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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1996 0-26976
PIXAR
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0086179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 WEST CUTTING BOULEVARD, RICHMOND, CALIFORNIA 94804
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 236-4000
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Securities registered pursuant to Section 12(b) of
the Act: NONE Securities registered pursuant to
Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 20, 1997, there were 40,141,461 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 20, 1997) was approximately
$167,113,835. Shares of Common Stock held by each executive officer and director
and by each entity that owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Pixar's Annual Report to Shareholders for the year
ended December 31, 1996 (the "1996 Annual Report") are incorporated by reference
in Parts II and IV of this Form 10-K to the extent stated herein. Also, certain
sections of Pixar's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on June 11, 1997 are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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This Annual Report on Form 10-K and the documents incorporated herein
by reference contain 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 " Certain Factors Affecting Business,
Operating Results and Financial Condition" on pages 15 through 26, as well as
those noted in the documents incorporated herein by reference. Particular
attention should be paid to the cautionary language in "Certain Factors
Affecting Business, Operating Results and Financial Condition--Anticipated
Decline in Operating Results in 1997 and Net Losses in 1998," "--Dependence on
Toy Story, Bugs and Toy Story Video Sequel," "--Liquidity Risks, "--Scheduled
Concurrent Release of Films; Management of Growth" 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.
PART I
ITEM 1. BUSINESS
GENERAL
Pixar is a digital animation studio with the technical, creative and
production capabilities to create a new generation of animated feature films and
related products. Pixar's objective is to develop computer animated feature
films with a new three-dimensional appearance, memorable characters and
heartwarming stories that will appeal to audiences of all ages. The first such
film, Toy Story, was created and produced by Pixar and was distributed by The
Walt Disney Company (along with its subsidiaries hereinafter referred to as
"Disney"). Pixar believes that consumer marketing campaigns surrounding the
theatrical release of such films can generate broad consumer awareness of the
films, which in turn can drive box office demand as well as sales of
film-related products, such as theatrical sequels, made-for-home video sequels,
soundtracks, toys and other merchandise.
RECENT DEVELOPMENTS
On February 24, 1997 Pixar and Walt Disney Pictures and Television, a
wholly-owned subsidiary of Disney, entered into the Co-Production Agreement
("Co-Production Agreement") pursuant to which Pixar, on an exclusive basis, will
produce five computer animated feature-length theatrical motion pictures (the
"Pictures") for distribution by Disney over approximately the next ten years.
Pixar and Disney will 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 will be financed by Disney), 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 Pixar will produce each Picture and that Disney will
control all decisions relating to marketing, promotion, publicity, advertising
and distribution of each Picture. Disney and Pixar have agreed that the first
Picture under the Co-Production Agreement is the Picture with the working title
"Bugs." 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 will have the opportunity to co-finance and produce such products or to
earn passive royalties on such products. Disney and Pixar have announced their
intention to produce a made-for-home video sequel to Toy Story (the "Toy Story
Video Sequel"), and Pixar has already begun work on the production under the
terms of the Co-Production Agreement. Pixar will not share in any theme park
revenues generated as a result of the Pictures.
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In addition to entering into the Co-Production Agreement, Pixar agreed
to sell, and Disney agreed to purchase for cash, 1,000,000 shares of Pixar
Common Stock which Disney has agreed to hold for at least three years. Pixar
also granted two warrants, each exercisable for five years, to Disney: one
warrant to purchase 750,000 shares of Common Stock at an exercise price of
$20.00 per share and another warrant to purchase 750,000 shares of Common Stock
at an exercise price of $25.00 per share. Pixar granted certain registration
rights for the shares issuable upon exercise of the warrants. This transaction
was consummated in late March 1997 and Pixar received gross proceeds of $15.0
million. Also in connection with the Co-Production Agreement, Pixar entered
into a new Employment Agreement with John Lasseter, the Academy Award -- winning
director of Toy Story, which contemplates that Mr. Lasseter's services will
continue to be available to Pixar until February 2004. Mr. Lasseter's Employment
Agreement is described in detail in the Pixar's Proxy Statement for the 1997
Annual Meeting of Shareholders to be filed with the Commission within 120 days
after the end of Pixar's fiscal year ended December 31, 1996.
In late March 1997, Pixar determined to discontinue its business of
producing CD-ROM and other interactive products in favor of other opportunities
made available through the Co-Production Agreement. See "Business Model and
Products -- Discontinuation of Interactive Products Division."
BUSINESS MODEL AND PRODUCTS
Pixar's strategy is to develop and produce animated feature films and
related products, such as theatrical sequels, made-for-home video sequels,
soundtracks, toys and other merchandise. Pixar is currently implementing this
strategy through the Co-Production Agreement with Disney.
Animated Feature Films. Pixar's first computer-animated feature film,
Toy Story, was released on November 22, 1995, and Pixar intends to continue to
develop computer animated feature films for the family entertainment market. In
1995, Pixar began development on a second computer-animated feature film for
Disney, with the working title of Bugs, which shall be the first such film
developed and distributed under the new Co-Production Agreement with Disney. The
screenplay for this film, which is also targeted to the family entertainment
market, is currently under development, but the film is not expected to be
released until the end of 1998 at the earliest. Pixar has established parallel
creative teams so that it can develop more than one film at a time.
Home Videos. Toy Story was released by Disney as a home video in
October 1996, and Pixar believes that its future animated feature films will
lend themselves to home video distribution in both domestic and international
markets. Distribution of home video versions of the animated feature films
developed and produced under the Co-Production Agreement will also be pursuant
to the Co-Production Agreement.
Made-For-Home Video Sequels. Disney and Pixar have announced their
intention to produce a made-for- home video sequel to Toy Story, such as
Disney's made-for-home video sequel to Aladdin entitled The Return of Jafar, and
Pixar has begun work on the Toy Story Video Sequel under the terms of the
Co-Production Agreement. Pixar intends in the future to continue to produce
made-for-home video sequels generally based on the same characters as the
original feature film. The Toy Story Video Sequel will also be distributed
pursuant to the Co-Production Agreement. Pixar expects that the Toy Story Video
Sequel and other made-for-home video sequels will be shorter in length and lower
in cost and quality than the theatrical films then under development.
Merchandise and Soundtracks. Pixar believes that the characters and
songs created in animated feature films lend themselves to opportunities for
selling merchandise and soundtracks. For example, merchandise such as children's
toys based on stories and characters in Toy Story were designed using
three-dimensional data from Pixar's digital models. Disney has the rights to
distribute merchandise and soundtracks from Toy Story and the feature films to
be made pursuant to the Co-Production Agreement, and Pixar shares in the
profits, if any, generated from such sales.
Short Animation Products. Pixar has also in the past produced animated
or partially animated television commercials, including for products such as
Coca-Cola, Listerine, Levi's Jeans, Gummi-Savers (a LifeSavers product) and
Fresca. However, in 1996, Pixar largely discontinued its business of producing
commercials in favor of other
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opportunities. Pixar does still produce short animation projects, such as
30-second Toy Story vignettes for television programming targeted at children.
Moreover, Pixar believes that there may be other opportunities to produce short
animation projects for Disney in connection with work performed under the
Co-Production Agreement. In particular, Pixar believes that there may be
opportunities for short animation projects related to theme parks and children's
television programming. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report.
Other Products. Pixar has been selling its RenderMan software for over
seven years. RenderMan has helped visual effects studios create visual effects
such as certain dinosaurs in Jurassic Park, the metal cyborg in Terminator 2 and
the ghosts in Casper. RenderMan runs on Unix-based workstations from Silicon
Graphics, Sun Microsystems, Inc. ("Sun"), The Hewlett-Packard Company
("Hewlett-Packard"), International Business Machines Corporation ("IBM") and
Digital Equipment Corp. ("Digital Equipment") as well as the Windows platform.
Examples of RenderMan customers include movie studios such as Disney, Boss Film
Studios, Inc., Digital Domain, Twentieth Century Fox Film Corporation,
Industrial Light and Magic ("ILM"), Columbia/Tri-Star Pictures Inc. and Warner
Bros. Inc. Customers also include government agencies and universities.
RenderMan is sold in several formats, including a Toolkit at a list price of
$5,000 per license. Discounts are available for site or multi-use licenses. As a
result of Pixar's reduced emphasis on the commercialization of software in favor
of products sold for their content, Pixar expects to dedicate less time and
resources to distributing and marketing RenderMan than it has in the past,
particularly shrink-wrapped versions of RenderMan, and expects that sales of
these products may decline. See "-- Technology -- RenderMan." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1996 Annual Report.
Discontinuation of Interactive Products Division. In 1995, Pixar
established a division that focused on the development of interactive CD-ROM
stories and games for PCs. Under a separate prior agreement with Disney, this
division of Pixar developed two CD-ROM titles based on Toy Story -- Toy Story
Interactive Storybook and Toy Story Activity Center. The products developed
under that agreement with Disney were financed and distributed by Disney. All
future CD-ROM products and other interactive products based on feature films
made pursuant to the Co-Production Agreement, if any, will be produced and
distributed pursuant to the terms of the Co-Production Agreement, which provides
Pixar with the option to produce and co-finance such products and to share
equally in the profits, after recovery of marketing and distribution costs.
After the Co-Production Agreement was executed on February 24, 1997,
Pixar began evaluating the merits of staying in the business of producing
CD-ROM products and comparing those opportunities with opportunities in film
and other potential projects under the Co-Production Agreement. Management
determined that, despite the fact that Pixar's first CD-ROM titles were
successful on relative terms, the resources currently devoted to its
interactive products division would be better allocated to other projects
arising from the Co-Production Agreement, which Pixar believes have greater
potential than CD-ROM titles, such as theatrical films, home video sequels and
short animation projects. Moreover, the CD-ROM and interactive product market
is not growing as fast as expected, the production costs of such products are
increasing and one project under negotiation with a third party was canceled.
For these reasons, Pixar determined in the last week of March 1997 to
discontinue its business of producing CD-ROM and other interactive products and
redirect the approximately 60 employees in this division to film and related
projects within Pixar. This decision is expected to have a material adverse
impact on Pixar's results of operations in 1997.
PIXAR COMPUTER ANIMATION PROCESS AND DIGITAL BACK LOT
Pixar Computer Animation Process
The production of an animated feature film is extremely complex and
time consuming due to the very large number of frames and intricate detail of
each frame. At 24 frames per second, a 77-minute animated feature film such as
Toy Story requires approximately 110,000 individual frames. Animation for a
feature film has traditionally been created through hand-drawn cels, requiring
hundreds of people working for two to three years. Although computers have been
used to assist in some elements of painting cels for more recent releases,
almost every frame is still hand-drawn.
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Pixar believes that its proprietary technology, which allows animators
to manipulate hundreds of motion control points within a single character,
allows for more intricacy and subtlety of character and personality than
traditional two-dimensional cel-based animation. This technology also
facilitates the manipulation, editing and re-use of animated images.
Pixar makes its computer animated films and other projects in three
stages: creative development, production and post-production.
CREATIVE Story -- Treatment/ -- Screen- -- Story -- Story -- Voice
DEVELOPMENT Concept Outline Play Board Reels Recording
Creative Development. Creative development is an iterative process in
which the story and its characters are created and developed. The first step in
creative development involves the development of a story concept, which often
takes the form of a story summary or outline known as a treatment. After
numerous iterations and research into the story and characters, a first draft of
a screenplay is written. The screenplay is then turned into story boards, which
are panels filled with thousands of sketches that represent the story to be
animated. The story boards are then transferred to film or video so that they
can be electronically edited into a photo play of the film called story reels, a
process which enables editing of the film before the production phase begins.
Voices are then selected, recorded and added to the story reels. Throughout the
creative development process, plans are developed for the style, colors and look
of the film.
PRODUCTION Modeling -- Layout -- Animation -- Shading -- Rendering -- Film
and Recording
Lighting
Production. Pixar's production stage consists of six phases: modeling,
layout, animation, shading and lighting, rendering and film recording. In the
modeling phase, digitized models of each set and character are created by
defining their shapes in three dimensions (height, width and depth) and by
adding animation control points that allow the model to be moved or animated. In
some cases, a model has hundreds of animation controls. In the layout stage,
artists place the digital models into a scene and position the digital cameras
at the angles from which the three-dimensional shot is to be seen. The assembled
shot is then given to the animator together with the prerecorded voice.
In the animation stage, the digitized models are animated, or "brought
to life," in three dimensions to create a motion sequence. Animation is
performed by defining "key frames," which are the frames containing the extremes
of motion that will occur in a scene. The computer then interpolates frames in
between the two most extreme positions in a particular segment of movement to
create smooth motion. The animators can then adjust the interpolation and key
frames repeatedly until they achieve the desired result. The next step in
completing a scene requires attaching to each object and model a description of
its surface characteristics. These "shaders" describe the pattern, texture,
finish and color for every object in the scene. Next, lighting is added by
placing digital lights into the scene. In the rendering phase, the renderer
takes the modeling, layout, animation, shading and lighting data and, for each
frame in the sequence, computes a three-dimensional image of what the scene
looks like at that point in time from the point of view of the camera. The final
rendering of a single frame can take between one and twenty hours. The final
rendered data is then sent to one of Pixar's film recorders for imaging onto
film.
POST- Sound -- Print -- Sound -- Color -- Delivery
PRODUCTION Effects Musical Mixing Correction of Print
Design Score
Post-Production. The post-production stage consists of two parallel
processes: the picture process and the sound process. In the picture process,
images are put on film, the film is sent to a laboratory for color correction
and final prints are made. In the sound process, the sound effects and musical
score are added and the final sound is mixed. Pixar's post-production is simpler
than post-production in a live-action film, which requires more significant
editing. In
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most live-action films, many hours of film are shot, and the film is then
significantly edited and re-edited in the post-production stage to create a
feature film. Pixar, like other animation studios, edits the film throughout the
entire creative development and production process. Thus post-production
involves only final editing.
Digital Back Lot
The digital models that Pixar develops to create its animated products
may be used again in future films, CD-ROM titles, television commercials and
other animation products. The Pixar technical team has developed a proprietary
database of thousands of digital models, sets, textures and surface appearances
from its short films and commercials. Much like the traditional movie studio's
back lot, this digital database allows Pixar animators to retrieve and re-use
thousands of different elements that make up the characters and scenes of a
film. Unlike a traditional movie studio's back lot however, digital animation
sequences can be easily re-used. For example, a sequence of a character walking
could be re-used with little or no rework in another portion of the film. These
models may also be used in other films or in videos, CD-ROM titles or to create
merchandise. For example, the models that were used to animate Toy Story were
"re-used" or rendered in a different resolution for use in Pixar's two Toy Story
CD-ROM titles and are being re-used in the Toy Story Video Sequel.
TECHNOLOGY
Pixar has three core proprietary technologies: (i) Marionette, an
animation software system for modeling, animating and lighting, (ii) Ringmaster,
a production management software system for scheduling, coordinating and
tracking of a computer animation project and (iii) RenderMan, a rendering
software system for high quality photo-realistic image synthesis that Pixar
uses internally and licenses to third parties. Each of these systems is critical
to the production of Pixar's animated feature films and other animation
products.
Marionette. Marionette is Pixar's software system for modeling,
animation and lighting for computer animation. Marionette is the primary
software tool of every animator and technical director at Pixar. In contrast to
many commercially available animation systems which are designed to address
product design, corporate logo graphics or cinematic special effects, Marionette
has been designed and optimized for character modeling and animation. Marionette
is portable across many of the standard Unix workstations, including those from
Silicon Graphics and Sun. Pixar has also ported Marionette to IBM and
Hewlett-Packard workstations for hardware evaluation purposes.
Ringmaster. Ringmaster is a production management software system for
scheduling, coordinating and tracking a computer animation project. Due to the
enormous amount of data required in three-dimensional animation, accurate
production information is essential for producing high quality animation.
Pixar's production coordination staff uses Ringmaster to plan and track projects
ranging from short commercials to feature films.
A key component of Ringmaster is a distributed rendering system for
managing the huge quantity of images and data that must be rendered to create
Pixar's products. Pixar does its rendering on an array of powerful Unix
processors which are dedicated to rendering 24 hours a day. These machines,
which Pixar calls the RenderFarm, are connected via a local area network. To
achieve the desired quality level, the average time to render a single frame at
film resolution is between one and four hours; for video resolution the average
time to render a single frame is between 30 and 90 minutes. Since an animated
feature film contains well over 100,000 frames, each of which may be rendered
several times in the production process, Pixar typically has a large number of
frames to render at any give time. To manage this process, Ringmaster
coordinates and schedules all the processors in the RenderFarm. Ringmaster
includes a compositing system and also maintains an array of disk drives as a
central data repository for the digital image files generated by the rendering
and compositing steps of the production process. Finally, Ringmaster controls
the filming phase of production and is responsible for backing up shots for
archival purposes.
RenderMan. RenderMan is a rendering software system for high quality
photo realistic image synthesis that Pixar uses internally and also licenses to
third parties. Today, RenderMan is used by many major film studios and special
effects firms. Examples of projects which have used RenderMan include Terminator
2, Jurassic Park, True Lies, Aladdin, Casper and Apollo 13. By licensing
RenderMan to film studios, visual effects houses, commercial production
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facilities and other computer animation companies, Pixar believes that RenderMan
has been established as a de facto industry standard for high quality rendering.
Pixar has used RenderMan for animation production since 1988, when it
was first used in the making of the short animated film Tin Toy. Since that
time, Pixar has used RenderMan for its films and for more than 40 television
commercials. Pixar also used RenderMan to render approximately 110,000 frames
for the animated feature film, Toy Story, and to render all frames for the two
Toy Story CD-ROM titles.
RenderMan was designed to be easily portable. It runs on a wide variety
of Unix workstations, including those from Silicon Graphics, Sun,
Hewlett-Packard and Digital Equipment. Pixar has also ported RenderMan to the
Windows and Macintosh platforms.
CREATIVE DEVELOPMENT GROUP
Pixar's creative and technical personnel have collaborated for over ten
years to produce three-dimensional computer animated films. The principal
objective of Pixar's creative group is to use the medium of computer animation
to create heartwarming stories with memorable characters that are targeted for
family entertainment. The members of Pixar's creative and technical teams have
been nominated for and received a number of awards. In 1986, the short animated
film Luxo Jr. earned an Academy Award nomination for Best Short Film (Animated).
In 1988, another of Pixar's short films, Tin Toy, became the first computer
animated film to win the Academy Award for Best Short Film (Animated).
The creative team at Pixar is under the direction of John Lasseter, an
Academy Award-winning director and animator and the director of Toy Story. In
March 1996, Mr. Lasseter received a Special Achievement Oscar from the Academy
of Motion Picture Arts and Sciences for the development and application of
techniques that made possible the first feature-length computer animated film --
Toy Story. Pixar has built an entire creative team consisting of highly skilled
animators, story artists and other artists highly skilled in the art of
animation, especially computer animation. Pixar strives to hire animators who
have superior acting ability -- those able to make characters and inanimate
objects come to life and appear as though they have their own thought processes.
Pixar's proprietary software tools enable artists unfamiliar with computers to
quickly become skilled in the art of three-dimensional animation. Along with
animators, the creative team at Pixar includes a story department and an art
department. The story department is responsible for a project's concept,
treatment, outline, script, story boards and story reels. The art department is
responsible for the visual development of a project, including the design of
characters and sets and the color, textures, shading and lighting. It is also
quite common for creative contributions to come from the technical group. All
groups work closely together in an iterative process. To encourage
collaboration, Pixar has strived to create a cooperative working environment and
a non-hierarchical culture whereby each member of the creative team, regardless
of position or department, considers the ideas of any other member of the team.
The success of each animated feature film developed by Pixar will
depend in large part upon the Pixar creative team's ability to predict the type
of content that will appeal to a broad audience and to develop stories and
characters that achieve broad market acceptance. Traditionally, this has been
extremely difficult. Disney provided creative assistance throughout the
production of Toy Story, including creative reviews and approvals, and the
Co-Production Agreement contemplates that Disney will continue to provide
creative assistance to Pixar on feature films and other products made pursuant
to that agreement, but there can be no assurance that Disney will continue to
provide assistance to Pixar in the development of creative content for its
feature films or related products. In addition, there can be no assurance that
voices and other intellectual property rights used in an animated feature film
will be available for use in any sequel or other product related to such feature
film. For example, Pixar was unable to obtain the rights to use certain voices
from Toy Story in the two CD-ROM products based on Toy Story. See "Certain
Factors Affecting Business, Operating Results and Financial Condition --
Dependence on Successful Development of Appealing Creative Content For Animated
Feature Films and Related Products."
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RELATIONSHIP WITH DISNEY
Prior Agreements
Pixar's relationship with Disney dates to 1986, when Pixar and Disney
entered into a joint technical development effort that resulted in the Computer
Animated Production System ("CAPS"), a production system owned and used by
Disney in certain of its two-dimensional cel-based animated feature films.
Disney first used CAPS for The Rescuers Down Under and subsequently used it for
other animated feature films, including Beauty and the Beast, Aladdin, The Lion
King and Pocahontas. In 1992, certain employees of Pixar and Disney were jointly
awarded an Academy Award for Scientific and Engineering Achievement for CAPS.
In May 1991, Pixar entered into a Feature Film Agreement with Walt
Disney Pictures, a wholly-owned subsidiary of Disney, which provided for the
development, production and distribution of up to three feature-length motion
pictures (the "Feature Film Agreement"). It is pursuant to that Feature Film
Agreement that Toy Story and the Toy Story home video were developed, produced
and distributed. In August 1995, Pixar entered into a non-exclusive CD-ROM
development and publishing agreement with Disney Interactive, Inc. ("Disney
Interactive"), a wholly-owned subsidiary of Disney, for the development,
production and distribution of CD-ROM titles based on Toy Story (the "CD-ROM
Agreement"). It is pursuant to the CD-ROM Agreement that the two Toy Story
CD-ROM products were developed, produced and distributed. Both the Feature Film
Agreement and the CD-ROM Agreement were superseded by the Co-Production
Agreement, except as discussed below.
Co-Production Agreement
The following is a summary of the Co-Production Agreement, which has
been filed as an exhibit to this Annual Report on Form 10-K. The foregoing
summary is not complete, and reference is made to the Co-Production Agreement
filed as an exhibit to this Annual Report on Form 10-K. This summary is
qualified in all respects by such reference. Shareholders and prospective
investors in Pixar's Common Stock are encouraged to read the Co-Production
Agreement.
Overview. On February 24, 1997 Pixar and Walt Disney Pictures and
Television entered into the Co-Production Agreement pursuant to which Pixar, on
an exclusive basis, will produce five computer animated feature-length
theatrical motion pictures (the "Pictures") for distribution by Disney over
approximately the next ten years. Pixar and Disney will 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 will be financed by Disney), 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 Pixar will produce
each Picture and that Disney will control all decisions relating to marketing,
promotion, publicity, advertising and distribution of each Picture. Disney and
Pixar have agreed that the first Picture under the Co-Production Agreement is
the Picture with the working title "Bugs." 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 will have the opportunity to co-finance and
produce such products or to earn passive royalties on such products. Disney and
Pixar have announced their intention to produce a made-for-home video sequel to
Toy Story, and Pixar has already begun work on the production under the terms of
the Co-Production Agreement. Pixar will not share in any theme park revenues
generated as a result of the Pictures.
Production. The Co-Production Agreement provides a mechanism for
Pixar's submission and the mutual selection of treatments that will be developed
and produced as Pictures. After the selection of a treatment, Pixar generally
controls the production of each Picture. Disney is entitled to designate a
representative at Pixar to monitor the production and production costs of the
Pictures.
Financing of Development and Production. Pixar and Disney are to
equally share all production costs. Production costs are defined in the
Co-Production Agreement to mean all costs and expenses incurred by Pixar
directly related to or fairly allocable to the creation, development,
pre-production, production, post-production and delivery to
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Disney of the Pictures. Production costs include, among other things, all
carrying costs incurred by Pixar for retaining of employees for production
purposes and the overhead attendant thereto, the costs of all treatments
prepared by Pixar for submission to Disney, all costs of computer hardware and
software used to develop the Pictures, and fair allocations of all costs and
expenses of Pixar associated with or benefiting the Picture, including research
and development, general and administrative and overhead expenses and
facilities. The Co-Production Agreement provides mechanisms for Disney and Pixar
to agree upon the budgets for treatments, development and production of each
Picture. Pixar may not exceed production budgets (which may be revised with
mutual approval) without Disney's written approval, subject to certain limited
exceptions.
Distribution. Disney has control over all decisions relating to, and is
solely responsible for financing the costs and expenses of, the marketing,
promotion, publicity, advertising and distribution of each Picture, subject to
certain requirements. Provided, in general, that Disney has agreed on the
treatment to be developed into each Picture, Disney has committed to initially
release each Picture within certain windows and not to release other Disney
family films during certain windows, and each Picture is to be distributed and
marketed under the Walt Disney Pictures brand (or the then current Disney brand
for premiere Disney movies) and is to be distributed and marketed by Disney in
all markets and media and on a worldwide basis in a manner similar to that in
which Disney then currently distributes and markets its premiere animated
movies. Disney is to consult with Pixar relating to all such major marketing and
distribution decisions, and Pixar is entitled to designate a representative to
monitor marketing and distribution of the Pictures.
Division of Gross Receipts. Pixar and Disney are entitled to share
equally in all gross receipts remaining after deduction of: (i) a distribution
fee to Disney, (ii) mutually agreed participations (payments to third parties
such as actors, composers and other artists contingent upon the success of the
Pictures), if any, on a pro rata basis, paid by either Disney or Pixar, and
(iii) Disney's distribution costs. Gross receipts includes all revenues or other
consideration received by Disney from the exploitation of the Pictures and any
related merchandise, books, soundtracks and other tangible personal property
based upon the Pictures, as more specifically provided in the Co-Production
Agreement (collectively, "Merchandise"), subject to certain exceptions relating
primarily to receipts from Disney's affiliates. The distribution fee payable to
Disney is substantially lower than under the prior Feature Film Agreement and
reflects Pixar's commitment to finance half of the production costs of the
Pictures. Distribution costs are broadly defined in the Co-Production Agreement
to include out-of-pocket costs paid (or in certain instances, accrued for
payment) to a third party (or in certain instances, to Disney's affiliates) by
Disney or certain of its affiliates, provided that such out-of-pocket costs are
directly related or fairly allocable to the distribution of the Picture and
Merchandise. Pursuant to the Co-Production Agreement, Pixar will receive
statements and payments of its share of gross receipts monthly within 45 days
after the end of each calendar month, and Pixar has the right to audit Disney's
and its affiliates' books and records relating to the Pictures and Merchandise.
Derivative Works. Subject to certain exceptions, Disney and Pixar have
mutual control of the decision to develop, produce or otherwise exploit any
derivative works (or to transfer or license any rights to exploit any derivative
works) during the term of the Co-Production Agreement or thereafter. Derivative
works include theatrical sequels, made-for-home video sequels, television
productions, interactive media products and other derivative works as more
specifically provided in the Co-Production Agreement (collectively, "Derivative
Works"). Except in certain very limited circumstances, in the event of a
disagreement over whether to proceed with a Derivative Work, Disney's decision
governs. Pixar is to be given the option to co-finance and produce, or to
participate on a passive financial basis with respect to, a Derivative Work that
is (i) a theatrical motion picture, a (ii) a made-for-home video production,
(iii) a television production, (iv) location-based entertainment which uses
unique characters or other elements from any of the Pictures or Toy Story as its
primary theme, or (v) an interactive product such as CD-ROMs, DVDs, video games
and arcade games (collectively, "Interactive Products").
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If Pixar elects to co-finance and produce a Derivative Work, the
Co-Production Agreement provides for the following:
(i) with respect to theatrical motion pictures and
made-for-home video productions, the terms and conditions of the
Co-Production Agreement are to be extended to cover such Derivative
Works, subject to certain exceptions;
(ii) with respect to (A) location-based entertainment using
characters or other elements from a Picture or Toy Story as its primary
theme and (B) television productions , Pixar and Disney are to mutually
agree upon the terms and the conditions under which such work shall be
financed, produced and distributed, subject to certain specified
requirements in the case of television productions; and
(iii) with respect to Interactive Products, Disney and Pixar
are to mutually agree upon the terms and conditions under which such
Interactive Product shall be financed, produced and distributed,
subject to certain commitments by Disney with respect to marketing and
distribution and provided that there shall be no distribution fee
payable to Disney.
For live entertainment such as stage plays or ice shows, Pixar is
entitled to participate on a passive financial basis as is specified in the
Co-Production Agreement. For all other Derivative Works except theme parks,
Pixar is entitled to participate on a passive financial basis in such work and
to receive a reasonable royalty to be mutually agreed upon if the work is a
revenue-producing work. Disney has the sole and exclusive right in perpetuity to
use, without compensation to Pixar, each Picture, the characters therefrom and
any story elements thereof in theme parks, location- based entertainment for
which Picture or Toy Story characters or elements are not the primary theme and
cruise ships.
A Derivative Work that is a theatrical motion picture would not count
towards the five Pictures to be produced under the Co-Production Agreement. The
Toy Story Video Sequel is the first such Derivative Work that Pixar has elected
to co-finance and produce.
Creative Controls. Creative controls and decisions with respect to
developing and producing Pictures are generally subject to the mutual approval
of Pixar and Disney. The Co-Production Agreement provides for certain dispute
resolution procedures in the event of disagreement.
Brand/Credit. The Co-Production Agreement sets forth Disney's and
Pixar's intent that the Pixar brand be established as a co-equal brand to the
Disney brand in connection with the Pictures, Merchandise and Derivative Works.
The Co-Production Agreement provides that the Pixar logo, animated logo and
credit shall be used in a manner which is perceptually equal to the Disney logo,
animated logo and credit, subject to certain specific requirements as set forth
in the Co-Production Agreement.
Exclusivity. Pixar has agreed not to release or authorize the release
of any feature length animated theatrical motion picture produced by Pixar,
other than the Pictures and Derivative Works produced by Pixar under the
Co-Production Agreement, until twelve months from delivery of the fifth Picture
under the Co-Production Agreement. Pixar has further agreed that it will not
enter into any agreement with any third party for the development, production or
distribution of any feature length animated theatrical motion picture until
after Pixar has delivered the third Picture to Disney under the Co-Production
Agreement. Pixar has also agreed that it will not develop or produce any rides
or attractions for major theme parks not owned or operated by Disney, and to
give Disney a right to negotiate with respect to animated television productions
or animated made-for-home video productions that Pixar proposes to produce
during the term of the Co-Production Agreement.
Proprietary Rights. The copyrights, trademarks and other intellectual
property rights in and to the Pictures, all new and unique characters and story
elements thereof and the audio-visual images thereof, and Merchandise relating
thereto, shall be jointly owned by Disney and Pixar on an undivided 50/50 basis,
subject to Pixar's ownership rights in the technology and excluding any
intellectual property rights previously owned by Pixar or Disney.
Notwithstanding the foregoing, Disney has the exclusive distribution and
exploitation rights with respect to the Pictures, Derivative Works
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and Merchandise relating thereto. Pixar shall own the copyright and all other
intellectual property rights in and to all computer programs and other
technology developed or discovered by Pixar before, during or after the term of
the Co-Production Agreement.
Term and Termination. The Co-Production Agreement continues until
delivery to Disney of the fifth Picture produced and financed under the
Co-Production Agreement, unless earlier terminated. Disney is entitled to
terminate the Co-Production Agreement in the event that Disney and Pixar fail to
agree on a treatment for a Picture within one year after the initial theatrical
release of the last Picture for which a treatment has been approved or selected,
subject to certain exceptions. Disney is also entitled to terminate the
Co-Production Agreement in the event that certain types of competitors directly
or indirectly acquire or control a 50% or greater ownership interest in Pixar or
Pixar merges or consolidates into such a competitor. Upon termination by Disney
pursuant to either of the last two sentences, Disney has certain rights to
compel Pixar to complete works in production. In the event of termination, the
Co-Production Agreement provides that its terms and conditions continue to apply
with respect to Pictures, Merchandise and Derivative Works which have been
delivered by Pixar to Disney or which Disney elects to have completed, as well
as all future Merchandise and future Derivative Works relating thereto, but
otherwise terminates.
Effect on Prior Agreements. All Derivative Works based on Toy Story,
including the Toy Story Video Sequel currently being produced, are to be
governed by the Co-Production Agreement and not the original Feature Film
Agreement or the CD-ROM Agreement. The original Feature Film Agreement now
applies only to the rights and obligations of Disney and Pixar relating to the
financial participation in, and the production and distribution of, the
theatrical motion picture Toy Story and the financial participation in
Merchandise related to Toy Story (unless gross receipts in any given month
exceed a certain amount, in which case they will be subject to the Co-Production
Agreement), and otherwise has no further force or effect. The original CD-ROM
Agreement remains in full force and effect with respect to the first and second
CD-ROM products developed under that agreement, but otherwise has no force or
effect.
COMPETITION
Pixar experiences intense competition with respect to both animated
feature films and software.
Movie Studios. Pixar's animated feature films compete and will continue
to compete with feature films and other family oriented entertainment products
produced by major movie studios, including Disney (as somewhat limited by the
Co-Production Agreement), Warner Bros. Inc. (which has acquired Turner
Broadcasting Systems Inc.), Twentieth Century Fox Film Corporation, Paramount
Pictures, Columbia/Tri-Star Pictures Inc., Lucasfilm Ltd. ("Lucasfilm"),
Universal City Studios, Inc. and MGM/UA, as well as numerous other independent
motion picture production companies. Several of these studios have already
developed and released animated feature films, and Pixar expects additional
competition in the animated feature film market from these and other movie
studios. Some of these other movie studios have announced their intention to
enter the animated feature film market, including DreamWorks SKG ("DreamWorks"),
a studio formed in 1994 which is expressly targeting the animated film market.
In particular, DreamWorks owns a significant equity stake in Pacific Data Images
("PDI"), a computer graphics special effects firm, and has begun developing a
computer animated movie with PDI that is expected to be completed by 1998. This
computer animated movie, which has been referred to publicly as "Ants", may
contain similar subject matter as Bugs. Pixar's films will compete with the
feature films of these movie studios for audience acceptance and exhibition
outlets. In addition, Pixar competes and will continue to compete with these
movie studios for the acquisition of literary properties, production financing,
the services of performing artists, and the services of other creative and
technical personnel, particularly in the fields of animation and technical
direction. Most of the other movie studios with which Pixar competes have
significantly greater name recognition and significantly greater financial,
technical, creative, marketing and other resources than does Pixar.
At least two of these movie studios, Disney and Lucasfilm (through its
affiliate Industrial Light and Magic ("ILM")), have developed their own internal
computer animation capability and have created computer animation for special
effects in animated films. In addition, Pixar believes that Disney is currently
developing and producing a feature film making substantial use of computer
animation. Other movie studios may internally develop, license or sub-contract
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three-dimensional animation capability. Further, Pixar believes that continuing
enhancements in computer hardware and software technology will lower barriers to
entry for studios or special effects companies which intend to produce computer
animated feature films or other products.
The Co-Production Agreement provides for the development and production
by Pixar of five computer animated feature films. Because Disney co-finances the
films developed and produced under the Co-Production Agreement, distributes the
films under the "Walt Disney Pictures" label and enjoys financial benefits in
the event that such films achieve significant box office revenues, Pixar
believes that Disney desires such films to be successful. Nonetheless, Disney
has been by far the most successful producer of animated feature films, and
family oriented motion pictures distributed by Disney or its affiliates are
likely to be in the market concurrently with and competing with Pixar's animated
feature films. Pixar's contractual arrangement with Disney also presents other
risks. See "Certain Factors Affecting Business, Operating Results And Financial
Condition -- Risks Associated With Co-Production Agreement."
Pixar believes that the primary competitive factors in the market for
animated feature films include creative content and talent, product quality,
technology, access to distribution channels and marketing resources. Due in part
to the Co-Production Agreement with Disney, pursuant to which Disney co-finances
the production of the feature films, markets the feature films and provides
creative assistance and access to significant distribution channels, Pixar
believes that it presently competes favorably with respect to each of these
factors.
Computer Graphics Special Effects Firms. Pixar also expects to compete
with computer graphics special effects firms, including ILM, Digital Domain,
PDI, Rhythm & Hues, Boss Film Studios, Inc. and Blue Sky Productions. These
computer graphics special effects firms may be capable of creating their own
three-dimensional computer animated feature films or may produce
three-dimensional computer animated feature films for movie studios that compete
with Pixar. For example, ILM has already created and produced three-dimensional
character animation which was used for the ghosts in the live action film
Casper, and ILM has a royalty-free, paid-up license to use Pixar's RenderMan
software and to obtain at no cost all enhancements and upgrades thereto. Other
computer graphics special effects firms have licensed or may license RenderMan.
Accordingly, Pixar's RenderMan software may not provide Pixar with a competitive
advantage. Pixar believes that the primary competitive factors in the market for
three-dimensional computer animation for feature films include creative content
and talent, product quality, technology, access to distribution channels and
marketing resources. Pixar believes that it presently competes favorably with
respect to each of these factors.
Software Publishers. Pixar also experiences intense competition with
respect to its RenderMan software product. In particular, Pixar competes with
makers of computer graphics imaging and animation software, principally
Microsoft (which acquired SoftImage Inc.), MentalImage (which offers the same
product offered by Microsoft), and Silicon Graphics (which acquired Wavefront
Technologies, Inc. ("Wavefront") and Alias Research, Inc. ("Alias")). Microsoft,
through SoftImage Inc., MentalImage and Silicon Graphics, through Wavefront and
Alias, are each marketing competing rendering software products. Microsoft and
Silicon Graphics have each licensed several of Pixar's patents that cover
certain rendering techniques and may therefore be better able to market products
that compete with Pixar's RenderMan software. In addition, as PCs become more
powerful, software suppliers may also be able to introduce products for PCs that
would be competitive with RenderMan in terms of price and performance for
professional users. Under appropriate circumstances, Pixar might elect to
license its rendering technology patents to other companies, some of which may
compete with Pixar. Pixar believes that the primary competitive factors in the
market for rendering software include product quality, price/performance,
technology, functionality, breadth of features and customer service and support.
Pixar believes that it presently competes favorably with respect to each of
these factors.
Pixar expects competition to persist, intensify and increase in each of
its business areas in the future. Almost all of Pixar's current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical,
marketing and other resources than Pixar. There can be no assurance that Pixar
will be able to compete successfully against current or future competitors. Such
competition could materially adversely affect Pixar's business, operating
results or financial condition.
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PROPRIETARY RIGHTS
Pixar's success and ability to compete is dependent in part upon its
proprietary technology. While Pixar relies on a combination of patents,
copyright and trade secret protection, nondisclosure agreements and cross-
licensing arrangements to establish and protect its proprietary rights, Pixar
believes that factors such as the technical and creative skills of its personnel
are more essential to its success and ability to compete. Pixar currently is the
owner of eight patents issued in the United States, one patent issued in the
United Kingdom, one patent issued in France, one patent issued in Germany, one
patent issued in Japan and two patents issued in Canada. In addition, Pixar has
six patent applications pending in the United States, four pending in Japan, one
pending before the European Patent Office and one pending before the Patent
Cooperation Treaty Office. There can be no assurance that patents will issue
from any of these pending applications or that, if patents do issue, any claims
allowed will be sufficiently broad to protect Pixar's technology. In addition,
there can be no assurance that any patents that have been issued to Pixar, or
that Pixar may license from third parties, will not be challenged, invalidated
or circumvented, or that any rights granted thereunder would provide proprietary
protection to Pixar.
The source code for Pixar's proprietary software is protected both as
trade secrets and as a copyrighted work. Pixar generally enters into
confidentiality or license agreements with its employees, consultants and
vendors, and generally controls access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use Pixar's
proprietary information, products or technology without authorization, or to
develop similar or superior technology independently. Policing unauthorized use
of Pixar's products is difficult. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries. To
license its RenderMan software product, Pixar primarily relies on "shrink wrap"
licenses that are not signed by the end-user and, therefore, may be
unenforceable under the laws of certain jurisdictions. There can be no assurance
that the steps taken by Pixar will prevent misappropriation of its technology or
that its confidentiality or license agreements will be enforceable. In addition,
litigation may be necessary in the future to enforce Pixar's intellectual
property rights, to protect Pixar's trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Any such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
Pixar's business, operating results or financial condition.
From time to time Pixar has received, and is likely to receive in the
future, notice of claims of infringement of other parties' proprietary rights.
There can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against Pixar or that any assertions or prosecutions will not
materially adversely affect Pixar's business, financial condition or results of
operations. Irrespective of the validity or the successful assertion of such
claims, Pixar would incur significant costs and diversion of resources with
respect to the defense thereof which could have a material adverse effect on
Pixar's business, financial condition or results of operations. If any claims or
actions are asserted against Pixar, Pixar may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance, however,
that under such circumstances a license would be available on reasonable terms
or at all.
Pixar also relies on certain technology that it licenses from third
parties, including software which is integrated and used with internally
developed software. There can be no assurance that these third party technology
licenses will continue to be available to Pixar on commercially reasonable
terms. The loss of or inability to maintain any of these technology licenses
could result in delays in feature film releases or product shipments until
equivalent technology could be identified, licensed and integrated. Any such
delays in feature film releases or product shipments could materially adversely
affect Pixar's business, operating results and financial condition.
In March 1996, Pixar entered into a license agreement with Silicon
Graphics whereby Pixar granted to Silicon Graphics and its subsidiaries a
non-exclusive license to use certain of Pixar's patents covering techniques for
creating computer-generated photorealistic images. These same patents were
licensed to Microsoft Corporation in June 1995. These patents relate to
pseudo-random point sampling techniques in computer graphics which are
incorporated into Pixar's RenderMan. The license agreements with Silicon
Graphics and Microsoft will expire no later than the year 2010.
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Silicon Graphics and Microsoft may use the licensed technology in rendering
products which compete with Pixar's RenderMan software, which could adversely
impact sales of RenderMan.
EMPLOYEES
As of December 31, 1996, Pixar had a total of 286 employees. Although
none of Pixar's employees is represented by a labor union, it is common for
animators and actors at film production companies to belong to a union, and
there can be no assurance that Pixar's employees will not join or form a labor
union or that Pixar, for certain purposes, will not be required to become a
union signatory. Pixar has not experienced any work stoppages and considers its
relations with the employees to be good.
Pixar's success depends to a significant extent on the performance of a
number of senior management personnel and other key employees, especially its
animators, creative personnel and technical directors. In particular, Pixar is
dependent upon the services of Steve Jobs, John Lasseter, Edwin E. Catmull
and Lawrence B. Levy. Pixar does not maintain "key man" life insurance for any
of its employees. Pixar does have employment agreements with Messrs. Lasseter
and Catmull, who are fundamental to its relationship with Disney. However, such
employment agreements do not necessarily assure the services of these employees.
Pixar believes that it may be particularly difficult to retain its key
employees, especially its animators, creative personnel and technical directors,
during periods in which it is not developing animated feature films. The loss of
the services of any of Messrs. Jobs, Lasseter, Catmull or Levy or of other key
employees, especially its animators, creative personnel and technical directors,
could have a material adverse effect on Pixar's business, operating results or
financial condition.
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CERTAIN FACTORS AFFECTING BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION
The following is a discussion of certain factors which 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.
ANTICIPATED DECLINE IN OPERATING RESULTS IN 1997 AND NET LOSSES IN 1998
A number of factors are expected to lead to a substantial decline in
Pixar's operating results in 1997 and net losses in 1998, as discussed more
fully below.
End of Toy Story Revenues
Pixar has already recognized the vast majority of the revenue it
expects to receive from the domestic and international theatrical releases of
Toy Story and expects substantially all of the revenue from the home video of
Toy Story to be recognized in the first two quarters of 1997. Under the terms of
the Feature Film Agreement, which still governs the compensation payable to
Pixar from the home video of Toy Story, Pixar is compensated for the home video
to a lesser extent than it was with respect to the theatrical release of Toy
Story. Pixar does not expect to recognize significant revenue from the Toy Story
home video in the third or fourth quarters of 1997 or in any quarter in 1998.
Pixar also expects limited revenue from the Toy Story CD-ROM products in 1997
and little or no revenue from such products in 1998.
Reduced CD-ROM Revenue
Pixar also expects to recognize less CD-ROM revenue in 1997 and 1998
than was previously anticipated. Although its first two CD-ROM products were
successful on relative terms, Pixar determined in the last week of March 1997
to discontinue its business of producing CD-ROM and other interactive products
in favor of other opportunities arising, in part, as a result of entering into
the Co-Production Agreement. This decision is expected to have a material
adverse impact on Pixar's operating results in 1997 and 1998. Pixar will not
recognize any CD-ROM or other interactive product revenue in 1997 or 1998,
other than revenue attributable to the two Toy Story CD-ROM products, and may
incur carrying costs associated with the approximately 60 employees currently
assigned to the interactive products division. Pixar does, however, expect to
be able to reassign most of these employees to Picture productions and other
departments within Pixar.
Timing of Bugs and Toy Story Video Sequel Releases
Bugs is not expected to be released until the end of 1998 at the
earliest, and revenue attributable to Bugs is not expected to be recognized
until after all costs have been recovered. Recovery of all costs depends on many
factors and may not occur until six to twelve months after its release at the
earliest, ensuring that Pixar will not recognize any revenue from Bugs until the
second half of 1999 at the earliest. The Toy Story Video Sequel is currently
targeted for release in the second half of 1998, but its release date could
change for a number of reasons. First, Pixar may be unable, for technical or
other reasons, to complete the production of the Toy Story Video Sequel in time
for its scheduled release in the second half of 1998. Second, even if completed,
Disney and Pixar may choose to delay release of the Toy Story Video Sequel until
the 1998 holiday season or thereafter. Depending on the timing of receipt of
revenues by Disney, Pixar may not recognize revenue from the Toy Story Video
Sequel until three to six months after its release at the earliest, meaning that
if the Toy Story Video Sequel were released in late 1998 or thereafter, Pixar
would not recognize any revenue from the Toy Story Video Sequel until 1999 at
the earliest. Third, it is possible that the Toy Story Video Sequel could be
released to the theaters instead of as a made-for-home video. In such event,
Pixar would not expect to recognize any revenue until six to twelve months after
the theatrical release, with the result that Pixar would not recognize any
revenue from such film until 1999, even if released to the theaters in the
second half of 1998.
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Possible Decline in Sales of RenderMan Due to Shift in Focus
As a result of Pixar's reduced emphasis on the commercialization of
software in favor of products sold for their content, Pixar expects to dedicate
less time and resources to distributing and marketing RenderMan than it has in
the past, particularly shrink-wrapped versions of RenderMan, and further expects
that sales of RenderMan may decline.
Increase in Operating Expenses
In 1996, Pixar significantly increased its operating expenses, and
Pixar plans to continue to increase its operating expenses to fund greater
levels of research and development and to expand operations. Specifically, Pixar
expects operating expenses to increase significantly due to continued investment
in proprietary software systems, increased compensation costs as a result of
intense competition for animators, creative personnel and technical directors
and increased costs associated with the expansion of its facilities.
Accordingly, Pixar anticipates significant increases in operating expenses in
each of 1997 and 1998. Finally, Pixar expects its tax rate to increase in 1997
and future years as the result of utilization of net operating losses in 1996.
Impact on Operating Results
As a result of the above factors, the only substantial revenue expected
to be recognized in 1997 will be from the Toy Story home video, and
substantially all of that will be recognized in the first and second quarters.
Further, unless the Toy Story Video Sequel is released early in the second half
of 1998 and is an extraordinary success on relative terms, Pixar will not
recognize substantial revenue in 1998. At the same time, Pixar's operating
expenses may increase in 1997 and 1998, even after giving effect to
capitalization of film production costs and allocation of certain operating
expenses to Disney under the Co-Production Agreement. Therefore, Pixar expects
revenue and operating results in the third and fourth quarters of 1997 to
decline substantially from the first and second quarters of 1997 and from the
same quarters of 1996. It is possible that Pixar would even incur operating and
net losses in each of the last two quarters of 1997. Pixar also expects to incur
operating and net losses in each of the first three quarters of 1998 and, unless
the Toy Story Video Sequel is released early in the second half of 1998, the
fourth quarter of 1998 and for the year ending December 31, 1998. See
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations" in the 1996 Annual Report.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
In addition to the factors set forth above, Pixar expects to generally
experience significant fluctuations in its future annual and quarterly operating
results caused by a variety of factors. Pixar expects that its annual and
quarterly operating results, particularly its revenue, will fluctuate due to
factors such as the timing of the domestic and international releases of the
animated feature films, the success of the animated feature films (which can
fluctuate significantly from film to film), the timing of the release of related
products into their respective markets, the demand for the related products
(which is 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 the animated feature films and
related products by Disney, the timing of revenue recognition under the
Co-Production Agreement, the Feature Film Agreement or the CD-ROM 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, Pixar's operating results are likely to fluctuate depending on
the level of success of its animated feature films and related products. The
revenues derived from the production and distribution of an animated feature
film depend primarily on the film's acceptance by the public, which cannot be
predicted and does not necessarily bear a direct correlation to the production
or distribution costs incurred. The commercial success of a motion picture also
depends upon promotion and marketing, production costs and other factors. See
"Risks of Motion Picture Industry -- Commercial Success of a Motion Picture is
Unpredictable." 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.
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Moreover, Pixar's operating expenses will be extremely difficult to
forecast. The direct costs of film production are budgeted in agreement with
Disney and shared equally. Pixar's share of these direct costs of film
production are capitalized by Pixar 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 ("Pixar's Overhead"),
including research and development expenses and general and administrative
expenses. Portions of Pixar's Overhead are included in the budgets for the
Pictures and will be shared equally with Disney under the Co-Production
Agreement. The remaining portion of Pixar's Overhead is either capitalized as
film production costs, if required under SFAS No. 53, or charged to operating
expense in the period incurred. Because a substantial portion of Pixar's
Overhead is allocated to the Pictures and reimbursed by Disney and other amounts
are capitalized by Pixar in accordance with SFAS No. 53, Pixar's future reported
operating expenses will not reflect the true level of spending on the production
of animated feature films, related products and overhead.
Pixar has a valuation allowance as of December 31, 1996 which fully
offsets its gross deferred tax assets due to Pixar's historical losses and the
fact that there is no guarantee Pixar will generate sufficient taxable income in
the future to be able to realize any or all of its deferred tax assets. As a
result, Pixar may not be able to realize a benefit in the future from its net
operating loss carryforwards, nor may it be able to recognize the tax benefits
of net operating losses to be generated in the future.
As a result of all of the foregoing, Pixar believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful, and its annual and quarterly results of operations should not be
relied upon as any indication of future performance. Due to all of the foregoing
factors, it is likely that in some future period Pixar's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of Pixar's Common Stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the 1996 Annual Report.
DEPENDENCE ON TOY STORY, BUGS AND TOY STORY VIDEO SEQUEL
Dependence on Toy Story
For at least 1997, Pixar's revenue and operating results will be almost
entirely dependent upon the success of Toy Story home video and the CD-ROM
products related to Toy Story. Under the Feature Film Agreement, even though Toy
Story grossed more than $350 million worldwide in box office receipts, Pixar's
compensation from these receipts (approximately $18.8 million) was relatively
small compared to that of Disney. Pixar expects to recognize substantially all
of the Toy Story home video revenue in the first two quarters of 1997 and little
or no revenue thereafter. The amount of compensation payable to Pixar from the
Toy Story home video is governed by the prior Feature Film Agreement, pursuant
to which Pixar's compensation rate for home videos is less than it was for
theatrical exhibitions of Toy Story. Pixar also expects limited revenue from its
Toy Story CD-ROM products in 1997 and little or no revenue from such products in
1998. Otherwise, Pixar expects little or no revenue in 1997 and 1998 from Toy
Story or related products. Because Bugs and the Toy Story Video Sequel are not
expected to be released until the end of 1998, all other revenues in the last
half of 1997 and 1998 will be primarily dependent upon Pixar's other businesses,
from which Pixar expects limited revenue. See "Business -- Relationship With
Disney -- Co-Production Agreement."
Dependence on Bugs and Toy Story Video Sequel
Beyond 1998, Pixar expects to be significantly dependent upon the
success of Bugs and the Toy Story Video Sequel (the "Current Projects") and
related products. Although creative development on each of the Current Projects
has begun, the Toy Story Video Sequel is not expected to be released any earlier
than the last half of 1998, and Bugs is not expected to be released any earlier
than the end of 1998. There can be no assurance that either of the Current
Projects will be successfully created, developed and released when scheduled or
thereafter. In addition, given the escalation in compensation rates of people
required to work on the Current Projects, the number of people required to work
on the Current Projects, and the equipment needs, the budget for the Current
Projects and subsequent films and related products will be substantially greater
than the budget for Toy Story and will be financed equally by Pixar and Disney
under the Co-Production Agreement. There can be no assurance that Pixar will not
experience difficulties that could delay or prevent the successful development
or production of either of the Current Projects or subsequent animated
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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, Pixar's business,
operating results and financial condition will be materially adversely affected.
Risks Associated With Bugs. Under the Co-Production Agreement, Pixar
shares the production costs of Bugs as well as a portion of the receipts. These
costs will initially be capitalized as film production costs under SFAS No. 53
and then be amortized over Bugs's expected revenue stream when revenue is
recognized. If Bugs is not an extraordinary box office success similar to Toy
Story, the amount of revenue recognized will not be significant, and the
capitalized production costs will have to be amortized in large amounts over a
limited number of quarters, resulting in significant costs of film revenue in
those quarters and, potentially, significant quarterly operating and net losses.
Animated feature films that become extraordinary box office successes are rare.
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 two movies generated domestic box office revenues greater than Toy
Story, and both of those films were produced and distributed solely by Disney.
During at least the last five years, Pixar believes that there has been no fully
animated feature film (other than Toy Story) produced or developed by a studio
other than Disney that has achieved more than $25 million in domestic box office
revenues. While Bugs will be co-financed, promoted and marketed by Disney, it
will have a different look, theme and musical style than Disney's other recent
animated films (except for Toy Story), and there can be no assurance that it
will have the same audience appeal as Disney's other animated films. For
example, The Nightmare Before Christmas, released in 1993, was an animated
feature film with a different appearance than traditional, hand drawn cel
animated feature films such as Beauty and the Beast, The Lion King, Aladdin,
Pocahontas and The Hunchback of Notre Dame and did not experience the same box
office returns as those films. As a result, even if released, Bugs and related
products may not generate significant revenue and operating results for Pixar,
even if Bugs is critically acclaimed and achieves substantial, but not
extraordinary, box office success. See "-- Risks Associated with Co-Production
Agreement -- Dependence on Disney for Distribution and Promotion of Feature
Films and Related Products," "-- Risks of Motion Picture Industry," and
"Business -- Relationship with Disney. " See also Note 4 of Notes to Financial
Statements in the 1996 Annual Report.
Risks Associated with Toy Story Video Sequel. There are several
additional risks unique to the Toy Story Video Sequel. First, Pixar has no
experience developing sequels, either theatrical or made- for-home video.
Moreover, the made-for-home video market has only recently begun to develop. As
is typical in the case of an undeveloped market, demand and market acceptance
are uncertain. Competition in this market is expected to increase dramatically.
Disney alone has announced its intention to distribute several made-for-home
video sequels in the next year, as have other studios. Pixar is at a
disadvantage in the made-for-home video sequel market as compared to other
animation studios in that Pixar cannot produce low cost animation, which
typically characterizes sequels to animated feature films. Finally, the Toy
Story Video Sequel will need to be an extraordinary success on relative terms in
order to generate profits for Pixar. If the Toy Story Video Sequel is not an
extraordinary success on relative terms, Pixar will incur substantial costs of
film revenue in those quarters in which revenue is recognized, which will have a
material adverse effect on its results of operations. There can be no assurance
that the Toy Story Video Sequel will be an extraordinary success on relative
terms, particularly given the recent emergence and uncertainty of the
made-for-home video market.
LIQUIDITY RISKS
Pursuant to the Co-Production Agreement, Pixar will co-finance the next
five animated feature films which it produces, including Bugs and the second
theatrical film being developed under the Co-Production Agreement (the "Second
Theatrical Film"), and will also co-finance the Toy Story Video Sequel. In the
future, Pixar may co-finance other derivative works such as theatrical sequels,
interactive products and television productions. As Pixar does not expect to
generate substantial, if any, cash from operations in 1997 and 1998, the
production costs of Bugs, the Second Theatrical Film and the Toy Story Video
Sequel are expected to have a material adverse impact on Pixar's cash and
short-term investment balances. As of December 31, 1996, Pixar had approximately
$161 million in cash and short-term investments. Pixar believes that these funds
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures, including the production costs of Bugs, the Second
Theatrical Film and the Toy Story Video Sequel, until Pixar begins receiving
cash from the release of these films (which is generally not expected to occur
until
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1999). However, even if these films generate cash, unless each 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 will 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 expansion of its facilities. See "Properties."
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.
SCHEDULED CONCURRENT RELEASE OF FILMS; MANAGEMENT OF GROWTH
In order to meet its obligations pursuant to the Co-Production
Agreement, Pixar has established parallel creative teams so that it can develop
more than one film at a time. These teams are currently working on Bugs, the
Second Theatrical Film and the Toy Story Video Sequel. Bugs and the Toy Story
Video Sequel are currently targeted for release at or about the same time in
late 1998. Pixar believes that the concurrent release of two major animated
feature films by one company is rare if not unique. Moreover, Pixar has only
produced one prior feature film to date and has no experience with respect to
producing two animated feature films in parallel. Pixar has been required, and
will continue to be required, to expand its employee base, increase capital
expenditures and procure additional resources and facilities in order to
accomplish the scheduled concurrent release of these two feature films. This
period of rapid growth and expansion has placed, and continues to place, a
significant strain on Pixar's resources. There can be no assurance that either
Bugs or the Toy Story Video Sequel will be released as scheduled in late 1998 or
that this strain on resources will not have a material adverse effect on Pixar's
business, financial condition or results of operations. In addition, when the
production of either film is completed, if completed, Pixar may incur
significant carrying costs associated with transitioning personnel on creative
and development teams from one project to another which, although shared with
Disney, could have a material adverse effect on Pixar's results of operations
and financial condition.
To continue to accommodate this growth, Pixar will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including improvement of its accounting and other
internal management systems. In addition, this growth and these diversification
activities, along with the corresponding increase in the number of Pixar's
employees and rapidly increasing costs, have resulted in increased
responsibility for Pixar's management. Pixar will need to continue to implement
and improve its operational, financial and management information systems and to
hire, train, motivate and manage its employees, to integrate them into Pixar and
to provide adequate facilities and other resources for them. There can be no
assurance that Pixar will be successful in accomplishing all of these activities
on a timely and cost-effective basis, and any failure to accomplish one or more
of these activities on a timely and cost-effective basis would have a material
adverse effect on Pixar's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH CO-PRODUCTION AGREEMENT
Dependence on Disney for Distribution and Promotion of Feature Films and
Related Products
The decisions regarding the timing of release of motion pictures and
related products and which of Disney's motion pictures and related products will
receive extensive promotional support from the studio are important in
determining the success of the motion picture and related products. Under the
terms of the Co-Production Agreement, Pixar has some general protections with
respect to the marketing and distribution of the feature films in the form of
commitments by Disney as to release windows, the timing of release of other
Disney family films and marketing obligations. However, Pixar ultimately does
not control the manner in which Disney distributes Pixar's animated feature
films and related products, the number of theaters to which Disney distributes
Pixar's feature films, the specific timing of release of the feature films and
related products or the specific amount or quality of promotional support of the
feature films and related products. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the "Walt Disney Pictures" label and may enjoy financial benefits in the
event that such films achieve significant box office revenues, Pixar believes
that Disney desires such films to be successful.
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Nonetheless, Disney could make certain decisions as to distribution or promotion
of the animated feature films or related products that could have a material
adverse effect on Pixar's business, operating results or financial condition.
See "Business -- Relationship with Disney."
Exclusivity
Pixar has agreed not to release or authorize the release of any feature
length animated theatrical motion picture produced by Pixar, other than the
feature films produced by Pixar under the Co-Production Agreement, until twelve
months from delivery of the fifth feature film under the Co-Production
Agreement. Pixar currently anticipates that the delivery of the fifth Picture
would not occur until at least ten years from the date of the Co-Production
Agreement. Pixar has further agreed that it will not enter into any agreement
with any third party for the development, production or distribution of any
feature length animated theatrical motion picture until after Pixar has
delivered the third feature film to Disney under the Co-Production Agreement.
Pixar has also agreed that it will not develop or produce any rides or
attractions for major theme parks not owned or operated by Disney, and to give
Disney a right to negotiate with respect to animated television productions or
animated made-for-home video productions that Pixar proposes to produce during
the term of the Co-Production Agreement.
Financing of Production Costs
Under the Co-Production Agreement, unlike the prior Feature Film
Agreement and the prior CD-ROM Agreement, Pixar will co-finance each of the five
animated feature films and may co-finance other related products to be developed
and produced pursuant to the Co-Production Agreement. Pixar is currently
co-financing Bugs, the Second Theatrical Film and the Toy Story Video Sequel
under the Co-Production Agreement. Accordingly, unlike the Feature Film
Agreement and the prior CD-ROM Agreement, Pixar will incur significant
production costs which must be offset by revenue generated by the animated
feature films and related products. If the feature films and related products do
not generate revenue sufficient to more than offset Pixar's share of their
production costs, Pixar's business, operating results and financial condition
will be materially adversely effected.
Rights to Characters and Elements Retained by Disney
Disney retains the exclusive distribution and exploitation right to all
feature films, all characters and story elements of the feature films and all
related products developed by Pixar under the Co-Production Agreement.
Accordingly, except in certain specified circumstances unlikely to generate
revenue, Pixar is not able to exploit or distribute any of the feature films or
characters or elements of any of the feature films or related products developed
under the Co-Production Agreement without a license from Disney. There can be no
assurances that such a license would be available to Pixar on commercially
reasonable terms or at all. See "Business -- Relationship with Disney."
Termination
Under the terms of the Co-Production Agreement, Disney may terminate
the agreement under certain circumstances. There can be no assurance that Disney
would not terminate the Co-Production Agreement under these circumstances.
Disney would not lose any of its rights to distribute and exploit all feature
films and all characters and elements of the feature films and other products
developed by Pixar under the Co-Production Agreement, except for a feature film
or related product then in production as to which Disney does not elect to
proceed, as to which Pixar would regain the rights subject to a lien in favor
Disney for the costs advanced to date. Further, in the event that Disney
terminated the Co-Production Agreement, Pixar would be required to seek
alternative channels for distribution of its animated feature films and related
products. There can be no assurance that Pixar would be able to find a third
party to finance, distribute and promote its animated feature films and related
products on terms acceptable to Pixar, if at all.
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RISKS OF MOTION PICTURE INDUSTRY
Commercial Success of a Motion Picture is Unpredictable
The motion picture industry involves a substantial degree of risk. Each
motion picture is an individual artistic work, and its commercial success is
primarily determined by audience reaction, which is unpredictable. The
commercial success of a motion picture also depends upon the quality and
acceptance of other competing films released into the marketplace at or near the
same time, critical reviews, the availability of alternative forms of
entertainment and leisure time activities, general economic conditions and other
tangible and intangible factors, all of which can change and cannot be predicted
with certainty. In addition, motion picture attendance is seasonal, with the
greatest attendance typically occurring during the summer and holidays. The
release of a film during a period of relatively low theater attendance is likely
to affect the film's box office receipts adversely. Further, due to the expected
release of a large number of animated films by Disney and other movie studios in
the next several years, it is possible that the market for animated films will
become saturated. Therefore, there is a substantial risk that some or all of
Pixar's motion pictures will not be commercially successful, which would have a
material adverse effect on Pixar's business, financial condition and results of
operations.
Completion of a Motion Picture Subject to Uncertainties and Financial Risks
The production, completion and distribution of motion pictures is
subject to numerous uncertainties, including financing requirements, personnel
availability and the release schedule of competitive films. Pixar is
concurrently developing three motion pictures, Bugs, the Second Theatrical Film
and the Toy Story Video Sequel, which compounds these uncertainties and
jeopardizes the successful, timely and cost-effective production and completion
of each film. Under the Co-Production Agreement, Pixar has increased its
financial involvement in the production costs of motion pictures, subjecting
Pixar to substantial financial risks relating to the production, completion and
release of the motion pictures. In addition, a significant amount of time will
elapse between the expenditure of funds by Pixar and the receipt of revenues
from the animated feature films.
COMPETITION
Pixar experiences intense competition with respect to both animated
feature films and software.
Competition From Movie Studios
Pixar's animated feature films compete and will continue to compete
with feature films and other family oriented entertainment products produced by
major movie studios, including Disney (as somewhat limited by the Co-Production
Agreement), Turner Broadcasting Systems Inc., Warner Bros. Inc. (which has
acquired Turner Broadcasting Systems Inc.), Twentieth Century Fox Film
Corporation, Paramount Pictures, Columbia/Tri-Star Pictures Inc., Lucasfilm,
Universal City Studios, Inc. and MGM/UA, as well as numerous other independent
motion picture production companies. Several of these studios have already
developed and released animated feature films, and Pixar expects additional
competition in the animated feature film market from these and other movie
studios. Some of these other movie studios have announced their intention to
enter the animated feature film market, including DreamWorks, a studio formed in
1994 which is expressly targeting the animated film market. In particular,
DreamWorks owns a significant equity stake in PDI, a computer graphics special
effects firm, and has begun developing a computer animated movie with PDI that
is expected be completed by 1998. This computer animated movie, which has been
referred to publicly as "Ants", may contain similar subject matter as Bugs.
Pixar's films will compete with the feature films of these movie studios for
audience acceptance and exhibition outlets. In addition, Pixar competes and will
continue to compete with these movie studios for the acquisition of literary
properties, production financing, the services of performing artists, and the
services of other creative and technical personnel, particularly in the fields
of animation and technical direction. Most of the other movie studios with which
Pixar competes have significantly greater name recognition and significantly
greater financial, technical, creative, marketing and other resources than does
Pixar.
At least two of these movie studios, Disney and Lucasfilm (through its
affiliate ILM), have developed their own internal computer animation capability
and have created computer animation for special effects in animated films. In
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addition, Pixar believes that Disney is currently developing and producing a
feature film making substantial use of computer animation. Other movie studios
may internally develop, license or sub-contract three-dimensional animation
capability. Further, Pixar believes that continuing enhancements in computer
hardware and software technology will lower barriers to entry for studios or
special effects companies which intend to produce computer animated feature
films or other products.
The Co-Production Agreement provides for the development and production
by Pixar of five computer animated feature films. Because Disney co-finances the
films developed and produced under the Co-Production Agreement, distributes the
films under the "Walt Disney Pictures" label and enjoys financial benefits in
the event that such films achieve significant box office revenues, Pixar
believes that Disney desires such films to be successful. Nonetheless, Disney
has been by far the most successful producer of animated feature films, and
family oriented motion pictures distributed by Disney or its affiliates are
likely to be in the market concurrently with and competing with Pixar's animated
feature films. Pixar's contractual arrangement with Disney also presents other
risks. See "-- Risks Associated With Co-Production Agreement" and "Business --
Competition."
Competition From Computer Graphics Special Effects Firms
Pixar also expects to compete with computer graphics special effects
firms, including ILM, Digital Domain, PDI, Rhythm & Hues, Boss Film Studios,
Inc. and Blue Sky Productions. These computer graphics special effects firms
may be capable of creating their own three-dimensional computer animated feature
films or may produce three-dimensional computer animated feature films for movie
studios that compete with Pixar. For example, ILM has already created and
produced three-dimensional character animation which was used for the ghosts in
the live action film Casper, and ILM has a royalty-free, paid-up license to use
Pixar's RenderMan software and to obtain at no cost all enhancements and
upgrades thereto. Other computer graphics special effects firms have licensed or
may license RenderMan. Accordingly, Pixar's RenderMan software may not provide
Pixar with a competitive advantage. See "Business -- Competition."
Competition From Software Publishers
Pixar also experiences intense competition with respect to its
RenderMan software product. In particular, Pixar competes with makers of
computer graphics imaging and animation software, principally Microsoft (which
acquired SoftImage, Inc.), MentalImage (which offers the same product offered by
Microsoft), and Silicon Graphics (which acquired Wavefront and Alias).
Microsoft, through SoftImage, Inc., MentalImage and Silicon Graphics, through
Wavefront and Alias, are each marketing competing rendering software products.
Microsoft and Silicon Graphics have each licensed several of Pixar's patents
that cover certain rendering techniques and may therefore be better able to
market products that compete with Pixar's RenderMan software. In addition, as
PCs become more powerful, software suppliers may also be able to introduce
products for PCs that would be competitive with RenderMan in terms of price and
performance for professional users. Under appropriate circumstances, Pixar might
elect to license its rendering technology patents to other companies, some of
which may compete with Pixar. See "Business -- Competition."
Competition Could Adversely Impact Pixar
Pixar expects competition to persist, intensify and increase in each of
its business areas in the future. Almost all of Pixar's current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical,
marketing and other resources than Pixar. There can be no assurance that Pixar
will be able to compete successfully against current or future competitors. Such
competition could materially adversely affect Pixar's business, operating
results or financial condition. See "Business -- Competition."
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LIMITED OPERATING HISTORY
Until 1996, Pixar had generated recurring revenue primarily from the
license of its RenderMan software, amounts received under software development
contracts and fees for animated television commercial development. However,
Pixar intends to generate a substantial majority of its future revenue from the
development and production of animated feature films and related products, such
as it did in 1996. Pixar has, to date, developed and produced only one animated
feature film, Toy Story, and only two related products (both CD-ROM titles,
which Pixar no longer intends to produce). Accordingly, Pixar has only a limited
operating history in implementing its new business model upon which an
evaluation of Pixar and its prospects can be based. Pixar's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of a new business enterprise,
particularly companies in highly competitive markets. To address these risks,
Pixar, among other things, must respond to competitive developments, continue to
attract, retain and motivate qualified persons, and continue to upgrade its
technologies. There can be no assurance that Pixar will be successful in
addressing such risks.
Risk of Made-For-Home Video Sequels Market
In addition to feature films, Pixar intends to generate revenue from
made-for-home video sequels, such as the Toy Story Video Sequel. There are
several risks associated with this market. Pixar has no experience developing
made-for-home video sequels. In addition, Pixar expects competition for sequels
to increase and intensify. Further, there can be no assurance that voices and
other intellectual property rights used in the original animated feature film
will be available for use in any made-for-home video sequel, or if available,
that such voices or other intellectual property rights can be obtained at a
reasonable cost. For example, certain of the voices used in Toy Story were
significantly more expensive to obtain for the Toy Story Video Sequel than they
were to obtain for the original feature film. Moreover, Pixar is at a
disadvantage in this market as compared to other animation studios in that Pixar
cannot produce low-cost animation which typically characterizes made-for-home
video sequels to animated feature films.
DEPENDENCE ON KEY PERSONNEL
Pixar's success depends to a significant extent on the performance of a
number of senior management personnel and other key employees, especially its
animators, creative personnel and technical directors. In particular, Pixar is
dependent upon the services of Steve Jobs, John Lasseter, Edwin E. Catmull
and Lawrence B. Levy. Pixar does not maintain "key man" life insurance for any
of its employees. Pixar does have employment agreements with Messrs. Lasseter
and Catmull, who are fundamental to Pixar's relationship with Disney. However,
such employment agreements do not necessarily assure the services of these
employees. Pixar believes that it may be particularly difficult to retain its
key employees, especially its animators, creative personnel and technical
directors, during periods in which it is not developing animated feature films.
The loss of the services of any of Messrs. Jobs, Lasseter, Catmull or Levy or of
other key employees, especially its animators, creative personnel and technical
directors, could have a material adverse effect on Pixar's business, operating
results or financial condition. Although none of Pixar's employees are
represented by a labor union, it is common for animators and actors at film
production companies to belong to a union. There can be no assurance that
Pixar's employees will not join or form a labor union or that Pixar, for certain
purposes, will not be required to become a union signatory. See "Business --
Employees" and "Executive Officers of the Company."
NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL
Pixar's success depends to a significant extent on its ability to
identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that Pixar will be successful in identifying,
attracting, hiring, training and retaining such personnel in the
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future. The competition for quality animators, creative personnel and technical
directors is especially intense because the entertainment market has
significantly expanded over the past several years. If Pixar is unable to hire,
assimilate and retain qualified personnel in the future, particularly animators,
creative personnel and technical directors, such inability would have a material
adverse effect on Pixar's business, operating results and financial condition.
See "Business -- Employees" and "Executive Officers of the Company."
DEPENDENCE ON SUCCESSFUL DEVELOPMENT OF APPEALING CREATIVE CONTENT FOR ANIMATED
FEATURE FILMS AND RELATED PRODUCTS
The success of each animated feature film created and produced by Pixar
will depend in large part upon the Pixar creative team's ability to predict the
type of content that will appeal to a broad audience and to develop stories and
characters that achieve broad market acceptance. Traditionally, this has been
extremely difficult. Disney provided creative assistance throughout the
production of Toy Story, including creative reviews and approvals, and the
Co-Production Agreement contemplates that Disney will continue to provide
creative assistance to Pixar on feature films and other products made pursuant
to that agreement, but there can be no assurance that Disney will continue to
provide assistance to Pixar in the development of creative content for its
feature films or related products. There also can be no assurance that voices
and other intellectual property rights used in an animated feature film will be
available for use in any CD-ROM or other product related to such feature film.
For example, Pixar was unable to obtain the rights to use certain voices from
Toy Story in the two CD-ROM products based on Toy Story. See "Business --
Creative Development Group."
DISTRIBUTION RISKS
Disney is required to distribute the five animated feature films to be
produced pursuant to the Co-Production Agreement. Distribution of a motion
picture generally involves domestic and foreign licensing for (i) theatrical
exhibition, (ii) home video, (iii) presentation on television, including pay,
basic cable and syndication, (iv) non-theatrical exhibition, which includes
airlines, hotels and armed forces facilities and (v) marketing of other rights
of the picture, which may include merchandising, such as CD-ROM titles, toys and
soundtrack recordings. Although the Co-Production Agreement provides Pixar with
some protection, there can be no assurance that the feature films made under the
Co-Production Agreement will be distributed through all of these outlets. For
example, Disney has traditionally not made its animated feature films available
on pay television other than the Disney Channel or on network television other
than ABC, an affiliate of Disney. See "Business -- Business Model and Products."
DEPENDENCE ON PROPRIETARY TECHNOLOGY FOR TIMELY AND SUCCESSFUL DEVELOPMENT OF
FEATURE FILMS AND RELATED PRODUCTS
There can be no assurance that Pixar will not experience difficulties
that could delay or prevent the successful development or production of future
animated feature films or other related products. Among other things, because
Pixar is dependent upon a large base of software and a large number of computers
for the development and production of its animated feature films and related
products, an error or defect in the software or a failure in the hardware could
result in a significant delay in production. A significant delay in production
could have a material adverse effect on Pixar's business, operating results or
financial condition. Further, because Pixar relies mostly on internally
developed software, Pixar would not be able to rely upon assistance from third
parties in the event that the software fails. See "Business -- Technology."
CONCENTRATION OF STOCK OWNERSHIP
Pixar's Chief Executive Officer, Steve Jobs, beneficially owns
approximately 74.7% of the outstanding Common Stock as of March 20, 1997. As a
result, Mr. Jobs, acting alone, is able to exercise sole discretion over all
matters requiring shareholder approval, including the election of the entire
board of directors and approval of significant corporate transactions, including
an acquisition of Pixar. Such concentration of ownership may also have the
effect of delaying or preventing a change in control of Pixar.
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RISK OF SUBSTANTIAL ADDITIONAL COSTS RELATED TO FACILITIES EXPANSION
Pixar leased significant additional space during 1996, but continues to
seek additional space. Pixar is evaluating such alternatives as building a new
studio facility and leasing additional buildings. Pixar currently expects to
exercise an option to purchase property (which option Pixar purchased in 1996)
and to build a new studio facility on the property. If Pixar purchases the
property and builds a new studio facility, Pixar currently expects to incur
capital expenditures of more than $10 million in 1997 and more than $12 million
in 1998. Pixar may choose to use its existing cash resources for such
expenditures or to finance such capital expenditures through the issuance of
additional equity or debt securities, by obtaining a credit facility or by some
other financing mechanism. If Pixar does not choose to purchase the property and
build a new facility, Pixar would need to write-off more than $900,000 of
capitalized expenses associated with site development and engineering and
architectural plans related to the new building, and would incur an additional
$300,000 charge related to Pixar's share of the site preparation. See
"Properties" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in the 1996 Annual
Report.
NEED FOR TECHNOLOGICAL ADVANCEMENT TO BE SUCCESSFUL
Substantially all of Pixar's revenues have been derived, and
substantially all of Pixar's future revenues are expected to be derived, from
the use and license of Pixar's proprietary technologies. Pixar expects that it
will be required to enhance these technologies and to develop new technologies
in order to be successful in its industry and in the licensing of its RenderMan
software. There can be no assurance that Pixar will be successful in enhancing
its existing technologies or in developing and utilizing new technologies, or
that competitors will not develop technology that is equivalent or superior to
Pixar's technologies or that makes Pixar's technologies obsolete. If Pixar is
unable to develop enhancements to its existing technologies or new technologies
as required, Pixar's business, operating results or financial condition could be
materially adversely affected. See "Business -- Technology."
DEPENDENCE ON PROPRIETARY RIGHTS
No Assurance That Patents Will Issue From Applications or Sufficiently
Protect Pixar's Technology
Pixar's success and ability to compete is dependent in part upon its
proprietary technology. While Pixar relies on a combination of patents,
copyright and trade secret protection, nondisclosure agreements and
cross-licensing arrangements to establish and protect its proprietary rights,
Pixar believes that factors such as the technical and creative skills of its
personnel are more essential to its success and ability to compete. Pixar
currently is the owner of eight patents issued in the United States, one patent
issued in the United Kingdom, one patent issued in France, one patent issued in
Germany, one patent issued in Japan and two patents issued in Canada. In
addition, Pixar has six patent applications pending in the United States, four
pending in Japan, one pending before the European Patent Office and one pending
before the Patent Cooperation Treaty Office. There can be no assurance that
patents will issue from any of these pending applications or that, if patents do
issue, any claims allowed will be sufficiently broad to protect Pixar's
technology. In addition, there can be no assurance that any patents that have
been issued to Pixar, or that Pixar may license from third parties, will not be
challenged, invalidated or circumvented, or that any rights granted thereunder
would provide proprietary protection to Pixar. Failure of the patents to provide
protection of Pixar's technology may make it easier for Pixar's competitors to
offer technology equivalent to or superior to Pixar's technology. See "Business
- -- Proprietary Rights."
No Assurance That Efforts to Protect Proprietary Technologies Will Succeed
The source code for Pixar's proprietary software is protected both as
trade secrets and as a copyrighted work. Pixar generally enters into
confidentiality or license agreements with its employees, consultants and
vendors, and generally controls access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use Pixar's
proprietary information, products or technology without authorization, or to
develop similar or superior technology independently. Policing unauthorized use
of Pixar's products is difficult. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries. To
license its RenderMan software product, Pixar primarily relies
-25-
<PAGE> 26
on "shrink wrap" licenses that are not signed by the end-user and, therefore,
may be unenforceable under the laws of certain jurisdictions. There can be no
assurance that the steps taken by Pixar will prevent misappropriation of its
technology or that its confidentiality or license agreements will be
enforceable. See "Business -- Proprietary Rights."
Risk That Litigation Will Be Required to Enforce Proprietary Rights
Litigation may be necessary in the future to enforce Pixar's
intellectual property rights, to protect Pixar's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Any such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on Pixar's business, operating results or financial condition. See
"Business -- Proprietary Rights."
Risks of Infringement Claims
From time to time Pixar has received, and is likely to receive in the
future, notice of claims of infringement of other parties' proprietary rights.
There can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against Pixar or that any assertions or prosecutions will not
materially adversely affect Pixar's business, financial condition or results of
operations. Irrespective of the validity or the successful assertion of such
claims, Pixar would incur significant costs and diversion of resources with
respect to the defense thereof which could have a material adverse effect on
Pixar's business, financial condition or results of operations. If any claims or
actions are asserted against Pixar, Pixar may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance, however,
that under such circumstances a license would be available on reasonable terms
or at all. See "Business -- Proprietary Rights."
No Assurance That Third Party Technology Licenses Will Continue to be
Available
Pixar also relies on certain technology that it licenses from third
parties, including software that is integrated and used with internally
developed software. There can be no assurance that these third party technology
licenses will continue to be available to Pixar on commercially reasonable
terms. The loss of or inability to maintain any of these technology licenses
could result in delays in feature film releases or product shipments until
equivalent technology could be identified, licensed and integrated. Any such
delays in feature film releases or product shipments could materially adversely
affect Pixar's business, operating results and financial condition. See
"Business -- Proprietary Rights."
POSSIBLE VOLATILITY OF SHARE PRICE AND RISK OF LITIGATION
Pixar believes that factors such as the publication of box office
results for Pixar's or its competitors' feature films, fluctuations in quarterly
or annual results of operations, changes in financial estimates by securities
analysts, announcements by Pixar or by its competitors, budget increases, delays
in or cancellation of feature film or other product release dates, or other
events or factors may cause the market price of Pixar's Common Stock to
fluctuate. Moreover, in recent years, the stock market in general, and the
shares of technology companies in particular, have experienced extreme price and
volume fluctuations, some of which have been unrelated or disproportionate to
the operating performances of such companies. These broad market and industry
fluctuations may adversely affect the market price of Pixar's Common Stock. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on Pixar's business, operating results and financial condition.
-26-
<PAGE> 27
ITEM 2. PROPERTIES
Pixar leases approximately 72,000 square feet of office space in
Richmond, California. Pixar has signed a lease for an additional 46,000 square
feet of office space at the same location which is scheduled to begin in the
second quarter of 1997. The leases expire on various dates ranging from July
1999 to February 2001.
Pixar will need to seek additional space in the near future and is
evaluating such alternatives as building a new studio facility and leasing
additional buildings. Pixar currently intends to build a new studio facility and
has paid deposits on the purchase of land which are nonrefundable and will be
applied to the purchase price of the property should Pixar elect to purchase the
property. If Pixar purchases the property and builds a new studio facility,
Pixar would incur substantial capital expenditures in 1997 and 1998. If Pixar
does not choose to purchase the property and build a new facility, Pixar would
need to write-off significant capitalized expenses associated with the new
building. See "Business -- Certain Factors Affecting Business, Operating Results
and Financial Condition -- Risk of Substantial Additional Costs Related to
Facilities Expansion". See also "Managements' Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in the 1996 Annual Report.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-27-
<PAGE> 28
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of Pixar and their ages as of March 20, 1997 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steve Jobs.......................... 42 Chairman, Chief Executive Officer and Office of the President
Edwin E. Catmull.................... 51 Executive Vice President, Chief Technical Officer and Office of
the President
Lawrence B. Levy.................... 37 Executive Vice President, Chief Financial Officer, Office of
the President and Secretary
John Lasseter....................... 40 Vice President, Creative Development
Ralph J. Guggenheim................. 45 Vice President, Feature Film Production
Pamela J. Kerwin.................... 48 Vice President, Interactive Products
William T. Reeves................... 45 Technical Director, Feature Films
</TABLE>
Pixar's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full time
employee of Pixar. There is no family relationship between any executive officer
or director of Pixar.
Mr. Jobs is a co-founder of Pixar and has served as its Chairman
since March 1991, as its Chief Executive Officer since February 1986 and in
the Office of the President since February 1995. He has been a director of Pixar
since February 1986 and served as Chairman from February 1986 to November 1988.
Mr. Jobs was also a co-founder of NeXT Software, Inc. ("NeXT"), which developed
and marketed object-oriented software for client/server business applications
and the Internet, and served as the Chairman and Chief Executive Officer of NeXT
from October 1985 until February 1997, when NeXT was acquired by Apple Computer,
Inc. ("Apple"). Mr. Jobs currently serves as an advisor to Apple on a limited
basis. Mr. Jobs was a co-founder of Apple, where he co-designed the Apple II and
led the development, manufacturing and marketing of the Macintosh and
LaserWriter printer. Mr. Jobs was awarded the National Technology Medal in 1985,
the Jefferson Award for Public Service in 1987 and was named Entrepreneur of the
Decade by Inc. magazine. Mr. Jobs attended Reed College in Portland, Oregon.
Dr. Catmull is a co-founder of Pixar and has served as Executive Vice
President and Chief Technical Officer since June 1995 and in the Office of the
President since February 1995. From March 1991 to February 1995, he served as
President, from November 1988 to March 1991 he served as Chairman and from
February 1986 to November 1988 he served as President. Prior to joining Pixar,
he was Vice President of the Computer Division of Lucasfilm. Dr. Catmull
received the Scientific and Engineering Award from The Academy of Motion Picture
Arts and Sciences in 1992 and also received the SIGGRAPH Coons Award for
lifetime contributions in 1993. Dr. Catmull is a member of the Scientific and
Technical Awards Committee of The Academy of Motion Picture Arts and Sciences.
Dr. Catmull received B.S. degrees in computer science and physics and a Ph.D. in
computer science from the University of Utah.
Mr. Levy has served as Executive Vice President, Chief Financial
Officer and in the Office of the President since February 1995. Mr. Levy has
served as Secretary of Pixar since October 1995. Prior to joining Pixar, he was
Vice Chairman and Chief Financial Officer of Electronics for Imaging, Inc., a
provider of hardware and software products for the digital color imaging market,
where he held various executive positions from April 1991 until January 1995.
From December 1987 to April 1991, he was head of the Technology Licensing and
Distribution Department at the law firm of Wilson Sonsini Goodrich & Rosati,
where he became a partner in February 1990. Mr. Levy received a B.S. in business
and accounting from Indiana University and a J.D. from Harvard Law School. Mr.
Levy is also a certified public accountant.
Mr. Lasseter has served as Vice President, Creative Development since
August 1991. Mr. Lasseter joined Pixar in February 1986 as Animator/Director.
From 1984 to 1986, he was an animator at Lucasfilm and from 1979 to 1984 he
worked as an animator at The Walt Disney Company. For his work in directing Toy
Story, Mr. Lasseter
-28-
<PAGE> 29
received an Academy Award in 1996 for Special Achievement, and for his work in
directing Tin Toy, Mr. Lasseter received an Academy Award in 1988 for Best Short
Film (Animated). Mr. Lasseter received a B.F.A. degree in film from the
California Institute of the Arts.
Mr. Guggenheim has served as Vice President, Feature Film Production
since April 1995. From May 1992 to April 1995, he served as Vice President and
General Manager, Animation Division. From July 1989 to May 1992, he served as
Executive Producer and from February 1986 to July 1989 he served as Director,
Animation Services. Since 1992, Mr. Guggenheim has also served as Vice President
of the production company set up to produce Toy Story. From 1980 to 1986, he was
Director of Editing Research at Lucasfilm's Computer Research Group and from
1978 to 1980 he was Producer of Computer Animated Commercials at the Computer
Graphics Lab of New York Institute of Technology. Mr. Guggenheim received a B.A.
in communications and an M.S. in computer graphics and motion picture production
from Carnegie Mellon University.
Ms. Kerwin has served as Vice President, Interactive Products since
April 1995. From May 1992 to April 1995, she served as Vice President and
General Manager, Technology Division. From May 1990 to May 1992, she served as
Vice President of Marketing and Sales and from June 1989 to May 1990 she served
as Director of Marketing. From July 1986 to June 1989, she was the Vice
President of Marketing and Sales at Media Cybernetics, which develops and
markets image processing software. From February 1985 to July 1986, Ms. Kerwin
served as Vice President of Marketing for Levine and Rudd, Inc., a marketing
consulting and graphic arts firm. From December 1978 to February 1985, Ms.
Kerwin held various marketing positions at Control Data. Ms. Kerwin received a
B.S. degree in English from Towson State University.
Dr. Reeves has served as Technical Director, Feature Films Production
since February 1991. Dr. Reeves joined Pixar in February 1986 as Director of
Animation Research and Development. From July 1982 to February 1986, he was
Project Leader of the Modeling and Animation Group at the Computer Division of
Lucasfilm. From September 1980 to July 1982, he was the Project Leader of the
Systems Group and a member of the Computer Graphics Group at Lucasfilm where he
invented a new image synthesis technique called particle systems that enables
the generation of very complex and detailed images. For his work as Technical
Director on Tin Toy, Dr. Reeves received an Academy Award in 1988 for Best Short
Film (Animated). Dr. Reeves received a B.S. in math from the University of
Waterloo in Canada and M.S. and Ph.D. degrees in computer science from the
University of Toronto.
-29-
<PAGE> 30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Pixar's Common Stock has been traded on the Nasdaq National Market
under the trading symbol "PIXR" since Pixar's initial public offering on
November 29, 1995. The following table sets forth the high and low sale prices
per share of Pixar's Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
Fourth Quarter (from November 29, 1995).................. $49 1/2 $22
1996
First Quarter............................................ $29 $18 1/2
Second Quarter........................................... $25 1/2 $16 3/4
Third Quarter............................................ $19 1/4 $12 1/4
Fourth Quarter........................................... $20 1/2 $12 3/4
1997
First Quarter (through March 20, 1997)................... $22 3/4 $12 5/8
</TABLE>
As of March 20, 1997, Pixar had approximately 2,103 shareholders of
record. The price for the Common Stock as of the close of business on March 20,
1997 was $19.75 per share. Pixar has never paid any cash dividends on its Common
Stock. Pixar intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the section entitled "Selected Financial Data" in the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the section entitled "Financial Statements and Selected Financial Data" in the
1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning Pixar's directors is
incorporated by reference to the information set forth in the section entitled
"Election of Directors" in Pixar's Proxy Statement for the 1997 Annual Meeting
of Shareholders to be filed with the Commission within 120 days after the end of
the Pixar's fiscal year ended December 31, 1996, except that the information
required by this item concerning the executive officers of Pixar is incorporated
by reference to the information set forth in the section entitled "Executive
Officers of the Company" at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation
is incorporated by reference to the information set forth in the sections
entitled "Election of Directors -- Director Compensation" and "Executive Officer
Compensation" in Pixar's Proxy Statement for the 1997 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Pixar's fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in Pixar's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed with the Commission within 120 days after
the end of Pixar's fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships
and related transactions is incorporated by reference to the information set
forth in the section entitled "Certain Transactions" in Pixar's Proxy Statement
for the 1997 Annual Meeting of Shareholders to be filed with the Commission
within 120 days after the end of Pixar's fiscal year ended December 31, 1996.
-31-
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial
statements of Pixar and the Independent Auditors'
Report therein are incorporated by reference to the
portions of Pixar's 1996 Annual Report filed as
Exhibit 13.1 to this Form 10-K:
<TABLE>
<S> <C>
Independent Auditors' Report ........................
Balance Sheets as of December 31, 1995 and 1996 .....
Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 ..................
Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1994, 1995 and 1996 ......
Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 ..................
Notes to Financial Statements .......................
</TABLE>
2. Financial Statement Schedule. The following financial
statement schedule of Pixar for the years ended
December 31, 1994, 1995, and 1996 is filed as part of
this Form 10-K and should be read in conjunction with
the Financial Statements, and related notes thereto,
of Pixar.
Independent Auditors' Report on Financial Statement
Schedule......................................... S-1
Schedule II--Valuation and Qualifying
Accounts and Reserves............................ S-2
Schedules not listed above have been omitted since
they are either not required, not applicable, or the
information is otherwise included.
3. Exhibits: See Item 14(c) below.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during
the fourth quarter ended December 31, 1996.
(c) Exhibits. The exhibits listed on the accompanying index to
exhibits immediately following the financial statement
schedule are filed as part of, or incorporated by reference
into, this Form 10-K.
(d) Financial Statement Schedules. See Item 14(a) above.
-32-
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 31st day of
March 1997.
PIXAR
By: /s/ Lawrence B. Levy
----------------------------------
Lawrence B. Levy
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Steven P. Jobs, Lawrence B.
Levy, Edwin E. Catmull and Pamela J. Kerwin and each of them, jointly and
severally, his attorneys-in-fact, each with full power of substitution, for him
in any and all capacities, to sign any and all amendments to this Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorneys-in-fact or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------- ------ ------
<S> <C> <C>
/s/ Steven P. Jobs Chairman of the Board and Chief Executive Officer March 31, 1997
- -------------------------------------- (Principal Executive Officer)
Steven P. Jobs
/s/ Lawrence B. Levy Executive Vice President and Chief Financial Officer March 31, 1997
- -------------------------------------- (Principal Financial and Accounting Officer)
Lawrence B. Levy
/s/ Skip M. Brittenham Director March 31, 1997
- --------------------------------------
Skip M. Brittenham
/s/ Joseph A. Graziano Director March 31, 1997
- --------------------------------------
Joseph A. Graziano
/s/ Larry W. Sonsini Director March 31, 1997
- --------------------------------------
Larry W. Sonsini
</TABLE>
-33-
<PAGE> 34
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Shareholders
Pixar:
Under date of January 31, 1997, except as to Note 11, which is as of
March 25, 1997, we reported on the balance sheets of Pixar as of December 31,
1995 and 1996, and the related statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1996, which are included in the annual report on Form 10-K. In
connection with our audits of the aforementioned financial statements, we also
audited the related financial statement schedule included herein. This financial
statement schedule is the responsibility of Pixar's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Palo Alto, California
January 31, 1997
S-1
<PAGE> 35
PIXAR
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS:
BEGINNING WRITE OFFS OF BALANCE AT
CLASSIFICATION OF YEAR ADDITIONS ACCOUNTS END OF YEAR
--------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts
Year ended December 31, 1994............. $ 36 $191 $ -- $227
==== ==== ==== ====
Year ended December 31, 1995............. $227 $ 61 $(32) $256
==== ==== ==== ====
Year ended December 31, 1996............. $256 $ 3 $ -- $259
==== ==== ==== ====
</TABLE>
S-2
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
--------- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation(1).............................................
3.4 Amended and Restated Bylaws, as amended(1)....................................................
4.1 See Exhibit 3.1...............................................................................
4.2 See Exhibit 3.2...............................................................................
4.5 Specimen Common Stock Certificate(1)..........................................................
4.6 Common Stock and Warrant Purchase Agreement between the Registrant and Disney
Enterprises, Inc. dated as of February 23, 1997...............................................
4.7 Form of Common Stock Purchase Warrant to be issued to Disney Enterprises, Inc.................
4.8 Form of Registration Rights Agreement by and between the Registrant and Disney
Enterprises, Inc..............................................................................
10.1* 1995 Stock Plan, as amended, and forms of agreements thereto(1)...............................
10.2* 1995 Director Option Plan(1)..................................................................
10.3* Form of Indemnification Agreement entered into between the Registrant and each of the
executive officers and directors(1)...........................................................
10.4 Agreement between the Registrant and Walt Disney Pictures dated May 3, 1991, as
amended(1)(5).................................................................................
10.5 Net Office Lease between the Registrant and Point Richmond R&D
Associates dated February 15, 1990, as amended(1).............................................
10.6 Secured Promissory Note between the Registrant and Edwin E. Catmull dated May 10,
1995(1).......................................................................................
10.7 Patent License Agreement between the Registrant and Microsoft
Corporation dated June 21, 1995(1)(5).........................................................
10.8 Recapitalization Agreement between the Registrant and the sole shareholder and key
employees of the Registrant dated April 28, 1995 and related agreement thereto(1).............
10.9* Employment Agreement between the Registrant and Edwin E. Catmull dated August 1,
1991(1).......................................................................................
10.10* Employment Agreement between the Registrant and John Lasseter dated February 24,
1997(4).......................................................................................
10.11* Employment Agreement between the Registrant and Ralph J. Guggenheim dated
August 1,1991(1)..............................................................................
10.12* Employment Agreement between the Registrant and William T. Reeves dated August 1,
1991(1).......................................................................................
10.13 Promissory Note between the Registrant and Steven P. Jobs dated January 13, 1995(1)...........
10.14 Patent License Agreement between the Registrant and Silicon Graphics, Inc. dated
March 12, 1996(2).............................................................................
10.15 Net Office Lease between the Registrant and Point Richmond R&D Associates dated
November 7, 1995(2)...........................................................................
10.16 Co-Production Agreement between the Registrant and Walt Disney Pictures and Television
dated February 24, 1997(4)....................................................................
10.17 Net Office Lease between the Registrant and Point Richmond R&D Associates dated
April 1, 1996(3)..............................................................................
</TABLE>
S-3
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
--------- --------
<S> <C> <C>
10.18 Net Office Lease between the Registrant and Point Richmond R&D Associates dated
September 12, 1996(3).........................................................................
11.1 Computation of Net Income (Loss) Per Share...................................................
13.1 Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1996,
expressly incorporated by reference herein....................................................
23.1 Consent of Independent Auditors...............................................................
27.1 Financial Data Schedule.......................................................................
</TABLE>
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-97918) declared effective on November 28, 1995.
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(4) Documents for which confidential treatment has been requested for
certain portions of these exhibits.
(5) Documents for which confidential treatment has been granted for certain
portions of these exhibits.
* Indicates management compensatory plan, contract or arrangement.
S-4
<PAGE> 1
Exhibit 4.6
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
DATED AS OF FEBRUARY 23, 1997
BY AND BETWEEN
PIXAR
AND
DISNEY ENTERPRISES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 SALE OF COMMON STOCK AND WARRANTS.................................... 1
1.1 Sale of Common Stock and Warrants................................... 1
1.2 Closing Date........................................................ 1
1.3 Delivery............................................................ 1
1.4 Legend.............................................................. 1
SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ 2
2.1 Organization........................................................ 2
2.2 Capitalization...................................................... 2
2.3 Authorization....................................................... 3
2.4 No Conflict......................................................... 3
2.5 Accuracy of Reports................................................. 3
2.6 Financial Statements and Changes.................................... 4
2.7 Governmental Consent, etc........................................... 4
SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...................... 4
3.1 Investment.......................................................... 4
3.2 Organization........................................................ 5
3.3 Authority........................................................... 5
3.4 Government Consents, etc............................................ 5
3.5 Investigation....................................................... 5
3.6 Financing........................................................... 5
SECTION 4 CONDITIONS TO OBLIGATIONS OF THE PURCHASER........................... 6
4.1 Representations and Warranties Correct.............................. 6
4.2 Covenants........................................................... 6
4.3 Opinion of Company's Counsel........................................ 6
4.4 No Order Pending.................................................... 6
4.5 HSR Act............................................................. 6
4.6 No Law Prohibiting or Restricting Such Sale......................... 6
4.7 Compliance Certificate.............................................. 6
SECTION 5 CONDITIONS TO OBLIGATIONS OF COMPANY................................. 7
5.1 Representations and Warranties Correct.............................. 7
5.2 Covenants........................................................... 7
5.3 No Order Pending.................................................... 7
5.4 HSR Act............................................................. 7
5.5 No Law Prohibiting or Restricting Such Sale......................... 7
5.6 Compliance Certificate.............................................. 7
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 6 COVENANTS OF THE COMPANY AND THE PURCHASER........................... 8
6.1 Market Standoff..................................................... 8
6.2 Registration Rights Agreement....................................... 8
SECTION 7 MISCELLANEOUS........................................................ 9
7.1 Termination of Agreement............................................ 9
7.2 Effect of Termination............................................... 9
7.3 Best Efforts........................................................ 9
7.4 Governing Law....................................................... 9
7.5 Survival............................................................ 9
7.6 Successors and Assigns.............................................. 9
7.7 Entire Agreement; Amendment......................................... 9
7.8 Notices............................................................ 10
7.9 Brokers............................................................ 11
7.10 Severability....................................................... 11
7.11 Injunctive Relief.................................................. 11
7.12 Costs and Expenses................................................. 11
7.13 No Third Party Rights.............................................. 11
7.14 Publicity.......................................................... 11
7.15 Captions and Headings.............................................. 12
7.16 Counterparts....................................................... 12
</TABLE>
-ii-
<PAGE> 4
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
THIS COMMON STOCK AND WARRANT PURCHASE AGREEMENT (the "Agreement") is
dated as of February 23, 1997, by and between PIXAR, a California corporation
(the "Company") and Disney Enterprises, Inc., a Delaware corporation and wholly
owned subsidiary of The Walt Disney Company (the "Purchaser").
SECTION 1
SALE OF COMMON STOCK AND WARRANTS
1.1 Sale of Common Stock and Warrants. Subject to the terms and conditions
hereof, the Company will issue and sell to the Purchaser, and the Purchaser will
purchase from the Company, at the Closing (as defined below), (i) 1,000,000
shares (the "Shares") of the Company's common stock (the "Common Stock"), at a
purchase price of $15.00 per share, for an aggregate purchase price of
$15,000,000, and (ii) two warrants (for other good and valuable consideration
hereby acknowledged): one warrant ("Warrant A") to purchase up to 750,000 shares
of the Company's Common Stock (the "Warrant A Shares") at an exercise price of
$20.00 per share; and one warrant ("Warrant B") to purchase up to 750,000 shares
of the Company's Common Stock (the "Warrant B Shares") at an exercise price of
$25.00 per share (together, Warrant A and Warrant B shall hereinafter be
referred to as the "Warrants," and the Warrant A Shares and the Warrant B Shares
together shall hereinafter be referred to as the "Warrant Shares"), and on such
other terms and conditions as are specified in the form of Common Stock Purchase
Warrant attached as Exhibit A hereto.
1.2 Closing Date. The closing of the purchase and sale of the Shares and
the Warrants (the "Closing") shall be held at the law offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California at 10:00 a.m. not
later than the third business day following expiration or early termination of
all waiting periods imposed by the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "HSR Act") and satisfaction of all closing conditions set forth in
Sections 4 and 5 hereof or at such other time and place upon which the Company
and the Purchaser shall mutually agree (the date of the Closing is hereinafter
referred to as the "Closing Date").
1.3 Delivery. At the Closing, the Company will deliver to the Purchaser
(i) a certificate registered in the name of the Purchaser representing the
Shares, against payment of the purchase price therefor by check payable to the
order of the Company or by wire transfer in same day funds to the Company's
account, and (ii) the duly executed Warrants.
1.4 Legend. The certificate for the Shares shall be subject to a legend
restricting transfer under the Securities Act of 1933, as amended (the
"Securities Act"), and referring to restrictions on transfer herein, such
legends to be substantially as follows:
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<PAGE> 5
"The securities represented by this certificate have been acquired
for investment and have not been registered under the Securities Act of
1933. Such securities may not be sold or transferred in the absence of
such registration or an opinion of counsel satisfactory to the Company as
to the availability of an exemption from such registration."
"The securities represented by this certificate are subject to
restrictions on transfer, including any sale, pledge or other
hypothecation, as set forth in a certain Common Stock and Warrant Purchase
Agreement dated as of February 23, 1997, a copy of which may be obtained
at no cost by written request made by the holder of record of this
certificate to the corporate secretary of the Company at the Company's
principal executive offices."
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as follows:
2.1 Organization. The Company is a corporation duly organized and validly
existing under the laws of the State of California and is in good standing under
such laws. The Company has all requisite corporate power and authority to own,
lease and operate its properties and assets, and to carry on its business as
presently conducted. The Company is qualified to do business as a foreign
corporation in each jurisdiction in which the ownership of its property or the
nature of its business requires such qualification, except where failure to so
qualify would not have a material adverse effect on the Company. The Company has
furnished to the Purchaser true and correct copies of its Articles of
Incorporation and Bylaws, each as amended to date, and will furnish upon request
to the Purchaser true and correct copies of any amendments thereto through the
term of this Agreement.
2.2 Capitalization. The authorized capital stock of the Company consists
of 100,000,000 shares of Common Stock, of which at December 31, 1996, 39,413,102
shares were issued and outstanding and 5,000,000 shares of Preferred Stock, of
which at December 31, 1996, no shares were issued and outstanding. All such
issued and outstanding shares have been duly authorized and validly issued and
are fully paid and nonassessable. As of December 31, 1996, the Company has
reserved a total of 13,000,000 shares of its Common Stock for issuance under its
1995 Stock Plan, of which 10,486,898 shares are reserved for issuance upon
exercise of outstanding options; and a total of 200,000 shares of its Common
Stock for issuance under its 1995 Director Option Plan, of which no shares are
reserved for issuance upon exercise of outstanding options. In addition,
effective upon the Closing, the Company has reserved such number of shares of
Common Stock as shall be necessary to provide for the exercise of the Warrants.
Except as provided or described in this Agreement, there are no other options,
warrants, conversion privileges or other contractual rights presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the Company's capital stock or other securities.
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<PAGE> 6
2.3 Authorization. The Company has all corporate right, power and
authority to enter into this Agreement, the Registration Rights Agreement in
substantially the form attached hereto as Exhibit B (the "Registration Rights
Agreement") and the Warrants and to consummate the transactions contemplated
hereby and thereby. All corporate action on the part of the Company, its
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Agreement, the Registration Rights Agreement and the
Warrants by the Company, the authorization, sale, issuance and delivery of the
Shares and the Warrant Shares upon exercise of the Warrants pursuant to the
terms thereof and the performance of the Company's obligations hereunder and
under the Registration Rights Agreement and the Warrants have been taken. This
Agreement, the Registration Rights Agreement and the Warrants have been duly
executed and delivered by the Company and constitute legal, valid and binding
obligations of the Company enforceable in accordance with their respective
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies, and to limitations of public
policy as they may apply to Section 7 of the Registration Rights Agreement. Upon
their issuance and delivery pursuant to this Agreement, the Shares will be
validly issued, fully paid and nonassessable. Upon exercise of the Warrants in
accordance with the terms thereof, the Warrant Shares will be validly issued,
fully paid and nonassessable. The issuance and sale of the Shares and the
Warrant Shares upon exercise of the Warrants will not give rise to any
preemptive rights or rights of first refusal on behalf of any person in
existence either on the date hereof or immediately prior to the Closing.
2.4 No Conflict. Subject to compliance with the HSR Act, the execution and
delivery of this Agreement, the Registration Rights Agreement and the Warrants
do not, and the consummation of the transactions contemplated hereby and thereby
will not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or to a loss of a
material benefit, under, any provision of the Articles of Incorporation or
Bylaws of the Company, as amended, or any mortgage, indenture, lease or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company, its properties or assets, the effect of which would have a material
adverse effect on the Company or materially impair or restrict its power to
perform its obligations as contemplated hereby or thereby.
2.5 Accuracy of Reports. The Company has, since November 29, 1995, filed
with the Securities and Exchange Commission ("SEC") all forms, reports and
documents (collectively, the "SEC Reports") which it has been required to file
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder. Each of the SEC Reports
complied as of its filing date in all material respects with all applicable
requirements of the Exchange Act. Except as subsequently disclosed or corrected
in an SEC Report filed prior to the date of this Agreement, none of such SEC
Reports, including without limitation, any financial statement or schedule
included therein, contained at the time filed any untrue statement of a material
fact or omitted to state a material fact required to be stated therein, or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
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<PAGE> 7
2.6 Financial Statements and Changes. The Company's (a) unaudited balance
sheet as of September 30, 1996 and the related statements of income, cash flows
and stockholders' equity for the interim periods then ended contained in the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
and (b) audited balance sheet as of December 31, 1995 and the related audited
statements of income, cash flows and stockholders' equity for the fiscal year
then ended contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except to the extent that certain footnote
disclosures regarding any period may have been omitted in accordance with the
applicable rules of the SEC under the Exchange Act), consistently applied except
as noted therein and except, in the case of unaudited interim financial
statements, for normal year-end adjustments, and fairly present the financial
position of the Company as of the respective dates set forth therein and the
results of operations and cash flows for the Company for the respective fiscal
periods set forth therein. Except as otherwise disclosed herein or in the SEC
Reports, since September 30, 1996, there has been no material adverse change in
the business, financial condition or results of operations of the Company, taken
as a whole (other than on account of matters which generally affect the economy
or the industry in which the Company is engaged).
2.7 Governmental Consent, etc. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of the Company is required in connection with the valid execution and delivery
of this Agreement, or the offer, sale or issuance of the Shares or the Warrant
Shares upon exercise of the Warrants, or the consummation of any other
transaction contemplated hereby, except the filing of such forms with the United
States Department of Justice and the Federal Trade Commission as shall be
required by the HSR Act and the expiration of any waiting periods thereunder and
such filings as may be required to be made with the SEC and the National
Association of Securities Dealers, Inc. ("NASD") and filings, if any, to be made
in compliance with applicable blue sky requirements.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company as follows:
3.1 Investment. The Purchaser will acquire the Shares, the Warrants and
the Warrant Shares for investment for its own account, not as a nominee or
agent, and not with a view to, or for resale in connection with, any
distribution thereof. The Purchaser understands that the Shares, the Warrants
and the Warrant Shares have not been, and will not be, registered (unless
pursuant to the Registration Rights Agreement) under the Securities Act by
reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the Purchaser's investment intent and the accuracy of the Purchaser's
representations as expressed herein.
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<PAGE> 8
3.2 Organization. The Purchaser is a corporation duly organized and
validly existing and in good standing under the laws of the state of its
incorporation, with all requisite corporate power and authority to own, lease
and operate its properties and assets and to carry on its business as presently
conducted.
3.3 Authority. The Purchaser has all corporate right, power and authority
to enter into this Agreement and the Registration Rights Agreement and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Registration Rights Agreement by the
Purchaser and the consummation by the Purchaser of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on behalf of the Purchaser. This Agreement and the Registration Rights Agreement
have been duly executed and delivered by the Purchaser and constitute legal,
valid and binding obligations of the Purchaser, enforceable in accordance with
their respective terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies, and to
limitations of public policy as they may apply to Section 7 of the Registration
Rights Agreement. Subject to compliance with the HSR Act and such filings as may
be required to be made with the SEC and any exchange or quotation system on
which the Purchaser's securities are listed or designated, the execution and
delivery of this Agreement and the Registration Rights Agreement do not, and the
consummation of the transactions contemplated hereby and thereby will not,
conflict with or result in any violation of any obligation under any provision
of the Restated Certificate of Incorporation or Bylaws of the Purchaser or any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to the Purchaser.
3.4 Government Consents, etc. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of the Purchaser is required in connection with the valid execution and delivery
of this Agreement, or the offer, sale or issuance of the Shares or the Warrants,
the issuance of the Warrant Shares upon exercise of the Warrants or the
consummation of any other transaction contemplated hereby, except the filing of
such forms with the United States Department of Justice and the Federal Trade
Commission as shall be required by the HSR Act and the expiration of any waiting
periods thereunder and such filings as may be required to be made with the SEC
and any exchange or quotation system on which the Purchaser's securities are
listed or principally traded.
3.5 Investigation. The Purchaser has had a reasonable opportunity to
discuss the Company's business, management and financial affairs with the
Company's management and the Purchaser has received satisfactory responses from
management of the Company to the Purchaser's inquiries.
3.6 Financing. The Purchaser has the funds, or has written commitments
from responsible financial institutions, to provide the Company with the funds
necessary to consummate the transactions to occur at the Closing.
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<PAGE> 9
SECTION 4
CONDITIONS TO OBLIGATIONS OF THE PURCHASER
The obligation of the Purchaser to purchase the Shares and the Warrants at
the Closing is subject to the fulfillment on or prior to the Closing Date of the
following conditions, any or all of which may be waived at the option of the
Purchaser:
4.1 Representations and Warranties Correct. The representations and
warranties made by the Company in Section 2 hereof shall be true and correct in
all material respects when made, and shall be true and correct in all material
respects on the Closing Date with the same force and effect as if they had been
made on and as of said date.
4.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all material respects.
4.3 Opinion of Company's Counsel. The Purchaser shall have received from
Wilson Sonsini Goodrich & Rosati, counsel to the Company, an opinion addressed
to it, dated the Closing Date, in substantially the form attached hereto as
Exhibit C.
4.4 No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this Agreement.
4.5 HSR Act. The Purchaser and the Company shall have filed such forms
with the United States Department of Justice and the Federal Trade Commission as
shall be required by the HSR Act and the applicable waiting periods under such
HSR Act shall have expired without notice from such governmental agencies that
additional inquiries are being made.
4.6 No Law Prohibiting or Restricting Such Sale. There shall not be in
effect any law, rule or regulation prohibiting or restricting such sale, or
requiring any consent or approval of any person which shall not have been
obtained to issue the Shares, the Warrants or the Warrant Shares.
4.7 Compliance Certificate. The Company shall have delivered to the
Purchaser a certificate, executed on behalf of the Company by the Chief
Executive Officer or Chief Financial Officer of the Company, dated the Closing
Date, and certifying to the fulfillment of the conditions specified in Sections
4.1 and 4.2.
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<PAGE> 10
SECTION 5
CONDITIONS TO OBLIGATIONS OF COMPANY
The Company's obligation to sell and issue the Shares and the Warrants at
the Closing is subject to the fulfillment on or prior to the Closing Date of the
following conditions, any or all of which may be waived at the option of the
Company:
5.1 Representations and Warranties Correct. The representations and
warranties made by the Purchaser in Section 3 hereof shall be true and correct
in all material respects when made, and shall be true and correct in all
material respects on the Closing Date with the same force and effect as if they
had been made on and as of said date.
5.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Purchaser on or prior to the Closing Date shall
have been performed or complied with in all material respects.
5.3 No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this Agreement.
5.4 HSR Act. The Purchaser and the Company shall have filed such forms
with the United States Department of Justice and the Federal Trade Commission as
shall be required by the HSR Act and the applicable waiting periods under such
HSR Act shall have expired without notice from such governmental agencies that
additional inquiries are being made.
5.5 No Law Prohibiting or Restricting Such Sale. There shall not be in
effect any law, rule or regulation prohibiting or restricting such sale, or
requiring any consent or approval of any person which shall not have been
obtained to issue the Shares, the Warrants or the Warrant Shares.
5.6 Compliance Certificate. The Purchaser shall have delivered to the
Company a certificate, executed on behalf of the Purchaser by an executive
officer of the Purchaser, dated the Closing Date, and certifying to the
fulfillment of the conditions specified in Section 5.1 and 5.2 of this
Agreement.
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<PAGE> 11
SECTION 6
COVENANTS OF THE COMPANY AND THE PURCHASER
6.1 Market Standoff.
(a) Until the termination of this Agreement in accordance with
Section 7.1 hereof, the Purchaser shall not, without the prior written consent
of the Company, during the period commencing on the Closing Date and ending
three years after the Closing Date, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any of the Shares, whether or not any such
transaction is to be settled by delivery of such Shares, in cash or otherwise.
(b) The Purchaser agrees in connection with any registration of the
Company's securities, upon request of the Company or the underwriters managing
any underwritten offering of the Company's securities, during the period
commencing on the effective date of the registration statement and ending not
more than 180 days after the effective date of the registration statement, not
to (i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of the Company's Common Stock (other than those shares
included in the registration pursuant to the exercise of rights pursuant to the
Registration Rights Agreement) or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Company's Common Stock, whether or not any such transaction
described in clause (i) or (ii) above is to be settled by delivery of such
Common Stock, in cash or otherwise, without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters; provided, however, that
the Purchaser shall not be subject to this Section 6.1(b) unless all executive
officers and directors of the Company enter into similar agreements.
Notwithstanding the foregoing, the obligations of the Purchaser contained in the
preceding sentence shall not apply to up to 1,000,000 shares of the Company's
Common Stock during the period beginning 91 days from the effective date of the
registration statement.
6.2 Registration Rights Agreement. The Company shall enter into the
Registration Rights Agreement at or prior to the Closing in order to provide
registration rights to the Purchaser with respect to the Warrant Shares.
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<PAGE> 12
SECTION 7
MISCELLANEOUS
7.1 Termination of Agreement. This Agreement may be terminated at any
time:
(a) by the mutual consent of the Company and the Purchaser; or
(b) by the Purchaser or the Company prior to Closing if the United
States Department of Justice or the Federal Trade Commission shall have objected
in writing to the consummation of the transactions contemplated to occur at
Closing.
7.2 Effect of Termination. From and after the termination of this
Agreement, the covenants, obligations and agreements of the parties set forth
herein shall be of no further force or effect and the parties shall be under no
further obligation with respect thereto.
7.3 Best Efforts. The Company and Purchaser shall use their respective
best efforts to take all actions required under the HSR Act and under any law,
rule or regulation adopted subsequent to the date hereto in order that the
Company may sell the Shares and the Warrants to the Purchaser and the Purchaser
may purchase the Shares and the Warrants and to ensure that the conditions to
the Closing set forth herein are satisfied on or before the scheduled date of
such Closing.
7.4 Governing Law. This Agreement shall be governed in all respects by the
laws of the State of California as applied to contracts entered into solely
between residents of, and to be performed entirely within, such state.
7.5 Survival. The representations and warranties in Sections 2 and 3 of
this Agreement shall survive any investigation made by the Purchaser or the
Company.
7.6 Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned by a party without the
prior written consent of the other party; provided, however, that the Purchaser
shall have the right, upon prior notice to the Company, to assign this Agreement
to its parent or to any wholly owned subsidiary of the Purchaser.
7.7 Entire Agreement; Amendment. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
thereof and supersede all prior agreements and understandings among the parties
relating to the subject matter hereof. Neither this Agreement nor any term
hereof may be amended, waived, discharged or terminated other than by a written
instrument signed by the party against whom enforcement of any such amendment,
waiver, discharge or termination is sought.
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<PAGE> 13
7.8 Notices and Dates. Any notice or other communication given under this
Agreement shall be sufficient if in writing and sent by personal service,
facsimile, courier service promising overnight delivery or registered or
certified mail, return receipt requested, postage prepaid, to a party at its
address set forth below (or at such other address as shall be designated for
such purpose by such party in a written notice to the other party hereto):
(a) if to the Company, to it at:
PIXAR
1001 West Cutting Boulevard
Richmond, California 94804
Facsimile: (510) 235-7772
Attn: Lawrence B. Levy, Esq.
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (415) 493-6811
Attn: Larry W. Sonsini, Esq.
(b) if to the Purchaser, to it at:
Disney Enterprises, Inc.
500 S. Buena Vista Street
Burbank, California 91521
Facsimile: (818) 842-5865
Attn: Robert Moore
with a copy to:
Disney Enterprises, Inc.
500 S. Buena Vista Street
Burbank, California 91521
Facsimile: (818) 566-7308
Attn: Gloria S. Lepow, Esq.
All such notices and communications shall be effective when received by the
addressee. In the event that any date provided for in this Agreement falls on a
Saturday, Sunday or legal holiday, such date shall be deemed extended to the
next business day.
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<PAGE> 14
7.9 Brokers.
(a) The Company has not engaged, consented to or authorized any
broker, finder or intermediary, to act on its behalf, directly or indirectly, as
a broker, finder or intermediary in connection with the transactions
contemplated by this Agreement. The Company hereby agrees to indemnify and hold
harmless the Purchaser from and against all fees, commissions or other payments
owing to any party acting on behalf of the Company hereunder.
(b) The Purchaser has not engaged, consented to or authorized any
broker, finder or intermediary to act on its behalf, directly or indirectly, as
a broker, finder or intermediary in connection with the transactions
contemplated by this Agreement. The Purchaser hereby agrees to indemnify and
hold harmless the Company from and against all fees, commissions or other
payments owing to any party acting on its behalf.
7.10 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and restriction
of this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
7.11 Injunctive Relief. The Purchaser, on the one hand, and the Company,
on the other, acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specific performance of the terms and provisions hereof in any court
of the United States or any state thereof having jurisdiction, this being in
addition to any other remedy to which they may be entitled at law or equity.
7.12 Costs and Expenses. Each party hereto shall pay its own costs and
expenses incurred in connection herewith, including the fees of its counsel,
auditors and other representatives, whether or not the transactions contemplated
herein are consummated.
7.13 No Third Party Rights. Nothing in this Agreement shall create or be
deemed to create any rights in any person or entity not a party to this
Agreement.
7.14 Publicity. The Purchaser and the Company shall not, without the prior
approval of each other party hereto, make or cause to be made any press release
or other public statement concerning the transactions contemplated by this
Agreement, except as and to the extent that any party hereto is so obligated by
law or the regulations of any stock exchange or the NASD (but only after the
Company or the Purchaser, as the case may be, shall have consulted with the
other party in advance regarding the form and substance of such press release or
public statement).
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<PAGE> 15
7.15 Captions and Headings. The captions and headings used herein are for
convenience and ease of reference only and are not intended to be a part of or
to affect the meaning or interpretation of this Agreement.
7.16 Counterparts. This Agreement may be executed in one or more
counterparts. All of such counterparts together shall constitute one and the
same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective authorized officers as of the date aforesaid.
"COMPANY" PIXAR
By: /s/ STEVE JOBS
-----------------------------------
Name: Steven P. Jobs
Title: Chairman and Chief Executive
Officer
"PURCHASER" DISNEY ENTERPRISES, INC.
By: /s/ RICHARD D. NANULA
----------------------------------
Name: Richard D. Nanula
Title: Senior Executive Vice
President and Chief
Financial Officer
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<PAGE> 1
Exhibit 4.7
THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUED UPON EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE AFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL
SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE WARRANT EVIDENCED
HEREBY IS NON-TRANSFERABLE.
NO. __ PIXAR __________, 1997
COMMON STOCK PURCHASE WARRANT
This certifies that, in connection with that certain Common Stock and
Warrant Purchase Agreement, dated February 23, 1997 (the "Purchase Agreement")
by and between PIXAR, a California corporation (the "Company"), and Disney
Enterprises, Inc., a Delaware corporation and wholly owned subsidiary of The
Walt Disney Company ("Disney"), and for other value received, Disney, is
entitled, upon the terms and subject to the conditions hereinafter set forth, at
any time on or after the date hereof and at or prior to 11:59 pm., Pacific Time,
on __________, 2002 (the "Expiration Time"), but not thereafter, to acquire from
the Company, in whole or from time to time in part, up to 750,000 fully paid and
nonassessable shares of Common Stock of the Company ("Common Stock") at a
purchase price per share (the "Exercise Price") as set forth in Section 1 below.
Such number of shares, type of security and Exercise Price are subject to
adjustment as provided herein, and all references to "Common Stock" and
"Exercise Price" herein shall be deemed to include any such adjustment or series
of adjustments.
1. EXERCISE PRICE
Subject to adjustments as provided herein, the Exercise Price per share of
Common Stock subject to this Warrant shall be equal to $[20.00/25.00 per share].
2. EXERCISE OF WARRANT
(a) The purchase rights represented by this Warrant are exercisable
by the registered holder hereof, in whole or in part, at any time from the date
hereof and up to and including the Expiration Time by the surrender of this
Warrant and the Notice of Exercise form attached hereto duly executed to the
office of the Company at 1001 West Cutting Boulevard, Richmond, California 94804
(or such other office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Company), and upon payment of the Exercise Price for the
shares thereby purchased (by cash or by certified check or bank draft payable to
the order of the Company in an amount equal to the purchase price of the shares
thereby purchased or in accordance with the cashless exercise provision set
forth in Section 2(b)); whereupon the holder of this Warrant shall be entitled
to receive from the Company a stock certificate in proper form representing the
number of shares of Common Stock so purchased, and a new Warrant in
substantially identical form and dated as of such exercise for the purchase of
that number of shares of Common Stock equal to the difference, if any, between
the number of shares of Common Stock subject hereto and the number of shares of
Common Stock as to which this Warrant is so exercised.
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<PAGE> 2
(b) Notwithstanding any provisions herein to the contrary, if the
fair market value (as defined in Section 3 hereof) of one share of the Company's
Common Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the holder may
elect to receive shares equal to the value (as determined below) of this Warrant
(or the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the properly endorsed Notice of
Exercise in which event the Company shall issue to the holder a number of shares
of Common Stock computed using the following formula:
X=Y (A-B)
--------
A
Where X = the number of shares of Common Stock to be issued to the
holder.
Y = the number of shares of Common Stock purchasable
under the Warrant or, if only a portion of the
Warrant is being exercised, the portion of the
Warrant being canceled (at the date of such
calculation)
A = the fair market value of one share of the
Company's Common Stock (at the date of such
calculation)
B = Exercise Price (as adjusted to the date of such
calculation)
3. ISSUANCE OF SHARES
Certificates for shares purchased hereunder shall be delivered to the
holder hereof within a reasonable time (in no event exceeding ten (10) business
days) after the date on which this Warrant shall have been exercised in
accordance with the terms hereof. The Company agrees that the shares so issued
shall be and shall for all purposes be deemed to have been issued to such holder
as the record owner of such shares as of the close of business on the date on
which this Warrant shall have been exercised or converted in accordance with the
terms hereof. No fractional shares or scrip representing fractional shares shall
be issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon the exercise of this Warrant, an amount equal to such
fraction multiplied by the fair market value of a share of Common Stock on the
date of exercise shall be paid in cash or check to the holder of this Warrant
(fair market value shall be the average closing price of a share of Common Stock
on the NASDAQ National Market System (or any other stock exchange on which the
Common Stock is listed at the time of exercise) as listed in "The Wall Street
Journal" over the five consecutive business days immediately prior to surrender
of this Warrant pursuant to Section 2 above).
4. REPRESENTATIONS AND COVENANTS OF THE COMPANY
(a) No Liens, etc. The Company hereby represents and warrants that
all shares of Common Stock which may be issued upon the exercise of this Warrant
will, upon such exercise, be duly and validly authorized and issued, fully paid
and nonassessable and free from all taxes, liens and charges in respect of the
issuance thereof (other than liens or charges created by or imposed upon the
holder of the Warrant) and not subject to preemptive or any similar rights of
the stockholders of the Company.
(b) Reservation of Stock. As soon as practicable after execution of
this Warrant, the Company will reserve sufficient authorized but unissued
securities to enable it to satisfy its obligations on exercise of this Warrant
and will, if necessary, reserve additional securities during the period in which
this Warrant may be exercised
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<PAGE> 3
to satisfy its obligations hereunder. If at any time the Company's authorized
securities shall not be sufficient to allow the exercise of this Warrant, the
Company shall take such corporate action as may be necessary to increase its
authorized but unissued securities to be sufficient for such purpose.
(c) Furnish Information. The Company agrees to promptly deliver to
the holder of this Warrant copies of all financial statements, reports and proxy
statements which the Company shall have sent to its stockholders generally.
(d) Rule 144 and 144A. In order to permit the holder of the Warrant
to sell the Common Stock issuable upon exercise of the Warrant pursuant to Rule
144 or Rule 144A under the 1933 Act (or any successors to such rules), the
Company will comply with all rules and regulations of the Commission applicable
in connection with use of each of Rule 144 and Rule 144A (or any successors
thereto), including the timely filing of all reports with the Commission in
order to enable such holder, if it so elects, to utilize Rule 144 or Rule 144A.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Company prior to the exercise hereof.
6. TRANSFERABILITY
(a) Restrictions on Warrant. This Warrant is not transferable,
whether by sale, pledge or other disposition, voluntarily or by operation of law
or otherwise. Any transfer in violation hereof shall be void and the Warrant
shall terminate immediately upon any such purported transfer.
(b) Restrictions on Common Stock Issuable Upon Exercise. In no event
will the holder make a disposition of the Common Stock issuable upon exercise of
this Warrant unless and until (i) it shall have notified the Company of the
proposed disposition, and (ii) if requested by the Company, it shall have
furnished the Company with an opinion of counsel satisfactory to the Company and
its counsel to the effect that (A) appropriate action necessary for compliance
with the 1933 Act provisions relating to sale of an unregistered security has
been taken, or (B) an exemption from the registration requirements of the 1933
Act is available. Notwithstanding the foregoing, the restrictions imposed upon
the transferability of the Common Stock issuable on the exercise of this Warrant
shall terminate as to any particular share of Common Stock when (1) such
security shall have been sold without registration in compliance with Rule 144
under the 1933 Act, or (2) a letter shall have been issued to the holder at its
request by the staff of the Securities and Exchange Commission or a ruling shall
have been issued to the holder at its request by such Commission stating that no
action shall be recommended by such staff or taken by such Commission, as the
case may be, if such security is transferred without registration under the 1933
Act in accordance with the conditions set forth in such letter or ruling and
such letter or ruling specifies that no subsequent restrictions on transfer are
required, or (3) such security shall have been registered under the 1933 Act and
sold by the holder thereof in accordance with such registration.
(c) Restrictive Legend. The Company may place a legend describing,
in whole or in part, the restrictions imposed by sub-sections (a) and (b) to
this Section 6 on this Warrant, any replacement Warrant and on any certificate
representing the Common Stock issuable upon exercise of this Warrant. Whenever
such restrictions shall terminate, Disney or the holder of a share of Common
Stock issued upon exercise of this Warrant as to which such restrictions have
terminated shall be entitled to receive from the Company one or more new
certificates for such shares of Common Stock not bearing the restrictive legend.
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<PAGE> 4
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
On receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and in
case of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company will execute and deliver to the holder, in lieu thereof, a
new warrant in substantially identical form, dated as of such cancellation and
reissuance.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding business day.
9. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES, EXERCISE PRICE
The type and number of securities of the Company issuable upon exercise of
this Warrant and the Exercise Price are subject to adjustment as set forth
below:
(a) Adjustment for Stock Splits. If at any time after issuance of
the Warrant the outstanding shares of Common Stock are subdivided into a greater
number of shares (whether by stock dividend, stock split or otherwise) or the
Company declares or pays, without consideration, any right to acquire Common
Stock for no consideration, then the Exercise Price will be reduced
proportionately and the number of securities issued upon exercise of this
Warrant will be increased proportionately. Conversely, if the outstanding Common
Stock is consolidated into a smaller number of shares (whether by reverse stock
split or otherwise), then the Exercise Price will be increased proportionately
and the number of securities issued upon exercise of this Warrant will be
reduced proportionately.
(b) Adjustment for Reorganization, Consolidation, Merger, etc. In
case of any consolidation or merger of the Company with or into any other
corporation, entity or person, or any other corporate reorganization, in which
the Company shall not be the continuing or surviving entity of such
consolidation, merger or reorganization, or any merger, consolidation or similar
transaction in which in excess of 50% of the Company's voting power is
transferred, or any sale of all or substantially all of the assets of the
Company (any such transaction being hereinafter referred to as a
"Reorganization"), then, in each case, the holder of this Warrant, on exercise
hereof at any time after the consummation or effective date of such
Reorganization, shall receive, in lieu of that which would be issuable on such
exercise prior to the date of such Reorganization, the stock, other securities
and/or property (including cash) to which such holder would have been entitled
upon the date of such Reorganization if such holder had exercised this Warrant
immediately prior thereto (such new consideration to be subject to all further
adjustments called for during the term hereof). The provisions of this Section
9(b) shall apply to successive Reorganizations.
In the case of any such merger, consolidation or other similar
transaction, the successor corporation shall expressly assume the due and
punctual observance and performance of each and every covenant and condition of
this Warrant to be performed and observed by the Company and all of the
obligations and liabilities hereunder, subject to such modification as shall be
necessary to provide for adjustments of the type and number of securities
issuable upon exercise of this Warrant and the Exercise Price which shall be as
nearly equivalent as practicable to the adjustments provided for herein.
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<PAGE> 5
(c) Certificate as to Adjustments. In case of any adjustment in the
Exercise Price or number and type of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the holder of
this Warrant in the form of a certificate, certified and confirmed by an officer
of the Company, setting forth such adjustment and showing in reasonable detail
the facts upon which adjustment is based.
10. REPRESENTATIONS AND COVENANTS OF DISNEY.
This Warrant has been granted by the Company in reliance upon the
following representations and covenants of Disney:
(a) Investment Purpose. This Warrant and the Common Stock issuable
upon exercise of Disney's rights contained herein will be acquired for
investment for Disney's own account, and not as a nominee or agent and not with
a view to the distribution of any part thereof. Disney further represents that
it does not have any contract, undertaking agreement or arrangement with any
person to sell, transfer or grant participations to such person, or to any third
person, with respect to this Warrant.
(b) Private Issue. Disney understands (i) that the Warrant and the
Common Stock issuable upon exercise of this Warrant are not registered under the
Securities Act of 1933, as amended, (the "1933 Act"), or qualified under
applicable state securities laws on the ground that the issuance of this Warrant
will be exempt from the registration and qualifications requirements thereof,
and (ii) that the Company's reliance on such exemption is predicated on the
representations set forth in this Section 10.
(c) Sales of Common Stock. Disney acknowledges that in the event the
applicable requirements of Rule 144 are not met, registration under the 1933 Act
or compliance with another exemption from registration will be required for any
disposition of the Common Stock issuable upon exercise of this Warrant.
(d) Financial Risk. Disney has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment.
(e) Accredited Investor. Disney is an "accredited investor" within
the meaning of Rule 501 of Regulation D promulgated under the 1933 Act.
11. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of the State of California applicable to contracts made and to be performed
wholly within such state.
12. COMPLETE AGREEMENT AND MODIFICATIONS
This Warrant and any documents referred to herein or executed
contemporaneously herewith constitute the Company's and Disney's entire
agreement with respect to the subject matter hereof and supersede all
agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Warrant may not be amended, altered or modified except by a writing
signed by the Company and the holder of this Warrant.
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<PAGE> 6
13. NOTICES
Except as otherwise provided herein, all notices under this Warrant shall
be in writing and shall be delivered by personal service, facsimile, courier
service promising overnight delivery or certified mail (if such service is not
available, then by first class mail), postage prepaid. Notices shall be
addressed as follows:
If to the holder of this Warrant: Disney Enterprises, Inc.
500 S. Buena Vista Street
Burbank, California 91521
Facsimile: (818) 842-5865
Attention: Robert Moore
With a copy to: Disney Enterprises, Inc.
500 S. Buena Vista Street
Burbank, California 91521
Facsimile: (818) 566-7308
Attention: Gloria S. Lepow, Esq.
If to the Company: PIXAR
1001 West Cutting Boulevard
Richmond, California 94804
Facsimile: (510) 235-7772
Attention: Lawrence B. Levy, Esq.
With a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Facsimile: (415) 493-6811
Attention: Larry W. Sonsini, Esq.
14. WAIVERS STRICTLY CONSTRUED
With regard to any power, remedy or right provided herein or otherwise
available to any party hereunder (i) no waiver or extension of time shall be
effective unless expressly contained in a writing signed by the waiving party;
and (ii) no alteration, modification or impairment shall be implied by reason of
any previous waiver, extension of time, delay or omission in exercise, or other
indulgence.
15. SEVERABILITY
The validity, legality or enforceability of the remainder of this Warrant
shall not be affected even if one or more of its provisions shall be held to be
invalid, illegal or unenforceable in any respect.
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<PAGE> 7
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officer.
Dated: __________, 1997 PIXAR
By: _________________________________
Name:
Title:
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<PAGE> 8
NOTICE OF EXERCISE
To: PIXAR
(1) / / The undersigned hereby elects to purchase __________ shares of
Common Stock of PIXAR pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price in full.
/ / The undersigned hereby elects to purchase __________ shares of
Common Stock of PIXAR pursuant to the terms of the attached Warrant, and tenders
herewith as a "cashless exercise" the attached Warrant to purchase _________
shares of Common Stock.
(2) Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
_____________________________________
(Name)
_____________________________________
(Address)
(3) The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares,
except in compliance with applicable federal and state securities laws.
__________________________________ ________________________________
(Date) (Signature)
<PAGE> 1
Exhibit 4.8
REGISTRATION RIGHTS AGREEMENT
DATED AS OF __________, 1997
BY AND BETWEEN
PIXAR
AND
DISNEY ENTERPRISES, INC.
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
_________, 1997, by and between PIXAR, a California corporation (the "Company"),
and Disney Enterprises, Inc., a Delaware corporation and wholly owned subsidiary
of The Walt Disney Company (the "Purchaser").
A. The Purchaser intends to purchase a minority interest in the Company
pursuant to the terms and conditions of a certain Common Stock and Warrant
Purchase Agreement dated as of February 23, 1997 (the "Purchase Agreement").
B. The Purchase Agreement requires that the Company enter into this
Agreement with the Purchaser.
NOW, THEREFORE, in consideration of the foregoing, the parties to this
Agreement hereby agree as follows:
1. Effectiveness. The rights and obligations of the parties hereto shall
be effective only upon the closing of the transactions contemplated by the
Purchase Agreement.
2. Demand Registration.
(a) If, at any time after the Closing (as defined in the Purchase
Agreement), the Purchaser shall request (a "Demand") the Company in writing to
register under the Securities Act of 1933, as amended (the "Securities Act"),
any shares of the Common Stock of the Company (the "Common Stock") acquired by
the Purchaser by exercise of the Warrants (as defined in the Purchase Agreement)
(the shares of Common Stock so acquired and subject to such request being herein
referred to as the "Subject Stock"), the Company shall use its best efforts to
cause the shares of Subject Stock specified in such request to be registered as
soon as reasonably practicable so as to permit the sale thereof, and in
connection therewith shall prepare and file a Form S-3 registration statement
(or similar form which may be promulgated in the future) with the Securities and
Exchange Commission (the "SEC") under the Securities Act to effect such
registration; provided, however, that such request shall (i) specify the number
of shares of Subject Stock intended to be offered and sold, which number of
shares shall represent Subject Stock (A) with an aggregate market value of at
least $5,000,000, based on the average closing sale price of the Common Stock
for the ten (10) trading days preceding the date prior to the date of the
Purchaser's request first received by the Company, and (B) that does not exceed
5% of the then outstanding Common Stock of the Company, (ii) express the present
intention of the Purchaser to offer or cause the offering of such shares of
Subject Stock for distribution, (iii) describe the nature or method of the
proposed offer and sale thereof, and (iv) contain the undertaking of the
Purchaser to provide all such information and materials and take all such action
as may be required in order to permit the Company to comply with all applicable
requirements of the SEC and to obtain any desired acceleration of the effective
date of such registration statement.
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<PAGE> 3
(b) Notwithstanding the foregoing and Section 4 hereof, upon
delivery to the Purchaser of a written notice, the Company shall be entitled to
postpone filing of the registration statement, and may withhold efforts to cause
the registration statement to become effective, for a reasonable period of time
(not to exceed ninety (90) days) if (i) the Company is contemplating filing a
registration statement within ninety (90) days of such request for registration
(which shall not affect the Purchaser's other rights hereunder, including
without limitation the Purchaser's rights under Section 3 below), (ii) the
Company determines in good faith that such registration might interfere with or
affect the negotiation or completion of any transaction that is being
contemplated by the Company (whether or not a final decision has been made to
undertake such transaction) at the time the right to delay is exercised or (iii)
the Company determines in good faith that such registration might involve
initial or continuing disclosure obligations that might not be in the best
interests of the Company or its shareholders. The Company shall not be required
to effect more than one demand registration statement under this Agreement;
provided, however, that if any postponement pursuant to the preceding sentence
extends beyond the date on which the Warrants expire, the obligations of the
Company hereunder shall be extended by a number of days necessary to complete
the distribution of securities subject to such postponement. In a case of
postponement pursuant to clause (i) of the first sentence of this paragraph (b),
the request for registration will not constitute a Demand for purposes of
determining the number of Demands permitted pursuant to this paragraph unless
the contemplated registration by the Company is abandoned or not consummated
within the ninety (90) day period and then the Company successfully registers
the shares of Subject Stock pursuant to the Demand.
(c) If, after a registration statement becomes effective, the
Company advises the Purchaser that the Company considers it appropriate for the
registration statement to be amended, the Purchaser shall suspend any further
sales of the registered shares until the Company advises the Purchaser that the
registration statement has been amended. The ninety (90) day time period
referred to in Section 4 hereof during which the registration statement must be
kept current after its effective date shall be extended for an additional number
of business days equal to the number of business days during which the right to
sell shares was suspended pursuant to the preceding sentence, but no event will
the Company be required to update the registration statement after the
expiration of this Agreement.
3. Company Registration.
(a) If, at any time after the Closing the Company shall determine to
register any shares of Common Stock, whether for its own account or for a
security holder or holders exercising their respective demand registration
rights (to the extent any may be granted in the future), other than (i) a
registration relating solely to employee benefit plans on Form S-1 or S-8 or
similar forms which may be promulgated in the future, or (ii) a registration on
Form S-4 or similar form which may be promulgated in the future relating solely
to a SEC Rule 145 transaction, the Company will promptly give to the Purchaser
written notice thereof and include in such registration (and any related
qualification under Blue Sky laws or other compliance), and in any underwriting
involved therein, all Subject Stock specified in a written request, made within
fifteen (15) business days after receipt of such written notice from the Company
by the Purchaser.
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(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Purchaser as a part of the written notice given pursuant to Section
3(a). In such event the right of the Purchaser to registration pursuant to this
Section 3 shall be conditioned upon such Purchaser's agreeing to participate in
such underwriting and in the inclusion of the Purchaser's Subject Stock in the
underwriting to the extent provided herein. The Purchaser shall (together with
the Company) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Company. If
the Purchaser disapproves of the terms of any such underwriting, the Purchaser
may elect to withdraw therefrom by written notice to the Company and the
underwriter. Any Common Stock excluded or withdrawn from such underwriting shall
be withdrawn from such registration.
(c) Notwithstanding any other provision of this Section 3, if the
Company or any underwriter determines that marketing or other factors require a
limitation of the number of shares to be registered or underwritten, the Company
or such underwriter may exclude all or any portion of the Subject Stock
requested to be included. The Company shall so advise the Purchaser and the
other holders distributing their Common Stock through such underwriting, if
any, and the number of shares of Subject Stock and other securities that may be
included in the registration and underwriting, if any, shall be allocated among
all holders thereof (other than those holders who are exercising their demand
registration rights) pro rata, based, as nearly as practicable, on the
respective amounts of Common Stock entitled to inclusion in such registration
held by such holders at the time of filing the registration statement.
Notwithstanding the foregoing, Steven P. Jobs shall not be subject to any such
pro rata reduction and shall be entitled to include as many shares as he and the
Company shall so agree in any such registration and underwriting.
4. Obligations of the Company. Whenever the Company is required by the
provisions of this Agreement to use its best efforts to effect the registration
of any Common Stock under the Securities Act, the Company shall (i) prepare and,
as soon as possible, file with the SEC a registration statement with respect to
the shares of Subject Stock, and shall use its best efforts to cause such
registration statement to become effective and to remain effective until the
earlier of the sale of the shares of Subject Stock so registered or ninety (90)
days subsequent to the effective date of such registration; (ii) prepare and
file with the SEC such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to make and
to keep such registration statement effective and to comply with the provisions
of the Securities Act with respect to the sale or other disposition of all
securities proposed to be registered in such registration statement until the
earlier of the sale of the shares of Subject Stock so registered or ninety (90)
days subsequent to the effective date of such registration statement, (iii)
furnish to the Purchaser such number of copies of any prospectus (including any
preliminary prospectus and any amended or supplemented prospectus) in conformity
with the requirements of the Securities Act as the Purchaser may reasonably
request in order to effect the offering and sale of the shares of Subject Stock
to be offered and sold, but only while the Company shall be required under the
provisions hereof to cause the registration statement to remain current; (iv)
use its best efforts to register or qualify the shares of Subject Stock covered
by such registration statement under the securities or blue sky laws of such
states as the Purchaser shall reasonably request, maintain any such registration
or qualification current until the earlier of the sale of the shares of Subject
Stock so registered or thirty (30) days subsequent to the effective date of the
registration statement, and do any and all other acts and things either
necessary or advisable to enable the Purchaser to consummate the public sale or
other disposition of the shares of Subject Stock in jurisdictions where the
Purchaser desires to effect such sales or other disposition (but the Company
shall not be required to take any action that would subject it to the general
jurisdiction of the courts of any jurisdiction in which it is not so subject or
to qualify as a foreign corporation in any
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<PAGE> 5
jurisdiction where the Company is not so qualified); (v) list the shares of
Subject Stock on the NASDAQ National Market System (or any other stock exchange
on which the Common Stock of the Company is listed at the time of registration);
and (vi) take all such other action either necessary or desirable to permit the
shares of Subject Stock held by the Purchaser to be registered and disposed of
in accordance with the method of disposition described herein. If requested, and
provided that the underwriter or underwriters are reasonably satisfactory to the
Company, the Company shall enter into an underwriting agreement with a
nationally recognized investment banking firm or firms containing
representations, warranties, indemnities and agreements then customarily
included by an issuer in underwriting agreements with respect to secondary
distributions. The Company shall not cause the registration under the Securities
Act of any other shares of its Common Stock to become effective (other than
registration of any employee stock plan, or registration in connection with any
Rule 145 or similar transaction) during the effectiveness of a registration
requested hereunder for an underwritten public offering if, in the judgment of
the underwriter or underwriters, marketing factors would adversely affect the
selling price of the Subject Stock. In connection with any offering of shares of
Subject Stock registered pursuant to this Agreement, the Company shall furnish
the Purchaser with unlegended certificates representing ownership of the shares
of Subject Stock being sold in such denominations as the Purchaser shall
request.
5. Expenses.
(a) All regular costs and expenses incurred in connection with any
registration pursuant to Section 2 shall be borne by the Purchaser, and all
regular costs and expenses, other than discounts and commissions applicable to
shares not sold by the Company, incurred in connection with any registration
pursuant to Section 3 shall be borne by the Company. The regular costs and
expenses of any such registration shall include, without limitation, the
reasonable fees and expenses of the Company's counsel and its accountants, the
costs and expenses of the Company incident to the preparation, printing and
filing under the Securities Act of the registration statement and all amendments
and supplements thereto and the cost of furnishing copies of each preliminary
prospectus, each final prospectus and each amendment or supplement thereto to
underwriters, dealers and other purchasers of the securities so registered, the
costs and expenses incurred in connection with the qualification of such
securities so registered under the "blue sky" laws of various jurisdictions, the
fees and expenses of the Company's transfer agent, listing fees and all other
miscellaneous costs and expenses typically incident to such registration
(collectively, "Registration Expenses").
(b) Excluding the Registration Expenses incurred in connection with
any registration pursuant to Section 3 made on behalf of the Company, the
Purchaser (and other holders including any Common Stock in such registration)
shall pay all other expenses incurred on its behalf with respect to any
registration pursuant to Section 2 or 3, including, without limitation, any
counsel for the Purchaser and all underwriting discounts and selling commissions
with respect to the Subject Stock sold by them pursuant to such registration
statement.
6. Indemnification.
(a) Indemnification by the Company. In the case of any offering
registered pursuant to this Agreement, the Company agrees to indemnify and hold
the Purchaser, each of its directors and officers, each underwriter of shares of
Subject Stock under such registration and each person who controls any of the
foregoing within the meaning of Section 15 of the Securities Act harmless
against any and all losses, claims, damages or liabilities, including any of the
foregoing incurred in settlement of any litigation
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<PAGE> 6
commenced or threatened, to which they or any of them may become subject under
the Securities Act or any other statute or common law or otherwise, and to
reimburse them, from time to time upon request, for any legal or other expenses
incurred by them in connection with investigating any claims and defending any
actions, insofar as any such losses, claims, damages, liabilities or actions
shall arise out of or shall be based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement
relating to the sale of such shares of Subject Stock, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus (as amended or supplemented if the Company shall have
filed with the SEC any amendment thereof or supplement thereto) if used prior to
the effective date of such registration statement or contained in the prospectus
(as amended or supplemented if the Company shall have filed with the SEC any
amendment thereof or supplement thereto), if used within the period during which
the Company shall be required to keep the registration statement to which such
prospectus relates current pursuant to the terms of this Agreement, or the
omission or alleged omission to state therein (if so used) a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the
indemnification agreement contained in this Section 6(a) shall not apply to such
losses, claims, damages, liabilities or actions which shall arise from the sale
of shares of Subject Stock to any person if such losses, claims, damages,
liabilities or actions shall arise out of or shall be based upon any such untrue
statement or alleged untrue statement, or any such omission or alleged omission,
if such statement or omission shall have been (x) made in reliance upon and in
conformity with information furnished in writing to the Company by Purchaser or
any such underwriter specifically for use in connection with the preparation of
the registration statement or any preliminary prospectus or prospectus contained
in the registration statement or any such amendment thereof or supplement
thereto, or (y) made in any preliminary prospectus, and the prospectus contained
in the registration statement as declared effective or in the form filed by the
Company with the SEC pursuant to Rule 424 under the Securities Act shall have
corrected such statement or omission and a copy of such prospectus shall not
have been sent or given to such person at or prior to the confirmation of such
sale to him.
(b) Indemnification by the Purchaser. In the case of each offering
registered pursuant to this Agreement, the Purchaser agrees, and each
underwriter participating therein shall agree, in the same manner and to the
same extent as set forth in Section 6(a) of this Agreement, severally to
indemnify and hold harmless the Company and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act, its
directors and those officers of the Company who shall have signed any such
registration statement with respect to any statement in or omission from such
registration statement or any preliminary prospectus (as amended or as
supplemented, if amended or supplemented as aforesaid) or prospectus contained
in such registration statement (as amended or as supplemented, if amended or
supplemented as aforesaid), if such statement or omission shall have been made
in reliance upon and in conformity with information furnished in writing to the
Company by the Purchaser or such underwriter specifically for use in connection
with the preparation of such registration statement or any preliminary
prospectus or prospectus contained in such registration statement or any such
amendment thereof or supplement thereto.
(c) Notice of Claims. Each party indemnified under Section 6(a) or
Section 6(b) of this Agreement shall, promptly after receipt of notice of the
commencement of any action against such indemnified party in respect of which
indemnity may be sought, notify the indemnifying party in writing of the
commencement thereof. The failure of any indemnified party so to notify an
indemnifying party of any such action shall not relieve the indemnifying party
from any liability in respect of such action which it may
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<PAGE> 7
have to such indemnified party on account of the indemnity agreement contained
in Section 6(a) or Section 6(b) of this Agreement, unless the indemnifying party
was prejudiced by such failure, and in no event shall relieve the indemnifying
party from any other liability which it may have to such indemnified party. In
case any such action shall be brought against any indemnified party and it shall
notify an indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party, and, after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party under Section 6(a) or Section 6(b) of this Agreement for
any legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. Notwithstanding the above, however, if representation of one or
more indemnified parties by the counsel retained by the indemnifying party would
be inappropriate due to actual conflicting interests between such indemnified
parties (the "conflicting indemnified parties") and any other party represented
by such counsel in such proceeding, then such conflicting indemnified parties
shall have the right to retain one separate counsel, chosen by the holders of a
majority of the Subject Stock included in the registration, at the expense of
the indemnifying party. No indemnifying party, (i) in the defense of any such
claim or litigation, shall, except with the consent of each indemnified party,
which consent shall not unreasonably be withheld, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation, or (ii)
shall be liable for amounts paid in any settlement if such settlement is
effected without the consent of the indemnifying party, which consent shall not
be unreasonably withheld.
7. Termination of Registration Rights. The registration rights granted
pursuant to this Agreement shall terminate at such time as all shares of Subject
Stock beneficially owned by the Purchaser can be sold within any given
three-month period without compliance with the registration requirements of the
Securities Act pursuant to Rule 144 and a written opinion to that effect of
legal counsel for the Company is delivered to the Purchaser which shall be
reasonably satisfactory in form and substance to legal counsel for the
Purchaser.
8. Notices. Any notice or other communication given under this Agreement
shall be sufficient if in writing and sent by personal service, facsimile,
courier service promising overnight delivery or registered or certified mail,
return receipt requested, postage prepaid, to a party at its address set forth
below (or at such other address as shall be designated for such purpose by such
party in a written notice to the other party hereto):
(1) if to the Company, to it at:
PIXAR
1001 West Cutting Boulevard
Richmond, California 94804
Facsimile: (510) 235-7772
Attn: Lawrence B. Levy, Esq.
with a copy to:
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<PAGE> 8
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (415) 493-6811
Attn: Larry W. Sonsini, Esq.
(2) if to the Purchaser, to it at:
Disney Enterprises, Inc.
500 S. Buena Vista Street
Burbank, California 91521
Facsimile: (818) 842-5865
Attn: Robert Moore
with a copy to:
Disney Enterprises, Inc.
500 S. Buena Vista Street
Burbank, California 91521
Facsimile: (818) 566-7308
Attn: Gloria S. Lepow, Esq.
All such notices and communications shall be effective when received by the
addressee. In the event that any date provided for in this Agreement falls on a
Saturday, Sunday or legal holiday, such date shall be deemed extended to the
next business day.
9. Captions and Headings. The captions and headings used herein are for
convenience and ease of reference only and are not intended to be a part of or
to affect the meaning or interpretation of this Agreement.
10. Entire Agreement; Amendments. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof and supersede all prior agreements and understandings
among the parties relating to the subject matter hereof. Neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated other than
by a written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought.
11. Governing Law. This Agreement shall be governed in all respects by the
laws of the State of California as applied to contracts entered into solely
between residents of, and to be performed entirely within, such state.
12. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned by the Purchaser without
the prior written consent of the Company.
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<PAGE> 9
13. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and restriction
of this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
14. No Third Party Rights. Nothing in this Agreement shall create or be
deemed to create any rights in any person or entity not a party to this
Agreement.
15. Counterparts. This Agreement may be executed in one or more
counterparts. All of such counterparts together shall constitute one and the
same agreement.
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective authorized officers as of the date aforesaid.
"COMPANY" PIXAR
By: ___________________________
Name:
Title:
"PURCHASER" DISNEY ENTERPRISES, INC.
By: ___________________________
Name:
Title:
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<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement made and entered into by and between PIXAR, a
California corporation (the "Company") and JOHN LASSETER ("Employee") effective
as of February 24, 1997.
Reference is made to that certain executed Employment Agreement ("Prior
Agreement") made and entered into by and between Pixar, a California corporation
Company and John Lasseter dated as of August 1, 1991.
As an inducement for Pixar to enter into this Employment Agreement, the
parties agree that notwithstanding anything to the contrary contained in the
Prior Agreement, the Term of the Prior Agreement shall expire on February 23,
1997 and no bonus shall be payable to Employee other than as set forth in this
Employment Agreement.
1. ENGAGEMENT:
1.1 Guaranteed Employment Term.
(a) The Company agrees to employ Employee and
Employee agrees to accept such employment, for a guaranteed period commencing on
February 24, 1997 ("Start Date") and ending on February 23, 2004. Company may
terminate this Employment Agreement prior to the expiration of the Term in
accordance with Company's Termination Rights under 6.5 below or in the event of
Employee's death, Incapacity or Default or an event of Force Majeure as more
fully set forth in paragraph 6.8 below. Employee may not terminate Employee's
services hereunder prior to the expiration of the Term except as more fully set
forth in paragraphs 6.7 and 6.8 below.
1.2 Duties and Responsibilities.
(a) During the Term and any extensions thereof,
Employee shall be employed by the Company as a director of animated motion
pictures and as "Vice President - Creative" of the Company (which corporate
officer position has been approved by Company's Board of Directors), reporting
directly to the CEO of Company or the Office of the President, as the CEO of
Company may from time to time designate. Company and Employee acknowledge that
Employee's first priority shall be the directing or supervision of feature
length animated motion pictures ("Picture(s)") and serving, at Company's
direction, as Company's representative to Walt Disney Pictures ("Disney") in the
exercise of Company's creative control rights and obligations and that
Employee's other duties for Company shall not materially interfere with such
priority services. Employee agrees that during the Term he will render exclusive
services to Company and devote his full time, effort and energies during
business hours to his responsibilities for the Company, and that he shall
faithfully and to the best of his ability discharge those duties.
(b) During the Term, Company and Employee shall have
the following creative control rights with respect to the development,
pre-production, production and post-production of the
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Pictures, made for home video productions and short subject motion pictures
(collectively, the "Productions"): (i) with respect to Productions for which
Employee renders executive producing services (but not directing services) [*],
provided that in the event of [*], the [*]; and (ii) with respect to Productions
directed by Employee, [*], provided that each party shall [*] and so not to [*].
The parties acknowledge that [*].
1.3 Location. Company agrees that Employee's services for
Company will be based within a thirty (30) mile radius of Company's current
headquarters in Richmond, California unless otherwise approved by Employee.
Employee hereby approves the intended location of a new facility in Emeryville,
California.
2. COMPENSATION:
2.1 Salary. Subject to the full and complete performance by
Employee of all of Employee's material obligations hereunder, Company shall pay
to Employee the following:
(a) Signing Bonus. Company shall pay to Employee the
sum of $1,250,000 within ten (10) business days after the execution of this
Employment Agreement.
(b) Salary. Company shall pay to Employee the annual
salary of $700,000, with eight percent (8%) cumulative annual increases at each
anniversary date of the Start Date. Employee's salary shall be payable in
accordance with Company's customary payroll practices. All payments made to
Employee as salary, signing bonus, theatrical motion picture bonus or otherwise
shall be subject to such deductions, withholdings and limitations as shall from
time to time be required by law, governmental regulations or orders, and any
agreements between Company and Employee.
2.2 Theatrical Motion Picture Bonus.
(a) If Employee is entitled to receive a "directed
by" credit on the Picture and Employee fully performs all directing services
requested by Company in accordance with this Agreement and material obligations
requested by Company in accordance with the terms of this Agreement in
connection with the applicable Picture, Employee shall be entitled to receive
contingent bonuses (which bonuses are cumulative at each box office benchmark)
based upon the domestic theatrical box office gross receipts of such Picture as
reported in the Daily Variety (or if Daily Variety discontinues such service,
the parties shall mutually determine an appropriate replacement, but in the
event of a disagreement relating to such replacement, the decision of Company
shall govern), as follows, payable within 30 days after such milestone is
reported in Daily Variety: [*]
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[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 3
(b) Vesting. If Employee's services are terminated
(including, but not limited to, termination as a result of expiration of the
Term of this Agreement) as director in connection with a Picture by any reason
other than Employee's breach or default of a material term or condition
hereunder, the contingent compensation set forth in Section 2.2(a) above with
regard to such Picture shall vest each month that Employee performs services on
such Picture as to a percentage equal to the quotient obtained when one is
divided by the total number of months of scheduled pre-production, production
and post-production of such Picture, but in no event shall the total number of
scheduled pre-production, production and post-production months exceed
forty-eight (48) months. As an example only, if production, pre-production and
post-production for a Picture are scheduled for a total of four years (i.e.,
forty-eight (48) months), then vesting shall be 1/48th or 2.083% for each month
of Employee's services on such Picture. Notwithstanding the foregoing, if
Employee's services are terminated for any reason other than Default under
Section 6.8 below, then if Employee has completed services for seventy-five
percent (75%) or more of the total schedule as computed above, then the
contingent compensation set forth in Section 2.2(a) above shall be deemed fully
vested.
2.3 Stock Options. Company shall grant to Employee 125,000
additional non qualified options for the purchase of Company's common stock
pursuant to the terms and conditions of Company's Stock Option Plan and a new
Employee Stock Option Agreement consistent with the terms of Company's Stock
Option Plan and the terms of this Agreement. Company agrees that the exercise
price for said stock options shall be the price of Company's common stock at the
close of business on Friday, February 21, 1997. Company agrees that such plan
will provide for a vesting of the stock options over a four year period, with
the first 25% vesting on the first anniversary date of this Agreement, and the
balance vesting on an equal monthly basis over the remaining three (3) years,
provided, that if Company exercises its Termination Rights under Section 6.5
below, Employee's stock options will be deemed fully vested.
2.4 Fringe Benefits. Employee shall be eligible to
participate, in accordance with their terms, in all medical and health plans,
life insurance and pension plans and such other employment benefits or programs
(other than executive bonus plans) as are maintained by Company for its
employees provided that Company shall at all times be free to modify or amend
such plans on a Company wide basis in accordance with the provisions thereof.
Notwithstanding the foregoing, in no event shall such fringe
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[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 4
benefits (other than executive bonus plans) be less favorable to Employee under
those accorded to any other employee of Company other than Steve Jobs.
2.5 Paid Vacations. Employee shall be entitled to paid
vacation in accordance with the vacation policy of Company, but in no event less
than four (4) weeks per annum. Notwithstanding the foregoing, Employee shall not
be entitled to accrue any vacation time in any contract year in which Employee
is [*]. Employee may use up to two (2) weeks of previously accrued
vacation time in a contract year in which Employee [*], but in no
event more than four (4) consecutive days at any one time during said contract
year.
2.6 [*]. Company shall allow Employee [*] on each
Picture which Employee directs under this Agreement. Company and Employee shall
mutually determine the [*], which shall be no later than [*] from the initial
theatrical release of the Picture directed by Employee, unless Employee
otherwise agrees. Employee agrees to [*] no less [*] than [*]. During each [*],
(i) Employee shall be entitled to [*] (ii) all terms and conditions of this
Agreement (including, without limitation, exclusivity and vesting) shall remain
in effect.
2.7 Expenses. Company recognizes that in connection with
Employee's performance of Employee's duties and obligations hereunder Employee
will incur certain ordinary and necessary expenses of a business character
including, without limitation, travel and expenses relating to the Pictures.
Company shall reimburse Employee for all such reasonable business expenses upon
presentation of itemized statements of such expenses and appropriate
substantiation thereof, in each case in accordance with Company's standard
policies. With respect to business travel, Employee shall be treated no less
favorably in class of travel (with respect to commercial airlines, but excluding
private airplane transportation) and expenses than (i) other executives of
Company or (ii) any individual on the same business trip as Employee. All such
expenses shall be subject to the pre-approval of Company.
3. WRITING SERVICES:
3.1 Services. At Company's request, Employee shall render
writing services and supervisory services to create stories, treatments and
screenplays for the Pictures hereunder.
3.2 Credits. In the event Employee creates the applicable
story and renders writing services in connection with any Picture, Employee
shall receive a "story by" credit, in first position, on screen in the end
titles, or the main titles if any other person receives credit in the main
titles of the Picture, (which credit may be shared with no more than three (3)
other writers). The Size (as hereinafter defined) of said credit shall be not
less than 50% of the Size of the regular title and no less than that accorded to
any other individual (other than principal cast members) receiving credit in
connection with the Picture. Additionally, Employee shall receive credit in the
billing block portion of paid advertising issued and controlled by Company or
the distributor (subject to the distributors customary exclusions and
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[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 5
restrictions for animated pictures) in a Size not less than 35% of the regular
title. Notwithstanding the foregoing, Employee shall receive credit in excluded
advertising whenever a writer, producer, director, technical director or
executive producer receive credit in said billing block (other than award or
congratulatory ads). "Size" shall mean height, width and thickness. All other
characteristics of Employee's credit shall be at Company's sole discretion.
Notwithstanding the foregoing, the parties acknowledge that Employee will
receive a shared "Story By" writing credit on "Bugs" in third position behind
Andrew Stanton and Joe Ranft.
4. EXECUTIVE PRODUCING SERVICES:
4.1 Services. Employee shall tender executive producing
services on a non-exclusive first priority basis on all Productions produced by
Company during the Term, other than with respect to those Productions which
Employee directs. Employee agrees to render all such services as required by
Company in accordance with this Agreement and customarily rendered by executive
producers of first class productions in the entertainment industry and to comply
with all reasonable instructions, requests, rules and regulations of Company in
connection therewith, whether or not the same involve matters of artistic taste
and judgment during the development, production and post production of the
Productions.
4.2 Credits. As to each Production for which at least seventy
five percent (75%) of the actual production schedule was completed during the
Term and subject to Employee's full performance of all material executive
producing services and material obligations in connection therewith, and further
subject to the distributor's standard exclusions and exceptions as customarily
negotiated for deals of this nature, Company shall accord Employee the following
credit, on screen: Executive Producer, on a card which may be shared, which
credit shall be in first position of all other executive producer credits, and
which credit may be in the main titles (or end titles of the film if all other
individual credits are in the end titles). Said credit shall be no less than 50%
of the regular title and in Size of type of the title and no less than the Size
of type accorded to any other individual (other than the principal cast members)
of the Picture. In addition, Employee shall be entitled to receive credit in the
billing block portion of paid advertising issued or controlled by Company or the
distributor (subject to distributor's standard exceptions and exclusions as
customarily negotiated for deals of this nature) in a Size of type not less than
35% of the Size of type of the regular title of the Picture. Employee shall also
receive credit in excluded advertising in which a writer, producer, director,
technical director or executive producer receive credit in said billing block
(other than award or congratulatory ads). All other characteristics of the
foregoing credit shall be subject to Company's sole discretion. Notwithstanding
the foregoing, Employee shall not be entitled to an executive producer credit on
those Productions on which Employee receives a "directed by" credit.
5. DIRECTING SERVICES:
5.1 Services.
(a) Employee shall render services in the capacity of
the director for three (3) Pictures during the Term, it being understood that
Employee's services for the third Picture are subject to subparagraph (b) below.
The parties acknowledge that the first Picture is "Bugs". Employee agrees
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<PAGE> 6
to render all such services as required by Company and customarily rendered by
directors of first-class feature length animated motion pictures in the motion
picture industry and to comply with all reasonable directions, requests, rules
and regulations of Company in connection therewith, whether or not the same
involve matters of artistic taste and judgment. If Company and Employee desire
to engage a co-director in connection with any Picture directed by Employee,
said co-director shall be subject to the approval of Employee, which approval
shall be exercised in Employee's sole discretion. Notwithstanding the foregoing,
if Company elects to proceed to production of a Picture during the Term and it
is reasonably anticipated by Company that the Term shall expire prior to
completion of Employee's directing services in connection therewith and Employee
and Company have not concluded an agreement for Employee's post term directing
services under subparagraph (b) below, then Company will have the right to
engage the services of a co-director in consultation with Employee. In any
event, such co-director will be subject to Employee's creative direction during
Employee's services as the director.
(b) Notwithstanding anything to the contrary
contained herein, if Company elects to proceed to production of a Picture during
the Term and it is reasonably anticipated by Company that the Term shall expire
prior to the completion of Employee's directing services in connection therewith
(Company and Employee specifically acknowledge that the third Picture may fall
under this category), either Company or Employee may initiate good faith
negotiations for post term directing services in connection with the applicable
Picture (with the salary and theatrical motion picture bonus set forth herein as
a floor for such directing services). If the parties are unable to reach an
agreement after a period of thirty (30) days from commencement of said
negotiations ("Negotiation Period"), Employee shall have the right by written
notice to Company within five (5) business days after expiration of the
Negotiation Period to extend the Term for up to six (6) months at then current
salary level. If Employee fails to submit such notice, the Term of this
Agreement shall be extended on a week-to-week basis until either party
terminates upon seven (7) days written notice.
5.2 Credits. As to each Picture produced for which Employee
renders directing services, and subject to Employee's full performance of all
material directing services requested by Company in accordance with this
Agreement and material obligations in connection therewith, and further subject
to the distributor's standard exclusions and exceptions as customarily
negotiated for deals of this nature Company shall accord Employee the following
sole credit, on screen, on a separate card, in the end titles or in the main
titles if any other individual receives credit in the main titles: "Directed by
John Lasseter", which shall be the last card in the main titles or the first
card of individual credits in the end titles, subject to industry wide
collective bargaining agreements. Said credit shall be no less than 50% of the
regular title and in a Size of type not less than the Size of type accorded to
any other individual (other than the cast members) of the Picture. In addition,
Employee shall be entitled to receive credit in the billing block portion of
paid advertising (including packaging of video devices) issued or controlled by
Company or the distributors (subject to the distributor's standard exceptions
and exclusions and subject to the distributor's customary restrictions as
customarily negotiated for deals of this nature) in a Size of type not less than
35% of the Size of type of the regular title of the Picture and 20% of the
artwork title of the Picture. Employee shall also receive credit outside of the
billing block or in excluded advertising in which any individual (other than
principal cast members) receives credit in said excluded ads or outside the
billing block (other than award or congratulatory ads). All other
characteristics of the foregoing credit shall be subject to Company's sole
discretion.
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<PAGE> 7
5.3 Delivery. With respect to each of the Pictures which
Employee directs, Employee, to the extent within Employee's control, shall
comply with the delivery and picture specification requirements of the
distributor of the Picture, of which Employee is informed in writing.
5.4 Sequels/Remakes. If within twelve (12) years after the
initial release (if any) of the applicable Picture directed by Employee, Company
(or its successor and assigns) elects in its sole discretion to produce a
theatrical sequel, theatrical remake, television motion picture, mini-series or
series, or "made for video production" based on any of the Pictures directed by
Employee ("Subsequent Productions") then provided that the applicable Picture
was completed at a final negative cost not exceeding 110% of the approved budget
excluding the contingency (excluding excess cost incurred due to Force Majeure
events and other causes beyond Employee's control, changes pre-approved by
Company, net insurance recoveries and retroactive increases to scale personnel
under any collective bargaining agreement which are not reasonably anticipated),
that Employee is not in Default hereunder and provided further that Employee is
available when reasonably required by Company, then Employee shall have the
first opportunity to be the director for the Subsequent Production which, if
after the Term shall be upon terms to be negotiated in good faith within
Company's standard parameters. If Company and Employee fail to agree on the
terms for Employee's engagement on the Subsequent Productions within thirty (30)
days following commencement of the negotiations, or if Employee is unavailable
or elects not to direct, then Company shall have no further obligation to
Employee under this paragraph 5.4.
5.5 Videocassette. If any Picture is produced and Employee
performs his services hereunder, Employee shall be entitled to receive one (1)
videocassette copy and one (1) laser disc copy of the Picture if and when
commercially available for release to the public.
5.6 Premieres. Employee and his spouse shall be invited to all
major celebrity premieres of the Picture (if any) in the United States which he
directs and shall be entitled to payment of first class transportation and
expenses.
5.7 No Union. The parties acknowledge that Company is not a
signatory to the DGA Basic Agreement and that the DGA Basic Agreement does not
currently apply to the Pictures.
5.8 E&O Insurance. Company shall include Employee as an
additional insured on Company's errors and omissions insurance policy consistent
with custom and practice in the industry.
6. GENERAL TERMS:
6.1 Right to Insure. Company shall have the right to secure in
its own name, or otherwise, and at its own expense, life, health, accident or
other insurance covering Employee and Employee shall have no right, title or
interest in and to such insurance. Employee shall assist Company in procuring
such insurance by submitting to examinations and by signing such applications
and other instruments as may be required by the insurance carriers to which
application is made for any such insurance. If Company is unable to obtain such
insurance at customary rates and deductibles, Company shall have the right which
must be exercised if at all within sixty (60) days from the date of this
Agreement to terminate this Agreement.
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<PAGE> 8
6.2 Noncompetitive Employment.
(a) Employee acknowledges that the nature of the
services furnished by Company to its clients requires that Employee at all times
perform Employee's services under this Agreement without divided loyalties or
obligations to any other person including, without limitation, to any person who
may become an employer of Employee following the end of the Term. Accordingly,
and without limiting the generality of the principle set forth in the preceding
sentence, it shall be a breach of this Agreement for Employee, without prior
written notice to and prior written consent of Company, to accept employment
with any business, individual, partnership, corporation, trust, joint venture,
unincorporated association or other entity or person other than the Company at
any time during the Term of this Agreement. During the Term, Employee may not
discuss, seek, solicit or accept future post Term employment.
(b) During the Term of this Agreement Employee shall
not become financially interested in (other than as a stockholder owning less
than one percent (1%) of the outstanding capital stock of any publicly traded
corporation) or directly associated with any other business or Person engaged in
a business that is involved in (i) developing, producing, distributing or
exploiting motion pictures, home videos, television programs, interactive
products or other audio visual works; (ii) the development, sale, licensing or
use of computer software for the creation or production of motion pictures, home
videos, television programs, interactive products or other audio visual works or
(iii) any other business that is competitive with the Company's business or
activities without the prior written consent of Company.
(c) After the expiration or termination of the Term
for any reason whatsoever, Employee shall not either alone or jointly with or on
behalf of others, either directly or indirectly, whether as principal, partner,
agent, shareholder, director, employee, consultant or otherwise, at any time
during the period of two (2) years following the expiration or termination of
the Term, offer employment to, or solicit the employment or engagement of, or
otherwise entice away from the employment of Company or Disney or any affiliated
entity, either for Employee's own account or for any other person, firm or
company, any person who is then employed by Company or Disney or any such
affiliated entity, whether or not such person would commit any breach of said
person's contract by reason of leaving the service of Company, Disney or any
affiliated entity.
6.3 Nondisclosure Agreement. Employee acknowledges and
confirms his continuing obligations under the Non-Disclosure Agreement
previously executed by Company and Employee regarding confidentiality and
inventions (the "Confidentiality Agreement"). Employee further acknowledges that
said Confidentiality Agreement applies to the terms and conditions of the
co-production agreement between Company and Disney to the extent Employee has
knowledge of the terms and conditions thereof. To the extent of any
inconsistency between this Agreement and the Confidentiality Agreement, this
Agreement shall govern.
6.4 Ownership. The results and proceeds of Employee's services
hereunder including, but not limited to, creating, designing, sketching,
animation, writing and/or directing in connection with ideas, stories,
screenplays and the Pictures, Productions or any other Pixar production's or
works shall
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be deemed a work-made-for-hire specially ordered or commissioned by Company
("Results and Proceeds"). As between Employee and Company, Company shall
exclusively own all now known or hereafter existing rights of every kind
throughout the universe, in perpetuity and in all languages, pertaining to such
Results and Proceeds, and all elements therein, for all now known or hereafter
existing uses, media, and forms (including, without limitation, all copyrights
and renewals and extension thereof), motion picture, television, sequel, remake,
character and allied rights therein, and the foregoing is inclusive of a full
assignment to Company thereof. In addition, Company shall have the right,
throughout the world and in perpetuity, to use and reproduce, and license others
to use and reproduce, Employee's name, likeness and biographical data relating
to Employee in connection with the Picture and the advertising or exploitation
thereof (including without limitation, in promotional films and featurettes
relating to any Pictures or projects); provided that in no event shall Employee
be depicted as using or endorsing any product, commodity or service. The use of
Employee's credit in a billing block shall not be deemed a use or endorsement of
a product, commodity or service. Company shall have the right, but not the
obligation, to use, adapt, change or revise any work or product of Artist or any
part thereof or the title thereof and to combine the same with other material or
works and Employee hereby expressly waives any so-called "moral rights" of
authors in the world.
6.5 Termination Without Cause. Company shall have the
unilateral right, at any time in the Company's sole and absolute discretion, to
terminate Employee's employment by the Company, without cause, and for any
reason or for no reason (the Company's "Termination Rights"). The Company's
Termination Rights are not limited or restricted by, and shall supersede, any
policy of the Company requiring or favoring continued employment of its
employees during satisfactory performance, any seniority system or any procedure
governing the manner in which the Company's discretion is to be exercised. No
exercise by the Company of its Termination Rights shall, under any
circumstances, be deemed to constitute (i) a breach by the Company of any term
of this Agreement, express or implied (including without limitation a breach of
any implied covenant of good faith and fair dealing), (ii) a wrongful discharge
of Employee or a wrongful termination of Employee's employment by the Company,
(iii) a wrongful deprivation by the Company of Employee's office (or authority,
opportunities or other benefits relating thereto), or injury to reputation, or
(iv) the breach by the Company of any other duty or obligation, express or
implied, which the Company may owe to Employee pursuant to any principle or
provision of law (whether contract or tort), unless the Company's determination
to terminate Employee pursuant to this Section 6.5 shall constitute a violation
of any applicable federal, state or municipal statute, ordinance, rule or
regulation, respecting which the parties may not contact otherwise. If the
Company elects to terminate Employee's employment pursuant to this Section 6.5,
the Company shall have no obligation or liability to Employee pursuant to this
Agreement or otherwise, except to (a) pay to Employee within ten (10) business
days of the exercise of the Termination Right an amount equal to seventy-five
percent (75%) of the balance of the Salary due to Employee under Section 2.1(b)
through the remainder of the Term, and (b) pay to Employee the vested portion of
the Theatrical Motion Picture Bonus as and if due pursuant to the terms of
Section 2.2. Upon exercise of such Termination Right, Employee shall have no
further obligation to provide services to Company hereunder and Employee shall
be free to accept third party employment.
6.6 Equitable Relief for Breach. Employee acknowledges that
the services to be rendered by Employee under the terms of this Agreement, and
the rights and privileges granted to
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Company by Employee under its terms, are of a special, unique, unusual,
extraordinary and intellectual character, which gives them a peculiar value, the
loss of which cannot be reasonably or adequately compensated in damages in any
action at law, and that a material breach by Employee of any of the provisions
contained in this Agreement will cause Company great and irreparable injury and
damage. Employee acknowledges that Company shall be entitled, in addition to any
other remedies it may have at law, to seek the remedies of injunction, specific
performance, and other equitable relief for any breach of this Agreement by
Employee. This provision shall not, however, be construed as a waiver of any of
the rights which Company may have for damages, or otherwise.
6.7 Breach By Company. In the event of any breach of this
Agreement by Company, Employee shall give Company written notice thereof. If
Company does not cure such breach within thirty (30) days of receiving written
notice thereof, Employee's remedy shall be limited to an action at law for
damages and/or declaratory relief and Employee shall not be entitled to rescind
this Agreement or to injunctive relief or other equitable remedies; provided,
however, the foregoing shall not be deemed a waiver of Employee's statutory or
common law right to discontinue rendering services hereunder in the event of a
material breach by Company of this Agreement. No inadvertent failure to comply
with the provisions of paragraphs 3.2, 4.2 or 5.2 nor any failure by third
parties to comply with their agreement with Company shall constitute a breach of
this Agreement by Company. Upon written notice from Employee specifying the
precise nature of the failure to accord credit as herein provided, Company
agrees to use reasonable efforts to cure prospectively any such breach, but
Company shall not be obligated to recall any prints or advertising material.
Company shall use good faith business efforts to advise third party licensees of
the credit obligations to Employee under this Agreement. Notwithstanding the
foregoing, Company will contractually require Disney to comply with the credit
obligations hereunder.
6.8 Suspension/Termination.
(a) In the event of Employee's death during the Term,
Company shall terminate Employee's services and pay pursuant to paragraph 6.8(f)
below.
(b) If Employee is prevented from fully performing
Employee's material obligations hereunder by reason of illness, accident or
mental or physical disability, or by reason of any law or authority (all of
which events are herein called "Incapacity"), Company may suspend the services
and compensation of Employee during the period of such Incapacity and/or extend
the Term of Employee's services hereunder for a period of time equal to the
period of such suspension. In the event such Incapacity continues for a period
of fourteen (14) consecutive days or twenty-one (21) days in the aggregate while
Employee is rendering directing services during production of any Picture
hereunder or six (6) consecutive weeks or ten (10) weeks in the aggregate, at
any other time hereunder, Company may terminate the employment of Employee's
services by giving thirty (30) days prior written notice to Employee.
(c) The Company may terminate this Agreement
immediately upon written notice to Employee for an event of "Default." For
purposes of this Agreement, a termination for "Default" occurs if Employee is
terminated for any of the following reasons:
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(i) Gross negligence by Employee of his
duties pursuant to this Agreement.
(ii) Conviction of Employee of any felony
or any lesser crime or offense involving the property of Company.
(iii) Any material breach by Employee of
any of the terms or covenants of this Agreement, it being understood that
Employee shall have a period of five (5) days from written notice from Company
to cure an alleged breach.
(d) The unearned salary provided for hereunder to
Employee may, at Company's option, be suspended during any interruption of
Company's business which prevents the performance of Employee's duties which has
been caused by an event of force majeure, including, but not limited to,
strikes, work stoppage or other labor dispute, acts of God, or other events of
force majeure ("Force Majeure"). If any such period of suspension hereunder
shall continue for a period of six (6) weeks or more, Company or Employee shall
have the right to elect to terminate this Agreement by written notice. In the
event Employee elects to submit a notice of termination, said election shall be
deemed null and void if Company elects to resume its payment obligations to
Employee with one (1) week of Company's receipt of said notice. If this
Agreement is terminated due to an event of Force Majeure and Company elects to
thereafter resume production of the applicable Picture within eighteen (18)
months, Employee shall have the first opportunity upon fifteen (15) business
days prior notice to the start date to be reinstated as the director under the
terms and conditions of this Agreement. During any suspension for an event of
Force Majeure, Employee's services to Company shall be on a non-exclusive basis.
(e) In the event of any such suspension or
suspensions hereunder, the Term of this Agreement shall be extended (unless
earlier terminated as provided above) for an additional period of time equal to
the period of such suspension or suspensions, and the dates for any increase in
salary provided for herein shall be correspondingly postponed.
(f) In the event of Employee's termination for death,
Incapacity, Default or Force Majeure pursuant to subsections (a), (b), (c) or
(d) above, Company shall be obligated to pay Employee only the specified salary,
bonuses, fringe benefits, expenses and vacation accrued through the date of
termination and any rights Employee may have under the Stock Option Plan shall
be determined under the terms thereof.
6.9 Assignment. Company may not assign its rights under this
contract unless to a company which acquires all or substantially all of
Company's assets or to a single purpose production entity which is formed by
Company for purposes of producing the Pictures (in which event Company may only
assign Employee's services and Company shall remain liable for all obligations
of said single purpose entity), without Employee's consent. This Agreement is
personal to Employee and Employee shall not have the right to assign Employee's
interest in this Agreement, any rights under this Agreement or any duties
imposed under this Agreement nor shall Employee have the right to pledge,
hypothecate or
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otherwise encumber Employee's right to receive compensation hereunder without
the prior written notice to Company.
6.10 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
6.11 Notices. Any notice, consent or other communication under
this Agreement shall be in writing and shall be considered given when mailed by
registered or certified mail, postage prepaid, to the parties at the addresses
set forth below (or at such other address as a party may specify by notice in
accordance with the provisions hereof to the other).
Company:
PIXAR
1001 W. Cutting Boulevard #200
Richmond, CA 94804-2452
With a copy to:
Ziffren, Brittenham, Branca & Fischer
2121 Avenue of the Stars
32nd Floor
Los Angeles, CA 90067
Attention: Sam Fischer, Esq.
John Lasseter
590 Daniel Young Dr.
Sonoma, CA 95476
With a copy to:
Crosby, Heafey, Roach & May
700 S. Flower
Suite 2200
Los Angeles, CA 90017
Attention: Nancy Newhouse Porter
6.12 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California
(regardless of that jurisdiction or any other jurisdictions' choice of law
principles).
6.13 Complete Agreement, Modification and Termination. This
agreement, along with the Stock Option Plan, and the Confidentiality Agreement,
contains a complete statement of all the arrangements between the parties with
respect to Employee's employment by Company, supersedes all
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existing agreements, whether written or oral, between them concerning Employee's
employment, and may be changed only in a writing executed by all parties hereto.
In entering into this Agreement, neither party has relied upon any
representation, warranty, assurance or statement of intention not expressly set
forth herein.
6.14 Validity. If any one or more of the provisions (or any
part thereof) of this Agreement shall be held to be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions (or any part thereof) shall not in any way be affected or
impaired thereby.
6.15 Waiver. The failure of a party to insist upon strict
adherence to any term, condition or other provision of this Agreement shall not
be considered a waiver or deprive that party of the right thereafter to insist
upon strict adherence to that term or any other term, condition or other
provision of this Agreement.
6.16 Commitment to Others. Employee shall not have any right
or authority to and shall not employ any person in any capacity nor contract or
purchase or rent any article or material, nor make any commitment, agreement or
obligation whereby Company shall be required to pay any monies or other
consideration without Company's prior consent in each instance.
6.17 I-9. All of Company's obligations under this Agreement
are expressly conditioned upon Employee's completion to Company's reasonable
satisfaction of an I-9 Form (Employee Eligibility Verification Form) and upon
Employee's submission to Company of original documents reasonably satisfactory
to Company to demonstrate Employee's employment eligibility.
6.18 Headings. The headings of this Agreement are solely for
convenience of reference and shall not affect its interpretation.
6.19 Arbitration. Any controversy or claim arising out of, or
relating to, this Agreement, or the making, performance or interpretation
thereof, shall be fully and finally settled by binding arbitration in San
Francisco, California, in accordance with the rules of the American Arbitration
Association the existing, and judgment on the arbitration award may be entered
in any court having jurisdiction over the subject matter of the controversy;
provided, however, that this arbitration provision shall not apply to any
dispute concerning any obligations arising under paragraphs 6.2, 6.3 and 6.4 of
this Agreement.
6.20 Indemnity. Company shall indemnify and hold harmless
Employee from and against any and all liability, costs, damages and expenses
(including reasonable attorneys' fees and court costs) which Employee may
sustain or suffer by reason of any third party claim resulting from the
development, production or distribution of the Picture and which is not caused
by a breach by Employee hereunder.
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6.21 EMPLOYEE ACKNOWLEDGES THAT HE HAS HAD THE OPPORTUNITY
TO CONSULT WITH THE ADVISOR OF HIS CHOICE AND THAT HE HAS FREELY AND
VOLUNTARILY ENTERED INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
February 23, 1997.
PIXAR
By /s/ Steve Jobs
----------------------------------------
EMPLOYEE
/s/ John Lasseter
-------------------------------------------
JOHN LASSETER
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EXHIBIT 10.16
CO-PRODUCTION AGREEMENT
WALT DISNEY PICTURES AND TELEVISION
AND
PIXAR
FEBRUARY 24, 1997
<PAGE> 2
CO-PRODUCTION AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Pictures.......................................................................1
2. Term...........................................................................1
3. Creative Controls..............................................................1
a. Treatments............................................................1
b. Development and Production............................................2
c. Final Cut.............................................................3
d. Ancillary Rights......................................................3
4. Production.....................................................................4
a. Production Control....................................................4
b. Disney Representative.................................................5
5. Computational Resources........................................................5
a. Computational Resources...............................................5
b. Acquisition and Funding of Computational Resources....................5
c. Use On other Projects.................................................5
d. Buy Out...............................................................6
6. Distribution...................................................................6
a. Initial Release.......................................................6
b. Release Period........................................................6
c. [*]...................................................................6
d. Walt Disney Pictures Brand............................................7
e. Distribution and Marketing............................................7
f. Consultation with Pixar...............................................7
g. Pixar Representative..................................................7
h. [*] Licensing.........................................................8
i. Short Subjects........................................................8
j. Subdistributors and Flat Sales........................................8
k. "Making of" Films.....................................................8
7. Financing of Development and Production........................................9
8. Budgets........................................................................9
a. Treatment Budget......................................................9
b. Development Budgets...................................................10
c. Picture Budgets.......................................................10
d. [*]...................................................................11
9. Definition of Gross Receipts...................................................11
</TABLE>
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 3
<TABLE>
<S> <C> <C>
a. Gross Receipts........................................................12
b. Exclusions from Gross Receipts........................................12
c. Ancillary Rights......................................................13
d. Home Video............................................................13
e. Affiliates............................................................13
10. Division of Gross Receipts.....................................................14
a. Division..............................................................14
b. Separate Accounting Units.............................................14
c. Statements............................................................14
d. Audit Rights..........................................................15
e. Payments..............................................................16
11. Distribution Costs.............................................................16
a. Definition............................................................16
b. Exclusions............................................................17
c. Cross Promotions......................................................17
d. Disney Responsible....................................................17
e. Accrual...............................................................18
12. Brand/Credit...................................................................18
a. On Screen Credits.....................................................18
b. Paid Advertising......................................................18
c. Packaging.............................................................19
d. Billing Block.........................................................19
e. Stationary Logo.......................................................19
f. [*]...................................................................20
g. Credits...............................................................20
h. Prospective Cure......................................................20
13. Proprietary Rights.............................................................20
a. Pictures and Ancillary Rights.........................................20
b. Corporate Promotional Use.............................................21
c. Pixar Technology......................................................21
d. Treatments............................................................22
14. Defense of Claims..............................................................22
a. By Disney.............................................................22
b. By Pixar..............................................................22
15. Derivative Works...............................................................23
a. Definition of Derivative Works........................................23
b. Decision to Produce...................................................23
c. Theatrical Motion Pictures............................................24
d. Made-for-Home Video Productions.......................................24
e. Television Productions................................................25
f. Interactive Works.....................................................26
g. Live Entertainment....................................................26
h. Location Based Entertainment..........................................27
</TABLE>
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been requested with respect to the omitted portions.
ii
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<TABLE>
<S> <C> <C>
i. All Other Works Other Than Theme Parks................................27
j. Theme Parks...........................................................27
k. Creative Control of Derivative Works Not Produced by Pixar............27
16. Toy Story......................................................................28
a. Derivative Works......................................................28
b. Toy Story Agreement...................................................28
c. Ancillary Rights......................................................28
17. Exclusivity....................................................................28
a. No Other Feature Length Animated Theatrical Motion Pictures...........28
b. Theme Parks...........................................................28
c. First Look at TV Productions and Home Video Productions...............29
d. No Material Interference..............................................29
e. Employment Agreement with John Lasseter...............................29
18. Exchange of Information........................................................29
19. Publicity and Confidentiality..................................................30
a. Publicity.............................................................30
b. Confidentiality of Terms of Agreement.................................30
c. Protection of Confidential Information................................30
20. Non-Solicitation...............................................................31
21. Assignment.....................................................................31
22. Change of Control of Pixar.....................................................31
23. Termination....................................................................31
24. Interest On Late Payments......................................................32
25. Governing Law..................................................................32
26. General Provisions.............................................................32
a. Right to Cure.........................................................32
b. Remedies..............................................................32
c. Force Majeure.........................................................33
d. No Waivers............................................................33
e. No Violation of Law...................................................34
f. Notice................................................................34
27. Entire Agreement...............................................................34
28. Execution in Counterparts......................................................34
Exhibit A - Certain Entertainment Companies....................................37
Exhibit B - Distribution Costs.................................................38
Appendix - Glossary of Terms...................................................42
</TABLE>
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<PAGE> 5
CO-PRODUCTION AGREEMENT
This Co-Production Agreement ("Agreement") is entered into as of February 24,
1997, by and between Pixar, a California corporation ("Pixar), and Walt Disney
Pictures and Television, a California corporation ("Disney").
1. PICTURES.
Pixar and Disney agree to develop, produce, finance and distribute five
(5) computer-animated feature-length theatrical motion pictures ("Picture(s)")
pursuant to the terms of this Agreement. Pixar and Disney hereby designate the
picture currently entitled Bugs as the first Picture hereunder.
2. TERM.
The term of this Agreement ("Term") shall commence upon the execution
hereof and shall continue until Delivery to Disney of the fifth Picture produced
and financed hereunder. For purposes of this Agreement, "Delivery" shall mean
delivery pursuant to terms to be mutually agreed upon by Pixar and Disney no
later than six (6) months before the delivery of Bugs. The provisions of
paragraphs 5(d), 6, 9 through 16, 17(a), and 18 through 28 of this Agreement
shall survive expiration of the Term.
3. CREATIVE CONTROLS.
Pixar and Disney shall collaborate in the creative process of
developing and producing the Pictures, as follows:
a. Treatments.
(i) For each of the four remaining Pictures, Pixar shall
submit one or more Treatments for Disney's consideration as the basis for the
Picture ("Treatment"). Each Treatment shall be either (a) a written treatment of
not less than three pages in length setting forth a story to be used as the
basis for the screenplay or (b) an oral presentation of not more than one (1)
hour, accompanied by rough sketches, conceptual art and rudimentary story boards
sufficient to communicate the essential idea for the Picture comparable to the
presentation previously made for Bugs and the first presentation for the second
Picture. Each such Treatment shall be based on a new idea and not be a sequel,
prequel or remake of a prior picture. Treatments may be submitted by Pixar
singly or in one or more groups. Disney shall accept or reject each Treatment
within forty-five (45) days after such Treatment
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is submitted by Pixar. [*] for [*] of the [*] within [*] by [*] of the [*], then
[*], whether or not it [*], to [*], by giving written notice of [*] at any time
[*] unless [*] the parties have [*] or [*] this Agreement under the provisions
of subparagraph (ii) below:
(A) [*] of the [*] as the [*] for a [*], provided in the
event of [*] under this subparagraph A the [*] to [*] and [*] shall be [*]
(unless [*] to [*] and with the [*] specified in [*], or
(B) in the case of [*] of the [*] as the [*] for such
[*] and in the event of [*] under this subparagraph B [*] and [*] shall be [*]
(unless [*] to [*]) and with the [*] specified in [*].
(ii) In the event that no Treatment has been approved or
selected under the provisions of subparagraph 3(a)(i) above within one (1) year
after the initial theatrical release of the last Picture for which a Treatment
has previously been approved or selected, then Disney shall be entitled to
terminate this Agreement upon thirty (30) days written notice to be served on
Pixar not more than sixty (60) days after the end of such one (1) year period,
unless within such thirty day notice period either; (A) the parties have
mutually approved a Treatment for a Picture or (B) [*] has [*] under the
provisions of subparagraph 3(a)(i)(A) or (if still applicable) subparagraph
3(a)(i)(B), provided that Pixar has otherwise satisfied the conditions in
paragraph 3(a)(i) above for such selection under subparagraph 3(a)(i)(A) or
3(a)(i)(B) above. In the event of such termination, the provisions of paragraph
23 shall apply.
b. Development and Production. After approval or selection of a
Treatment, Disney and Pixar shall have mutual creative control of the further
development, pre-production and production of each Picture, provided that in the
event of a disagreement with respect to any particular creative matter in such
Picture final creative control with respect to such creative matter shall be as
follows:
(i) [*] shall have [*] in any of the Pictures which [*];
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(ii) [*] shall have [*] in any of the [*] have previously
[*] for [*] with [*]; or
(iii) if neither subparagraph (i) or (ii) is applicable, the
[*] and [*] shall have [*] of such [*]. The [*] shall be [*] so long as [*] is
[*] (unless [*] , on [*] or [*] to [*]); otherwise [*] shall appoint the [*], or
if [*] is no longer employed by [*] will [*] the [*] . The [*] shall be [*] so
long as [*] is [*] (and not [*]); otherwise [*] (or if [*] is no longer employed
by [*], the [*] of [*]) shall appoint the [*].
c. Final Cut/Rating. Disney and Pixar shall have mutual control over the
final cut of each Picture, provided that each party shall exercise its final cut
rights in good faith and so not to frustrate or delay the release of the
Picture. Each Picture shall be produced hereunder so as to receive a G rating
(or substitute equivalent). If for any reason a G rating (or substitute
equivalent) is not received or the Picture does not qualify for such rating,
Pixar agrees to make such changes as necessary to obtain or qualify for such
rating prior to Delivery. Within a reasonable time after completion of the final
cut as provided herein, Pixar shall deliver the Picture to Disney.
d. Ancillary Rights.
(i) Disney and Pixar shall have mutual creative control with
respect to the creation and design of any Ancillary Rights, provided that in the
event of a disagreement Disney's decision shall govern.
(ii) For purposes of this Agreement, the terms "Ancillary
Rights", "Merchandising Rights" and "Interactive Works" shall have the following
meanings:
(A) "Ancillary Rights" means items created in the
exercise of Merchandising Rights, literary publishing, soundtrack and publishing
rights in and to any of the Pictures, any Derivative Works or, subject to the
provisions of paragraph 16, Toy Story. Ancillary Rights does not include any
works within the scope of Derivative Works, as defined in paragraph 15 below,
but does include any items created in the exercise of Merchandising Rights,
literary publishing, soundtrack and publishing rights in and to any Derivative
Works.
(B) "Merchandising Rights" means the right to make, use,
sell, exercise or otherwise exploit and license or authorize others to make,
use, sell, exercise or otherwise exploit tangible personal property, of any and
all kinds, based upon, utilizing or
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embodying any Picture or Derivative Work or subject to the provisions of
paragraph 16, Toy Story, or any of the characters or story or other unique
elements thereof, including without limitation any unique names, likenesses or
characteristics of any character portrayed therein other than pre-existing
Disney characters, or any unique title, catch word, slogan, situations, designs,
equipment or events depicted therein, or any trademark, trade name or copyright
related thereto other than pre-existing Disney marks; provided that
Merchandising Rights shall not include Interactive Works.
(C) "Interactive Work" means any audio-visual work or
other work, regardless of the physical medium in which the work is fixed
(including without limitation CD ROMs, DVDs, video games and arcade games), now
known or hereafter coming into being, which work is designed with a primary
purpose of permitting the viewer to modify or control the sequence or
performance of the presentation in a non-linear fashion.
4. PRODUCTION.
a. Production Control. Subject to the provisions of paragraph 3 above and
this paragraph 4, Pixar shall control the production of each Picture. Pixar, or
at Pixar's option an entity established and controlled by Pixar, shall serve as
the production entity, provided that none of the entities described in Exhibit A
may own any interest in the production entity. Pixar may also establish a
separate entity (which may or may not be owned by Pixar but over which Pixar
shall exercise production control by contract or otherwise) for purposes of
undertaking all or certain portions of production services, such as hiring
voice, writers and other artistic talent, provided that none of the entities
described in Exhibit A may own any interest in such separate entity. Pixar shall
designate and approve all production personnel. Pixar shall consult with Disney
concerning the selection of the producers and directors for each Picture,
provided that in the event of disagreement the decision of Pixar shall govern.
[*] shall [*] talent [*] the [*] then [*] by [*] for [*] in [*] (as defined in
paragraph 6(c) below). In contracting with third parties in connection with the
production of each Picture, Pixar shall, in addition to following the other
terms of this Agreement, follow Disney's then customary policies for Premiere
Disney Movies with respect to the scope of any grant of rights for use in the
Picture ( and the exercise of Ancillary Rights or Derivative Works derived
therefrom) obtained from such third parties, provisions limiting such third
parties' right to interfere with distribution or other exploitation of the
Picture and product placement in the Picture.
b. Disney Representative. Disney may designate a Disney representative
(the "Disney Production Representative"), who shall be subject to the reasonable
approval of Pixar. The Disney Production Representative shall be entitled to
maintain an office at Pixar's facilities, to monitor production of the Pictures,
to review production and production finance books, records and documentation,
including creative materials (e.g. dailies, story boards and scripts), to have
access to Pixar production personnel and production meetings solely relating to
the Pictures on a regular basis, and to receive periodic briefings from Pixar on
production and production finance issues. Pixar will also furnish the Disney
Production Representative,
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upon request, weekly cost reports, production reports and backup data with
respect to carrying costs incurred by Pixar relating to the retaining of
employees for production purposes. The Disney Production Representative shall
not have decision-making authority over Pixar, and shall not have access to
Pixar Technology (as defined in paragraph 13(c)). The Disney Production
Representative shall have entered into a confidentiality agreement with Disney
which covers and protects Pixar Confidential Information as provided in this
Agreement or shall enter into a confidentiality agreement with Pixar. The salary
and expenses of the Disney Production Representative shall not be included in
the Picture Budget and shall be the sole responsibility of Disney. Pixar
preapproves [*] as the Disney Production Representative.
5. COMPUTATIONAL RESOURCES.
Pixar shall have control over the selection, acquisition, placement and
use of Computational Resources as provided in this paragraph 5.
a. "Computational Resources" means all workstations, servers and other
computers, network and networking equipment, storage systems and other
computational equipment and third party software used by Pixar to develop and
produce the Pictures or any Derivative Works, other than any such equipment and
software owned or controlled by Disney (and not financed by Pixar) used by Pixar
at Pixar's request to develop or produce the Pictures or Derivative Works.
b. Acquisition and Funding of Computational Resources. Pixar shall pay
fifty percent (50%) and Disney shall pay fifty percent (50%) of the purchase
price of all such Computational Resources as provided in paragraph 7. Pixar (or
a production entity established by Pixar) shall convey to Disney an undivided
fifty percent (50%) interest in all Computational Resources co-funded by Disney
immediately upon acquisition and funding by Disney of such Computational
Resources. The purchase price of Computational Resources shall be determined net
of any discounts or rebates, but before the application of any credits granted
to Pixar unrelated to the Pictures (e.g. equipment credits granted to Pixar in
connection with its patent license agreement with Silicon Graphics Inc.). Pixar
shall have the right to attempt to secure Computational Resources at less than
market costs in exchange for providing to the supplier any of the following
promotional or marketing consideration relating to one or more Pictures: (i)
private screenings of the Picture(s), (ii) permitting the supplier to mention
the Picture(s) in its advertisements and marketing materials, (iii) in the case
of a supplier who contributes Computational Resources or provides equipment
credits worth U.S.$[*] or more (at list price), [*] for use of such
Computational Resources in the Picture(s), and (iv) in the case of a supplier
who contributes Computational Resources or provides equipment credits worth
U.S.$[*] or more (at list price), providing [*] from the Picture(s) for
unaltered use after the initial theatrical release of the Picture in the [*]
which mention the Picture, provided that such [*] do not mention a competing
motion picture and are in circulation for no more than a [*] from initial use.
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c. Use on Other Projects. Pixar shall have the right to use Computational
Resources for Pixar productions and activities not covered by the terms of this
Agreement, provided that such productions and activities are not prohibited by
the terms of this Agreement. Pixar shall reimburse Disney a reasonable amount in
proportion to Pixar's use of the Computational Resources on non-Disney
productions and activities, except for network and networking equipment,
including wires, routers and other dedicated network equipment and networked
file servers, for which no such reimbursement shall be due.
d. Buy-Out. Pixar shall have the right at any time to purchase Disney's
interest in any Computational Resource for a buy-out price equal to fifty
percent (50%) of the greater of (A) the depreciated book value of such resource,
calculated using a three (3) year straight line depreciation schedule or (B) ten
percent (10%) of the original purchase price of such resource.
6. DISTRIBUTION.
Disney shall have control over all decisions relating to the marketing,
promotion, publicity, advertising and distribution of each Picture, subject to
the following:
a. Initial Release. Disney shall initially release each Picture
theatrically in the United States within twelve (12) months, or if the Picture
is a holiday-themed motion picture (e.g. A Christmas Carol), fifteen (15)
months, after Delivery of the Picture by Pixar. Disney shall release each
Picture in the home video market in the United States within fifteen (15) months
after the initial United States theatrical release date of the Picture. The
exact release dates shall be determined by Disney, subject to the provisions of
this paragraph 6, in consultation with Pixar.
b. Release Period. Disney shall initially release each Picture
theatrically in the United States either during the period from May 15 to August
15 ("Summer Period") or during the period from November 15 to December 31
("Holiday Period").
c. [*].
(i) Neither Disney nor any of its Affiliates shall [*] any [*]
(other than [*] shown with a [*] any of the following [*]:
(A) during the [*] before and [*] after the initial
theatrical release of the Picture;
(B) during a [*] in which a [*] is [*]; or
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(C) during the period commencing [*] before a [*] or [*]
after [*], and ending at the end of [*] in which a Picture is [*], except that
Disney may [*] or [*] another [*] during such period provided that [*] and is
not [*] or [*] until at least [*] after the [*] of such Picture in the [*]. For
purposes of this Agreement, [*] means a premiere animated feature-length
theatrical motion picture (e.g. [*] or [*] and not [*] or [*]) fully financed
and distributed by Disney.
(ii) Neither Disney nor any of its Affiliates shall [*] or [*]
any Disney branded or G-rated live action motion picture distributed by Disney
or its Affiliates (e.g. [*] or [*]) during the period commencing [*] before and
ending [*] after the [*] of the Picture, or ending [*] after the [*] of the
Picture in the case of a Picture [*].
(iii) For purposes of this Agreement, "Affiliate" means any
person or entity (i) in which Disney owns or controls directly or indirectly at
least a 25% ownership interest, (ii) which owns or controls directly or
indirectly at least a 25% ownership interest in Disney, or (iii) in which a
person or entity owns or controls directly or indirectly at least a 25%
ownership interest that also owns or controls directly or indirectly a 25%
ownership in Disney.
d. Walt Disney Pictures Brand. Each Picture shall be distributed and
marketed under the Walt Disney Pictures brand (or the then current Disney brand
for Premiere Disney Movies) and with the credits and branding specified in
paragraph 12.
e. Distribution and Marketing. Each Picture shall be distributed and
marketed by Disney in all markets and media and on a worldwide basis in a manner
similar to that in which Disney then currently distributes and markets[*].
f. Consultation with Pixar. Disney shall consult with Pixar relating to
all such major marketing and distribution decisions including, without
limitation, the initial release plan of each Picture in each primary market
(i.e., theatrical, non-theatrical, pay-per-view, pay televisions, network, first
cycle free television syndication and home video), any theatrical re-release,
the initial advertising campaign, home video pricing and commercial tie-ins and
cross-promotion deals, provided that Disney shall have the final decision on
such matters. Upon request by Pixar, Disney shall [*] with [*] and [*], provided
that at Disney's option such [*] and [*] may be in either [*] or [*].
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g. Pixar Representative. Pixar may designate a representative (the
"Pixar Marketing and Distribution Representative"), who shall be subject to the
reasonable approval of Disney. The Pixar Marketing and Distribution
Representative shall be [*] to monitor marketing and distribution of the
Pictures, Ancillary Rights and Derivative Works and the Distribution Costs
related thereto, to review marketing and distribution and Distribution Cost [*],
to have access to Disney's marketing and distribution personnel and marketing
and distribution [*] solely related to the Pictures on a regular basis, and to
receive periodic briefings from Disney on marketing and distribution issues.
Disney will also furnish the Pixar Marketing and Distribution representative,
upon request, [*] relating to anticipated [*] and [*] relating to the Pictures,
Ancillary Rights and Derivative Works. The Pixar Marketing and Distribution
Representative shall not have decision-making authority over Disney. The Pixar
Marketing and Distribution Representative shall have entered into a
confidentiality agreement with Pixar which covers and protects Disney
Confidential Information as provided in this Agreement or shall sign a
confidentiality agreement with Disney. The salary and expenses of the Pixar
Marketing and Distribution Representative shall not be included in Distribution
Costs and shall be the sole responsibility of Pixar.
h. [*] Licensing. Disney shall not have the right to [*] (including
without limitation per-pay-view distribution) if such Picture has [*], without
the prior written consent of Pixar. If any Picture [*] within [*] after its
initial United States theatrical release, Disney shall have the right to [*],
provided that any such [*] shall be consistent with Disney's standard [*]
practices and terms for all of its own animated motion pictures of similar
performance. Any payments received by Disney attributable to [*] motion picture
or television program shall be fairly [*] among such [*].
i. Short Subjects. Disney may not exhibit a short subject motion
picture with any Picture without the prior written consent of Pixar, unless
required to do so by local law or the Picture is less than seventy (70) minutes
in length. If Disney determines to exhibit a short subject with such Picture in
accordance with this paragraph, Disney shall consult with Pixar with respect to
using a Pixar motion picture as such short subject, but Disney's decision shall
govern.
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j. Subdistributors and Flat Sales . Disney shall have the right to
utilize a subdistributor in connection with the initial release or other
distribution of a Picture in any medium in any territory only if, at the time
such [*] is to be made, Disney [*] utilizes a subdistributor in connection with
the [*] of its own motion pictures in such medium and/or territory, including
[*]. Disney shall have the right to conclude a "flat sale" of a Picture in any
medium and/or territory only if, at the time such license is to be made, Disney
[*] in connection with the [*] of [*] in such medium and/or territory, including
[*].
k. "Making of" Films. The parties shall have [*] over the development
and production of any "making of" or other promotional films relating to any of
the Pictures, provided that [*]. The costs of developing and producing such
films shall be included within Distribution Costs, and any [*] (to the extent a
[*] can be attributed to such [*]) actually [*], or [*], Disney and its
Affiliates (including any Affiliates acting as subdistributors) from the
exploitation of such films [*], of such Picture.
7. FINANCING OF DEVELOPMENT AND PRODUCTION.
Pixar (or a production entity established by Pixar in accordance with
this Agreement) shall finance or cause to be financed fifty percent (50%) and
Disney shall finance or cause to be financed fifty percent (50%) of all costs
and expenses incurred by Pixar directly related to or fairly allocable to the
creation, development, pre-production, production, post-production and delivery
to Disney of the Pictures ("Production Costs"). Production Costs shall include
without limitation (a) the costs of all Treatments prepared by Pixar for
submission to Disney under this Agreement, (b) all carrying costs incurred by
Pixar for retaining of employees for production purposes under this Agreement
and the overhead attendant thereto, (c) all costs of Computational Resources,
and (d) fair allocations of all costs and expenses of Pixar associated with or
benefiting the Picture, including research and development, general and
administrative and overhead expenses and facilities. All such Production Costs
shall be financed by Pixar and Disney on a current, as needed basis. Without
limiting the generality of the foregoing, Disney's share of the costs of
purchasing Computational Resources shall be paid at the time of purchase of such
Computational Resources, and Disney's share of carrying costs and other costs
shall be paid on an on-going basis as Pixar incurs such arrying osts and other
costs. Disney and Pixar shall establish a mutually acceptable funding mechanism
to ensure that sums will be available in a timely manner to finance all such
expenditures pursuant to a cash flow projections prepared and updated from time
to time by Pixar.
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8. BUDGETS.
a. Treatment Budget. Pixar and Disney shall mutually agree on a budget
for the creation of Treatments ("Treatment Budget") for each Picture, which
shall be separate from and not include carrying costs or the costs of
Computational Resources. If Pixar and Disney are unable to reach agreement on a
Treatment Budget for a Picture within forty-five (45) days after submission by
Pixar of a proposed budget, the decision of Pixar as to such Treatment Budget
shall govern, so long as such Treatment Budget does not exceed [*] dollars
(U.S.$[*]) for the second Picture. Such amount shall increase by [*] percent
([*]%) for each subsequent Picture. The Treatment Budget shall be based on the
assumption that as many as three (3) Treatments will be created by Pixar in
connection with such Picture. If more than three Treatments are created by
Pixar, the Treatment Budget shall be increased by an amount equal to [*] of the
Treatment Budget for each Treatment above three created by Pixar. If a Treatment
with respect to such Picture is approved or selected under paragraph 3(a), any
unused portion of the Treatment Budget shall be applied to the Development
Budget for such Picture.
b. Development Budgets. Pixar and Disney shall mutually agree on a
development budget for the costs and expenses of the creation, development,
pre-production and production of each Picture (after Bugs) after approval or
selection of the Treatment and prior to the approval of the Picture Budget for
such Picture ("Development Budget"). The Development Budget shall be separate
from and not include carrying costs or the costs of Computational Resources.
Pixar and Disney shall seek to reach mutual agreement on the Development Budget
for each Picture. If Pixar and Disney are unable to reach agreement on a
Development Budget for a Picture within forty-five (45) days after approval or
selection of the Treatment for such Picture, the decision of Pixar as to such
Development Budget shall govern, so long as such Development Budget does not
exceed [*] dollars (U.S.$[*]) for the second Picture. Such amount
shall increase by [*] percent ([*]) or each subsequent Picture.
c. Picture Budgets.
(i) Approval of Picture Budgets. A budget for each Picture
(the "Picture Budget") shall be established as provided in this subparagraph
(c). Pixar shall be responsible for proposing a Picture Budget and submitting it
to Disney. The Development Budget for the Picture shall be included in the
Picture Budget for the Picture. Pixar and Disney will seek to reach mutual
agreement on the Picture Budget within sixty (60) days after submission by
Pixar. If Pixar and Disney are unable to reach agreement on the Picture Budget
within that period of time, the decision of Pixar as to the Picture Budget shall
govern, so long as such Picture Budget does not exceed [ * ]
percent ([*]%) of the largest Picture Budget for any prior Picture (determined
on the basis of the originally approved Picture Budget for such Picture plus
[*] percent ([*]%) of any approved increases or overages in such Picture
Budget), whether released or in production, provided that the facilities
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allocation in such budget shall not exceed [*] percent ([*]%) of the facilities
allocation in the Picture Budget for the immediately preceding Picture. The
Picture Budget may be revised from time to time during production of the Picture
upon written mutual agreement of Disney and Pixar, and when so revised such
revised Picture Budget shall be deemed the Picture Budget of such Picture. No
charges for Disney services or personnel shall be charged to the Picture except
those services or personnel separately contracted for by Pixar (or the
production entity established by Pixar).
(ii) Contents of Picture Budgets. Each Picture Budget
shall include the following items:
(A) All direct costs and expenses previously incurred or
to be incurred in the creation, development, pre-production, production,
post-production and delivery to Disney of the Picture, including the cost of the
Treatment used as the basis for the screenplay funded under the Treatment Budget
for such Picture and the costs and expenses of creation, development,
pre-production and production funded under the Development Budget for such
Picture;
(B) All carrying costs incurred by Pixar for retaining
of employees for production purposes under this Agreement for the applicable
Picture and the overhead attendant thereto;
(C) Fair allocations of all costs and expenses of Pixar
associated with or benefiting the Picture, including research and development,
general and administrative and overhead expenses and facilities;
(D) All Picture - specific costs, or fair allocations of
all costs, as applicable, of Computational Resources used in connection with
development or production of the Picture; and
(E) A [*] in the amount of [*] percent ([*]%) of the
sum of [*] and [*] under subparagraphs ([*]) through ([*])(the "[*]").
(iii) Production Costs To Be Within Budget. Pixar shall have
the right to reallocate costs among individual budget categories in the Picture,
subject to the following: (1) Pixar shall advise the Disney Production
Representative of any reallocation within the Picture Budget and shall obtain
Disney's written approval for any reallocation which exceeds [*] percent ([*]%)
in any budget category; and (2) use of the Contingency shall be subject to
written mutual approval of Pixar and Disney, except that Pixar may, without
prior approval of Disney, apply the Contingency to cover increases in salary,
benefits and other compensation paid to personnel included within the Picture
Budget (but not to increase the number of such personnel) up to a total of
[*] percent ([*]%) of the costs of salary, benefits and other compensation
for such personnel included within items (A) through (D) of
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such Picture Budget. Any expenditures in excess of the Picture Budget for such
Picture shall be subject to mutual written approval.
d. [*]. All [*] must be jointly approved in writing by Disney and
Pixar. Disney will account for and pay all [*] other than those paid to Pixar
employees, which Pixar will account for and pay, subject to recoupment as
provided in paragraph 10(a). For purposes of this Agreement, "[*]" means all
mutually approved [*] or other [*] to [*] of [*] of the Pictures or Ancillary
Rights, excluding [*] as defined in Exhibit B. [*] payable to [*] for [*] of [*]
pursuant to the agreement in effect as of the date of this Agreement between
Disney and [*], if the parties mutually agree to use [*] on a Picture, and [*]
payable to [*] pursuant to the [*] entered or to be entered under paragraph [*]
between Pixar with [*] are deemed jointly approved by Disney and Pixar under
this paragraph.
9. DEFINITION OF GROSS RECEIPTS.
a. "Gross Receipts". Except as otherwise expressly provided in this
paragraph 9, "Gross Receipts" shall include one hundred percent (100%) of all
revenues, money or other consideration (to the extent a cash value can be
attributed to such other consideration) actually received by, or credited to,
Disney and its Affiliates (including any Affiliates acting as subdistributors)
from the exploitation of (i) the Picture, or any elements or portions thereof,
in any and all media and markets throughout the universe (including without
limitation, theatrical, non-theatrical, home video and all forms of television),
whether now known or hereafter devised, and (ii) all Ancillary Rights relating
to such Picture or to any Derivative Works based on such Picture. Without
limiting the generality of the foregoing, Gross Receipts shall include, but not
be limited to, [*], revenue generated from [*] which [*] (or the [*] if such [*]
more than one [*]) and income received for [*] on or in [*] of any of the
Pictures. With respect to [*] not yet known or devised, any other [*] not
currently being [*] or [*] shall be included within Gross Receipts if, and to
the extent, such inclusion is consistent with the provisions of this Agreement.
Gross Receipts shall be calculated using the [*] so [*] (to the extent [*]) are
[*] if the [*] has not yet occurred for the [*] Disney may establish [*] only
for [*] and [*] for [*] and [*] (subject to paragraph 11(e) below), provided
that (1) such [*] do not [*] of the Gross Receipts from [*] less any [*] or [*]
of the Gross Receipts from [*] less any [*], (2) such [*] are [*] within a
reasonable time not to exceed [*] for [*] and [*] for [*], and (3) [*] shall [*]
on any [*] portion of [*], at the rate specified in paragraph 24, from the
mid-point of the applicable
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month or quarter in which [*] until such [*] is [*]. To the extent that [*]
receive an [*] shall [*] on [*] from the date [*] until [*] is either [*] in
Gross Receipts, at the rate specified in paragraph 24.
b. Exclusions from Gross Receipts. Notwithstanding anything to the
contrary in this Agreement, Gross Receipts shall not include:
(i) [*] of any [*] for [*] of the Pictures [*],
(ii) receipts of [*] (including without limitation
[*]) for the [*] of the Pictures or the [*] thereof
[*],
(iii) receipts of [*], including without limitation
[*] in [*] (as defined in paragraph [*])[*],
(iv) receipts from [*] (as defined in paragraph [*]),
(v) amounts [*] or for [*] or [*], and similar [*],
(vi) amounts [*] on or for [*] or any portion
thereof, or the [*] or [*] of [*], including any [*],
(vii) receipts from the [*] except as specified in
this paragraph or in paragraph [*],
(viii) receipts from [*] contributed to [*], and
(ix) [*] including [*].
c. Ancillary Rights. Subject to the exclusions set forth in paragraph
9(b) and the provisions of this paragraph 9(c), an amount equal to one hundred
percent (100%) of all revenues, money or other consideration (to the extent a
cash value can be attributed to such other consideration) actually received by,
or credited to, Disney and its Affiliates (including any Affiliates acting as
subdistributors) with respect to Ancillary Rights [*] shall be [*] Gross
Receipts, and not [*]. In the case of Ancillary Rights which are [*] or [*]
for
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[*], the amount included in Gross Receipts shall be [*] or the [*] received by
[*] for [*] of its [*] of [*] of the [*] of such items.
d. Home Video. With respect to the home video exploitation of the
Picture, subject to the exclusions set forth in paragraph 9(b) [*] percent
([*]%) of all [*] or [*] (to the extent a [*] can be attributed to such [*]) [*]
(including any [*]) [*] shall be included in Gross Receipts, and not [*].
e. Affiliates. Gross Receipts shall be calculated by aggregating the
Gross Receipts of all Affiliates, subject to the exclusions set forth in
paragraph 9(b). Any license or distribution agreement entered into by Disney (or
any Affiliate) with any Affiliates serving as [*] (e.g. [*]) shall be on terms
[*] of the following, in each case taking into account applicable windows, runs
and the box office performance of the respective works: (i) terms obtained by
Disney (or any Affiliate) from such [*] for [*], (ii) terms given by such [*] to
[*] for [*], and (iii) terms given by [*] other than [*], (e.g. [*]) for [*]. In
the case where the same items or license rights are made available to both
Affiliates and non-Affiliates, the [*] or other [*] to Affiliates for purposes
of determining Gross Receipts shall be [*] or other [*] charged by Disney or its
Affiliates to [*] for the [*] or [*] at [*].
10. DIVISION OF GROSS RECEIPTS.
a. Division. Gross Receipts from each Picture and all Ancillary Rights
relating thereto, shall be disbursed in the following order, on a continuing and
cumulative basis:
(i) To Disney, a distribution fee ("Distribution Fee") equal
to [*] of Gross Receipts excluding any Gross Receipts consisting of interest
or insurance recoveries.
(ii) To Disney and Pixar, on a prorata basis, an amount equal
to any [*] paid on behalf of the production entity) for such Picture and related
Ancillary Rights as pro-rata recoupment by Disney and Pixar for any [*] paid by
each such party.
(iii) To Disney, an amount equal to its "Distribution Costs"
as defined in paragraph 11 with respect to such Picture and related Ancillary
Rights; and
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(iv) All remaining Gross Receipts shall be disbursed fifty
percent (50%) to Pixar and fifty percent (50%) to Disney.
b. Separate Accounting Units. Each Picture and the Ancillary Rights
relating thereto shall be treated as a separate accounting unit and there shall
be no cross-collateralization of the Gross Receipts or Distribution Costs, as
defined in paragraph 11 below, among the Pictures hereunder or between the
Pictures and any Derivative Works. Cross-collateralization of Gross Receipts and
Distribution Costs in different markets and media (including home video and
Ancillary Rights) within each Picture is permissible.
c. Statements. Disney shall render detailed statements to Pixar of
Gross Receipts, Distribution Costs and Distribution Fees with respect to each
Picture and its Ancillary Rights, together with payment of Pixar's share of such
Gross Receipts, monthly (on a calendar month basis), within forty-five (45) days
after the end of the calendar month, for the first three (3) years commencing
with the first month in which there are Gross Receipts from such Picture, and
thereafter quarterly (on a calendar quarter basis), within forty-five (45) days
after the end of the quarter. Each statement shall include a statement of the
applicable Gross Receipts, and the manner in which they have been disbursed, and
an itemization of the Distribution Costs paid during the applicable period.
Notwithstanding the foregoing, starting three (3) years after the initial
theatrical release of a Picture, Disney shall not be required to render
statements with respect to such Picture (and its Ancillary Rights) for any
quarter in which Gross Receipts are less than $200,000 or in which no net
payment is due to Pixar after division of Gross Receipts as provided in this
Agreement, unless Pixar requests Disney in writing to render such statements
such request to be made not more than once per year.
d. Audit Rights.
(i) General. Pixar shall have the right to audit Disney's and
its Affiliates' books and records (other than tax returns) relating to the
Pictures and Ancillary Rights, such audit to be conducted during normal business
hours by a certified public accountant selected by Pixar. Each audit shall be
completed within one (1) year from the time such audit commences. Only one such
audit may be conducted with respect to any one statement of Disney. Pixar shall
not have the right to commence an audit of any statement after the expiration of
thirty-six (36) months after the receipt of such statement by Pixar, but shall
be entitled to complete any audit of such statements commenced prior to the
expiration of such period. Disney shall be entitled to receive a copy of any
report of the audit furnished by the auditors to Pixar. [*] of any audit of
Disney, unless the audit reveals an underpayment by Disney of amounts payable
under this Agreement for any period of more than five percent (5%)(excluding any
subjective accounting judgments, such as subjective judgments as to allocation
of costs or revenues, with respect to which there is a good faith dispute
between the parties), [*]. Disney shall designate [*] one employee in its
finance department who shall be available
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[*] to provide information to Pixar or its auditor, but who may also perform
other duties when not requested for such assistance by Pixar and its auditor.
Pixar shall also [*] its subdistributors and agents, the costs of which shall be
included in Distribution Costs (as defined in paragraph 11).
(ii) [*]. If so required by its contract with [*] (or [*])
Pixar's audit under subparagraph (i) above, if any, of Disney's contract with
[*] (or [*]) will be separate from the general audit rights set forth above and
will subject to the following additional conditions: the audit must be conducted
by Disney's auditor from Price Waterhouse, and the auditor will confirm in
writing the following:
"We have examined the calculation of Disney's
Distribution Costs reported on the participated
statement rendered for the period __________ with
respect to the motion picture entitled
"_________________". Our examination was performed in
accordance with standards established by the American
Institute of Certified Public Accountants and,
accordingly, included such procedures as we
considered necessary in the circumstances.
In our opinion, in so far as the "Distribution Costs"
referred to above relate to amounts paid to
[*] (or [*]) such Distribution Costs were calculated
and reported on the participation statement rendered
for the period _____________ in conformity with the
terms of the Agreement between Disney and Pixar dated
______________________
e. Payments. All payments to Pixar shall be in U.S. dollars, and shall
be converted by Disney from any currency other than U.S. dollars into U.S.
dollars at the exchange rate at which such currency is converted by Disney for
its internal accounting purposes (with respect to Disney's other revenue and
expenses). Sums derived outside the United States which are not remittable to
Disney in the United States in U.S. dollars by reason of currency or other
government restrictions shall be deemed "Blocked Funds" for purposes of this
Agreement. With respect to such portion of the Blocked Funds as would have been
payable to Pixar hereunder, Disney shall deposit such portion into a Pixar
interest bearing bank account in the same bank as Disney uses in the applicable
jurisdiction. To the extent Disney or its Affiliates expend or utilize any
Blocked Funds, including without limitation as a loan, Disney shall credit Gross
Receipts with the amount of Blocked Funds so expended or utilized.
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11. DISTRIBUTION COSTS.
a. Definition. For purposes of this Agreement, "Distribution Costs"
shall include only:
(i) all out-of-pocket costs paid (or subject to paragraph
11(e) accrued for payment) to third parties by Disney and its Affiliates (other
than Affiliates whose receipts are not included in the computation of Gross
Receipts) net of discounts, credits, refunds and rebates, provided that such
out-of-pocket costs are directly related or fairly allocable to distribution of
a Picture in any and all media and markets and the Ancillary Rights relating
thereto and are either:
(A) [*] or
(B) for [*] undertaken for the sole purpose of [*] or
[*] or [*] to [*] of a Picture in [*] not utilized by [*] as of the date of
this Agreement, provided that the [*] by this subparagraph (B) shall not [*] of
the Distribution Costs of such Picture [*];
(ii) [*] for each Picture as the [*] for the services of
[*].
b. Exclusions. No payments by Disney or any Affiliate to Disney or any
Affiliate, [*], shall be included within Distribution Costs, except that
Distribution Costs otherwise within the definition of Distribution Costs may
include payments to an Affiliate for [*] or [*] hereafter acquired by Disney for
[*] from a [*]. The payments for such [*] or [*] must be [*] as though based on
an [*] and in no event [*] the [*] of the rate [*] for similar services for
other [*] or the rate charged by such [*] to [*] for similar services for [*].
Except as included in the payments for the services covered by the preceding
sentence, [*] or other [*] or its [*] (including without limitation [*] of [*]
and [*] shall be included in Distribution Costs beyond the [*] specified in item
[*] above. Distribution Costs shall not include any financing costs [*]. Any
Distribution Costs allocable to more than one motion picture shall be [*] to the
Picture, with no [*]. Distribution Costs shall not include any
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amounts related to creation, development, pre-production, production,
post-production or delivery to Disney of any of the Pictures or any
Participations.
c. Cross Promotions. Cross promotion within the Theme Parks or other
Disney attractions or with another product distributed by Disney (e.g.
advertisement on a videocassette of another motion picture) will not be included
in Distribution Costs. Special projects (e.g. [*]) and promotional activities
related to a Picture (e.g. [*]) shall not be included in Distribution Costs
unless they are constructed or undertaken for the sole purpose of marketing and
promoting a Picture. Thus, for example, the cost of a [*] in a [*] relating to a
Picture would not be included in Distribution Costs because such [*] also serves
to promote the [*]. If a special project included in Distribution Costs in
accord with this paragraph is later used in a [*] at any time after sixty (60)
days following the release of the video release of such Picture or for other
purposes other than solely promotion of a Picture, the costs of such special
project shall be deducted from Distribution Costs. One hundred percent (100%) of
all costs of relocating or reconstructing such special projects shall be
excluded from Distribution Costs.
d. Disney Responsible. As between Disney and Pixar, Disney shall be
responsible for financing one hundred percent (100%) of the costs and expenses
of marketing, promotion, publicity, advertising and distribution (including
costs of goods) of each Picture and all Ancillary Rights relating thereto,
including without limitation all items listed in Exhibit B and all
Participations, subject to recoupment of Distribution Costs and Participations
as provided in paragraph 10, and Pixar shall not be responsible or liable for
any costs, expenses or losses incurred in connection therewith.
e. Accrual. Distribution Costs shall be calculated based on [*] and [*]
(applying generally accepted accounting principles), provided that commencing
[*] after [*] and [*] may be [*] only if such [*] by an [*] or other [*] and are
payable within [*] following the end of the period covered by the statement to
Pixar [*], are payable within [*] following the end of such period) and are paid
within such [*] or [*], respectively.
12. BRAND/CREDIT.
It is the parties' intent that the Pixar brand be established
as a co-equal brand to the Disney brand in connection with the Pictures,
Ancillary Rights and Derivative Works. To this end, the Pixar logo, animated
logo and credit as specified by Pixar from time to time shall be used in a
manner which is [*] (as defined in subparagraph (f) below) to the Disney logo,
animated logo and credit, in connection with all Pictures, Ancillary Rights and
Derivative Works, subject where applicable to the requirements set forth below.
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a. On Screen Credits. With respect to theatrical motion
pictures and made for home video productions, screen credits to Pixar and Disney
shall be in the main titles, in the following order of appearance and on
separate cards: (A) opening credit - the Walt Disney Pictures animated logo; (B)
the Pixar animated logo, for the same duration accorded Disney's animated logo;
(C) a credit in the form "Walt Disney Pictures Presents"; (iv) a credit in the
form "A Pixar Animation Studio Film" or "A Pixar Film", as Pixar may timely
elect; for each Picture, for the [*] and in an [*] than the [*] utilized for [*]
and in an [*] than [*] of the [*] used to display the [*], and (E) the title of
the Picture. With respect to television productions, the on screen credits shall
be the last two credits of the program, each on a separate card, as follows: (A)
the Pixar logo, which may be animated, for the [*] accorded the [*], and (B) the
Disney (or Walt Disney Television) logo, which may be animated. Credits in
compliance with this subparagraph (a) shall be deemed [*].
b. Paid Advertising
(i) With respect to all paid advertising within Disney's
control relating to the distribution or exploitation of the Pictures and
Derivative Works (other than as specified in subparagraph (ii) below), the
credits shall be, in order of appearance: (A) first line- "Walt Disney
Pictures"; (B) second line - "Presents"; (C) third line - "A Pixar Film"; and
(D) fourth line - the artwork title of the Picture. Pixar's credit shall be [*]
in size to the [*] credit.
(ii) With respect to so called "teaser" and "trailers"
or other similar advertising (including promotional films) within Disney's
control, on the screen or by radio or television, the credits accorded to the
parties shall be as set forth in subparagraph (a), provided that if Disney
elects not to display its animated logo, Pixar shall not be entitled to an
animated logo. Notwithstanding the foregoing, if only a verbal credit is
utilized, the credit shall contain references to both parties in similar fashion
(e.g. "From Disney and Pixar" or "Walt Disney Pictures Presents a Pixar Film")
immediately before the title, with the [*] made with [*] and [*] to the Disney
credit.
(iii) Each party will insure (to the extent within its
control) that any publicity relating to the Pictures, Derivative Works and
Ancillary Rights shall reflect the co-equal brand established hereunder.
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c. Packaging.
(i) With respect to packaging of home video devices, the
credit sets forth in subparagraph (b) (i) shall apply.
(ii) With respect to packaging of Ancillary Rights
(including without limitation, so called hang tags on merchandising items), the
credits shall be in order of appearance: (A) first line - the artwork title of
the Picture, it being understood that there should be no above title credit
unless otherwise mutually agreed and (B) second line - "A Disney/Pixar
Production", provided that Pixar's credit shall be [*] in size to the [*]
credit.
(iii) With respect to the packaging of Interactive
Works, the credits shall be in order of appearance: (A) "Disney Interactive and
Pixar Animation Studios Presents" or "Disney Interactive and Pixar Presents", as
Pixar may timely elect for each Interactive Work and (B) the artwork title of
the product provided that Pixar's credit shall be [*] in size to the Disney
credit.
d. Billing Block. Wherever a billing block is utilized in paid
advertising or packaging hereunder, the credits shall be, in order of
appearance: (A) a credit in the form "Walt Disney Pictures Presents"; (B) a
credit in the form " A Pixar Film", immediately following and on the same line
as the Disney presentation credit, in an average size of type [*] of the
average size of type used to display the [*] of the Picture and in an average
size of type [*] the average size of type utilized for the [*]; and (C) the
regular title of the Picture.
e. Stationary Logo. Wherever Disney accords a stationary logo
credit in paid advertising or packaging hereunder, Pixar shall also be accorded
a stationary logo credit (side by side), which logo credit shall be [*] in size
to the Disney credit.
f. [*]. "[*]" shall mean that Pixar's credit shall [*] appear
[*] to the [*] when [*] in context, even if they are [*] in [*]. For example,
the parties agree that a logo [*] than the same logo [*] with [*] letters, and
that a credit positioned [*] of [*] may [*]. These [*] effects shall be included
in any assessment to determine the [*] of each party's credit.
If the parties cannot agree as to the [*] of a credit, then
[*] and [*] (or their replacements as determined under paragraph 3.b. above)
shall decide the issue. If they are unable to decide for any reason, then each
party shall select one individual and those two individuals shall select a third
individual mutually
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acceptable to both parties, and such three individuals shall decide the issue.
No individual which has or had a commercial tie to either party during the
preceding five years may be selected.
g. Credits. Pixar shall have the right, in consultation with
Disney, to designate all credits in the Pictures; provided that the types and
placement of credits shall be materially consistent with the then current Disney
credit policy. Disney shall comply with any such credits of which Pixar advises
Disney in writing. Disney acknowledges that John Lasseter will receive Executive
Producer credit on all Pictures on which he renders such services.
h. Prospective Cure. In the event of failure by a party to
accord credit or branding in accordance with the terms of this paragraph 12,
such party shall upon receipt of written notice promptly cure the failure on a
prospective basis, it being understood that Disney will correct all prints in a
manner which will not materially interfere with the distribution of the Picture.
Disney will use good faith efforts to correct any material failure with respect
to any existing packaging within Disney's control. The foregoing shall not be
deemed a [*] of any other [*] of Pixar in the event of a breach of this
paragraph, other than as set forth in paragraph 26(b) below. The credits and
branding contained in any Completed Work (as defined in paragraph 26(b) below)
delivered to Pixar by Disney shall be deemed approved by Pixar for such work.
13. PROPRIETARY RIGHTS.
a. Pictures and Ancillary Rights. The copyright, trademarks and other
intellectual property rights in and to the Pictures, all new and unique
characters and story elements thereof and the audio-visual images thereof, and
the Ancillary Rights relating thereto, excluding Pixar Technology as defined in
subparagraph (c) below and further excluding any trademarks and other
intellectual property rights not uniquely associated with the Pictures or
Ancillary Rights related thereto owned by Pixar (e.g. "Pixar") or Disney (e.g.
"Disney"), shall be jointly owned by Disney and Pixar on an undivided 50/50
basis, provided, however, that Disney shall have (i) the sole and exclusive
right and obligation to register, administer and enforce such jointly-owned
copyrights, trademarks and other intellectual property rights in the joint name
of Pixar and Disney, and (ii) exclusive distribution and exploitation rights to
the Pictures, Derivative Works and Ancillary Rights relating thereto in
perpetuity in any and all media now known or unknown and by any and all means or
devices now known or unknown throughout the universe, subject to the provisions
of this Agreement. Upon request, Pixar will cooperate with Disney in connection
with the registration, administration and enforcement of such rights. The
parties will execute, promptly upon request, all further reasonable and
necessary documents to effectuate the provisions of this paragraph 13.
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b. Corporate Promotional Use. Each party shall have the right to use
the characters, trademarks and all unique story elements of the Pictures and of
Toy Story and excerpts of the Pictures and Toy Story not more than five (5)
minutes in length for purposes of corporate identification and marketing,
including without limitation in or on any of the following: corporate
advertising and promotional materials, stationery, stock certificates, business
cards, annual reports and other shareholder materials, recruiting materials,
press kits (multimedia and printed), corporate trade shows, Internet web pages
and in corporate facilities. Pixar shall include a copyright notice in the form
"O Pixar" on all such materials of Pixar, and Disney shall include a copyright
notice in the form "O Disney" on all such materials of Disney. [*] any new
characters of a Picture under this paragraph 13(b) [*] the initial theatrical
release of the Picture and [*] a [*] throughout its corporate identification and
marketing over [*] in such manner as to create the [*] that [*] is its [*]. Each
party will grant the other party access to any key advertising artwork and
materials for the foregoing purposes.
c. Pixar Technology. As between Disney and Pixar, Pixar shall own the
copyright and all other intellectual property rights in and to all computer
programs, computer models, software, data, tools, algorithms, inventions, film
scanning and film recording technology and other technology developed or
discovered by Pixar before, during or after the Term of the Agreement, including
without limitation all computer programs, computer models, software, data,
tools, algorithms, inventions, film scanning and film recording technology and
other technology discovered or developed by Pixar in developing or producing any
of the Pictures or Derivative Works or used to produce images included in any of
the Pictures or Derivative Works (collectively, "Pixar Technology").
Notwithstanding any other provision of this Agreement, no license is granted to
Disney under this Agreement to use or to authorize the use of Pixar Technology
in any manner. Nothing in this Agreement shall be deemed to grant a license by
Disney to Pixar of any technology owned by Disney or to amend or supersede any
existing end user license by Pixar to Disney of Pixar's Renderman product or
other software product. Nothing in this Agreement shall prevent or restrict
Pixar from using Pixar Technology (but not the unique characters or story
elements of the Pictures) in non-Disney projects, subject to the provisions of
paragraph 17. If Pixar grants a security interest or other lien in Pixar
Technology to a third party, it will require the third party to enter into a
non-disturbance agreement under which the third party agrees not to foreclose or
otherwise enforce its security interest or lien in such a manner as to prevent
Pixar from completing and delivering the Pictures or frustrate the distribution
or other exploitation of the Pictures under this Agreement.
d. Treatments . To the extent Pixar develops any Treatments based on a
Pixar original idea, an idea acquired by Pixar or a public domain idea (but not
an original idea or material assigned by Disney to Pixar, which idea or material
shall be owned by Disney) which were rejected by Disney pursuant to the
procedure set forth in paragraph 3 above, [*] shall [*] all [*] in and to
such Treatments. Pixar shall have the right to
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continue to develop and use such Treatments subject to the provisions of
paragraph 17(a) below, provided that for any Treatment which Pixar uses as the
basis for a motion picture, Pixar shall reimburse Disney upon commencement of
production animation for the amount paid by Disney for such Treatment, with
interest at the Bank of America reference rate plus 125 basis points from the
date of Disney's payment. Nothing in this provision shall be deemed to place
either party in a worse position with respect to use of public domain ideas and
public domain materials than a member of the general public.
14. DEFENSE OF CLAIMS.
a. By Disney. Disney shall defend, and pay any judgment or settlement
of, any claims or actions asserted by any third party against Disney, its
Affiliates, Pixar, any production entity established by Pixar or any of their
respective officers, directors, employees, agents or representatives, arising
out of or in connection with the Pictures or any Ancillary Rights relating
thereto, or the development, production, distribution, exploitation or
exhibition thereof, including without limitation any claim or actions alleging
that any Picture or any element or part thereof, or the reproduction,
distribution, exploitation or exhibition thereof, infringes the copyright,
publicity rights or other intellectual property rights of any person or entity,
other than those claims or actions which Pixar is required to defend under
paragraph 14(b). Disney shall pay all expenses, court costs and outside
attorneys' fees incurred in connection with any of the foregoing claims or
actions. [*] shall obtain [*] to any [*], which [*] shall not be [*]. Any
amounts paid to third parties by Disney in connection with such claims or
actions shall be recoupable by Disney as [*] as provided in
paragraphs [*].
b. By Pixar. Pixar shall defend, and pay any judgment or settlement of,
any claims or actions asserted by any third party against Disney, its
Affiliates, Pixar, any production entity established by Pixar or any of their
respective officers, directors, employees, agents or representatives, arising
out of or in connection with personal injury, property damage or breach of
contract in connection with the development or production of the Pictures,
excluding any claim or action relating in whole or part to distribution,
exploitation or exhibition of any of the Pictures or alleging infringement of
copyright, publicity rights or other intellectual property rights. Pixar shall
pay all expenses, court costs and outside attorneys' fees incurred in connection
with any of the foregoing claims or actions. [*] shall obtain [*] to any [*] or
[*], which [*] shall not be [*]. Any amounts paid to third parties by Pixar in
connection with such claims or actions shall be considered [*] to be [*] and
[*] under the provisions of [*].
15. DERIVATIVE WORKS.
a. Definition of Derivative Works. For purposes of this Agreement,
"Derivative Works" means any work based upon any of the Pictures or Toy Story,
or any original
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characters therefrom or story or other elements thereof, including without
limitation sequels, prequels, remakes, made-for-home video productions,
television productions, Interactive Works, shorts, commercials and interstitial
works, stage plays, [*], Internet websites, [*], [*] and [*].
b. Decision to Produce.
(i) Subject to the provisions of this paragraph 15, Disney and
Pixar shall have mutual control of whether or not to develop, produce or
otherwise exploit any Derivative Works (or transfer or license any rights to
exploit any Derivative Works) during the Term or thereafter. Within a reasonable
time after request of Disney or Pixar, Disney and Pixar will seek to reach
agreement on the terms of development and production of any Derivative Work. In
the event of a disagreement of whether or not to develop, produce or otherwise
exploit any Derivative Work, Disney's decision shall govern, [*]. Prior to
commencement of the development or production of any Derivative Work (or
transfer or license of any rights to exploit any Derivative Work), Disney shall
notify Pixar and afford Pixar the opportunity to make its election with respect
to such work as provided in this paragraph 15. Pixar shall notify Disney of its
applicable election as set forth in the following paragraphs, within thirty (30)
days after written notice from Disney specifying the Derivative Work to be
developed and produced. Disney will consult with Pixar during this thirty (30)
day period in order to discuss the proposed Derivative Work in order to assist
Pixar in making its election. If Pixar fails to notify Disney of its election
within such thirty (30) period, Disney may serve on Pixar a notice demanding
Pixar to make its election, and if Pixar fails to make its election within
fifteen (15) days after such demand notice, Pixar shall be deemed to have
elected to participate on a passive financial basis under the terms provided in
this paragraph 15.
(ii) If any Picture [*] or more in domestic box office
receipts, [*] with a made-for-home video sequel or prequel of such Picture under
the terms set forth in paragraph (d)(i) below, [*] within [*] after the end of
the statement period in which such Picture [*], subject to the following: Upon
request by Disney, Pixar and Disney will discuss during the sixty (60) days
following such [*] whether the sequel or prequel should be a made-for-home video
or a theatrical motion picture. Following such discussion, the [*] whether to
proceed with such sequel or prequel in the form of a made-for-home video [*]
that in the case of one but only one such sequel or prequel, [*] that the sequel
or prequel be a [*].
c. Theatrical Motion Pictures. In the case of any Derivative
Work which is a theatrical motion picture, including a sequel, prequel or
remake, whether during the Term or thereafter, Pixar shall be entitled, at its
election, to do any one of the following:
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(i) Co-finance and produce such Derivative Work. If Pixar
elects to co-finance and produce such work, such motion picture shall be added
to the definition of Pictures produced and financed hereunder and all the
provisions of this Agreement shall apply to such motion picture, subject to the
following: Such Derivative Work shall not count toward the five Pictures to be
produced under this Agreement. Disney shall be entitled to approve the
Treatment. The provisions of paragraphs) 3(a)(i) and (ii) shall not apply to
such Derivative Work.
(ii) Participate on a passive financial basis in such
Derivative Work. If Pixar elects to participate on a passive financial basis,
Pixar shall be entitled to a participation equal to [*] of the Gross Receipts
of such motion picture, permanently escalating on a prospective basis to [*] of
Gross Receipts at Cash Breakeven, and permanently escalating on a prospective
basis to [*] of Gross Receipts at Second Cash Breakeven. For purposes of this
Agreement, "Cash Breakeven" means the first accounting period in which
cumulative Gross Receipts equal or exceed the sum of Distribution Costs and
Distribution Fees with respect to the applicable work and the direct cost of
production of the applicable work, and "Second Cash Breakeven" means the first
accounting period in which the cumulative Gross Receipts equal or exceed the sum
of Distribution Costs and Distribution Fees computed as if Distribution Fees
were [*] with respect to the applicable work and the direct cost of production
of the applicable work. If Pixar elects to participate on a passive financial
basis with a theatrical motion picture under this provision, it shall not be
entitled thereafter to elect to co-finance and produce a subsequent theatrical
motion picture or made-for-home video production based upon the same Picture.
d. Made-for-Home Video Productions. In the case of any
Derivative Work which is a made-for-home video production, including a sequel,
prequel or remake, whether during the Term or thereafter, Pixar shall be
entitled, at its election, to do any one of the following:
(i) Co-finance and produce such Derivative Work. If Pixar
elects to co-finance and produce such work, the terms and conditions of this
Agreement shall apply or be extended to cover such work, and the provisions of
this Agreement shall apply to such work in the same manner as they apply to
Pictures, subject to following: Disney shall be entitled to approve the
Treatment. Creative control shall be governed by the terms of this Agreement as
if such work were a Picture. Pixar and Disney shall mutually agree on a Picture
Budget for such Derivative Work. If Pixar and Disney are unable to reach
agreement on the Picture Budget for such Derivative Work within sixty (60) days
after submission by Pixar of a proposed budget and the domestic box office
receipts of the Picture on which such Derivative Work is based are $[*] million
or more, the decision of Pixar as to such budget shall govern, so long as such
Picture Budget does not exceed $[*] million (including the Treatment Budget for
such Derivative Work but excluding voice talent). Disney shall release such
video within six (6) months after delivery of the work to Disney by Pixar; the
work shall be distributed and marketed by Disney, under the Disney brand if the
work is G-rated and the Picture on which
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it is based was distributed and marketed by Disney under the Disney brand, and
with the credits and branding specified in paragraph 12, throughout the universe
in a [*] that in which [*] and [*] (e.g. [*]) financed and distributed by
Disney. The [*] under [*] as the [*] for Disney's [*] department in connection
with such Derivative Work shall be [*] dollars ($[*]). Disney agrees that it and
its Affiliates will not [*] any other made-for-home video within the [*] or the
[*] the [*] of such work. The following provisions of this Agreement shall not
apply to such Derivative Work: 3(a)(i), 3(a)(ii), 6(a), 6(b), 6(c), 6(d), and
6(e). Pixar and Disney hereby designate the made-for-home video sequel to Toy
Story as a video production Derivative Work which Pixar has elected to
co-finance and produce under this subparagraph.
(ii) Participate on a passive financial basis in such
Derivative Work. If Pixar elects to participate on a passive financial basis,
Pixar shall be entitled to a royalty equal to [*] of the Gross Receipts of
such made-for-home video production, permanently escalating on a prospective
basis to [*] of Gross Receipts at Cash Breakeven. If Pixar elects to
participate on a passive financial basis with a made-for-home video production
under this provision, it shall not be entitled thereafter to elect to
co-finance and produce a subsequent theatrical motion picture or made-for-home
video production based upon the same Picture.
e. Television Productions. In the case of any Derivative Work
which is a television production (including without limitation any series,
specials, "movie of the week" or mini-series), whether during the Term or
thereafter, Pixar shall be entitled, at its election, to do any one of the
following:
(i) Co-finance and produce such Derivative Work. If Pixar
elects to co-finance and produce such work, the parties shall mutually agree
upon the terms and conditions under which such work shall be financed, produced
and distributed, subject to the following: The Treatment for such television
production (or the pilot thereof in the case of a series) shall be subject to
mutual approval; the parties will have mutual creative control of the work; the
financial terms (including the financing of production and division of Gross
Receipts) shall be the same as under this Agreement, and the branding and
credits for such work shall be consistent with the terms of paragraph 12.
(ii) Participate on a passive financial basis in such
Derivative Work. If Pixar elects to participate on a passive financial basis,
Pixar shall be entitled to a royalty equal to (A) $[*] per episode plus
[*] of [*] of the net profits (the definition of which will be negotiated in
good faith by the parties in accordance with Disney's customary parameters
for deals of this kind) in the case of a television production which is
broadcast only during non-prime time, and (B) an amount to be mutually agreed
in advance in the case of any other television production.
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f. Interactive Works. In the case of Derivative Work which is an
Interactive Work, including without limitation any interactive CD ROM-based and
DVD-based products, whether during the Term or thereafter, Pixar shall be
entitled, at its election, to do any one of the following:
(i) Co-finance and produce such Interactive Work. If Pixar
elects to co-finance and produce such work, the parties shall mutually agree
upon the terms and conditions under which such work shall be financed, produced
and distributed, subject to the following. Disney shall be entitled to approve
the Treatment, and subject to Disney's approval of the Treatment, Pixar [*]
with respect to such Derivative Work. The parties shall mutually agree upon a
budget for such work. The financial terms (including the financing of production
and division of Gross Receipts) shall be the same as under this Agreement,
except that the parties shall mutually agree upon a budget for Distribution
Costs and there shall be no distribution fee. Disney shall release such work
within six (6) months after delivery of the work to Disney by Pixar; the work
shall be distributed and marketed by Disney, under the Disney Interactive brand,
and with the branding and credits specified in paragraph 12, in all markets and
media throughout the universe in a [*] Interactive Works financed and
distributed by Disney based upon [*].
(ii) Participate on a passive financial basis in such
Interactive Work. If Pixar elects to participate on a passive financial basis,
Pixar shall be entitled to a royalty equal to [*] of the Gross Receipts of
such Interactive Work.
g. Live Entertainment. In the case of any Derivative Work which is a
live entertainment, including without limitation stage plays and [*], whether
during the Term or thereafter, Pixar shall be entitled to participate on a
passive financial basis in such Derivative Work as follows: In the case of a
stage play, Pixar shall receive [*] of the gross weekly box office receipts. In
the case of an [*], Pixar shall receive a fee of [*] dollars ($[*]) per year on
a title by title basis (pro rated if other non-Pixar characters are also used in
the production). In the case of other live entertainment, Pixar shall receive a
participation in an amount to be mutually agreed in advance. Notwithstanding the
foregoing, if an [*] or other live entertainment (other than a stage play ) is
fully financed and produced under license from Disney by a third party which is
not Disney or an Affiliate of Disney, the proceeds from such license shall be
split [*], after deducting a distribution fee for Disney of [*].
h. Location Based Entertainment. In the case of all Derivative Works
which are venues, retail operations or location-based entertainment which use
unique characters or other elements of any of the Pictures or Toy Story as their
primary theme ("Picture-Themed Location-Based Entertainment"), Pixar shall be
entitled either to [*] or to [*], upon terms and conditions to be mutually
agreed in advance by the parties. If a venue, retail operation or location-based
- -------
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 32
entertainment uses some unique characters or other elements of any of the
Pictures or Toy Story in combination with other characters or elements such that
the unique characters or other elements of the Pictures or Toy Story are not the
primary theme, such venue, retail operation or location-based entertainment
shall be treated pursuant to subparagraph (j) below. By way only of example, a
[*] would be a Picture-Themed Location-Based Entertainment, but a [*] which
included a [*] area along with substantial other areas themed from other
characters or elements not based on any of the Pictures or Toy Story would not
be a Picture-Themed Location-Based Entertainment.
i. All Other Works other than Theme Parks. Except as otherwise provided
in subparagraph (h) below, in the case of all Derivative Works not covered by
subparagraphs 15(c) through (h), including shorts, commercials, Internet
websites, interstitial works and radio productions, whether during the Term or
thereafter, Pixar shall be entitled to [*] in such work and receive a [*] to
be [*] agreed if the work is a revenue-producing work, provided that if Pixar
requests to produce such work, or elements thereof, the parties will negotiate
in good faith within sixty (60) days appropriate terms under which Pixar may
do so.
j. Theme Parks. Disney shall have the sole and exclusive right in
perpetuity to use each Picture, the characters therefrom and unique story
elements thereof (excluding Pixar Technology) and/or footage from each Picture
[*] in any of the following: (i) venues, retail operations and location-based
entertainment which are not Picture-Themed Location-Based Entertainment,(ii)
Disney's major theme parks currently in Anaheim, California; Orlando, Florida;
Paris, France; and Tokyo, Japan, or future Disney theme parks of similar
magnitude (collectively "Theme Parks"), and (iii) cruise ships throughout the
universe (collectively "Theme Park Rights") with no financial obligation to
Pixar. Such use may include use of the characters from the Pictures and unique
story elements thereof (excluding Pixar Technology) as so called "walking
characters", or in parades, stage shows or similar activities therein, as
elements thereof (e.g., standees, props, etc.) , and as rides and attractions.
Disney shall consult with Pixar as to the exploitation of the said Theme Park
Rights, but Disney's decision shall govern.
k. Creative Control of Derivative Works Not Produced by Pixar. In the
case of all Derivative Works not produced by Pixar, Disney shall have creative
control over the development and production of the work, provided that Disney
and Pixar shall [*] of any 3D computer animation embodied or used in production
of such work but in the event of disagreement the [*].
16. TOY STORY.
a. Derivative Works. The parties acknowledge that any Derivative Works
based on Toy Story including, without limitation, a theatrical motion picture
sequel, a made-for-home video sequel, a television production, or a third or
subsequent CD-ROM product, but excluding the first and second Interactive Works
developed under the CD-ROM
- -------
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 33
Development and Publishing Agreement dated as of August 24, 1995 between Disney
Interactive and Pixar (the "CD ROM Agreement"), shall be governed by this
Agreement and treated in accordance with paragraph 15 above.
b. Toy Story Agreement. Upon execution of this Agreement, the parties
agree that the agreement between Disney and Pixar dated as of May 3, 1991, as
amended, ("1991 Agreement") shall apply only to the rights and obligations of
the parties relating to the financial participation in and the production and
distribution of the theatrical motion picture Toy Story and to financial
participation in Ancillary Rights related to Toy Story as provided in paragraph
(c) below, and shall have no further force nor effect and that this Agreement
shall supersede the terms thereof with respect to Pixar's arrangement with
Disney relating to future services and productions. The CD ROM Agreement shall
remain in full force and effect with respect to the first and second Interactive
Works developed under that agreement.
c. Ancillary Rights. For purposes of this Agreement, Gross Receipts for
any Toy Story sequel or prequel shall include Gross Receipts from Ancillary
Rights based upon Toy Story, and unique characters or story or other elements
thereof, only to the extent that such Gross Receipts exceed, in any [*] of the
total amount of Gross Receipts from Toy Story Ancillary Rights in the [*] period
commencing [*] before and ending [*] before the initial release of the sequel or
prequel of Toy Story. The remaining Gross Receipts from Toy Story Ancillary
Rights shall continue to be accounted for under the 1991 Agreement. Distribution
Costs relating to Toy Story Ancillary Rights shall be apportioned between this
Agreement and the 1991 Agreement in the same proportion as Gross Receipts from
such Ancillary Rights are apportioned between this Agreement and the 1991
Agreement.
17. EXCLUSIVITY.
a. No Other Feature Length Animated Theatrical Motion Pictures. Pixar
agrees that it will not release or authorize the release of any feature length
animated theatrical motion picture produced by Pixar other than the Pictures and
Derivative Works, produced by Pixar hereunder until a date which is twelve (12)
months from delivery of the fifth Picture hereunder. Pixar further agrees that
it will not enter into an agreement with any third party for the development,
production or distribution of any feature length animated theatrical motion
picture until after Pixar has delivered the third Picture to Disney hereunder.
b. Theme Parks. Pixar agrees that it will not develop or produce any
rides or attractions for use in major theme parks not owned or operated by
Disney (e.g. Universal Studios or Six Flags). Nothing in this paragraph (b)
shall prohibit [*] from [*] for [*] not used in any such [*] not [*], subject to
the terms and conditions of this Agreement.
c. First Look at TV Productions and Home Video Productions. Pixar will
give Disney advance notice of any animated television production or animated
made-for-home
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[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 34
video production owned and controlled by Pixar that Pixar proposes to produce
during the term of this Agreement before commencing production thereof. Disney
shall notify Pixar within thirty (30) days after Pixar's notice whether Disney
wishes to obtain distribution rights to such television production or home video
production. If Disney notifies Pixar that it does wish to obtain such rights,
Disney and Pixar shall negotiate in good faith to reach mutually agreeable terms
under which Disney may do so. If for any reason the parties have failed to reach
mutual agreement on such terms within sixty (60) days after such original
notice, Pixar shall have no further obligation to Disney with respect to the
work which was the subject of such notice.
d. No Material Interference. Pixar agrees that non-Disney activities
undertaken by Pixar will be managed so as not to materially interfere with
Pixar's obligations to Disney under this Agreement.
e. Employment Agreement with John Lasseter. Pixar shall enter into a
new exclusive agreement for a period of seven (7) years from the commencement
date of the Term for the services of John Lasseter; provided that Pixar shall
have no liability for Lasseter's failure to render services under such agreement
due to his default, disability or death. Pixar shall not terminate Lasseter's
employment without cause without Disney's approval. Without limiting any other
rights or remedies, if any, of Disney, Disney shall be free, notwithstanding the
provisions of paragraph 20, to seek to employ Lasseter after termination of his
employment by Pixar, whether such termination is with or without cause; provided
that Disney shall not solicit or offer employment to Lasseter prior to such
termination. Pixar agrees that Lasseter will direct one of the remaining four
Pictures under this Agreement after Bugs. Disney acknowledges and agrees that
Lasseter will be rendering services at Pixar for non-Disney projects, provided
that Pixar agrees that Lasseter's first priority during his employment at Pixar
will be rendering services for Disney-related projects. Lasseter's salary and
signing bonus (other than any Pixar stock) shall be allocated to the Production
Costs of the Pictures and Derivative Works in development or production at the
time paid, and Disney shall fund Disney's fifty-percent (50%) share of such
salary and signing bonus as part of such Production Costs.
18. EXCHANGE OF INFORMATION.
In order for the parties to exercise effectively their rights
hereunder, and to the extent the same would not violate Disney's or Pixar's
confidentiality obligations to third parties, the parties shall provide, upon
request, [*] relating to [*] relating to the Pictures, provided that nothing in
such disclosed information shall constitute or be deemed to be a representation,
warranty or covenant by either party with respect to such matters. Such
information may be furnished orally.
- -------
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 35
19. PUBLICITY AND CONFIDENTIALITY.
a. Publicity. Within seven (7) days after execution of this Agreement,
Disney and Pixar will make a joint press announcement concerning this Agreement,
which will be mutually agreed upon by the parties.
b. Confidentiality of Terms of Agreement. Disney and Pixar shall be
free to disclose the terms of this Agreement to third parties, except that each
party shall limit disclosure of the provisions of [*] to substantially the
information to be mutually agreed by the parties.
c. Protection of Confidential Information.
(i) For purposes of this Agreement, "Confidential Information"
shall mean all information which is received by one party (the "Recipient") from
the other (the "Discloser") under or in the course of performance of this
Agreement.
(ii) The Recipient shall maintain Confidential Information in
confidence, shall not disclose Confidential Information, or any portion thereof,
to any third party except as permitted by this Agreement or as reasonably
necessary to carry out the provisions of this Agreement, and shall protect
Confidential Information with at least the same degree of care as the Recipient
uses in maintaining as secret its own confidential and proprietary information,
but in no case less than a reasonable degree of care.
(iii) This Agreement imposes no obligation on the Recipient
with respect to any portion of Confidential Information which (A) was generally
available to the public prior to Discloser's first disclosure thereto to
Recipient or subsequently becomes generally available to the public through no
fault of the Recipient; (B) was in Recipient's possession prior to receipt from
Discloser and not acquired directly or indirectly from Discloser; (C) is
lawfully received by the Recipient from a third party not directly or indirectly
associated with Discloser and having no obligation of confidentiality with
respect thereto; or (D) is independently developed by the receiving party
without the benefit of the other party's Confidential Information; provided that
each party shall use reasonable efforts to instruct its employees not to confirm
or otherwise respond to Confidential Information or an inquiry about same
presented by a third party.
(iv) Nothing in this Agreement shall prohibit the Recipient
from disclosing Confidential Information (a) as required to prepare and report
financial statements in accordance with generally accepted accounting principles
or (b) if legally required to do so, by statute, regulation, judicial or
Governmental order or by deposition, interrogatory, request for documents,
subpoena, civil investigative demand or similar process in a judicial or
Governmental proceeding.
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[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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20. NON-SOLICITATION.
During the Term and continuing for a period of two (2) years
thereafter, Pixar and Disney shall not engage the services of any person who was
employed by Pixar or Disney, as the case may be, during the prior six (6) months
before such engagement, without prior approval of the applicable party.
21. ASSIGNMENT.
Neither party may assign its rights or obligations under this Agreement
without the consent of the other party except as follows:
a. Either party may freely assign its rights to payments from the other
party hereunder, but such assignment will be made pursuant to Disney's customary
notice of irrevocable authority and acknowledgement of such notice.
b. Either party may assign or delegate any of its rights or obligations
under this Agreement to any entity with or into which such party may merge or
consolidate, or which may succeed to all or substantially all of such party's
assets related to the subject matter of this Agreement, subject to the
provisions of paragraph 23.
c. Disney may enter into subdistribution agreements for sale or
distribution of the Pictures or Ancillary Rights related thereto; provided that
such agreements are subject to and consistent with the terms and conditions of
this Agreement.
22. CHANGE OF CONTROL OF PIXAR.
In the event that any entity described in Exhibit B directly or
indirectly acquires or controls fifty percent (50%) or greater ownership
interest in Pixar or Pixar merges or consolidates into such an entity, or such
an entity succeeds to all or substantially all of Pixar's assets related to the
subject matter of this Agreement, Disney shall be entitled to terminate this
Agreement upon thirty (30) days written notice to Pixar given not later than ten
(10) days after notice from Pixar of such event. In the event of such
termination, the provisions of paragraph 23 shall apply.
23. TERMINATION.
a. Effect of Termination. Upon termination of this Agreement by Disney
under paragraphs 3(a)(ii) or 22, the terms and conditions of this Agreement
shall continue to apply to Pictures, Ancillary Rights and Derivative Works which
have been delivered by Pixar to Disney as of the date of such termination, or
are at Disney's option delivered by Pixar to Disney under the terms of this
subparagraph 23(b) after such termination, and to all future Ancillary Rights
and future Derivative Works relating thereto. Upon such termination, this
Agreement shall terminate as to any Pictures which have not been delivered to
Disney as of
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<PAGE> 37
the date of such termination and which Disney does not elect to have completed
under the terms of this subparagraph 23(b), whether or not in development or
production ("Uncompleted Pictures") and to all future Ancillary Rights and
future Derivative Works relating thereto. Upon such termination, Pixar shall own
all copyright, trademark and other intellectual property rights in and to
Uncompleted Pictures, including the Treatments on which such Uncompleted
Pictures are or would be based, and all unique character and story elements
thereof and the audio visual images thereof, and the Ancillary Rights and
Derivative Works relating thereto. Nothing in this provision shall be deemed to
place either party in a worse position with respect to use of public domain
ideas and public domain materials than a member of the general public. If at any
time after such termination Pixar elects to complete and release or have an
Uncompleted Picture released or to use the Treatment thereof as the basis for
any motion picture, Pixar shall so notify Disney and reimburse Disney, no later
than ninety (90) days after Pixar's notice of election, for the amount paid by
Disney for such Uncompleted Picture, with interest at the Bank of America
reference rate plus 125 basis points from the date of Disney's payment of such
amounts . Upon such termination, the provisions of paragraphs 1, 2 and 17 shall
terminate and be of no further force or effect.
b. Completion of Works in Production. If any Picture is within [*] of
its target delivery date as of the date of such termination, Disney shall be
entitled at its option to have Pixar proceed to complete production and delivery
of such Picture under the terms of this Agreement, and in such event this
Agreement shall continue to apply to such Picture, and to all Ancillary Rights
and Derivative Works relating thereto. If Pixar has as of the date of such
termination elected to co-finance and produce a Derivative Work and a budget for
such Derivative Work has been approved under this Agreement as of the date of
such termination, Pixar shall complete and deliver such Derivative Work to
Disney and Disney shall finance and distribute such work in accordance with the
terms of this Agreement.
24. INTEREST ON LATE PAYMENTS.
Any late payments (including as a result of any inaccurate accounting)
owed by either party to the other party hereunder shall bear interest from the
date such payment was due until paid. The applicable interest rate shall be Bank
of America's reference rate plus 125 basis points in effect on the first day of
each calendar month, which rate shall apply for the calendar month.
25. GOVERNING LAW
This Agreement shall be governed by the laws of State of California
without regard to its conflict of law principles.
26. GENERAL PROVISIONS
a. Right to Cure. No act or omission of any party shall constitute an
event of default or breach by such party of the Agreement unless the
non-breaching party shall first
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[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 38
notify such party in writing setting forth such alleged breach or default and
such party shall not cure the same within thirty (30) days after receipt of such
notice.
b. Remedies.
(i) Notwithstanding any provision of this Agreement to the
contrary, after production of a Picture or a Derivative Work is completed, if
Pixar claims that Disney has breached this Agreement with regard to any such
completed Picture or completed Derivative Work or completed Ancillary Right
relating thereto ("Completed Work"), Pixar shall not be entitled to seek and/or
obtain equitable or injunctive relief to enjoin or restrain the distribution,
exhibition, advertising or any other means of exploitation by Disney of such
Completed Work. To be considered "completed", a Picture, Derivative Work or
Ancillary Right must in the case of any works produced by Pixar have been
completed and delivered by Pixar to Disney under this Agreement. Nothing in this
paragraph shall [*] from [*] to comply with the terms and conditions of this
Agreement in connection with the distribution, exhibition, advertising and other
means of exploitation of such Completed Work ; provided that [*] shall [*]
distribution, exhibition, advertising or any other means of exploitation by
Disney of any such Completed Work. Nothing in this paragraph shall apply to, or
be construed to limit in any way [*] with respect to distribution, exhibition,
advertising or any other form of exploitation of any work other than a Completed
Work.
(ii) Subject to subparagraph (b)(i). above, if either party
claims the other party has breached this Agreement, then before the party
claiming such breach seeks [*] against the other party, the claiming party must
notify the other party. For a period of [*] after such notice is given (the
"Resolution Period"), both parties shall attempt to cure (if curable) or
otherwise resolve the claim. During such Resolution Period either party may [*]
the claim. If after expiration of the Resolution Period the parties are not able
to resolve such claim, the claiming party may [*] against the other party,
subject to any and all claims and/or defenses of the other party and to
subparagraph (b)(i).
(iii) Nothing under this paragraph shall prevent or limit
either party from [*] of the copyright or other rights in a Picture or
Derivative Work to the extent any such [*] would be a breach of this Agreement.
c. Force Majeure. No party shall be liable to the other party because
of any failure to perform hereunder caused by any cause beyond said party's
control, including without limitation fire, earthquake, flood, epidemic,
accident, explosion, casualty, strike, lockout, labor controversy, riot, civil
disturbance, act of public enemy, embargo, war, act of God or law, except as
expressly provided herein to the contrary.
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[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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<PAGE> 39
d. No Waivers. No waiver by either party hereto of any breach of this
Agreement shall be deemed to be a waiver of any preceding or succeeding breach
of the same or any other provision hereof. The exercise of any right granted to
either party hereunder shall not operate as a waiver.
e. No Violation of Law. Nothing contained in this Agreement shall be
construed so as to require the commission or any act contrary to law, and
wherever there is any conflict between any provisions of this Agreement and any
material statute, law or ordinance contrary to which the parties have no legal
right to contract, the latter shall prevail, but in such event the provision of
this Agreement affected shall be curtailed and limited only to the extent
necessary to bring it within the legal requirements.
f. Notice. Any notices required or permitted by this Agreement shall be
in wirting and shall be delivered either by personal delivery or by overnight
commercial delivery service, such as Federal Express or DHL, addressed as
follows:
If to Disney: Walt Disney Pictures and Television
500 South Buena Vista
Burbank, CA 91521
Attention: Senior Vice President - Legal and Business
Affairs
With copies to: Senior Vice President-Legal and Business Affairs
Walt Disney Feature Animation
500 South Buena Vista
Burbank, CA 91521
Senior Vice President - Finance
Walt Disney Feature Animation
500 South Buena Vista
Burbank, CA 91521
If to Pixar: Pixar Animation Studio
1001 W. Cutting Blvd.
Richmond, CA 94804
Attention: Chief Financial Officer
With copies to: Ziffren, Brittenham, Branca & Fischer
2121 Avenue of the Stars, 32nd Floor
Los Angeles, CA 90067
Attn: Sam Fischer, Esq.
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McCutchen, Doyle, Brown & Enersen
Three Embarcadero Center
San Francisco, CA 94111
Attn: Gary H. Moore, Esq.
Either party shall be entitled to change its address for purposes of
this section by notice to the other. Notices shall be effectiive upon receipt.
g. Headings. The headings in this Agreement are solely for convenience
of reference and shall not effect its interpretation.
27. ENTIRE AGREEMENT.
This Agreement, including its exhibits, constitutes the entire
agreement between the parties with respect to the subject matter hereof, and
supersedes and replaces any prior correspondence, negotiations, agreements,
understandings and representations with respect thereto, except for the 1991
Agreement and the CD ROM Agreement to the extent provided in paragraph 16(b).
This Agreement may not be modified or amended unless in a writing signed by both
parties.
28. EXECUTION IN COUNTERPARTS.
This Agreement may be executed in counterparts and transmitted by
facsimile copy, each of which shall constitute an original and which taken
together shall constitute the Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
PIXAR WALT DISNEY PICTURES
AND TELEVISION
By: /s/ LAWRENCE B. LEVY By: /s/ ROBERT MOORE
---------------------------- ---------------------------
Name: Lawrence B. Levy Name: Robert Moore
Title: Executive VP & CFO Title: Executive VP & CFO
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<PAGE> 1
EXHIBIT 11.1
PIXAR
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Weighted-average number of shares outstanding:
Preferred stock 20,000 -- --
Common stock 10,000 31,202 38,632
Number of common and common equivalent shares
issued in accordance with Staff Accounting
Bulletin No. 83 9,669 7,024 --
Common stock equivalents -- 2,124 8,357
-------- ------- -------
Total shares used in computing net income (loss) per share 39,669 40,350 46,989
======== ======= =======
Net income (loss) $ (2,372) $ 1,627 $25,319
======== ======= =======
Net income (loss) per share $ (0.06) $ 0.04 $ 0.54
======== ======= =======
Pro forma net income (loss) data (unaudited):
Income (loss) before taxes as reported $ (2,371) $ 1,747
Pro forma income taxes* 1 90
-------- -------
Pro forma net income (loss) $ (2,372) $ 1,657
======== =======
Pro forma net income (loss) per share** $ (0.06) $ 0.04
======== =======
</TABLE>
- ----------
* Computed assuming Pixar had been a C corporation since the beginning of
those respective periods, and fully subject to federal and state income
taxes.
** Pro forma net income (loss) per share is not materially different from
actual net income (loss) per share.
<PAGE> 1
EXHIBIT 13.1
SELECTED FINANCIAL DATA
The following selected financial data is derived from the Company's
financial statements. This data should be read in conjunction with the Financial
Statements and Notes thereto, and with Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software $ 2,179 $ 4,702 $ 3,323 $ 3,144 $ 6,306
Animation services 2,038 2,127 2,267 2,469 3,947
Film -- -- -- -- 18,847
Patent licensing -- -- -- 6,500 9,127
------- ------- ------- ------- -------
Total revenues 4,217 6,829 5,590 12,113 38,227
------- ------- ------- ------- -------
Cost of revenues:
Software 716 1,327 1,164 513 113
Animation services 1,939 1,692 1,964 1,873 3,039
Film -- -- -- -- 1,551
------- ------- ------- ------- -------
Total cost of revenues 2,655 3,019 3,128 2,386 4,703
------- ------- ------- ------- -------
Gross margin 1,562 3,810 2,462 9,727 33,524
------- ------- ------- ------- -------
Operating expenses:
Research and development 2,307 1,757 2,288 4,065 6,985
Sales and marketing 1,851 2,368 2,180 1,588 1,768
General and administrative 799 715 831 3,043 5,577
------- ------- ------- ------- -------
Total operating expenses 4,957 4,840 5,299 8,696 14,330
------- ------- ------- ------- -------
Income (loss) from operations (3,395) (1,030) (2,837) 1,031 19,194
Other income (expense) 19 (142) 466 716 8,031
------- ------- ------- ------- -------
Income (loss) before income taxes (3,376) (1,172) (2,371) 1,747 27,225
Income taxes 2 1 1 120 1,906
------- ------- ------- ------- -------
Net income (loss) $(3,378) $(1,173) $(2,372) $ 1,627 $25,319
======= ======= ======= ======= =======
Net income (loss) per share $ (0.06) $ 0.04 $ 0.54
======= ======= =======
Shares used in computing
net income (loss) per share 39,669 40,350 46,989
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ (924) $ (638) $(1,199) $138,688 $162,983
Total assets 2,002 1,987 1,896 153,015 177,463
Long-term obligations 1,346 1,460 1,573 -- --
Total shareholders' equity (deficit) (1,333) (1,216) (1,675) 142,907 170,804
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The foregoing discussion and other sections of this Annual Report to
Shareholders contain 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 "Overview," "Anticipated Decline in
Operating Results in 1997 and Net Losses in 1998" and "Potential Fluctuations in
Operating Results" as well as those noted in the section entitled "Certain
Factors Affecting Business, Operating Results and Financial Condition" in
Pixar's Annual Report on Form 10-K for the year ended December 31, 1996 (the
"Form 10-K"). Particular attention should be paid to the cautionary language in
the section in the Form 10-K entitled "Certain Factors Affecting Business,
Operating Results and Financial Condition -- Anticipated Decline in Operating
Results in 1997 and Net Losses in 1998," "-- Dependence on Toy Story, Bugs and
Toy Story Video Sequel," "--Liquidity Risks," "--Scheduled Concurrent Release of
Films; Management of Growth" 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.
OVERVIEW
Pixar was formed in 1986 when Steve Jobs purchased the computer
division of LucasFilm and incorporated it as a separate company. Until 1996,
Pixar generated its recurring revenue primarily from the license of RenderMan
software, software development contracts and fees for animated television
commercials. Financial information relating to business segments is set forth in
Note 10 of Notes to Financial Statements. In 1991, Pixar entered into the
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"), for the development and production
of up to three animated feature films to be marketed and distributed by Disney.
As a result, in 1992, Pixar began to place more emphasis on products sold for
their content, especially feature films, and the continued development of its
proprietary software. At the same time, Pixar reduced emphasis on the
commercialization of software and contract development work. Pixar has
implemented this shift in focus over the last four years. In accordance with
this shift in focus, Pixar adopted a new business model pursuant to which it
will develop and produce new animated feature films and related products, such
as theatrical sequels, made-for-home video sequels, merchandise and soundtracks.
Adoption of this new business model did not materially impact Pixar's
results of operations and financial condition until 1996, when Pixar first
recognized film revenue and cost of film revenue attributable to Pixar's first
animated feature film, Toy Story, which was released in November 1995, and first
recognized CD-ROM revenue and associated costs from the release in 1996 of two
CD-ROM products related to Toy Story. Pixar's share of revenues and expenses
from Toy Story were governed by the terms of the Feature Film Agreement, and
Pixar's share of expenses and revenue from the two Toy Story CD-ROM products
were governed by a separate CD-ROM production and distribution agreement that
Pixar and Disney entered into in August 1995 (the "CD-ROM Agreement"). Those
agreements have been largely superseded by the Co-Production Agreement entered
into in February 1997, as described below, except with respect to treatment of
existing films and products developed pursuant to those agreements, such as the
Toy Story home video. Accordingly, Pixar believes that the results of its
operations for 1995 and prior years, during which time Pixar recognized no
revenue from animated feature films or related products, are not meaningful
indicators of future performance. Further, Pixar believes that its results of
operations for 1996, during which time revenue and costs attributable to feature
films and CD-ROM products were governed by the terms of the Feature Film
Agreement and the CD-ROM Agreement, are also not meaningful indicators of future
performance, although they are more meaningful than results of operations for
1995 and prior years. See "Anticipated Decline in Operating Results in 1997
and Net Losses in 1998."
<PAGE> 3
NEW AGREEMENT WITH DISNEY
On February 24, 1997 Pixar and Walt Disney Pictures and Television, a
wholly-owned subsidiary of Disney, entered into the Co-Production Agreement
("Co-Production Agreement") pursuant to which Pixar, on an exclusive basis, will
produce five computer animated feature-length theatrical motion pictures (the
"Pictures") for distribution by Disney over approximately the next ten years.
Pixar and Disney will 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 will be financed by Disney), 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 Pixar will produce each Picture and that Disney will
control all decisions relating to marketing, promotion, publicity, advertising
and distribution of each Picture. Disney and Pixar have agreed that the first
Picture under the Co-Production Agreement is the Picture with the working title
"Bugs." 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 will have the opportunity to co-finance and produce such products or to
earn passive royalties on such products. Disney and Pixar have announced their
intention to produce a made-for-home video sequel to Toy Story (the "Toy Story
Video Sequel"), and Pixar has already begun work on the production under the
terms of the Co-Production Agreement. Pixar will not share in any theme park
revenues generated as a result of the Pictures. See Note 11 of Notes to
Financial Statements.
In addition to entering into the Co-Production Agreement, Pixar agreed
to sell, and Disney agreed to purchase for cash, 1,000,000 shares of Pixar
Common Stock which Disney has agreed to hold for at least three years. Pixar
also granted two warrants, each exercisable for five years, to Disney: one
warrant to purchase 750,000 shares of Common Stock at an exercise price of
$20.00 per share and another warrant to purchase 750,000 shares of Common Stock
at an exercise price of $25.00 per share. Pixar granted certain registration
rights for the shares issuable upon exercise of the warrants. This transaction
was consummated in late March 1997 and Pixar received gross proceeds of $15.0
million.
RESULTS OF OPERATIONS
A number of factors may lead to a substantial decline in Pixar's
operating results in 1997 and net losses in 1998. See "Anticipated Decline in
Operating Results in 1997 and Net Losses in 1998."
Revenues
In the year ended December 31, 1996, Pixar derived revenue from its
first animated feature film, Toy Story, from its first two CD-ROM products
related to Toy Story, from software licenses, from the license of certain
patents and from fees for animated television commercials and other animation
services. Revenue from feature films is recognized upon receipt of compensation
from Disney. Revenue from CD-ROM products is recognized upon shipment in the
form of a royalty from Disney after a minimum number of units have been sold.
All payments to Pixar from Disney for development and production of both Toy
Story and the Toy Story CD-ROM products under the Feature Film Agreement and the
CD-ROM Agreement, respectively, have been recorded as cost reimbursements.
Accordingly, no revenues have been recognized for such reimbursements; rather,
Pixar has netted the reimbursements against the related costs. These reimbursed
costs for the years ended December 31, 1994, 1995 and 1996 are set forth in Note
4 of Notes to Financial Statements. Software license revenue is recognized upon
shipment if there are no significant vendor obligations. Revenue from patent
licensing is recognized upon release of the rights to the technology. See Note 1
of Notes to Financial Statements. Television commercial and other animation
services revenues are recognized on the percentage-of-completion method of
accounting. Prior to 1996, Pixar also derived revenue from software development
contracts for which revenues were recognized on the percentage-of-completion
method of accounting.
Total revenues increased from $5.6 million in 1994 to $12.1 million in
1995 and to $38.2 million in 1996. Total revenues increased from 1994 to 1995
primarily as a result of patent licensing revenues of $6.5 million recognized in
the second quarter of 1995. Total revenues increased from 1995 to 1996 primarily
as a result of revenues received attributable to Toy Story and the two related
CD-ROM products.
Software revenues include software license revenue, principally from
RenderMan, royalties received from the 1996 release of Pixar's first two CD-ROM
products, The Toy Story Animated Storybook and The Toy Story Activity Center,
and,
<PAGE> 4
prior to 1996, software development contract revenues. Software revenue
decreased from $3.3 million in 1994 to $3.1 million in 1995 and increased to
$6.3 million in 1996. Software revenues decreased from 1994 to 1995 as an
increase in software license revenue was more than offset by a decline in
revenue from software development contracts. Software revenues increased from
1995 to 1996 due primarily to first time CD-ROM royalty revenues of $3.0 million
and, to a lesser extent, an increase in RenderMan software license revenue. Due
to Pixar's focus on content creation for animated feature films and related
products, Pixar continues to expect that revenue derived from software licenses
may decline. In addition, in 1995, Pixar completed work under all of the
software development contracts that generated revenues in 1994 and 1995. No
further development contract revenue was generated in 1996, and Pixar does not
expect to pursue future software development work for third parties, nor to
generate future revenues in this area.
After the Co-Production Agreement was executed on February 24, 1997,
Pixar began evaluating the merits of staying in the business of producing
CD-ROM products and comparing those opportunities with opportunities in film
and other potential projects under the Co-Production Agreement. Management
determined that, despite the fact that Pixar's first CD-ROM titles were
successful on relative terms, the resources currently devoted to its
interactive products division would be better allocated to other projects
arising from the Co-Production Agreement which Pixar believes have greater
potential than CD-ROM titles, such as theatrical films, home video sequels and
short animation projects. Moreover, the CD-ROM and interactive product market
is not growing as fast as expected, the production costs of such products are
increasing and one project under negotiation with a third party was canceled.
For these reasons, Pixar determined in the last week of March 1997 to
discontinue its business of producing CD-ROM and other interactive products and
redirect the approximately 60 employees in this division to film and related
projects within Pixar. This decision is expected to have a material adverse
impact on Pixar's results of operations in 1997.
Animation services revenues include revenue generated from short
projects related to Pixar's films, animated television commercials and other
short animated productions. Fees for animation services, which are fixed in
advance, depend on the relative complexity and length of each production and may
also depend on the market and other competitive conditions. Animation services
revenues increased from $2.3 million in 1994 to $2.5 million in 1995 and to $3.9
million in 1996. The increase in revenue from 1994 to 1995 was due to an
increase in the average fee charged due to the increased complexity of the
commercials produced, which more than offset the decrease in the number of
television commercials produced due to increased emphasis on content creation
for feature films. The increase in revenue from 1995 to 1996 was due to $2.4
million in fees from Disney for a series of televised animation short
productions related to Toy Story. During 1996, Pixar announced plans to
substantially discontinue its production of animated television commercials for
third parties after fulfilling its current commitments and to redirect the
talent in its television commercial group to animated feature films and related
products. Pixar continues to expect some ongoing activity in the animation
services area primarily due to projects related to Pixar's films. Pixar may even
devote more resources to the animation services group as a result of potential
opportunities arising from the Co-Production Agreement.
Toy Story was not released until November 1995, and accordingly, there
were no film revenues in 1994 or 1995. Under the Feature Film Agreement, film
revenues of $18.8 million were recognized in 1996, representing Pixar's share of
both the domestic and international theatrical releases of Toy Story and related
products. The Toy Story home video was released in October 1996 and, due to the
one quarter delay between the time Disney receives Toy Story revenues and the
time Disney pays Pixar its portion of these revenues, Pixar's share of Toy Story
home video revenues will not begin to be received until the first quarter of
1997. The amount of compensation payable to Pixar from the Toy Story home video
is governed by the prior Feature Film Agreement, pursuant to which Pixar's
compensation rate for home videos is less than it was for theatrical exhibitions
of Toy Story. Since the Toy Story home video is the last major release for Toy
Story, and since Pixar's next feature film is not targeted for release until the
fourth quarter of 1998 at the earliest, Pixar's revenues and earnings will
likely decrease in 1997 and 1998 as compared to 1996. Moreover, unless the Toy
Story Video Sequel is released in the first half of 1998 and achieves
extraordinary success on relative terms, Pixar will incur a net loss in 1998.
Patent license revenues of $6.5 million in the year ended December 31,
1995 were attributable to a patent license with Microsoft. Prior to 1995, there
were no patent license revenues. Patent license revenues of $9.1 million in the
year ended December 31, 1996 were attributable to a patent license with Silicon
Graphics whereby Pixar granted to Silicon
<PAGE> 5
Graphics and its subsidiaries a non-exclusive license to use certain of Pixar's
patents covering techniques for creating computer-generated photorealistic
images. Under the agreement, Silicon Graphics agreed to pay Pixar total
compensation of $11 million, $6 million in cash and $5 million in the form of
credits to purchase hardware and software from Silicon Graphics. In 1996, Pixar
recognized revenue of $9.1 million, which included $6.0 million received in cash
in March 1996 and $3.1 million representing that portion of the $5.0 million in
hardware and software credits actually used in 1996. The remaining $1.9 million
will be recognized as revenue in future periods as hardware and software credits
are used. Pixar does not expect that patent license revenues will be generated
on an on-going basis. See Note 5 of Notes to Financial Statements.
In the year ended December 31, 1995, Microsoft accounted for 54% of
Pixar's total revenues, attributable to a one-time patent license. In the year
ended December 31, 1996, Disney accounted for 65% of Pixar's total revenues,
attributable to revenue generated from Toy Story, two related CD-ROM games,
short animated television productions based on Toy Story, and, to a lesser
degree, software license sales. Also in 1996, Silicon Graphics accounted for 24%
of total revenues, attributable to a one-time patent license. Due to the
continuation of film-related revenues generated by Toy Story, Disney is expected
to continue to represent greater than 10% of revenues in 1997. For information
regarding Pixar's 10% customers in 1994, see Note 10 of Notes to Financial
Statements.
Cost of Revenues
Cost of software revenues consists of the direct cost and manufacturing
overhead required to reproduce and package Pixar's software products and, prior
to 1996, the cost of salaries and overhead associated with the software
development contracts. Because costs of development and production of the first
two CD-ROM products were paid by Disney pursuant to the CD-ROM Agreement, there
were no costs of revenue associated with CD-ROM royalty revenue. All payments to
Pixar from Disney for Pixar's efforts in the development and production of
CD-ROM products were recorded as cost reimbursements and were netted against the
related costs. Cost of software revenues as a percentage of the related revenues
decreased from 35% in 1994 to 16% in 1995 and to 2% in 1996 due to a substantial
reduction in revenue in each year from low margin software development
contracts, to increased sales of the RenderMan ToolKit in each year, which
carries a higher gross margin than other software products, and, in 1996, to
$3.0 million in CD-ROM revenue which carries no related cost. Cost of software
revenues includes no amortization of capitalized software development expenses.
Cost of animation services revenues consists of production costs, which
include salaries, benefits and facility expenses and department overhead costs.
Cost of animation services revenues as a percentage of the related revenues
decreased from 87% in 1994 to 76% in 1995 primarily due to increased
efficiencies in the production of commercials and to slightly higher fees
charged. Cost of animation services revenues as a percentage of the related
revenues increased slightly to 77% in 1996 due to higher costs associated with
increased complexity and reduced prices for television commercials attributable
to competitive pressures, largely offset by the higher margins earned on a
series of animated short projects related to Toy Story.
Toy Story was released in November 1995, and accordingly, there was
neither film revenue nor cost of film revenues in 1994 or 1995. In 1996, cost of
film revenues was $1.6 million, or 8% of film revenues, consisting of the
amortized portion of Pixar's share of unreimbursed amounts incurred to produce
Toy Story. See "Capitalized Film Production Costs." Film production costs are
amortized under the individual film forecast method.
Under the Feature Film Agreement, with the exception of overbudget
amounts discussed above, all payments to Pixar from Disney for Pixar's efforts
in the development and production of feature films were recorded as cost
reimbursements and were netted against the related costs. However, under the
terms of the Co-Production Agreement, in which Pixar co-finances each film
production, amortized film production costs for future feature films will be
significantly higher, and gross profit margins on future film projects, if any,
will be substantially lower than those achieved on Toy Story.
There are no costs of revenues associated with technology licensing
revenues.
<PAGE> 6
Operating Expenses
Pixar's total operating expenses increased in each of 1994, 1995 and
1996, and Pixar intends to continue to increase operating expenses in a number
of areas. With respect to general expense growth, as a result of intense
competition for animators, creative personnel and technical directors, Pixar has
had to pay higher salaries to attract new creative and technical personnel.
Pixar expects compensation for such personnel to continue to increase
substantially. In the year ended December 31, 1996, Pixar funded greater levels
of research and development, expanded its administrative staff and facilities,
expanded other operations, and incurred significant costs related to being a
public company. Pixar expects continued growth in operating expenses in each of
these areas. To the extent that such 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 revenues, Pixar's business, operating results and
financial condition will be materially adversely affected.
In 1995, Pixar recorded deferred compensation of $3.7 million for the
difference between the grant price and the deemed fair value of Pixar's Common
Stock for 9,823,900 shares subject to options granted during 1995. Amortization
of deferred compensation of $1.4 million was recorded in the year ended December
31, 1995 -- $292,000 was capitalized to film production costs and $1.1 million
was charged to expense -- based upon the vesting of the underlying options. In
1996, amortization of deferred compensation of $1.2 million was recorded --
$44,000 was capitalized to film production costs and the balance was charged to
expense. See "--Capitalized Film Production Costs." The remaining deferred
compensation expense will be amortized primarily to operating expense over the
related 48-month vesting period of the options and will therefore continue to
have a material adverse effect on Pixar's results of operations. See Note 8 of
Notes to Financial Statements.
Research and Development. Research and development expenses consist
primarily of salaries and support for personnel conducting research and
development for the RenderMan product, for Pixar's proprietary Marionette and
Ringmaster software, and for Pixar's interactive products. Research and
development expenses increased from $2.3 million in 1994 to $4.1 million in 1995
and to $7.0 million in 1996. Research and development expenses increased in each
of 1995 and 1996 as compared to the prior year due to an increase in personnel
responsible for the development of interactive titles and tools, and due to
development of improvements and upgrades for Pixar's Marionette, Ringmaster and
RenderMan software systems. Additional charges of $305,000 and $472,000 were
taken in 1995 and 1996, respectively, to amortize the costs of deferred
compensation in connection with stock option grants. To date, all research and
development costs not reimbursed by Disney have been expensed as incurred. Pixar
expects research and development expenses to further increase.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and overhead and public relations, advertising, technical support and
trade show costs required to support the software segment. Sales and marketing
expenses decreased from $2.2 million in 1994 to $1.6 million in 1995 due to a
reduction in salaries and advertising costs as Pixar focused on content
creation, primarily for animated feature films. Sales and marketing expenses
increased to $1.8 million in 1996 primarily as a result of the success of Toy
Story and as a result of becoming a public company, both of which caused
increases in public relations and corporate marketing costs. Pixar believes that
sales and marketing expenses may increase in absolute dollars in future periods,
particularly in the areas of corporate marketing and public relations.
General and Administrative. General and administrative expenses consist
primarily of salaries of management and administrative personnel, insurance
costs and professional fees. Under the Feature Film Agreement, all or a portion
of the salaries of certain of Pixar's executives and other general and
administrative personnel were charged as film production costs and were
reimbursed by Disney and were therefore not included in general and
administrative expenses. General and administrative expenses increased from
$831,000 in 1994 to $3.0 million in 1995 and to $5.6 million in 1996. The
increase in general and administrative expenses from 1994 through 1996 was
primarily due to the amortization of deferred compensation expense recorded in
connection with stock option grants, increased staffing, increased professional
fees associated with the protection of intellectual property, and increased
costs and fees associated with being a public company. Charges of $788,000 and
$658,000 were taken in 1995 and 1996, respectively, to amortize the costs of
deferred compensation in connection with stock option grants. Pixar expects
general and administrative expenses to further increase in absolute dollars in
future periods as Pixar incurs additional costs related to being a public
company and expands its administrative staff and facilities.
<PAGE> 7
Other Income, Net
Other income, net was $466,000 in 1994, $716,000 in 1995 and $8.0
million in 1996. Other expense in each of 1994 and 1995 was primarily
attributable to net interest expense consisting primarily of interest accrued on
a promissory note issued by Pixar to its majority shareholder. In 1994, net
interest expense was more than offset by other income of $584,000 recognized as
gain on the sale of equity securities. In 1995, net interest expense was more
than offset by net other income consisting primarily of interest income from
investments, amounts received pursuant to settlement of an intellectual property
rights dispute and additional gain on the sale of equity securities. Other
income in 1996 consisted primarily of interest income from investments made with
the net proceeds from Pixar's initial public offering of Common Stock.
Income Taxes
Pixar elected S corporation status for federal income tax purposes as
of January 1, 1992, whereby income was taxed to its individual shareholder.
Accordingly, income tax expense in 1994 related only to the State of
California's minimum franchise tax expense. At the end of April 1995, Pixar
became a C corporation. Income tax expense for the year ended December 31, 1995
represented federal and state alternative minimum taxes (after utilization of
net operating loss carryforwards) on the earnings of Pixar following termination
of its S corporation status.
Income tax expense for the year ended December 31, 1996 consisted
primarily of state income taxes and federal alternative minimum tax. Income
taxes increased in 1996 due to increased earnings and to full utilization of
state net operating loss carryforwards. As of December 31, 1996, Pixar had net
operating loss carryforwards from pre-S corporation years of approximately $23.0
million for federal income tax purposes. See Notes 1 and 7 of Notes to Financial
Statements.
ANTICIPATED DECLINE IN OPERATING RESULTS IN 1997 AND NET LOSSES IN 1998
A number of factors are expected to lead to a substantial decline in
Pixar's operating results in 1997 and net losses in 1998, as discussed more
fully below.
End of Toy Story Revenues
Pixar has already recognized the vast majority of the revenue it
expects to receive from the domestic and international theatrical releases of
Toy Story and expects substantially all of the revenue from the home video of
Toy Story to be recognized in the first two quarters of 1997. Under the terms of
the Feature Film Agreement, which stills governs the compensation payable to
Pixar from the home video of Toy Story, Pixar is compensated for the home video
to a lesser extent than it was with respect to the theatrical release of Toy
Story. Pixar does not expect to recognize significant revenue from the Toy Story
home video in the third or fourth quarters of 1997 or in any quarter in 1998.
Pixar also expects limited revenue from the Toy Story CD-ROM products in 1997
and little or no revenue from such products in 1998.
Reduced CD-ROM Revenue
Pixar also expects to recognize less CD-ROM revenue in 1997 and 1998
than was previously anticipated. Although its first two CD-ROM products were
successful on relative terms, Pixar determined in the last week of March 1997
to discontinue its business of producing CD-ROM and other interactive products
in favor of other opportunities arising, in part, as a result of entering into
the Co-Production Agreement. This decision is expected to have a material
adverse impact on Pixar's operating results in 1997 and 1998. Pixar will not
recognize any CD-ROM or other interactive product revenue in 1997 or 1998,
other than revenue attributable to the two Toy Story CD-ROM products, and may
incur carrying costs associated with the approximately 60 employees currently
assigned to the interactive products division. Pixar does, however, expect to
be able to reassign most of these employees to Picture productions and other
departments within Pixar.
Timing of Bugs and Toy Story Video Sequel Releases
Bugs is not expected to be released until the end of 1998 at the
earliest, and revenue attributable to Bugs is not expected to be recognized
until after all costs have been recovered. Recovery of all costs depends on many
factors and may not occur until six to twelve months after its release at the
earliest, ensuring that Pixar will not recognize any revenue from
<PAGE> 8
Bugs until the second half of 1999 at the earliest. The Toy Story Video Sequel
is currently targeted for release in the second half of 1998, but its release
date could change for a number of reasons. First, Pixar may be unable, for
technical or other reasons, to complete the production of the Toy Story Video
Sequel in time for its scheduled release in the second half of 1998. Second,
even if completed, Disney and Pixar may choose to delay release of the Toy Story
Video Sequel until the 1998 holiday season or thereafter. Depending on the
timing of receipt of revenues by Disney, Pixar may not recognize revenue from
the Toy Story Video Sequel until three to six months after its release at the
earliest, meaning that if the Toy Story Video Sequel were released in late 1998
or thereafter, Pixar would not recognize any revenue from the Toy Story Video
Sequel until 1999 at the earliest. Third, it is possible that the Toy Story
Video Sequel could be released to the theaters instead of as a made-for-home
video. In such event, Pixar would not expect to recognize any revenue until six
to twelve months after the theatrical release, with the result that Pixar would
not recognize any revenue from such film until 1999, even if released to the
theaters in the second half of 1998.
Possible Decline in Sales of RenderMan Due to Shift in Focus
As a result of Pixar's reduced emphasis on the commercialization of
software in favor of products sold for their content, Pixar expects to dedicate
less time and resources to distributing and marketing RenderMan than it has in
the past, particularly shrink-wrapped versions of RenderMan, and further expects
that sales of RenderMan may decline.
Increase in Operating Expenses
In 1996, Pixar significantly increased its operating expenses, and
Pixar plans to continue to increase its operating expenses to fund greater
levels of research and development and to expand operations. Specifically, Pixar
expects operating expenses to increase significantly due to continued investment
in proprietary software systems, increased compensation costs as a result of
intense competition for animators, creative personnel and technical directors
and increased costs associated with the expansion of its facilities.
Accordingly, Pixar anticipates significant increases in operating expenses in
each of 1997 and 1998. Finally, Pixar expects its tax rate to increase in 1997
and future years as the result of utilization of net operating losses in 1996.
Impact on Operating Results
As a result of the above factors, the only substantial revenue expected
to be recognized in 1997 will be from the Toy Story home video, and
substantially all of that will be recognized in the first and second quarters.
Further, unless the Toy Story Video Sequel is released early in the second half
of 1998 and is an extraordinary success on relative terms, Pixar will not
recognize substantial revenue in 1998. At the same time, Pixar's operating
expenses may increase in 1997 and 1998, even after giving effect to
capitalization of film production costs and allocation of certain operating
expenses to Disney under the Co-Production Agreement. Therefore, Pixar expects
revenue and operating results in the third and fourth quarters of 1997 to
decline substantially from the first and second quarters of 1997 and from the
same quarters of 1996. It is possible that Pixar would even incur operating and
net losses in each of the last two quarters of 1997. Pixar also expects to incur
operating and net losses in each of the first three quarters of 1998 and, unless
the Toy Story Video Sequel is released early in the second half of 1998, the
fourth quarter of 1998 and for the year ending December 31, 1998.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
In addition to the factors set forth above, Pixar expects to generally
experience significant fluctuations in its future annual and quarterly operating
results caused by a variety of factors. Pixar expects that its annual and
quarterly operating results, particularly its revenue, will fluctuate due to
factors such as the timing of the domestic and international releases of the
animated feature films, the success of the animated feature films (which can
fluctuate significantly from film to film), the timing of the release of related
products into their respective markets, the demand for the related products
(which is 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 the animated feature films and
related products by Disney, the timing of revenue recognition under the
Co-Production Agreement, the Feature Film Agreement or the CD-ROM 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
<PAGE> 9
Co-Production Agreement is directly related to the success of a feature film,
Pixar's operating results are likely to fluctuate depending on the level of
success of its animated feature films and related products. The revenues derived
from the production and distribution of an animated feature film depend
primarily on the film's acceptance by the public, which cannot be predicted and
does not necessarily bear a direct correlation to the production or distribution
costs incurred. The commercial success of a motion picture also depends upon
promotion and marketing, production costs and other factors. Further, the
theatrical success of a feature film can be a significant factor in determining
the amount of revenues generated from the sale of the related products.
Moreover, Pixar's operating expenses will be extremely difficult to
forecast. The direct costs of film production are budgeted in agreement with
Disney and shared equally. Pixar's share of these direct costs of film
production are capitalized by Pixar 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 ("Pixar's Overhead"),
including research and development expenses and general and administrative
expenses. Portions of Pixar's Overhead are included in the budgets for the
Pictures and will be shared equally with Disney under the Co-Production
Agreement. The remaining portion of Pixar's Overhead is either capitalized as
film production costs, if required under SFAS No. 53, or charged to operating
expense in the period incurred. Because a substantial portion of Pixar's
Overhead is allocated to the Pictures and reimbursed by Disney and other amounts
are capitalized by Pixar in accordance with SFAS No. 53, Pixar's future reported
operating expenses will not reflect the true level of spending on the production
of animated feature films, related products and overhead.
Pixar has a valuation allowance as of December 31, 1996 which fully
offsets its gross deferred tax assets due to Pixar's historical losses and the
fact that there is no guarantee Pixar will generate sufficient taxable income in
the future to be able to realize any or all of its deferred tax assets. As a
result, Pixar may not be able to realize a benefit in the future from its net
operating loss carryforwards, nor may it be able to recognize the tax benefits
of net operating losses to be generated in the future.
As a result of all of the foregoing, Pixar believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful, and its annual and quarterly results of operations should not be
relied upon as any indication of future performance. Due to all of the foregoing
factors, it is likely that in some future period Pixar's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of Pixar's Common Stock would likely be materially adversely
affected.
CAPITALIZED FILM PRODUCTION COSTS
Although Disney funded the entire production of Toy Story, Pixar
contractually guaranteed certain of the film budget overages and is liable to
Disney for these amounts under the original Feature Film Agreement. Because
these are "production costs" under SFAS No. 53, the costs were capitalized and
amortized against future film revenue. As of December 31, 1995, Pixar had
approximately $3.6 million of capitalized film production costs, $3.3 million of
which represents the overage liability to Disney. During 1996, Pixar's overage
liability was reduced by $1.0 million as a result of budget savings and the
balance of $2.3 million owed to Disney was satisfied through a deduction from
the amount due from Disney to Pixar for Pixar's compensation, which is based on
Toy Story revenues. Pixar is entitled to recover any overages that it has
funded, either directly or through its compensation under the original Feature
Film Agreement, if Toy Story meets certain predefined criteria.
During 1996, $1.6 million of Toy Story film production costs were
amortized against film revenues. As of December 31, 1996, Pixar had $3.0 million
in capitalized film production costs, $1.5 million of which represents remaining
film production costs related to Toy Story. The balance represents costs
relating to Pixar's second and third theatrical film productions and Pixar's
first sequel production based on Toy Story. See Notes 1 and 4 of Notes to
Financial Statements.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Until 1995, Pixar financed its operations primarily through financial
support from its majority shareholder in the form of capital infusions and
promissory notes. In December 1995, Pixar completed the initial public offering
of its Common Stock, which resulted in net proceeds of approximately $139.7
million from the sale of 6,900,000 shares of Common Stock. Cash and short-term
investments increased to $161.0 million at December 31, 1996 from $144.3 million
at December 31, 1995 due primarily to net income of $25.3 million in 1996.
Net cash used in operating activities in 1994 was primarily
attributable to a net loss. Net cash provided by operating activities in 1995
was primarily attributable to net income resulting from patent licensing revenue
of $6.5 million and an increase in accrued liabilities, somewhat offset by
growth in other receivables. Net cash provided by operating activities in 1996
was primarily attributable to net income resulting from film and CD-ROM revenues
related to Toy Story which generated $20.3 million in cash and from the cash
portion of patent licensing revenue totaling $6.0 million. Net cash used in
investing activities in 1994 was due primarily to the purchase of property and
equipment, largely offset by the proceeds from sale of equity securities in an
unrelated company. See Note 2 of Notes to Financial Statements. Net cash used in
investing activities in 1995 and 1996 was due primarily to investments in
short-term securities. Cash flows provided by financing activities in 1994 were
attributable to a capital infusion from Pixar's majority shareholder. Cash flows
provided by financing activities 1995 were primarily attributable to the net
proceeds of approximately $139.7 million from Pixar's initial public offering of
Common Stock. Net cash used in financing activities in 1996 was due primarily to
the repayment of the note payable to the majority shareholder. See Note 6 of
Notes to Financial Statements.
As of February 24, 1997, Pixar's capital commitments primarily
consisted of obligations to fund production costs of films and derivative
products under the new Co-Production Agreement, obligations to pay portions of
any revenue derived from each feature film produced under the Co-Production
Agreement to its entertainment law firm in consideration for services rendered,
obligations under operating leases and commitments to purchase certain computer
equipment. Excluding costs related to the possible new studio facility discussed
below, Pixar expects 1997 cash expenditures for capital equipment to be
approximately $4.0 million. This will consist primarily of computer equipment,
tenant improvements and furniture, some of which are more fully described below.
Film Production Costs Under Co-Production Agreement. Under the
Co-Production Agreement, Pixar's share of costs required to fund several films
in various stages of production is expected to total approximately $33 million
in 1997, which will directly impact working capital. Because Disney has already
funded the costs incurred to date on these productions under the terms of the
prior Feature Film Agreement, a significant portion of Pixar's 1997 production
spending will represent reimbursement to Disney of Pixar's share of these film
production costs already funded by Disney.
Facilities Expansion. In 1996, Pixar entered into two new lease
agreements to expand the total square footage of its existing corporate
headquarters by approximately 72,000 square feet. The first lease agreement, for
approximately 26,000 square feet, resulted in additional cash commitments for
lease payments of approximately $540,000 per year beginning August 1996 and
continuing through July 1999. Tenant improvements and capital equipment
purchases related to that expansion totaled approximately $800,000 during 1996.
The second lease agreement, for approximately 46,000 additional square feet,
will begin during the second quarter of 1997 and result in additional cash
commitments for lease payments of $846,000 per year for four years, with an
option to terminate the lease after 30 months. Tenant improvements and capital
equipment purchases related to this expansion are expected to total
approximately $1.0 million during 1997.
Also in 1996, Pixar paid a $150,000 refundable deposit on the purchase
of land to build a new studio facility. In January 1997, Pixar paid an
additional deposit of $150,000. At that time, the entire deposit of $300,000
became nonrefundable and will be applied to the purchase price of the property
should Pixar elect to purchase the property. If Pixar purchases the property and
builds a new studio facility, which it currently intends to do, Pixar currently
expects to incur capital expenditures of more than $10 million in 1997 and more
than $12 million in 1998. Pixar may choose to use its existing cash resources
for such expenditures or to finance such capital expenditures through the
issuance of additional equity or debt securities, by obtaining a credit facility
or by some other financing mechanism. If Pixar does not choose to purchase the
property and build a new facility, Pixar would need to write-off more than
$900,000 of capitalized expenses associated with site development and
engineering and architectural plans related to the new building, and would incur
an additional $300,000 charge related to Pixar's share of the site preparation.
<PAGE> 11
Computer Equipment. In October 1996, Pixar entered into agreements to
purchase certain computer and network equipment from several vendors to be used
on the second film and other projects, requiring cash commitments of
approximately $3.0 million for the year ending December 31, 1997. A portion of
these costs will be reimbursed by Disney. Additional equipment will be purchased
from other sources, including equipment purchased in the form of credits in
conjunction with the patent licensing agreement with Silicon Graphics.
As of December 31, 1996, Pixar's principal source of liquidity was
approximately $161.0 million in cash and short-term investments. In March 1997,
Pixar received $15.0 million, before deduction of expenses, from Disney in
connection with the sale of 1,000,000 shares of Pixar Common Stock and the
issuance of two warrants to purchase an aggregate of 1,500,000 shares of Common
Stock.
Pursuant to the Co-Production Agreement, Pixar will co-finance the next
five animated feature films which it produces, including Bugs and the second
theatrical film being developed under the Co-Production Agreement (the "Second
Theatrical Film"), and will also co-finance the Toy Story Video Sequel. In the
future, Pixar may co-finance other derivative works such as theatrical sequels,
interactive products and television productions. As Pixar does not expect to
generate substantial, if any, cash from operations in 1997 and 1998, the
production costs of Bugs, the Second Theatrical Film and the Toy Story Video
Sequel are expected to have a material adverse impact on Pixar's cash and
short-term investment balances. Pixar believes that available funds will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures, including the production costs of Bugs, the Second Theatrical Film
and the Toy Story Video Sequel, until Pixar begins receiving cash from the
release of these films (which is generally not expected to occur until 1999).
However, even if these films generate cash, unless each 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 will 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 expansion of its facilities. 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.
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Pixar:
We have audited the accompanying balance sheets of Pixar as of December
31, 1995 and 1996, and the related statements of operations, shareholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1996. These financial statements are the responsibility of
Pixar's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pixar as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Palo Alto, California
January 31, 1997, except as to Note 11,
which is as of March 25, 1997
-1-
<PAGE> 13
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PIXAR
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 97,286 $ 44,648
Short-term investments 47,002 116,321
Trade accounts receivable, net of allowance for returns and doubtful accounts
of $256 and $259 in 1995 and 1996, respectively 784 929
Other receivables 1,969 5,390
Prepaid expenses and other current assets 309 982
Capitalized film production costs 1,446 1,372
--------- ---------
Total current assets 148,796 169,642
Property and equipment, net 1,552 4,655
Capitalized film production costs, net of current portion 2,170 1,578
Other assets 497 1,588
--------- ---------
Total assets $ 153,015 $ 177,463
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 742 $ 1,060
Note payable to the majority shareholder and accrued interest 2,373 --
Film production costs payable 3,324 --
Accrued liabilities 3,400 5,262
Unearned revenue 269 337
--------- ---------
Total current liabilities 10,108 6,659
--------- ---------
Commitments
Shareholders' equity:
Preferred stock; no par value; 5,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock; no par value; 100,000,000 shares authorized; 38,286,500 and 39,413,102
shares issued and outstanding as of December 31, 1995 and 1996, respectively 185,845 187,308
Unrealized gain (loss) on investments 49 (48)
Deferred compensation (2,261) (1,049)
Accumulated deficit (40,726) (15,407)
--------- ---------
Total shareholders' equity 142,907 170,804
--------- ---------
Total liabilities and shareholders' equity $ 153,015 $ 177,463
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-2-
<PAGE> 14
PIXAR
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Software $ 3,323 $ 3,144 $ 6,306
Animation services 2,267 2,469 3,947
Film -- -- 18,847
Patent licensing -- 6,500 9,127
-------- ------- -------
Total revenues 5,590 12,113 38,227
-------- ------- -------
Cost of revenues:
Software 1,164 513 113
Animation services 1,964 1,873 3,039
Film -- -- 1,551
-------- ------- -------
Total cost of revenues 3,128 2,386 4,703
-------- ------- -------
Gross margin 2,462 9,727 33,524
-------- ------- -------
Operating expenses:
Research and development 2,288 4,065 6,985
Sales and marketing 2,180 1,588 1,768
General and administrative 831 3,043 5,577
-------- ------- -------
Total operating expenses 5,299 8,696 14,330
-------- ------- -------
Income (loss) from operations (2,837) 1,031 19,194
Other income, net 466 716 8,031
-------- ------- -------
Income (loss) before income taxes (2,371) 1,747 27,225
Income tax expense 1 120 1,906
-------- ------- -------
Net income (loss) $ (2,372) $ 1,627 $25,319
======== ======= =======
Net income (loss) per share (see Note 1) $ (0.06) $ 0.04 $ 0.54
======== ======= =======
Shares used in computing net income (loss) share
per share 39,669 40,350 46,989
======== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-3-
<PAGE> 15
PIXAR
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total
Unrealized Share-
Preferred Stock Common Stock Gain (Loss) Deferred Accum- holders'
------------------ -------------------- on Invest- Compen- ulated Equity
Shares Amount Shares Amount ments sation Deficit (Deficit)
-------- -------- -------- ---------- -------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 -- $ -- 20 $ 46,405 $ -- $ -- $(47,621) $ (1,216)
Capital infusion from
shareholder -- -- -- 1,850 -- -- -- 1,850
Unrealized gain on
investments -- -- -- -- 63 -- -- 63
Net loss -- -- -- -- -- -- (2,372) (2,372)
------- -------- ------ --------- -------- -------- -------- ---------
Balances, December 31, 1994 -- -- 20 48,255 63 -- (49,993) (1,675)
Recapitalization (conversion
of note payable to the
majority shareholder and
existing common stock into
Series A preferred stock
and common stock) 10,000 47,900 9,980 (46,288) -- -- -- 1,612
Reclassification of S
corporation net operating
losses -- -- -- (7,640) -- -- 7,640 --
Exercise of stock options -- -- 1,386 277 -- -- -- 277
Deferred compensation
related to grant of stock
options -- -- -- 3,680 -- (3,680) -- --
Amortization of deferred
compensation -- -- -- -- -- 1,419 -- 1,419
Conversion of existing
preferred stock
into common stock (10,000) (47,900) 20,000 47,900 -- -- -- --
Initial public offering net
of expenses of $1,892 -- -- 6,900 139,661 -- -- -- 139,661
Unrealized gain on
investments -- -- -- -- 76 -- -- 76
Realized gain on investment -- -- -- -- (90) -- -- (90)
Net income -- -- -- -- -- -- 1,627 1,627
------- -------- ------ --------- -------- -------- -------- ---------
Balances, December 31, 1995 -- -- 38,286 185,845 49 (2,261) (40,726) 142,907
Exercise of stock options,
including tax benefit
from disqualifying
dispositions -- -- 1,127 1,463 -- -- -- 1,463
Amortization of deferred
compensation -- -- -- -- -- 1,212 -- 1,212
Unrealized loss on
investments -- -- -- -- (97) -- -- (97)
Net income -- -- -- -- -- -- 25,319 25,319
------- -------- ------ --------- -------- -------- -------- ---------
Balances, December 31, 1996 -- $ -- 39,413 $ 187,308 $ (48) $ (1,049) $(15,407) $ 170,804
======= ======== ====== ========= ======== ======== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-4-
<PAGE> 16
PIXAR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,372) $ 1,627 $ 25,319
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of deferred compensation -- 1,127 1,168
Noncash revenue attributable to film overbudget -- -- (2,324)
Provision for returns and doubtful accounts 191 29 3
Depreciation and amortization 374 467 2,283
Tax benefit from disqualifying dispositions -- -- 1,236
Licenses exchanged for equipment -- -- (1,465)
Gain on sale of equity securities (584) (90) --
Changes in operating assets and liabilities:
Trade accounts receivable 143 (502) (148)
Other receivables (128) (1,809) (3,421)
Prepaid expenses and other current assets 127 (85) (673)
Accounts payable 167 86 318
Accrued liabilities 205 2,656 1,862
Unearned revenue (4) (142) 68
------- --------- ---------
Net cash provided by (used in) operating activities (1,881) 3,364 24,226
------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (589) (955) (2,371)
Proceeds from sale of property and equipment -- 33 --
Proceeds from sale of equity securities 584 90 175,360
Investments in short-term securities -- (46,953) (244,776)
Capitalized film production costs -- -- (1,840)
Change in other assets -- (497) (1,091)
------- --------- ---------
Net cash used in investing activities (5) (48,282) (74,718)
------- --------- ---------
Cash flows from financing activities:
Net proceeds from initial public offering -- 139,661 --
Proceeds from capital infusion 1,850 -- --
Proceeds from exercised stock options -- 277 227
Repayment of note payable to shareholder -- -- (2,373)
Proceeds from note payable to shareholder -- 2,225 --
------- --------- ---------
Net cash provided by (used in) financing activities 1,850 142,163 (2,146)
------- --------- ---------
Net increase (decrease) in cash and cash equivalents (36) 97,245 (52,638)
Cash and cash equivalents at beginning of year 77 41 97,286
------- --------- ---------
Cash and cash equivalents at end of year $ 41 $ 97,286 $ 44,648
======= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ -- $ 172 $ 523
======= ========= =========
Supplemental disclosures of noncash investing and financing activities:
Credits used to purchase equipment $ -- $ -- $ 3,127
======= ========= =========
Film overbudget reductions $ -- $ -- $ 3,324
======= ========= =========
Noncash film production costs capitalized $ -- $ 3,616 $ 44
======= ========= =========
Conversion of note payable to shareholder, and accrued interest, to equity $ -- $ 1,612 $ --
======= ========= =========
Accrual of stock option deferred compensation $ -- $ 3,680 $ --
======= ========= =========
Unrealized gain (loss) on investments $ 63 $ (14) $ (97)
======= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE> 17
PIXAR
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF PIXAR AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Pixar was incorporated in the state of California on December 9, 1985.
The Company is a digital animation studio with the technical, creative and
production capabilities to create a new generation of animated feature films and
related products.
Cash and Cash Equivalents
Pixar considers all highly liquid instruments with an original maturity
of 90 days or less to be cash equivalents. Cash equivalents as of December 31,
1996 consisted primarily of U.S. Treasury Bills, demand notes, commercial paper
and federal agency obligations.
Short-Term Investments
Pixar has classified its short-term investments as
"available-for-sale." Such investments are recorded at fair value, and
unrealized gains and losses, if material, are reported as a separate component
of equity until realized. Interest income is recorded using an effective
interest rate with the associated premium or discount amortized to interest
income. The cost of securities sold is based upon the specific identification
method. See Note 2 for a description of short-term investments.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over estimated useful
lives ranging from three to seven years. Leasehold improvements are amortized
over the lesser of the related lease term or the life of the improvement.
Film Production Costs
Film production costs include costs to develop and produce computer
animated motion pictures, mainly salaries, equipment and overhead. Film
production costs in excess of reimbursable amounts are capitalized. Once a film
is released, any film production costs capitalized will be amortized in the
proportion that the compensation revenue during the year for each film bears to
the estimated compensation revenue to be received from all sources under the
individual film forecast method. Estimates of anticipated total gross revenues
will be reviewed periodically and revised when necessary. Unamortized film
production costs will be compared with net realizable value each reporting
period on a film-by-film basis. If estimated gross revenues are not sufficient
to recover the unamortized film production costs, the unamortized film
production costs will be written down to net realizable value. The costs of
feature films are classified as current assets to the extent such costs are
expected to be recovered from primary markets. Costs of feature films
recoverable from secondary markets are classified as noncurrent assets.
Research and Development Costs
Research and development costs are charged to operations as incurred.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, development costs related to software products are expensed as
incurred until the technological feasibility of the product has been
established. After technological feasibility is established, additional costs
would be capitalized. To date, Pixar has not capitalized any software
development costs after technological feasibility has been established on its
software products since Pixar believes its process for developing software is
essentially completed concurrently with the establishment of technological
feasibility and costs incurred thereafter have not been material.
-6-
<PAGE> 18
PIXAR
NOTES TO FINANCIAL STATEMENTS
Revenue Recognition
Software licensing revenue is recognized upon shipment if there are no
significant vendor obligations and if collection is probable.
Software development contracts and animated television commercial
revenues are recognized on the percentage-of-completion method of accounting.
Patent licensing revenue is recognized upon release of the rights to
the technology.
Compensation based on the revenues from the distribution of animated
feature films and related products is recognized as earned and reasonably
estimable. The related revenue cycle is generally five to seven years, with the
substantial majority expected to be recognized in the first two years.
Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including
marketable securities and accounts receivable, approximates fair market value.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
trade accounts receivable. The Company invests its excess cash in a variety of
investment grade, interest-bearing securities with a major bank. This
diversification of risk is consistent with the Company's policy to ensure safety
of principal and maintain liquidity.
The Company licenses its products and provides its services to a large
number of customers in several business segments, primarily in the United
States, as outlined in Note 10. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. The Company
maintains reserves for potential credit losses and such losses have been within
management's expectations.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
Pixar accounts for income taxes under the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in income in the period that includes the
enactment date.
Pixar elected to be treated as an S corporation for federal income tax
purposes as of January 1, 1992, whereby income was taxed to its individual
shareholder. In 1995, Pixar's S corporation election terminated as a result of
the recapitalization described in Note 7. The accompanying pro forma net income
(loss) data for the year ended December 31, 1995, reflect provision for income
taxes on a pro forma basis, using the asset and liability method, as if Pixar
had been a C corporation since the beginning of that period, fully subject to
federal and state income taxes. Undistributed losses during the period in which
Pixar was an S corporation were reclassified from accumulated deficit to common
stock, resulting in a $7,600,000 decrease in both accumulated deficit and common
stock on the accompanying balance sheet as of December 31, 1995.
Pro forma income taxes reflected in the pro forma net income data for
the year ended December 31, 1995 primarily reflect the alternative minimum tax
liability after utilization of net operating loss carryforwards recorded prior
to the S corporation termination event described in Note 7.
-7-
<PAGE> 19
PIXAR
NOTES TO FINANCIAL STATEMENTS
Net Income (Loss) per Share
Net income (loss) per share for the years ended December 31, 1994 and
1995, is computed using pro forma net income (loss), assuming C corporation
income tax expense. Net income (loss) per share for all periods presented is
computed using the weighted-average number of shares of common stock outstanding
and common equivalent shares from stock options (under the treasury stock
method, if dilutive). In accordance with SEC Staff Accounting Bulletins, such
computations include all common and common equivalent shares issued within 12
months of the initial public offering (IPO) as described in Note 8 for all
pre-IPO periods presented.
Reclassifications
Certain amounts reported in previous years have been reclassified to
conform to the 1996 financial statement presentation.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Pixar adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(2) SHORT-TERM INVESTMENTS
In 1993, Pixar licensed certain technology in exchange for a 10% equity
interest in the licensee. As of the date of this transaction, management
determined that there was no reasonable basis to determine the fair value of the
assets exchanged and, accordingly, the preferred stock received was valued at
zero.
In 1994, the licensee was acquired by another company. As a result,
Pixar received 10,310 shares of common stock of the acquiring entity in exchange
for its equity in the licensee. In 1994, Pixar recognized a gain on this
transaction amounting to $584,000, which represents the fair value of the 9,279
shares received and the proceeds received from their subsequent sale. The
remaining 1,031 shares were placed in escrow to secure certain indemnification
obligations of the licensee and were valued at zero as of the date of the
transaction. As of December 31, 1994, Pixar had valued the 1,031 shares at fair
value and recorded unrealized gains of $63,000 under the belief that no
obligations existed under the escrow agreement. Pixar recognized a gain of
$90,000 from the sale of the remaining 1,031 shares in the year ended December
31, 1995.
-8-
<PAGE> 20
PIXAR
NOTES TO FINANCIAL STATEMENTS
All investments were considered available-for-sale securities and
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of December 31, 1995:
U. S. Treasury Bills $ 71,846 $ 50 $ -- $ 71,896
Demand notes 14,499 -- -- 14,499
Commercial paper 34,833 -- (3) 34,830
Federal Agency obligations 19,861 2 -- 19,863
-------- ---- --------- --------
$141,039 $ 52 $ (3) $141,088
======== ==== ========= ========
As Of December 31, 1996:
U. S. Treasury Bills $ 39,186 $-- $ (33) $ 39,153
Demand notes 22,106 -- -- 22,106
Commercial paper 20,000 -- -- 20,000
Federal Agency obligations 69,495 6 (21) 69,480
Banker's Acceptance 4,886 -- -- 4,886
-------- ---- --------- --------
$155,673 $ 6 $ (54) $155,625
======== ==== ========= ========
</TABLE>
The contractual maturities of available-for-sale debt securities,
regardless of their balance sheet classification, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996
Cost Fair Value Cost Fair Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Due within one year $141,039 $141,088 $ 95,095 $ 95,072
Due after one year through five years -- -- 60,578 60,553
-------- -------- -------- --------
$141,039 $141,088 $155,673 $155,625
======== ======== ======== ========
</TABLE>
(3) BALANCE SHEET COMPONENTS
Balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1996
---------- ---------
<S> <C> <C>
Property and equipment:
Equipment $3,298 $6,238
Leasehold improvements 265 1,007
------ ------
3,563 7,245
Less accumulated depreciation and amortization 2,011 2,590
------ ------
$1,552 $4,655
====== ======
Accrued liabilities:
Employee-related expenses $1,277 $2,280
IPO costs payable 1,071 --
Professional services 206 1,157
Other 846 1,825
------ ------
$3,400 $5,262
====== ======
</TABLE>
-9-
<PAGE> 21
PIXAR
NOTES TO FINANCIAL STATEMENTS
(4) FEATURE FILM AND CD-ROM PRODUCTION
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 revenue from
the distribution of animated feature films and related products. The first
feature film, Toy Story, was in production as of December 31, 1994, and released
in November 1995. The second and third feature films, and a made-for-home video
sequel to Toy Story were in development as of December 31, 1996. On February 24,
1997, Pixar and Disney entered into a co-production agreement which will now
govern the second and third feature films, three additional films, and
made-for-home video sequels (see Note 11).
Under the terms of the Feature Film Agreement, Disney funded each
motion picture produced up to the total budgeted film costs. Costs incurred by
Pixar, inclusive of salaries and overhead, were billed to Disney and reimbursed
on a current basis. All payments to Pixar from Disney for costs of feature film
production have been recorded as cost reimbursements; accordingly, no revenues
have been recorded for such reimbursements; rather, Pixar has netted the
reimbursements against the related costs. The Feature Film Agreement provided
that, in the event that production costs for the motion picture exceeded the
total budget, Disney would pay a specified amount of the over budget costs (a
portion of which has since been deducted from Pixar's Toy Story film revenue)
plus all over budget costs that were preapproved in writing by a Disney
executive. Pixar was obligated to fund unapproved production cost overages in
excess of that specified amount, but was entitled to recover any overages that
it had funded if the motion picture met certain criteria.
As of December 31, 1995, total film production costs incurred exceeded
budget by approximately $9,300,000, a portion of which was assumed by Disney, as
defined above. Pixar's portion of the film production cost overage incurred,
approximately $3,300,000, and amortization of deferred compensation were
capitalized as film production costs as of December 31, 1995. During the year
ended December 31, 1996, Pixar's portion of the film production cost overage was
reduced by $1,000,000. Additional costs capitalized as film production costs
during the year ended December 31, 1996, included additional amortization of
deferred compensation, participation fees related to the first feature film, and
costs related to additional films in process. Based on the individual film
forecast method, substantially all of the film production costs capitalized
related to the first feature film will be substantially amortized by December
31, 1997. Film production costs capitalized related to additional films in
process will be amortized when the respective films are released.
The total film production costs and related amounts capitalized are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended Total as of
December 31, December 31,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Released film:
Disney production costs (unaudited) $ 382 $5,006 $5,299 $ 8,158 $ 754 $ 19,599
Pixar reimbursed film production costs 585 1,899 2,570 3,015 53 8,122
---------------------------------------------------- ------------
Total film production costs (unaudited) $ 967 $6,905 $7,869 $11,173 $ 807 27,721
====================================================
Disney reimbursements of budgeted costs
and approved overages (unaudited) (25,396)
Amortization of deferred compensation 336
Participation fees 350
Amortization of film production costs (1,551)
------------
Total film production costs capitalized
for released film 1,460
------------
</TABLE>
-10-
<PAGE> 22
PIXAR
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year ended Total as of
December 31, December 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Films in process:
Disney production costs (unaudited) $ 903 $ 5,996 6,899
Pixar reimbursed film production costs 1,904 11,786 13,690
------------------- ------------
Total film production costs (unaudited) $ 2,807 $17,782 20,589
===================
Disney reimbursements of budgeted costs
and approved overages (unaudited) (19,099)
------------
Total film production costs capitalized
for films in process 1,490
------------
Total film production costs capitalized $ 2,950
============
</TABLE>
The reimbursements receivable from Disney for the first feature film were
$220,000 as of December 31, 1995, and are included in other receivables on the
accompanying balance sheet. There were no reimbursements receivable for the
first film as of December 31, 1996. The reimbursements receivable from Disney
for the second film were $943,000 and $1,313,000 as of December 31, 1995 and
1996, respectively, and are included in other receivables on the accompanying
balance sheet. The reimbursement receivable from Disney for the made-for-home
video sequel to the first feature film was $617,000 as of December 31, 1996,
which is included in other receivables on the accompanying balance sheet.
Pixar was obligated to pay 5% of its compensation based on revenue from the
distribution of the first feature film up to $350,000 to a third party in
consideration for services rendered.
CD-ROM Agreement
Pixar has entered into an agreement with Disney to develop and produce
interactive CD-ROM titles based on the first motion picture. Disney pays Pixar a
development fee for the development of the titles and Pixar is entitled to
receive a per-unit royalty on sales of the CD-ROM titles after a certain minimum
number of units has been sold. Pixar recognized $3,009,000 of royalties from
sales of CD-ROM titles for the year ended December 31, 1996. Amounts
required to develop the titles in excess of the development fees are funded by
Pixar and are recorded as research and development fees, unless Disney agrees to
provide additional fees. Total development fees recorded as an offset in
research and development pursuant to this agreement were $3,011,000 for the year
ended December 31, 1996.
(5) PATENT LICENSING ARRANGEMENTS
As of December 31, 1995, fees of $6,500,000 were recognized on the
licensing of certain patents.
For the year ended December 31, 1996, fees of $9,100,000 were
recognized with respect to the licensing of certain patents. The Company
delivered all rights to utilize the technology underlying the license to the
licensee, and received a nonrefundable fixed-fee cash payment of $6,000,000 and
$5,000,000 in the form of credits for products to be purchased from the licensee
by Pixar over the next four years. Following the release of the rights to
utilize the patents to the licensee, Pixar maintained no significant vendor
obligations to the licensee, so the Company recognized as revenue the fixed and
determinable amounts of the $6,000,000 cash payment received, plus $3,127,000
that represents the portion of the credits Pixar has used in the year ended
December 31, 1996.
-11-
<PAGE> 23
PIXAR
NOTES TO FINANCIAL STATEMENTS
(6) RELATED PARTY TRANSACTIONS
Notes Payable to Shareholder
Pixar had a note payable upon demand to its majority shareholder
amounting to $1,137,000 as of December 31, 1994, bearing simple interest of 10%.
Interest expense related to the note was $113,000 for 1994. The note, plus
accrued interest of $474,000, was converted to common stock in 1995.
As of December 31, 1995, Pixar had a $2,225,000 note payable to its
majority shareholder, plus accrued interest of $148,000, which bears simple
variable interest equal to prime rate revised quarterly (8.75% as of December
31, 1995). The note plus accrued interest was repaid in January 1996.
Note Receivable from Shareholder
In 1995, Pixar loaned $200,000 to an employee and shareholder, due in
May 1998. The note was secured by certain assets, included an interest rate of
6.62% compounded annually, and was included in other assets on the accompanying
balance sheet as of December 31, 1995. During the year ended December 31, 1996,
the note and accrued interest was paid in full.
(7) INCOME TAXES
Pixar elected to be treated as an S corporation for federal income tax
purposes as of January 1, 1992. The S corporation status was terminated as a
result of the recapitalization described in Note 8. Accordingly, Pixar was
taxed as a C corporation following the recapitalization.
The pro forma provisions for income taxes reflect the income tax
expense that would have been reported if Pixar had been a C corporation. The
components of income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
1994 1995 1996
------------------- -------------------- -------------------
(Pro Forma) (Pro Forma) (Actual)
(Unaudited)
<S> <C> <C> <C>
Income taxes:
Current:
Federal $ -- $ 69 $ 620
State 1 21 1,286
--------------- --------------- --------------
Total income taxes $ 1 $ 90 $ 1,906
=============== =============== ==============
</TABLE>
The following tabulation reconciles the statutory corporate federal
income tax expense (benefit) (computed by multiplying Pixar's income (loss)
before income taxes by 34%) to Pixar's pro forma or actual income tax expense
(in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
1994 1995 1996
------------- --------- ------------
(Pro Forma) (Pro Forma) (Actual)
(Unaudited)
<S> <C> <C> <C>
Expected income tax expense (benefit) $(806) $ 594 $ 9,257
State income taxes, net of federal tax effect 1 14 1,286
Unutilized net operating losses 806 -- --
Change in beginning of year valuation allowance -- (539) (9,261)
Alternative minimum tax -- -- 37
Other, net -- 21 587
----- ----- -------
Income taxes $ 1 $ 90 $ 1,906
===== ===== =======
</TABLE>
-12-
<PAGE> 24
PIXAR
NOTES TO FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals $ 1,496 $ 2,113
Net operating loss carryforwards 13,603 7,749
Credit carryforwards 637 748
-------- --------
Total gross deferred tax assets 15,736 10,610
Valuation allowance (15,736) (10,610)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
Pixar has a valuation allowance as of December 31, 1996, which fully
offsets its gross deferred tax assets due to the Company's historical losses and
the fact that there is no guarantee the Company will generate sufficient taxable
income in the future to be able to realize any or all of the deferred tax
assets.
Included in the deferred tax assets above is approximately $4,000,000
related to stock option compensation for which the benefit when realized will be
an adjustment to equity. As of December 31, 1996, Pixar had net operating loss
carryforwards from pre-S corporation years of approximately $23,000,000 for
federal income tax purposes. Pixar has research credit carryforwards of
approximately $400,000 and $50,000 for federal and California income tax
purposes, respectively. In addition, Pixar has alternative minimum tax credit
carryforwards for federal and California tax purposes of approximately $320,000
and $50,000, respectively. If not utilized, the federal and California
carryforwards will expire in years 2002 through 2011.
(8) SHAREHOLDERS' EQUITY
Recapitalization and Stock Split
As of December 31,1994, Pixar had 100,000 shares of common stock
authorized, 20,000 shares of common stock issued and outstanding, and no
preferred stock authorized, issued and outstanding. In April 1995, the sole
shareholder approved the recapitalization of Pixar, whereby the 20,000 shares of
common stock then outstanding and a note payable to the sole shareholder (see
the second paragraph of Note 6 above) were converted into 9,999,999 shares of
Series A preferred stock and 10,000,002 shares of common stock.
In October 1995, the Board of Directors approved a two-for-one stock
split of the common stock. The accompanying financial statements have been
retroactively restated for all periods presented to reflect the effect of the
stock split on the common stock.
Initial Public Offering
In November 1995, Pixar completed an IPO of 6,900,000 shares of common
stock for $22 per share, which resulted in proceeds to the Company of
approximately $139,700,000, net of issuance costs of approximately $1,900,000.
Deferred Compensation
Pixar has recorded deferred compensation of $3,680,000 for the
difference between the grant price and the deemed fair value of the common stock
underlying certain options granted in 1995. This amount is being amortized over
the vesting period of the individual options, generally four years. Amortization
of deferred compensation was approximately $1,419,000 for the year ended
December 31, 1995, $292,000 of which was capitalized as film production costs
and $1,127,000 of which was expensed. For the year ended December 31, 1996,
amortization of deferred compensation was approximately $1,212,000, $44,000 of
which was capitalized as film production costs and $1,168,000 of which was
expensed.
-13-
<PAGE> 25
PIXAR
NOTES TO FINANCIAL STATEMENTS
Stock Option Plans
As of December 31, 1996, the Company has two stock option plans, which
are described below.
1995 Stock Plan
Pixar has reserved 13,000,000 shares of common stock for issuance under
the 1995 Stock Plan (the Plan), as approved in October 1995. The Plan provides
for stock options to be granted to employees and consultants at an exercise
price not less than 100% of the fair market value (110% of fair value in certain
instances), at the grant date, as determined by the Board of Directors or a
committee of the Board of Directors, for incentive stock options; at prices
determined by the Board of Directors or a committee of the Board of Directors
for nonstatutory stock options; and at prices and terms determined by the Board
of Directors or a committee of the Board of Directors for stock purchase rights.
All options are to have a term not greater than 10 years from the date of grant.
The Board of Directors or a committee of the Board of Directors determines the
number of shares for which an option may be granted. Options issued generally
vest 25% after one year and then ratably 1/48 per month thereafter.
1995 Director Option Plan
Pixar has reserved 200,000 shares of common stock for issuance under the
1995 Director Option Plan. The Director Option Plan provides for the automatic
grant of nonstatutory options to nonemployee directors (eligible directors) of
Pixar. Each eligible director will be granted an option to purchase 30,000
shares of common stock on the date on which the optionee first becomes a
director of Pixar. One-third of the options will vest one year after their date
of grant and an additional one-third at the end of each year thereafter. On the
third and subsequent anniversaries of a nonemployee director's first becoming a
director, that director is automatically granted an option to purchase an
additional 10,000 shares of common stock that will vest in full one year after
the date of the respective grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost, except for the
$3,680,000 of deferred compensation and subsequent amortization, has been
recognized for its fixed stock options. Had compensation cost for the Company's
two stock option plans been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net Income:
As reported $ 1,627 $ 25,319
Pro Forma $ 880 $ 24,017
Earnings per share:
As reported $ 0.04 $ 0.54
Pro Forma $ 0.02 $ 0.51
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: 1995 - zero dividend yield, expected volatility of
50 percent, risk-free interest rates of 5.90 percent, and weighted-average
expected life of 2.42 years; 1996 - zero dividend yield, expected volatility of
50 percent, risk-free interest rate of 6.06 percent, and weighted-average
expected life of 3.52 years.
The effects of applying SFAS No. 123 in this pro forma disclosure is not
indicative of the effects on reported results for future years. SFAS No. 123
does not apply to awards prior to 1995, and additional awards in future years
are anticipated.
-14-
<PAGE> 26
PIXAR
NOTES TO FINANCIAL STATEMENTS
A summary of the status of the Company's two fixed stock option plans as
of December 31, 1995 and 1996, is as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------------- -------------------------------------
Weighted-average Weighted-average
Shares exercise price Shares exercise price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -- $ -- 9,140,900 $ 1.00
Granted 10,641,400 0.89 1,297,000 15.18
Exercised (1,386,500) 0.20 (1,126,602) 0.20
Forfeited (114,000) 0.20 (447,458) 15.79
----------- ----------
Outstanding at end of year 9,140,900 $ 1.00 8,863,840 $ 2.41
=========== ==========
Options exercisable at year-end 2,282,251 3,878,682 0.96
=========== ==========
Weighted-average fair value of $ 0.31 $ 6.51
=========== ==========
options granted during the year
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Number of Weighted-average Weighted- Number of Weighted-
options remaining average exercise options average exercise
Exercise Prices outstanding contractual life price outstanding price
--------------- ----------- ---------------- ----- ----------- -----
<C> <C> <C> <C> <C> <C>
$ 0.20 7,006,365 8.35 $ 0.20 3,502,741 $ 0.20
$ 1.25 to $ 9.60 843,350 8.79 7.35 344,597 7.79
$10.80 to $15.00 738,125 9.49 12.56 31,344 10.94
$15.38 to $19.00 276,000 9.80 16.25 -- --
--------- ---------
$0.20 to $19.00 8,863,840 8.53 $ 2.41 3,878,682 $ 0.96
========= =========
</TABLE>
Employee Benefit Plans
In 1992, Pixar adopted a 401(k) Profit Sharing Plan (the 401(k) Plan)
that is intended to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended. The 401(k) Plan covers substantially all of Pixar's employees.
Participants may elect to contribute a percentage of their compensation to this
plan, up to the statutory maximum amount. Pixar may make discretionary
contributions to the 401(k) Plan; none have been made to the 401(k) Plan to
date.
-15-
<PAGE> 27
PIXAR
NOTES TO FINANCIAL STATEMENTS
(9) COMMITMENTS
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of December 31,
1996, were as follows (in thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
- ------------
<S> <C>
1997 $ 1,922
1998 2,388
1999 2,175
2000 1,486
2001 267
-------
Total minimum lease payments $ 8,238
=======
</TABLE>
Rental expense from operating leases amounted to approximately
$887,000, $925,000 and $1,236,000 for the years ended December 31, 1994, 1995,
and 1996, respectively.
(10) SIGNIFICANT CUSTOMERS AND SEGMENT REPORTING
The following table summarizes the annual percentage contribution to
revenues by customers when revenues from such customers exceeded 10% of total
revenues in 1994, 1995 and 1996, and the amounts due from these customers as a
percentage of total accounts receivable at the corresponding year-end:
<TABLE>
<CAPTION>
Percentage of Total Percentage of Total
Revenues Accounts Receivable as of
Year Ended December 31, December 31,
1994 1995 1996 1994 1995 1996
---------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Walter Thompson USA, Inc. 13% --- --- --- --- ---
Eastman Kodak Company 11% --- --- 16% --- ---
Microsoft Corporation --- 54% --- --- --- ---
Disney --- --- 65% --- --- 34%
Silicon Graphics, Inc. --- --- 24% --- --- ---
</TABLE>
-16-
<PAGE> 28
PIXAR
NOTES TO FINANCIAL STATEMENTS
Pixar operates principally in three business segments: software,
animation services, and film. Financial information relating to business
segments follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
--------- --------- --------
<S> <C> <C> <C>
Revenues:
Software $ 3,323 $ 3,144 $ 6,306
Animation services 2,267 2,469 3,947
Film -- -- 18,847
Corporate and other -- 6,500 9,127
--------- --------- --------
$ 5,590 $ 12,113 $ 38,227
========= ========= ========
Income (loss) from operations:
Software $ (2,416) $ (495) $ 1,587
Animation services 63 (55) 302
Film (484) (3,826) 9,308
Corporate and other -- 5,407 7,997
--------- --------- --------
$ (2,837) $ 1,031 $ 19,194
========= ========= ========
Depreciation expense:
Software $ 111 $ 125 $ 176
Animation services 153 158 95
Film 35 104 251
Corporate and other 75 80 210
--------- --------- --------
$ 374 $ 467 $ 732
========= ========= ========
Capital expenditures:
Software $ 70 $ 317 $ 942
Animation services 300 133 51
Film 207 340 1,694
Corporate and other 12 178 1,149
--------- --------- --------
$ 589 $ 968 $ 3,836
========= ========= ========
Identifiable assets:
Software $ 784 $ 1,104 $ 3,832
Animation services 485 769 627
Film 389 5,534 6,882
Corporate and other 238 145,608 166,122
--------- --------- --------
$ 1,896 $ 153,015 $177,463
========= ========= ========
</TABLE>
(11) SUBSEQUENT EVENTS
On February 24, 1997 Pixar and Disney entered into a co-production
agreement (Co-Production Agreement) pursuant to which Pixar, on an exclusive
basis, will produce five computer animated feature-length theatrical motion
pictures (the Pictures) for distribution by Disney over approximately the next
ten years. Pixar and Disney will co-own and co-brand the Pictures, and
co-finance the production costs. Pixar and Disney will share equally in the
profits of each Picture and any related merchandise and other ancillary
products, after recovery of certain costs. The Co-Production Agreement generally
provides that Pixar will produce each Picture and Disney will control all
decisions relating to marketing, promotion, publicity, advertising and
distribution of each Picture.
Pixar is obligated to pay 5% of its compensation based on revenue from
the distribution of each of the Pictures under the Co-Production Agreement to a
third party in consideration for services rendered. The compensation is subject
to a cap of $500,000 for each theatrical motion picture and a cap of $200,000
for each sequel or remake, with a total aggregate cap of $3,000,000.
The Co-Production Agreement provides Pixar with the option to produce
and co-finance any future CD-ROM or interactive products based on the Pictures
and to share equally in the profits, after recovery of marketing and
distribution costs. However, after entering into the Co-Production Agreement,
Pixar made a decision to discontinue its business of producing CD-ROM
and other interactive products and to devote related resources to
other projects arising from the Co-Production Agreement. The CD-ROM and
interactive products division reported revenues of $-0- and $3,009,000 in 1995
and 1996, respectively, and losses from operations of $1,830,000 and $1,101,000
in 1995 and 1996, respectively. The CD-ROM and interactive products division
will be recorded as discontinued operations during the first quarter of 1997.
-17-
<PAGE> 29
PIXAR
NOTES TO FINANCIAL STATEMENTS
In connection with the Co-Production Agreement, Pixar sold to Disney
1,000,000 shares of Pixar Common Stock which Disney has agreed to hold for at
least three years. Pixar also granted two warrants to Disney: one warrant to
purchase 750,000 shares of Common Stock at an exercise price of $20.00 per
share, and another warrant to purchase 750,000 shares of Common Stock at an
exercise price of $25.00 per share. Pixar granted certain registration rights
for the shares issuable upon exercise of the warrants. Gross proceeds on the
transaction were $15,000,000.
-18-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Pixar:
We consent to the incorporation by reference in the registration
statement (No. 33-99838) on Form S-8 of Pixar of our reports dated January 31,
1997, except as to Note 11, which is as of March 25, 1997 relating to the
balance sheets of Pixar as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1996, and the
related schedule, which reports appear or are incorporated by reference in the
December 31, 1996, annual report on Form 10-K of Pixar.
KPMG PEAT MARWICK LLP
Palo Alto, California
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 44,648
<SECURITIES> 116,321
<RECEIVABLES> 6,319
<ALLOWANCES> (323)
<INVENTORY> 0
<CURRENT-ASSETS> 169,642
<PP&E> 7,245
<DEPRECIATION> (2,590)
<TOTAL-ASSETS> 177,463
<CURRENT-LIABILITIES> 6,659
<BONDS> 0
0
0
<COMMON> 187,308
<OTHER-SE> (16,504)
<TOTAL-LIABILITY-AND-EQUITY> 177,463
<SALES> 0
<TOTAL-REVENUES> 38,227
<CGS> 0
<TOTAL-COSTS> 4,703
<OTHER-EXPENSES> 14,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,225
<INCOME-TAX> 1,906
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,319
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
