life on home video in the United States. While A Bug's Life has done extremely
well in its theatrical release, earlier this year Disney reported general
softness in its domestic home video sales and worldwide merchandise licensing as
compared to levels associated with many of its previous blockbuster animated
feature films. In addition, Pixar believes that A Bug's Life faced an unusually
high number of competing films released during the 1998 holiday season, such as,
Antz, The Rugrats Movie and Prince of Egypt, and that the related home video
and/or merchandise sales from these films have adversely impacted sales of A
Bug's Life products. As a result, Pixar continues to expect that worldwide
revenues associated with A Bug's Life home video sales and merchandise licensing
could be adversely impacted by these factors.
For the remainder of 1999 and the first half of 2000, Pixar expects to be
significantly dependent upon the success of A Bug's Life. Because most revenues
from the worldwide theatrical release of A Bug's Life have been reported by
Disney, sources of future revenues primarily include foreign home video sales,
any remaining domestic home video sales, and any future merchandise royalties,
all of which must be substantial in order for the film to generate significant
revenues. Revenue from any future television airings of A Bug's Life is not
expected until a few years after release of the film, at the earliest. Moreover,
potential future revenues will be offset by future distribution costs, which
primarily include marketing costs for the foreign home video release, video cost
of goods, remaining distribution costs for the international theatrical release
of A Bug's Life, Disney's distribution fee based on film-related revenues, and
other distribution costs such as residuals. It is difficult to predict the
amount and timing of Pixar's future revenues from A Bug's Life, particularly in
the last quarter of 1999 and the first half of 2000, because of the many
variables involved. Such variables include the
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timing of related product releases, as determined by Disney, and the amount and
timing of related revenue and distribution cost flows. For example, the timing
of release of A Bug's Life video in foreign countries is particularly uncertain
since the video is released in various countries over the course of six months
or more. All decisions regarding its international release are made by Disney
and such decisions are subject to change. It is possible, in any given quarter
or quarters for the remainder of 1999 and in 2000 that Pixar will not recognize
sufficient revenue from A Bug's Life to generate significant earnings.
Toy Story Revenue
Pixar has already recognized the vast majority of revenue it expects to
receive from Toy Story. While Pixar may receive minor amounts of revenue in
subsequent periods, Pixar does not expect to recognize any further significant
revenue from Toy Story. Based on terms of the Feature Film Agreement, future
film revenue from Toy Story, if any, will be received from Disney on a
semi-annual basis (March and September) going forward.
Software Revenue
As a result of Pixar's shift in focus to products sold for their content,
Pixar has reduced emphasis on the commercialization of software products. Pixar
is not increasing the time and resources necessary to generate higher RenderMan
licensing revenues; therefore, Pixar expects that revenue from the licensing of
RenderMan will remain flat or possibly decline. In addition, from the
acquisition date of PEI on June 16, 1998, through October 2, 1999, Pixar has
received lower license revenue than expected related to the purchased technology
associated with the acquisition. If future license revenue continues to be lower
than originally estimated, Pixar may be required to write off all or a
significant portion of the unamortized purchased technology.
RISK ASSOCIATED WITH A BUG'S LIFE
Under the Co-Production Agreement, Pixar shares with Disney the production
costs of A Bug's Life. These costs were initially capitalized as film production
costs under SFAS No. 53, and Pixar is amortizing these costs over the expected
revenue stream as Pixar recognizes revenue from the film. The amount of film
costs that will be amortized each quarter will depend on how much future revenue
Pixar expects to receive from A Bug's Life. Although A Bug's Life has achieved
substantial domestic and foreign box office success and has done well in its
domestic home video release, the home video has not been substantially released
in foreign markets, nor have any significant foreign home video proceeds been
received by Pixar. It is difficult to predict how much additional revenue will
be derived from merchandise sales and from television airings of A Bug's Life.
In addition, Pixar believes that the amount spent by Disney for marketing and
distribution, particularly for distribution of the home video, will continue to
be significant. In any given quarter, if Pixar's forecast changes with respect
to total revenue from A Bug's Life, and becomes lower than was previously
forecasted, Pixar would be required to accelerate amortization of related film
costs, resulting in lower gross margins. Such lower gross margins from A Bug's
Life would adversely impact Pixar's business, operating results, and financial
condition.
DEPENDENCE ON TOY STORY 2 AND MONSTERS, INC.
Pixar expects to receive the majority of the proceeds from A Bug's Life by
the end of 2000. In addition, while Toy Story 2 is scheduled for release on
November 24, 1999, Pixar does not expect to recognize any revenue from Toy Story
2 until six to twelve months after its release. Therefore, Pixar is unlikely to
recognize any revenue from Toy Story 2 until the second half of 2000. Beyond
2000, Pixar expects to be largely
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dependent upon the success of Toy Story 2 and Monsters, Inc. (together referred
to as the "Current Projects"). Pixar cannot provide any assurances that the
Current Projects will be successfully produced and released when targeted. Pixar
is currently scheduled to complete production of Monsters, Inc. in 2001. Disney
has not formally scheduled the theatrical release of Monsters, Inc., and Pixar
cannot provide any assurances as to when the film will be released. Pixar cannot
provide any assurances that it will not experience difficulties that could delay
or prevent the successful development or production of any of the Current
Projects or subsequent animated feature films or related products. If Pixar is
unable to produce and develop on a timely basis the Current Projects and
subsequent animated feature films and related products that meet with broad
market acceptance, its business, operating results and financial condition will
be materially adversely affected.
RISKS ASSOCIATED WITH TOY STORY 2
It is rare for animated feature films to achieve extraordinary box office
success. Pixar believes, based on available information, that there is a
reasonable basis to conclude that of the more than 40 animated feature films
introduced since 1990, only three films generated domestic box office revenues
greater than A Bug's Life and Toy Story, and all of those films were produced
and distributed solely by Disney. During at least the last five years, Pixar
believes that The Rugrats Movie and The Prince of Egypt are the only
fully-animated feature films (other than Toy Story and A Bug's Life) produced or
developed by a studio other than Disney that have achieved more than $100
million in domestic box office revenues. Unless Toy Story 2 achieves
extraordinary box office success and also achieves success in home video and
merchandise sales, Toy Story 2 may not generate significant revenue and
operating results.
As a sequel, there are also risks unique to Toy Story 2. With a theatrical
sequel, the story concept and characters are not as novel as the original film.
In the vast majority of cases in which a film that achieved domestic box office
receipts of greater than $100 million was followed by the release of a sequel,
the sequel did not perform as well at the box office as the original. This was
the case for sequels to such films as Jurassic Park, Home Alone, Jaws, Batman,
Raiders of the Lost Ark, Beverly Hills Cop, Ghostbusters and Back to the Future,
among others. In many cases, sequels substantially under-perform the original
film. In far fewer cases have sequels performed as well or better than the
original blockbuster feature film, and in almost all of these cases, the
original feature films and related sequels were action-adventure films, such as
Lethal Weapon and Die Hard. Accordingly, Pixar cannot provide any assurances
that Toy Story 2 will perform as well as Toy Story at the box office. It is
possible that Toy Story 2 will substantially under-perform the original feature
film. In addition, fees and participations paid to key talent on Toy Story 2 are
substantially greater than for the original film, which together with other
increases in production costs will have the effect of increasing the cost of the
film when compared to Toy Story.
As a result of these factors, Toy Story 2 and related products may not
generate significant revenue and operating results for Pixar, even if Toy Story
2 is critically acclaimed and achieves substantial, but not extraordinary, box
office success.
RISKS ASSOCIATED WITH PRODUCTION BUDGETS
Given (1) the escalation in compensation rates of people required to work
on the Current Projects, (2) the number of people required to work on the
Current Projects, and (3) the equipment needs, the budget for the Current
Projects and subsequent films and related products are and will continue to be
substantially greater than the budgets for Toy Story and A Bug's Life. Pixar
will continue to finance these budgets equally with Disney under the
Co-Production Agreement. In addition, due to production exigencies which are
often difficult to predict, Pixar believes that it is not uncommon for film
production spending to exceed film production budgets, and Pixar cannot provide
any assurances that any of the Current Projects can be completed within the
budgeted amounts. For example, in order to meet the production schedule for Toy
Story 2, Pixar reassigned employees from its animation services group and from
Monsters, Inc. to Toy Story 2 for the completion of its production, which
resulted in a larger production staff than originally anticipated and which
generated additional production costs. In addition, when production of each film
is completed, if completed, Pixar may incur significant carrying costs
associated with transitioning personnel on creative and
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development teams from one project to another which, although shared with
Disney, are generally treated as film costs which increase overall production
budgets and could have a material adverse effect on results of operations and
financial condition.
RISKS ASSOCIATED WITH ADEQUACY OF CASH BALANCES
Pursuant to the Co-Production Agreement, Pixar will co-finance the next
four animated feature films that it produces, including Monsters, Inc. Pixar has
co-financed Toy Story 2 on the same basis as the other theatrical films. In the
future, Pixar may co-finance other derivative works such as sequels and
television productions. In addition, Pixar is building a new headquarters and
studio facility in Emeryville, California, which is being financed by the use of
cash and may continue to be financed by the use of cash. For the foreseeable
future, the development and production costs of the Current Projects and the
costs of the new Emeryville facility will have a material adverse impact on
Pixar's cash and short-term investment balances. As of October 2, 1999, Pixar
had approximately $188.5 million in cash and short-term investments. Pixar
believes that these funds, along with any further cash received from the release
of A Bug's Life, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures, including the development and
production costs of the Current Projects, until cash is received from the future
release of additional films. However, even if these films generate cash in
future quarters, unless each film is a success such that Pixar recovers on a
timely basis its share of the production costs, as well as other operating
expenses and capital expenditures, Pixar may be required to seek financing for
its ongoing commitments under the Co-Production Agreement and any other
requirements of its operations. Pixar may also seek additional financing in
connection with the construction of its new facility. See also "-- Liquidity and
Capital Resources." The sale of additional equity or convertible debt securities
would result in additional dilution to Pixar's shareholders. Moreover, there can
be no assurance that Pixar will be successful in obtaining future financing, or
even if such financing is available, that it will be obtained on terms favorable
to Pixar or on terms providing Pixar with sufficient funds to meet its
obligations and objectives. The failure to obtain such financing would have a
material adverse effect on Pixar's business, operating results and financial
condition.
PIXAR EXPECTS OPERATING RESULTS TO CONTINUE TO FLUCTUATE
In addition to the factors set forth above, Pixar continues to expect
significant fluctuations in future annual and quarterly operating results
because of a variety of factors, including the following:
- the timing of the domestic and international releases of animated feature
films,
- the success of its animated feature films (which can fluctuate
significantly from film to film),
- the timing of the release of related products into their respective
markets (such as home videos and merchandising),
- the demand for such related products (which is often a function of the
success of the related animated feature film),
- film production costs,
- 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 its animated feature films and
related products by Disney,
- the timing of revenue recognition under the Co-Production Agreement and
the Feature Film Agreement, as the case may be,
- the introduction of new feature films or products by Pixar's competitors,
and
- general economic conditions.
In particular, since Pixar's revenue under the Co-Production Agreement is
directly related to the success of a feature film, operating results are likely
to fluctuate depending on the level of success of Pixar's animated
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feature films and related products. The revenue derived from the production and
distribution of an animated feature film depends 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.
Moreover, Pixar's operating expenses will continue to be extremely
difficult to forecast. Pixar budgets the direct costs of film productions with
Disney, and shares such costs equally. Pixar capitalizes its share of these
direct costs of film production in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 53, Financial Reporting by Producers and
Distributors of Motion Picture Films. A substantial portion of all of Pixar's
other costs are incurred for the benefit of feature films ("Overhead"),
including research and development expenses and general and administrative
expenses. Portions of overhead are included in the budgets for the Pictures, and
Pixar will share such costs equally with Disney under the Co-Production
Agreement. With respect to the portion of overhead that is not reimbursed by
Disney, Pixar either (1) capitalizes such portion as film production costs, if
required under SFAS No. 53, or (2) charges it to operating expense in the period
incurred. Since a substantial portion of overhead is related to the Pictures and
is, therefore, reimbursed by Disney, and since Pixar capitalizes other amounts
in accordance with SFAS No. 53, reported operating expenses for the first nine
months of 1999 have not reflected, and future reported operating expenses will
not reflect, the true level of spending on the production of animated feature
films, related products and overhead.
Although Pixar was profitable for financial statement purposes, Pixar has
not been profitable for federal income tax purposes for each of fiscal 1996,
1997 and 1998 due to additional tax deductible items and the utilization of
federal net operating loss carryforwards. Pixar was profitable for state income
tax purposes for each of 1996 and 1997, but at levels significantly lower than
those reported for financial statement purposes. Pixar maintains a valuation
allowance that offsets a portion of its deferred tax asset, given the dependence
on the success of A Bug's Life and future films, which continues to be
uncertain. In addition, Pixar's effective tax rate increased in 1998 and is
likely to return to statutory rates in the 42% range for the remainder of 1999.
As a result of the factors discussed above, Pixar believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful, and one should not rely on Pixar's annual and quarterly results of
operations as any indication of future performance. Due to the factors discussed
above, it is likely that in some future period Pixar's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of Pixar's Common Stock would likely be materially adversely affected.
CAPITALIZED FILM PRODUCTION COSTS
Pixar had $60.6 million in capitalized film production costs as of October
2, 1999, consisting primarily of costs relating to A Bug's Life, Toy Story 2 and
Monsters, Inc., all of which are being co-financed by Disney under the
Co-Production Agreement. All Toy Story capitalized film costs were fully
amortized as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased by $39.5 million to $188.5
million at October 2, 1999 from $149.0 million at January 2, 1999 due primarily
to Pixar's share of A Bug's Life film revenue, offset by film production
spending and construction spending on Pixar's new studio facility in Emeryville,
California.
Net cash provided by continuing operations for the nine months ended
October 2, 1999 was primarily attributable to net income of $39.6 million, and
the non-cash impacts of depreciation and amortization expense, and amortization
of capitalized film production costs, totaling $30.5 million. Cash used in
investing activities of $97.8 million was due primarily to funding of film
production costs of $24.5 million, the purchase of property and equipment of
$24.8 million, net of sale proceeds, and investments in short-term securities,
net of proceeds from sales, of $48.5 million. Cash provided by financing
activities was due to proceeds from the exercise of stock options.
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As of October 2, 1999, Pixar's principal source of liquidity was
approximately $188.5 million in cash and short-term investments. Pixar believes
that these funds will be sufficient to meet the Company's operating requirements
through at least the next twelve months.
THE YEAR 2000
The Year 2000 problem is the result of computer programming using two
digits rather than four to define the applicable year. Computer programs that
have time-sensitive software may recognize a date using "00" as the Year 1900
rather than the Year 2000. This could result in a major system failure or
miscalculation.
Pixar has formed a committee to address Year 2000 issues and the committee
is currently reviewing Pixar's products, Pixar's internal computer systems and
the systems of third parties on which Pixar relies for handling the Year 2000.
This committee is composed of senior management and personnel from the systems
department and the finance and administration staff. The committee's strategy
for identifying and addressing Year 2000 issues involves five phases:
Phase 1 -- Inventory: Prepare an inventory of software, hardware,
third party services and building systems used by Pixar and determine Year
2000 compliance. For third party software, hardware and services, vendors
are contacted and written certification is obtained to verify that such
items are Year 2000 compliant. This phase was completed in April 1999. To
date, most items in the inventory are either Year 2000 compliant or will be
with minor modifications.
Phase 2 -- Assessment: Determine which of the inventory items
identified in Phase 1 are critical or important as they relate to Pixar's
business. For third party software, hardware and services that are deemed
to be critical or important, Pixar is reviewing the written certification
provided by vendors and performing internal testing where possible. This
phase was completed in May 1999. To date, Pixar has identified a few
non-critical third party systems that are not Year 2000 compliant.
Phase 3 -- Strategy: Prepare strategies to modify or replace systems
that are not Year 2000 compliant. To date, the few items in the inventory
that have been identified as not being Year 2000 compliant are software
items that can be made compliant by upgrading to the most recent versions
of the software. This phase also includes monitoring the Year 2000
compliance programs of third parties whose services have been deemed to be
critical to Pixar's business. This phase was completed in August 1999.
Phase 4 -- Remediation: Initiate remediation strategies. Pixar is
planning to upgrade certain of its systems to the most recent versions of
the software and most required fixes are underway. This phase is
approximately 95% complete, and is anticipated to be complete in November
1999.
Phase 5 -- Testing: Test and certify all critical and certain
important systems where appropriate. Testing schedules have been set for
Pixar's financial systems and studio tools. This phase is approximately 95%
complete, and is anticipated to be complete in November 1999.
Based on information available to date, Pixar believes that it will be able
to complete its Year 2000 compliance review and make any necessary modifications
to its internal systems prior to the end of 1999. Pixar expects that the total
costs associated with resolving its Year 2000 issues will not be material and
does not expect such costs to exceed $500,000. The majority of these costs will
result from consultants, software upgrades and dedicated program equipment.
Pixar's most significant Year 2000 risk results from Pixar's relationship
with Disney, a public company. Pixar relies on Disney for the distribution and
marketing of its films. Toy Story 2 is expected to be released at the end of
1999. The disruption of Disney's distribution activities as a result of Year
2000 problems could result in lost revenues for Toy Story 2 and related
merchandise. In addition, if the accounting and financial systems of Disney are
adversely affected by Year 2000 issues and Disney is unable to issue revenue
reports to Pixar, Pixar's recognition of its share of the revenue generated
pursuant to the Co-Production Agreement and the Feature Film Agreement could be
delayed. There can be no assurance that the failure of any third parties to have
systems that are Year 2000 compliant would not have a material adverse effect on
Pixar's financial position or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pixar invests in a variety of investment grade, interest-bearing
securities, including fixed rate obligations of corporations, municipalities,
and national governmental entities and agencies. This diversification of risk is
consistent with Pixar's policy to ensure safety of its principal and maintain
liquidity. Pixar only invests in securities with a maturity of 24 months or
less, with only government obligations exceeding 12 months. Pixar's investments
are fixed rate obligations and carry a certain degree of interest rate risk. A
rise in interest rates could adversely impact the fair market value of these
securities.
All of Pixar's financial instruments are held for purposes other than
trading and are considered "available for sale" per SFAS 115. The table below
provides information regarding Pixar's investment portfolio at October 2, 1999.
The table presents principal amounts and related weighted average fixed interest
rates presented by expected maturity date (dollars in thousands):
< 1 YEAR > 1 YEAR TOTAL
-------- -------- --------
Available-for-sale securities....................... $137,862 $45,486 $183,348
Weighted-average interest rate...................... 5.46% 5.09% 5.37%
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to the shareholders at Pixar's Annual
Meeting of Shareholders held July 23, 1999. Each of these matters was approved
by a majority of the shares present at the meeting.
1. The uncontested election of seven 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
---------- --------------
Steve Jobs.......................................... 41,930,065 102,086
Larry W. Sonsini.................................... 41,928,983 103,168
Skip M. Brittenham.................................. 41,929,777 102,374
Joseph A. Graziano.................................. 41,929,836 102,315
Jill E. Barad....................................... 41,929,968 102,183
Edwin E. Catmull.................................... 41,929,958 102,193
Lawrence B. Levy.................................... 41,923,770 108,381
2. The ratification of the appointment of KPMG LLP as the independent
auditors for the Company for the 1999 fiscal year ending January 1, 2000.
Results of the voting included 41,996,473 shares for, 14,791 shares against
and 20,887 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.4 Amended and Restated Bylaws, as amended
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Pixar during the quarter ended October
2, 1999.
ITEMS 1, 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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: November 16, 1999 By: /s/ ANN MATHER
------------------------------------
Ann Mather,
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer
and Duly Authorized Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule