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, 2001.
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)
<Table>
CALIFORNIA 68-0086179
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 PARK AVENUE, EMERYVILLE, CALIFORNIA 94608
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 752-3000
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, 2001 was 48,314,559.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIXAR
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
JUNE 30, DECEMBER 30,
2001 2000
-------- ------------
ASSETS
Cash and cash equivalents................................... $ 76,930 $ 63,241
Short-term investments...................................... 199,291 139,514
Trade receivables, net...................................... 1,810 1,136
Receivable from Disney...................................... 5,158 73,850
Other receivables........................................... 6,474 3,121
Prepaid expenses and other assets........................... 4,287 4,903
Deferred income taxes....................................... 25,768 25,915
Property and equipment, net................................. 111,980 110,891
Capitalized film production costs........................... 75,455 57,032
-------- --------
Total assets...................................... $507,153 $479,603
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 2,327 $ 1,622
Income taxes payable........................................ 1,406 9,650
Accrued liabilities......................................... 10,429 17,229
Unearned revenue............................................ 21,891 15,382
-------- --------
Total liabilities................................. 36,053 43,883
-------- --------
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;
48,301,029 and 47,633,372 shares issued and outstanding
as of June 30, 2001 and December 30, 2000,
respectively........................................... 311,320 293,209
Accumulated other comprehensive income.................... 498 249
Retained earnings......................................... 159,282 142,262
-------- --------
Total shareholders' equity........................ 471,100 435,720
-------- --------
Total liabilities and shareholders' equity........ $507,153 $479,603
======== ========
</Table>
See accompanying notes to financial statements.
1
3
PIXAR
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
QUARTER ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
-------- ------- -------- -------
Revenue:
Film and animation services....................... $14,652 $16,540 $28,806 $74,779
Software.......................................... 2,013 1,793 4,010 4,532
------- ------- ------- -------
Total revenue............................. 16,665 18,333 32,816 79,311
------- ------- ------- -------
Cost of revenue:
Film and animation services....................... 2,358 3,567 4,531 18,601
Software.......................................... 127 138 291 279
------- ------- ------- -------
Total cost of revenue..................... 2,485 3,705 4,822 18,880
------- ------- ------- -------
Gross profit.............................. 14,180 14,628 27,994 60,431
------- ------- ------- -------
Operating expenses:
Research and development.......................... 1,564 1,763 3,109 3,176
Sales and marketing............................... 419 337 809 727
General and administrative........................ 1,856 2,004 3,938 3,820
------- ------- ------- -------
Total operating expenses.................. 3,839 4,104 7,856 7,723
------- ------- ------- -------
Income from continuing operations......... 10,341 10,524 20,138 52,708
Other income, net................................... 3,442 3,058 6,668 5,895
------- ------- ------- -------
Income from continuing operations before
income taxes............................ 13,783 13,582 26,806 58,603
Income tax expense.................................. 5,120 5,637 9,958 24,320
------- ------- ------- -------
Net income from continuing operations..... 8,663 7,945 16,848 34,283
Income from discontinued operations, net of taxes... 90 75 172 125
------- ------- ------- -------
Net income................................ $ 8,753 $ 8,020 $17,020 $34,408
======= ======= ======= =======
Basic net income per share from continuing
operations........................................ $ 0.18 $ 0.17 $ 0.35 $ 0.73
Basic net income per share from discontinued
operations........................................ -- -- -- --
------- ------- ------- -------
Basic net income per share.......................... $ 0.18 $ 0.17 $ 0.35 $ 0.73
======= ======= ======= =======
Shares used in computing basic net income per
share............................................. 48,607 47,179 48,504 47,092
======= ======= ======= =======
Diluted net income per share from continuing
operations........................................ $ 0.17 $ 0.16 $ 0.33 $ 0.69
Diluted net income per share from discontinued
operations........................................ -- -- -- --
------- ------- ------- -------
Diluted net income per share........................ $ 0.17 $ 0.16 $ 0.33 $ 0.69
======= ======= ======= =======
Shares used in computing diluted net income per
share............................................. 52,066 49,977 51,704 49,953
======= ======= ======= =======
</Table>
See accompanying notes to financial statements.
2
4
PIXAR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
----------------------
JUNE 30, JULY 1,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income................................................ $ 17,020 $ 34,408
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Discontinued operations................................ (172) (125)
Depreciation and amortization.......................... 3,955 2,608
Amortization of capitalized film production costs...... 4,531 18,159
Tax benefit from option exercises...................... 4,915 3,685
Deferred income tax.................................... 147 61
Changes in operating assets and liabilities:
Receivables, net..................................... (4,027) 1,142
Due from Disney...................................... 68,692 2,318
Prepaid expenses and other assets.................... 376 (975)
Accounts payable..................................... 705 2,945
Income taxes payable................................. (8,244) (1,801)
Accrued liabilities.................................. (6,800) (6,161)
Unearned revenue..................................... 6,509 54
--------- ---------
Net cash provided by continuing operations........ 87,607 56,318
Net cash provided by discontinued operations...... 172 125
--------- ---------
Net cash provided by operating activities......... 87,779 56,443
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (4,825) (28,701)
Proceeds from sale of equipment........................... -- 399
Proceeds from sale of short-term securities............... 97,240 221,934
Investments in short-term securities...................... (156,768) (217,405)
Capitalized film production costs......................... (22,933) (12,256)
--------- ---------
Net cash used in investing activities............. (87,286) (36,029)
--------- ---------
Cash flows from financing activities:
Proceeds from exercised stock options..................... 13,196 3,635
--------- ---------
Net cash provided by financing activities......... 13,196 3,635
--------- ---------
Net increase in cash and cash equivalents................... 13,689 24,049
Cash and cash equivalents at beginning of period............ 63,241 31,170
--------- ---------
Cash and cash equivalents at end of period.................. $ 76,930 $ 55,219
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes.............. $ 13,800 $ 22,525
========= =========
Supplemental disclosure of non-cash investing and financing
activities:
Loss on equipment disposals capitalized as film production
costs.................................................. $ 21 $ --
========= =========
Unrealized gain on investments............................ $ 249 $ 85
========= =========
</Table>
See accompanying notes to financial statements.
3
5
PIXAR
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed 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 condensed
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of our
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 December 30, 2000 and January 1, 2000, and
for each of the years in the three-year period ended December 30, 2000,
including notes thereto.
The results of operations for the three and six months ended June 30, 2001
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 2001 financial statement presentation.
(2) FISCAL YEAR
Effective for fiscal year 1998, Pixar (the "Company") adopted a 52- or
53-week fiscal year, changing the year end dates from December 31 to the
Saturday nearest December 31. Fiscal year 2001 will end on December 29, 2001 and
will consist of 52 weeks.
(3) NET INCOME PER SHARE
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 potential
common shares outstanding during the period, using the treasury stock method for
options and warrants. Options to purchase approximately 504,000 shares and
643,000 shares of common stock were outstanding during the three and six month
periods ending June 30, 2001, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.
Reconciliation of basic and diluted net income per share (in thousands,
except per share amounts):
<Table>
<Caption>
QUARTER ENDED
--------------------------------------------------------
JUNE 30, 2001 JULY 1, 2000
-------------------------- --------------------------
NET NET
INCOME SHARES EPS INCOME SHARES EPS
------- ------ ----- ------- ------ -----
Basic net income per share........... $ 8,753 48,607 $0.18 $ 8,020 47,179 $0.17
Effect of dilutive shares:
Warrants/options................... -- 3,459 -- 2,798
------- ------ ------- ------
Diluted net income per share......... $ 8,753 52,066 $0.17 $ 8,020 49,977 $0.16
======= ====== ======= ======
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
--------------------------------------------------------
JUNE 30, 2001 JULY 1, 2000
-------------------------- --------------------------
NET NET
INCOME SHARES EPS INCOME SHARES EPS
------- ------ ----- ------- ------ -----
Basic net income per share........... $17,020 48,504 $0.35 $34,408 47,092 $0.73
Effect of dilutive shares:
Warrants/options................... -- 3,200 -- 2,861
------- ------ ------- ------
Diluted net income per share......... $17,020 51,704 $0.33 $34,408 49,953 $0.69
======= ====== ======= ======
</Table>
4
6
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) COMPREHENSIVE INCOME
Other comprehensive income (loss) consists of unrealized holding gains or
losses on the Company's short-term investments. The following table sets forth
the calculation of comprehensive income, net of income taxes (in thousands):
<Table>
<Caption>
QUARTER ENDED
-------------------
JUNE 30, JULY 1,
2001 2000
-------- -------
Net income............................................... $ 8,753 $ 8,020
Unrealized holding gains (losses) on short-term
investments............................................ (117) 90
------- -------
Comprehensive income..................................... $ 8,636 $ 8,110
======= =======
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
-------------------
JUNE 30, JULY 1,
2001 2000
-------- -------
Net income............................................... $17,020 $34,408
Unrealized holding gains on short-term investments....... 249 85
------- -------
Comprehensive income..................................... $17,269 $34,493
======= =======
</Table>
(5) FEATURE FILM AND CO-PRODUCTION AGREEMENTS
Feature Film Agreement
In 1991, the Company entered into a feature film agreement with Walt Disney
Pictures, a wholly owned subsidiary of Walt Disney Pictures and Television
(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"). The Company is entitled to receive compensation
based on revenue from the distribution of these films and related products. In
1995, the Company released its first feature film under the terms of the Feature
Film Agreement, Toy Story.
Co-Production Agreement
In February 1997, Pixar and Disney entered into a new co-production
agreement (the "Co-Production Agreement") which now governs all films made by
the Company since 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 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 is responsible for the production of each Picture and Disney
is responsible for the marketing, promotion, publicity, advertising and
distribution of each Picture. The first original film produced under the
Co-Production Agreement was A Bug's Life. Films in development or production at
Pixar governed by this agreement include Monsters, Inc., Finding Nemo, the
Company's sixth film "Film Six" and the Company's seventh film "Film Seven." A
Bug's Life, Monsters, Inc., Finding Nemo, Film Six and Film Seven count toward
the five original Pictures, whereas Toy Story 2, as a sequel, is a derivative
work that will not count toward the Pictures. However, under the Co-Production
Agreement, all provisions applicable to the Pictures also apply to derivative
works such as Toy Story 2.
All payments to Pixar from Disney for development and production of Toy
Story under the Feature Film Agreement, and A Bug's Life, Toy Story 2, Monsters,
Inc., Finding Nemo, Film Six, and Film Seven under the Co-Production Agreement
have been recorded as cost reimbursements. Accordingly, no revenue has been
5
7
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
recognized for such reimbursements; rather, the Company has netted the
reimbursements against the related costs.
Creative Development Group
In addition to the films produced and in process under the Co-Production
Agreement, Pixar's creative development group is working on concept development
for several new projects that are not governed by the Co-Production Agreement.
Costs related to these projects are therefore not shared or reimbursed by
Disney. Such costs are capitalized as film costs and will be amortized under the
film forecast method assuming the concept development leads to a successful
concept and realization of a film project when it is expected that the film will
be set for production. In the event a film is not set for production within
three years from the time of the first capitalized transaction, such costs will
be expensed.
The total film production costs and related amounts capitalized are as
follows (in thousands):
<Table>
<Caption>
TOTAL THROUGH
JUNE 30,
2001
-------------
RELEASED FILMS.............................................. $87,780
Cumulative amortization of film production costs............ (74,010)
-------
Total film production costs capitalized for
released films.................................. 13,770
FILMS IN PRODUCTION......................................... 52,368
FILMS IN DEVELOPMENT OR PREPRODUCTION....................... 9,317
-------
Total film production costs capitalized........... $75,455
=======
</Table>
Under the Co-Production Agreement, certain operating expenses benefiting
the productions, such as certain research and development and certain general
and administrative expenses, are paid half by Pixar and half by Disney. From the
beginning of each respective fiscal year, the Company recorded the following
amounts reimbursed by Disney as offsets to the following expense categories (in
thousands):
<Table>
<Caption>
SIX MONTHS ENDED
-------------------
JUNE 30, JULY 1,
2001 2000
-------- -------
Research and development.................................. $2,307 $2,782
General and administrative................................ 1,746 1,386
------ ------
Total........................................... $4,053 $4,168
====== ======
</Table>
At June 30, 2001 and December 30, 2000, the receivable from Disney
aggregated $5.2 million and $73.9 million, respectively, which consists of a
receivable from Disney for film revenue, advances net of Disney's actual share
of expenditures for all films, amounts due for animation services and
miscellaneous reimbursements.
For released films, the Company expects to amortize, based on current
estimates, approximately $4 million to $6 million in capitalized film production
costs over the succeeding twelve-month period. In addition, the Company expects
that all released films will have amortized more than 80% of each released
film's original production costs by the end of fiscal year 2003.
(6) SEGMENT REPORTING
The Company adopted the provisions of SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information." The chief operating decision-maker is
considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews
financial information presented on a summary basis accompanied by disaggregated
information about film revenue for purposes of making operating decisions and
assessing
6
8
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
financial performance. The summary financial information reviewed by the CEO is
identical to the information presented in the accompanying statement of
operations and the Company has no foreign operations. Therefore, the Company
operates in a single operating segment.
The Company's revenue segment information by film category follows (in
thousands):
<Table>
<Caption>
QUARTER ENDED
-------------------
JUNE 30, JULY 1,
2001 2000
-------- -------
Toy Story 2.............................................. $ 3,188 $13,333
Library titles........................................... 11,464 2,726
Animation services....................................... -- 481
------- -------
$14,652 $16,540
======= =======
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
-------------------
JUNE 30, JULY 1,
2001 2000
-------- -------
Toy Story 2.............................................. $10,430 $67,240
Library titles........................................... 18,363 6,725
Animation services....................................... 13 814
------- -------
$28,806 $74,779
======= =======
</Table>
Library titles include A Bug's Life and Toy Story.
(7) EMPLOYMENT AGREEMENT
In March 2001, the Company entered into an employment agreement with John
Lasseter, (the "Employment Agreement"), which has a term of 10 years. Mr.
Lasseter is a two-time Academy Award(R)-winning director and animator. In
addition to serving as head of all of the Company's creative projects, he
directed Toy Story, the first feature-length computer animated film (for which
he won a special Achievement Academy Award(R)), A Bug's Life and Toy Story 2. He
is currently in development on his fourth feature film for the Company. This
Employment Agreement supercedes the Company's prior employment agreement with
Mr. Lasseter, which was entered into in February 1997. Pursuant to the
Employment Agreement, Mr. Lasseter received a signing bonus of $4,940,000. The
Employment Agreement also provides for a current annual salary of $2,500,000
with 5% annual increases. In connection with the Employment Agreement, Mr.
Lasseter was previously granted an option to purchase 1,000,000 shares of our
common stock at the fair market value on the date of such grant. The option
vests on an equal monthly basis over the ten-year term of the agreement, except
for options that vest on the last month will vest on the penultimate month of
this ten-year period.
7
9
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 our 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 Risk Factors on pages 12
to 17. Particular attention should be paid to the cautionary language in Risk
Factors "-- To meet our fiscal 2001 diluted earning per share target, we must
receive sufficient revenues primarily from our feature films and, to a lesser
extent, our non-film related sources," "-- Our operating results have fluctuated
in the past and we expect such fluctuations to continue," and "-- Our scheduled
successive releases of feature films will continue to place a significant strain
on our resources," as well as those noted in the section entitled "Risk Factors"
in our Annual Report on Form 10-K for the year ended December 30, 2000, as
amended (the "Form 10-K"). 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.
Our operating performance each quarter is subject to various risks and
uncertainties as discussed in our 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.
OVERVIEW
In February 1997, we entered into the Co-Production Agreement with Disney
pursuant to which we, on an exclusive basis, agreed to produce five original
computer-animated feature-length theatrical motion pictures (the "Pictures") for
distribution by Disney. 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 as well as 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 any participations provided to talent and the like. The
Co-Production Agreement generally provides that we will be responsible for the
production of each Picture, while Disney will be responsible for the marketing,
promotion, publicity, advertising and distribution of each Picture. Our second
feature film, A Bug's Life, was released in November 1998 and counts as the
first original 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, we will have the opportunity
to co-finance and produce such products or to earn passive royalties on such
products. We 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 us for
our share of certain general and administrative costs and certain research and
development costs that benefit the productions.
In November 1999, Toy Story 2, our third animated feature film was
released. As a sequel, Toy Story 2 is a derivative work of the original Toy
Story and therefore it does not count toward the five original Pictures to be
produced under the Co-Production Agreement. However, as a derivative work, Toy
Story 2 is treated as a Picture under the Co-Production Agreement, and all the
provisions applicable to the five original Pictures apply.
In 1999, we began production on our fourth theatrical film, Monsters, Inc.
and concept development on our sixth animated feature film, "Film Six." In 2000,
we began production on our fifth animated feature film, Finding Nemo and concept
development on our seventh animated feature film, "Film Seven." These films will
8
10
be produced and distributed under the Co-Production Agreement and will count as
the second, third, fourth, and fifth films of the five original films to be
produced under the Co-Production Agreement. We expect to release Monsters, Inc.
in November 2001, and Finding Nemo in summer 2003, at the earliest. Film Six and
Film Seven are currently targeted for release no earlier than 2004 and 2005,
respectively.
Target Earnings per Share for Fiscal Year 2001
We are targeting diluted earnings per share of $0.50 to $0.58 for fiscal
year 2001. This estimate is primarily based on the results from the first half
of the fiscal year and our current expectations regarding the following: (1)
revenues from worldwide network television licensing revenues for A Bug's Life,
Toy Story and Toy Story 2; (2) merchandise revenue and ancillary royalties
relating to the sale of products from the Toy Story franchise and A Bug's Life;
(3) continuing home video sales from A Bug's Life, Toy Story and Toy Story 2;
and (4) our assumptions, including the timing and amount, for box office
receipts, as well as merchandise revenues, from our upcoming film, Monsters,
Inc., targeted for domestic theatrical release on November 2, 2001.
In addition, we are targeting diluted earnings per share of $0.08 to $0.10
for the third quarter of fiscal year 2001. Our third quarter film revenues are
expected to be derived primarily from worldwide television licensing, continuing
merchandise sales from the Toy Story franchise and A Bug's Life, and potential
ancillary royalties from interactive games.
These statements regarding our targeted earnings are forward-looking, and
actual results may differ materially. Factors that could cause actual fiscal
year 2001 results to differ include but are not limited to: (1) the timing and
amount of worldwide television revenues for A Bug's Life, Toy Story, and Toy
Story 2, (2) the timing and amount of related revenues from all home video
releases of our three films and the Buzz Lightyear of Star Command
direct-to-video, (3) the timing and amount of Monsters, Inc., Toy Story
franchise, and A Bug's Life merchandise sales and ancillary royalties, (4) the
timing of the theatrical release of Monsters, Inc. and the amount of related
revenues, (5) the timing and amount of distribution costs incurred in all
markets for Monsters, Inc., Toy Story 2, Toy Story, and A Bug's Life, (6) the
timing, accuracy, and sufficiency of the information we receive from Disney to
determine revenues and associated gross profits, (7) the timing and amount of
non-film related revenues, such as licensing our software and interest income;
and (8) the market price of our common stock and related volatility. See "Risk
Factors" set forth below for a more detailed discussion of factors that could
cause actual results to differ.
RESULTS OF OPERATIONS
Revenue
Total revenue for the three and six months ended June 30, 2001 were $16.7
million and $32.8 million, respectively, compared to $18.3 million and $79.3
million in the corresponding periods of the prior year.
Film and animation services revenue for the three months ended June 30,
2001 were $14.7 million compared with $16.5 million in the corresponding prior
year period. Film revenue for the three months ended June 30, 2001 includes
domestic network television licensing of A Bug's Life, continuing worldwide home
video sales of our three films, foreign home video sales of Buzz Lightyear of
Star Command direct-to-video, merchandise sales, and one-time revenue associated
with interactive games. Film revenue for the three months ended July 1, 2000
were comprised of worldwide theatrical and related merchandise revenues from Toy
Story 2, which was released in November 1999, and to a lesser extent, film
revenues from our library titles.
Film and animation services revenue for the six months ended June 30, 2001
were $28.8 million compared to $74.8 million in the corresponding prior year
period. The decrease in the current six-month period from the corresponding
prior year period was largely due to the timing and success of Toy Story 2
theatrical performance in the first quarter of 2000.
Software revenue includes software license revenue, principally from
RenderMan(R), and royalty revenue from licensing Physical Effects, Inc. (PEI)
technology to a third party. Software revenue increased to
9
11
$2.0 million for the three months ended June 30, 2001 compared to $1.8 million
in the corresponding period of the prior year and decreased to $4.0 million for
the six months ended June 30, 2001 from $4.5 million in the corresponding prior
year period. In spite of the increase in software revenues for the second
quarter, there was an overall decrease in revenue for the six month period ended
June 30, 2001 resulting primarily from decreases in RenderMan(R) software
licensing in the first quarter and to a lesser extent, from a decrease in
royalty revenue from licensing PEI technology to a third party. PEI, a company
we acquired in 1998, licensed certain of its technology to a third party, from
which we now receive associated royalty revenue on a quarterly basis. Due to our
focus on content creation for animated feature films and related products, we
have not increased the time and resources necessary to generate significantly
higher RenderMan(R) sales. Therefore, we expect ongoing variability in revenues
derived from software licenses and that such revenue will remain flat or
possibly decline, as seen for the six month period ended June 30, 2001.
For the three and six months ended June 30, 2001, Disney accounted for 88%
of our total revenue compared to 90% and 94%, respectively, for the
corresponding periods of the prior year. The revenue from Disney consisted
primarily of film related revenue and to a lesser extent some animation services
revenue. Because of our relationship with Disney under the Co-Production
Agreement, Disney is expected to continue to represent significantly greater
than 10% of our revenue in 2001 and for the foreseeable future. As of June 30,
2001, amounts related to Disney include unearned revenue from Disney, which
represents 92% of unearned revenue on the balance sheet.
Cost of Revenue
Cost of film and animation services revenue for the three and six months
ended June 30, 2001 was $2.4 million and $4.5 million, respectively, compared to
$3.6 million and $18.6 million, respectively, in the corresponding prior year
periods. Cost of film revenue represents amortization of capitalized film
production costs. See "Capitalized Film Production Costs." For the three and six
months ended June 30, 2001, cost of film revenue represents amortization of
capitalized film production costs associated with Toy Story 2 and A Bug's Life,
and represents 16% of total film revenue for both periods. For the three and six
months ended July 1, 2000, cost of film revenue represented amortized costs
associated with Toy Story 2 and A Bug's Life, and represented 22% and 25%,
respectively, of total film revenue. Toy Story revenue has no related cost, as
film costs were fully amortized by December 31, 1997. The decrease in cost of
revenue as a percent of revenue for the current periods as compared to the prior
year periods, is attributable to the mix of film revenue from quarter to quarter
as the gross profit percentage varies by film. For example, Toy Story and A
Bug's Life have lower amortized costs as a percentage of revenue relative to Toy
Story 2. The prior year periods experienced higher Toy Story 2 revenue which
resulted in an increase in cost of film revenue as compared to the current
periods. In addition, revisions of estimates on revenue to be received under the
individual film forecast method for Toy Story 2 and A Bug's Life resulted in
lower amortization of capitalized film costs compared to the prior period.
Cost of software revenue consists of the direct costs and manufacturing
overhead required to reproduce and package our software products, as well as
amortization of purchased technology. Cost of software revenue as a percentage
of the related revenue was 6% and 7% for the three and six months ended June 30,
2001, respectively, compared to 8% and 6%, respectively, for the three and six
month corresponding prior year periods. Cost of software revenue for the three
and six months ended June 30, 2001 and July 1, 2000, relates primarily to
amortization of purchased technology associated with the acquisition of PEI of
$120,000 and $240,000, respectively, in both years. We are amortizing this
purchased technology against related license revenue over a period not to exceed
four years.
Operating Expenses
Total operating expenses were $3.8 million and $7.9 million for the three
and six months ended June 30, 2001, respectively, compared to $4.1 million and
$7.7 million in the corresponding prior year periods. We anticipate an increase
in operating expenses in future periods impacting a number of areas. We still
expect future operating expenses to reflect the growth of the studio as we
prepare for the release of Monsters, Inc. and as we ramp up toward our goal of
producing one feature film per year. Under the Co-Production Agreement,
10
12
Disney reimburses us for half 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. To the
extent that personnel, facilities and other expenditures are not capitalized by
us nor allocated to and paid for by Disney, and precede or are not subsequently
followed by an increase in revenue, our 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 our RenderMan(R) software and for our proprietary Marionette and
Ringmaster animation and production management software and for creative
development for future films. Research and development expenses decreased to
$1.6 million for the three months ended June 30, 2001 from $1.8 million in the
corresponding prior year period and decreased to $3.1 million for the six months
ended June 30, 2001 from $3.2 million in the corresponding prior year period.
During the first quarter of fiscal year 2000 we recorded a one-time adjustment
of $523,000, which reduced our research and development expenses for the six
months ended July 1, 2000, from $3.7 million to $3.2 million. This adjustment
was due to an additional reimbursement from Disney under the terms of the
Co-Production Agreement for certain research and development expenses incurred
prior to fiscal year 2000. After allowing for this adjustment, the decreases in
research and development expenses for the three and six months ended June 30,
2001 from the same period in 2000, were due to reductions in short film project
costs as a result of the completion of For the Birds in the first half of fiscal
year 2000, which was somewhat offset by our continued investment in proprietary
technology and increased salaries and related overhead. We expect research and
development expenses to increase in future periods. To date, all research and
development costs not reimbursed by Disney have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related overhead, as well as public relations, advertising,
technical support and trade show costs required to support our software segment.
Sales and marketing expenses increased to $419,000 and $809,000, respectively,
for the three and six months ended June 30, 2001, from $337,000 and $727,000,
respectively, in the corresponding prior year periods. The increase is due to
additional expenses associated with marketing in preparation for the upcoming
Monsters, Inc. release, which was partially offset by a decrease in selling
costs relating to our software. We believe that sales and marketing expenses
will increase in future periods, particularly in the areas of public relations
and corporate marketing.
General and Administrative. General and administrative expenses consist
primarily of salaries of management and administrative personnel, insurance
costs and professional fees. General and administrative expenses decreased to
$1.9 million for the three months ended June 30, 2001 from $2.0 million in the
corresponding prior year period and increased to $3.9 million for the six months
ended June 30, 2001 from $3.8 million in the corresponding prior year period.
Overall general and administrative expenses increased by $100,000 for the six
month period ended June 30, 2001 as a result of employee related costs and
insurance, which was offset by reductions in public company costs which occurred
in the second quarter. General and administrative expenses may increase in
future periods.
Other Income, Net
Other income, net was $3.4 million and $6.7 million for the three and six
months ended June 30, 2001, respectively, and $3.1 million and $5.9 million for
the three and six months ended July 1, 2000, respectively, consisting primarily
of interest income on short-term investments. The increase was primarily due to
an increase in our average cash, cash equivalents and short-term investment
balances through June 30, 2001, which was partially offset by decreases in our
annualized rate of return due to falling interest rates during 2001.
Income Taxes
Income tax expense from continuing operations for the three and six months
ended June 30, 2001 reflects our federal and state income tax expense of 37.1%
versus 41.5% in the same period of the prior year. Our income tax rate is lower
in 2001 due to the utilization of research and experimentation credits for
federal and state tax purposes, as well as the utilization of certain other
state credits and exemptions.
11
13
CAPITALIZED FILM PRODUCTION COSTS
We had $75.5 million in capitalized film production costs as of June 30,
2001, consisting primarily of costs relating to Toy Story 2, A Bug's Life,
Monsters, Inc., Finding Nemo, Film Six, and Film Seven, 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, cash equivalents and short-term investments increased $73.4 million
to $276.2 million at June 30, 2001 from $202.8 million at December 30, 2000 due
primarily to cash received from Disney for our share of film revenue, as well as
proceeds from stock option exercises, software revenue and interest income,
which was offset by film production spending and capital expenditures.
Net cash provided by continuing operations for the six months ended June
30, 2001 was primarily attributable to net income of $17.0 million, the non-cash
impact of depreciation and amortization expense and amortization of capitalized
film production costs totaling $8.5 million, the tax benefit from option
exercises of $4.9 million, a decrease in receivables from Disney of $68.7
million and an increase in unearned revenue of $6.5 million, which were offset
by decreases in income taxes payable and accrued liabilities totaling $15.0
million. Net cash used in investing activities primarily consisted of
investments in short-term securities of $156.8 million, the purchase of property
and equipment of $4.8 million and funding of film production costs of $22.9
million, which were offset by net proceeds from sales of short-term investments
of $97.2 million. Net cash provided by financing activities consisted of
proceeds from exercised stock options.
As of June 30, 2001, our principal source of liquidity was $276.2 million
in cash, cash equivalents and short-term investments. We believe that these
funds will be sufficient to meet our operating requirements through the next
twelve months.
RISK FACTORS
The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. You
should carefully consider these factors before making an investment decision
with respect to our Common Stock.
TO MEET OUR FISCAL 2001 DILUTED EARNINGS PER SHARE TARGET, WE MUST RECEIVE
SUFFICIENT REVENUES PRIMARILY FROM OUR FEATURE FILMS AND, TO A LESSER EXTENT,
OUR NON-FILM RELATED SOURCES.
In 2001, our revenue and operating results will be largely dependent upon
(1) the timing and amount of worldwide television revenues from our three films,
(2) the timing and amount of related revenues from all home video releases of
our three films and the Buzz Lightyear of Star Command direct-to-video, (3) the
timing and amount of Monsters, Inc., Toy Story franchise, and A Bug's Life
merchandise sales and ancillary royalties, (4) the timing of the theatrical
release of Monsters, Inc. and the amount of related revenues, (5) the timing and
amount of distribution costs incurred in all markets for Monsters, Inc., Toy
Story 2, Toy Story, and A Bug's Life, (6) the timing, accuracy, and sufficiency
of the information we receive from Disney to determine revenues and associated
gross profits, (7) the timing and amount of non-film related revenues, such as
licensing our software and interest income; and (8) the market price of our
common stock and related volatility.
Dependence on revenue from our feature films.
Under the Co-Production Agreement, Pixar and Disney share equally in the
profits of A Bug's Life, Toy Story 2, and Monsters, Inc. after Disney recovers
its distribution fee and its marketing and distribution costs. Distribution
costs include worldwide theatrical release costs, costs related to merchandise,
Disney's costs to distribute home videos in the United States and foreign
markets, Disney's distribution fee, and other distribution costs including
talent participation and residuals.
12
14
Beginning with the first quarter of 2000, we have had an improved ability,
through information available to us from Disney and other sources, to estimate
and record our share of film revenues and gross profits. While we anticipate
this improved ability will continue to allow us to recognize our share of film
revenues and gross profits on a more timely basis, we will remain dependent on
the timing, accuracy, and sufficiency of the information provided by Disney.
For our business to be successful, our films must achieve extraordinary box
office success. It is rare for animated feature films to achieve extraordinary
box office success. While we have been successful in the release of our first
three feature films, this level of success is unusual in the motion picture
industry, and our future releases may not achieve similar results. Beyond 2001,
we will be dependent on the future success of Monsters, Inc., Finding Nemo, Film
Six, and Film Seven (together referred to as the "Current Projects"). Unless
Monsters, Inc. and Finding Nemo achieve extraordinary box office success and
also achieve success in home video and merchandise sales, they may not generate
significant revenue and operating results for us in future years.
Dependence on Toy Story franchise and A Bug's Life. In 2000, we recognized
essentially all of Toy Story 2 worldwide theatrical revenues, as well as a
substantial amount of anticipated related merchandise revenue. Toy Story 2 was
released on home video domestically on October 17, 2000, and was released in
various major international markets, including the U.K. and Japan, in November
2000. Consequently, a significant amount of expected lifetime worldwide home
video revenues from Toy Story 2 has been recognized as of June 30, 2001. We also
recognized a significant amount of expected revenues from the Buzz Lightyear of
Star Command television series and related home video release as of June 30,
2001.
A Bug's Life was released in November 1998, and we have recognized film
revenues to date of $129.4 million resulting primarily from the domestic and
foreign theatrical revenues from A Bug's Life, related domestic and foreign home
video revenue, related merchandise licensing, and some television revenue,
offset by Disney's marketing and distribution costs and its distribution fee.
These revenues from A Bug's Life represent a significant amount of the revenues
we expect to recognize over the lifetime of A Bug's Life.
For the remainder of fiscal year 2001 our targeted earnings are dependent
upon the Toy Story franchise and A Bug's Life. We expect sources of revenue to
include revenues from potential worldwide television licensing and domestic
Pay-Per-View revenues, any continuing home video sales of our three films, and
any continuing merchandise revenues and ancillary royalties; however, there can
be no assurance that such revenues will be sufficient to meet our targeted
earnings for 2001.
Dependence on Monsters, Inc. While we anticipate Monsters, Inc. will be
released as targeted on November 2, 2001, we cannot guarantee Monsters, Inc.
will be released at the scheduled time, and if it is released as scheduled,
whether it will be a box office success. A portion of our anticipated revenues
for fiscal year 2001, are based on the assumption that Monsters, Inc. will be
released in November 2001, and that it will be a box office success. If
Monsters, Inc. is not released as scheduled or is not a box office success with
successful merchandise sales, it could adversely impact our targeted 2001
operating results.
Forecasting revenue from our feature films is extremely difficult.
It is difficult to forecast the amount and timing of our future revenues
from Toy Story, A Bug's Life, Toy Story 2 and Monsters, Inc. for the remainder
of fiscal year 2001. The amount of future revenues depends not only on customer
acceptance of a film in its worldwide theatrical release, but also on customer
acceptance of related products in each separate release category -- home video,
merchandise and television collectively, being the most significant. While
customer acceptance is initially measured by box office success, customer
acceptance within each follow-on product category, such as home video,
merchandise or television, depends on factors unique to each type of product,
such as pricing, competitive products, and the time of year or state of the
economy in which a product is released, among many other factors. In addition,
we have found that the degree of customer acceptance varies widely among foreign
countries. While box office success is often a good indicator of general
customer acceptance, the relative success of follow-on products is not always
directly correlated, and the degree of correlation is difficult to predict.
Disney's strategic distribution decisions also impact the amount of our future
revenues. For example, in the first half of 1999, Disney reported general
13
15
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. As a result, in 2000 Disney implemented a new strategy of
releasing animated films on home video year round, and in special editions in
both VHS and DVD formats. However, the relative success of this strategy is
still not yet known. For this reason and all of the above reasons, in spite of
Toy Story 2's remarkable box office success, it is difficult to predict how
successful its lifetime home video sales will be, or how successful sales of
other follow-on products will be for fiscal year 2001. Similarly, it is
difficult to predict residual video sales for the remainder of 2001. It is also
difficult to predict theatrical revenue and related merchandise revenue from the
anticipated release of Monsters, Inc. in November 2001.
With respect to the difficulty of forecasting the timing of revenues,
Disney distributes our films and film-related products and therefore determines
the timing of product releases. While the timing of theatrical releases is
typically known well in advance of release, the timing of release of follow-on
products is often decided just in advance of release, is subject to change, and
is therefore less predictable. For example, it was not until the first quarter
of fiscal year 2000 that it was determined that the Toy Story 2 home video would
be released domestically on October 17, 2000. In all product categories, timing
of revenues is particularly uncertain with respect to releases in foreign
markets as a foreign product release is often marked by a rollout across many
countries over the course of many months. Therefore, the timing of international
revenues is inherently more difficult to predict than the timing of domestic
revenues. In addition, the amount of revenue recognized in any given quarter or
quarters from all of our films depends on the timing, accuracy, and sufficiency
of the information we receive from Disney to determine revenues and associated
gross profits. Although we obtain from Disney the most current information
available to recognize our share of revenue and to determine our film gross
profit, Disney may make subsequent adjustments to the information that it has
provided which could have a material impact on us in later periods. For
instance, towards the end of the life cycle for a revenue stream, Disney may
inform us of additional distribution costs to those previously forecasted, as
occurred in the second quarter of fiscal year 2000. Such adjustments have and
may continue to impact our revenue share and our film gross profit. In addition,
through information we obtain from other sources, we may make certain judgments
and/or assumptions and adjust the information we receive from Disney. Due to
these factors, the amount and timing of our future revenues from Toy Story, Toy
Story 2, A Bug's Life and Monsters, Inc. are difficult to forecast, and it is
possible, in any given quarter, that we will not recognize sufficient film
revenue to generate significant earnings.
Under the Co-Production Agreement, Pixar and Disney share the production
costs of our feature films. We initially capitalize our share of these costs as
film production costs. Our policy is to amortize these costs over the expected
revenue streams as we recognize revenues from the associated films. The amount
of film costs that will be amortized each quarter will depend on how much future
revenue we expect to receive from each film. In any given quarter, if our
forecast changes with respect to total anticipated revenue from any individual
feature film and becomes lower than was previously forecasted, we would be
required to accelerate amortization of related film costs, resulting in lower
gross margins. Such lower gross margins would adversely impact our business,
operating results, and financial condition.
Software revenue.
Software revenue declined in the first half of fiscal year 2001 as compared
to the first half of 2000. This decline may be indicative of future trends as we
continue to reduce our emphasis on the commercialization of software products.
We are not increasing the time and resources necessary to generate higher
RenderMan(R) licensing revenues; therefore, we expect that revenue from the
licensing of RenderMan(R) will remain flat or possibly decline. However, to meet
our fiscal 2001 diluted earnings per share target, our revenue estimates include
revenues attributable to non-film related sources including software revenue.
There can be no assurance that the timing and amount of such revenues will be
sufficient to meet our targeted earnings.
14
16
OUR OPERATING RESULTS HAVE FLUCTUATED IN THE PAST, AND WE EXPECT SUCH
FLUCTUATIONS TO CONTINUE.
Our revenues fluctuate significantly.
We continue to expect significant fluctuations in our future annual and
quarterly revenues because of a variety of factors, including the following:
- the timing of the domestic and international releases of our animated
feature films,
- the success of our 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, television, and merchandising,
- the demand for such related products, which is often a function of the
success of the related animated feature film,
- Disney's costs to distribute and promote the feature films and related
products,
- Disney's success at marketing the films and related products,
- the timing and accuracy of information received from Disney and other
sources on which we base estimates of revenue to be recognized from our
animated feature films and related products by Disney,
- the introduction of new feature films or products by our competitors,
- general economic conditions, and
- timing and amount of non-film related revenues such as licensing of our
software.
In particular, since our revenue under the Co-Production Agreement is
directly related to the success of a feature film, our operating results are
likely to fluctuate depending on the level of success of our animated feature
films and related products. The revenues derived from the production and
distribution of an animated feature film depend primarily on the film's
acceptance by the public, which cannot be predicted and does not necessarily
bear a direct correlation to the production or distribution costs incurred. The
commercial success of a motion picture also depends upon promotion and
marketing, production costs and other factors. Further, the theatrical success
of a feature film can be a significant factor in determining the amount of
revenues generated from the sale of the related products.
Our operating expenses fluctuate.
Our operating expenses and effective tax rate continue to
fluctuate. Operating expenses for the first half of fiscal year 2001 increased
slightly in comparison to the first half of fiscal year 2000 and we expect to
continue to increase our operating expenses to fund greater levels of research
and development, to build to our goal of producing one feature film per year and
to expand operations. Specifically, we expect our spending levels may increase
significantly due to (1) continued investment in proprietary software systems,
(2) potential increased compensation costs as a result of possible competition
for creative, technical and administrative talent, (3) increased costs
associated with the expansion of our facilities, (4) number of personnel
required to support studio growth and (5) increased investment in creative
development. A portion of our operating expenses that are allocable to film
productions is either capitalized by us or reimbursed by Disney under the
Co-Production Agreement. To the extent that we do not capitalize (or Disney does
not pay for) the increases in expenses, our operating expenses will
significantly increase in 2001. Finally, we expect our tax rate in 2001 to be
lower than statutory rates due to the utilization of certain federal and state
tax credits, as well as the realization of certain tax benefits. We realize tax
benefits from the exercise of non-qualified employee stock options that reduce
the amount of our tax payments and liabilities, but will not reduce our future
effective tax rates.
Forecasting our operating expenses is extremely difficult. Moreover, our
operating expenses will continue to be extremely difficult to forecast. We
budget the direct costs of film productions with Disney, and we share such costs
equally. We capitalize our share of these direct costs of film production in
accordance with
15
17
SOP 00-2, which we adopted in the first quarter of fiscal year 2001. A
substantial portion of all of our other costs are incurred for the benefit of
feature films ("Overhead"), including research and development expenses and
general and administrative expenses. Portions of our Overhead are included in
the budgets for the Pictures, and we will share such costs equally with Disney
under the Co-Production Agreement. With respect to the portion of our Overhead
that is not reimbursed by Disney, we either (1) capitalize such portion as film
production costs, if required under SOP 00-2, or (2) charge it to operating
expense in the period incurred. Since a substantial portion of our Overhead is
related to the Pictures, and is therefore reimbursed by Disney, and since we
capitalize other amounts in accordance with SOP 00-2, our reported operating
expenses for the first half of fiscal year 2001 have not reflected, and future
reported operating expenses will not reflect, our true level of spending on the
production of animated feature films, related products and overhead.
Film production budgets may increase, and film production spending may
exceed such budgets. Given the (1) escalation in compensation rates of people
required to work on the Current Projects, (2) number of personnel required to
work on the Current Projects, and (3) equipment needs, the budget for the
Current Projects and subsequent films and related products may continue to be
greater than the budgets for Toy Story, A Bug's Life, and Toy Story 2. We 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, we believe that it is not uncommon for film production spending to
exceed film production budgets, and the Current Projects may not be completed
within the budgeted amounts. For example, to meet the production schedule of Toy
Story 2, we reassigned employees from other projects, including Monsters, Inc.,
to complete Toy Story 2. This resulted in a larger production staff than
originally anticipated and it increased production costs. In addition, when
production of each film is completed, we may incur significant carrying costs
associated with transitioning personnel on creative and development teams from
one project to another. These carrying costs are shared with Disney and treated
as film costs, which increases overall production budgets and could have a
material adverse effect on our results of operations and financial condition.
OUR SCHEDULED SUCCESSIVE RELEASES OF FEATURE FILMS WILL CONTINUE TO PLACE A
SIGNIFICANT STRAIN ON OUR RESOURCES.
In order to meet our obligations pursuant to the Co-Production Agreement,
we have established parallel creative teams so that we can develop more than one
film at a time. These teams are currently working on Monsters, Inc., which is
targeted for release on November 2, 2001, and Finding Nemo, which is currently
targeted for release in summer 2003. We also plan to have parallel creative
teams for Film Six and Film Seven and further to work towards producing one
feature film per year. We have only produced three prior feature films to date
and have limited experience with respect to producing animated feature films in
parallel. We have been required, and may continue to be required, to expand our
employee base, increase capital expenditures and procure additional resources
and facilities in order to accomplish the scheduled release of these two feature
films. This period of rapid growth and expansion has placed, and continues to
place, a significant strain on our resources. We cannot provide any assurances
that Monsters, Inc. or Finding Nemo will be released as targeted or that this
strain on resources will not have a material adverse effect on our business,
financial condition or results of operations. For example, to meet the
production schedule of A Bug's Life, we reassigned employees from other
projects, including Toy Story 2, to A Bug's Life. Similarly, to meet the
production schedule of Toy Story 2, we reassigned employees from other projects,
including Monsters, Inc., to Toy Story 2. In addition, John Lasseter, who was
previously providing creative oversight for Toy Story 2 in his role as Executive
Vice President, Creative, assumed the role of Director of Toy Story 2 in order
to expedite development and production of the film. Using the personnel of
future films to meet the immediate deadlines of films nearing release, as we
have for both A Bug's Life and Toy Story 2, is likely to have the long term
impact of pushing out the targeted release dates of future films, substantially
increasing film budgets, and adversely impacting our ability to generate
creative concepts for subsequent films on a timely basis.
In addition, as Director of Toy Story 2, John Lasseter was focused on Toy
Story 2 until its completion in 1999, and was less available to assist on
Monsters, Inc. during its development phase. John Lasseter's availability has
been a key ingredient in the successful completion of our prior films. A lack of
his availability may adversely impact our ability to release future films as
targeted.
16
18
If we are able to release films in 2001 and 2003, we cannot provide any
assurances that we will release our next film in 2004. Due to the strain on our
personnel from the effort required for the release of Monsters, Inc. and Finding
Nemo and the time required for creative development of a new film, it is
possible that we would be unable to release a successive new film in 2004. It is
too early to determine the rate at which any future films are to be released,
and we cannot provide any assurances that we will release a film in each
successive year or in any particular year.
To continue to accommodate growth, we will be required to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, including improvement and maintenance of our accounting system, other
internal management systems and backup systems. In addition, this growth and
these diversification activities, along with the corresponding increase in the
number of our employees and rapidly increasing costs, have resulted in increased
responsibility for our management team. We will need to continue to improve our
operational, financial and management information systems and to hire, train,
motivate and manage our employees, to integrate them into Pixar and to provide
adequate facilities and other resources for them. We cannot provide any
assurance we will be successful in accomplishing all of these activities on a
timely and cost-effective basis. Any failure to accomplish one or more of these
activities on a timely and cost-effective basis would have a material adverse
effect on our business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio. We invest 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 our policy to ensure safety of our
principal and maintain liquidity. We only invest in securities with a maturity
of 24 months or less, with only government obligations exceeding 12 months. Our
investments are primarily 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 our financial instruments are held for purposes other than trading
and are considered "available for sale" per SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." The table below provides information
regarding our investment portfolio at June 30, 2001. The table presents
principal cash flows and related weighted-average fixed interest rates presented
by expected maturity date (dollars in thousands):
<Table>
<Caption>
LESS THAN OVER
1 YEAR 1 YEAR TOTAL
--------- ------- --------
Available-for-sale securities....................... $122,519 $76,772 $199,291
Weighted-average interest rate...................... 5.24% 4.68% 5.02%
</Table>
Impact of Foreign Currency Rate Changes. While Disney and its affiliates
distribute our products in foreign markets, we are not directly exposed to
foreign currency rate fluctuations. However, we recognize revenues from foreign
territories based on an average foreign currency exchange rate used by Disney
for revenue reporting. This rate may differ from the actual exchange rate at the
time cash is remitted to Disney and subsequently to us. Therefore, there may be
some indirect foreign currency exchange rate exposure as managed by Disney.
17
19
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Pixar during the quarter ended June
30, 2001.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
18
20
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
By: /s/ ANN MATHER
------------------------------------
Ann Mather,
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer
and Duly Authorized Officer)
Date: August 14, 2001
19