<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 0-26976
PIXAR
(Exact name of registrant as specified in its charter)
California 68-0086179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 West Cutting Boulevard, Richmond, California 94804
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (510) 236-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
The number of shares outstanding of the registrant's Common Stock as of
May 12, 1997 was 41,159,988.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIXAR
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 69,829 $ 44,648
Short-term investments 110,545 116,321
Trade and other accounts receivable, net 3,135 4,328
Prepaid expenses and other current assets 813 982
Capitalized film production costs, current portion 765 1,372
Net assets from discontinued operations 1,280 1,469
--------- ---------
Total current assets 186,367 169,120
Property and equipment, net 6,117 4,655
Capitalized film production costs, net of current portion 14,302 1,578
Other assets 1,987 1,588
--------- ---------
Total assets $ 208,773 $ 176,941
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 989 $ 1,060
Income taxes payable 1,510 --
Film costs payable 8,227 --
Accrued liabilities 6,374 4,740
Unearned revenue 448 337
--------- ---------
Total current liabilities 17,548 6,137
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock; no par value; 5,000,000 shares authorized and no
shares issued and outstanding -- --
Common stock; no par value; 100,000,000 shares authorized and
41,141,711 shares issued and outstanding 202,593 187,308
Unrealized loss on investments (260) (48)
Deferred compensation (849) (1,049)
Accumulated deficit (10,259) (15,407)
--------- ---------
Total shareholders' equity 191,225 170,804
--------- ---------
Total liabilities and shareholders' equity $ 208,773 $ 176,941
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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<PAGE> 3
PIXAR
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Software $ 1,418 $ 911
Animation services -- 785
Film 6,301 76
Patent licensing 148 6,495
-------- --------
Total revenues 7,867 8,267
-------- --------
Cost of revenues:
Software 9 54
Animation services -- 716
Film 558 9
-------- --------
Total cost of revenues 567 779
-------- --------
Gross margin 7,300 7,488
-------- --------
Operating expenses:
Research and development 1,081 1,101
Sales and marketing 252 419
General and administrative 1,227 988
-------- --------
Total operating expenses 2,560 2,508
-------- --------
Income from continuing operations 4,740 4,980
-------- --------
Other income, net 2,135 1,868
-------- --------
Income from continuing operations before income taxes 6,875 6,848
Income taxes expense 1,650 341
-------- --------
Net income from continuing operations 5,225 6,507
Discontinued operations:
Loss from discontinued operations (including income tax
benefits of $24 and $12 in 1997 and 1996, respectively) (77) (228)
-------- --------
Net income $ 5,148 $ 6,279
======== ========
Shares used in computing net income per share 47,200 47,051
======== ========
Net income per share from continuing operations (see Note 2) $ 0.11 $ 0.14
======== ========
Net loss per share from discontinued operations (see Note 2) $ (--) $ (0.01)
======== ========
Net income per share (see Note 2) $ 0.11 $ 0.13
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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<PAGE> 4
PIXAR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,148 $ 6,279
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Discontinued operations 77 228
Amortization of deferred compensation 192 372
Depreciation and amortization 338 122
Amortization of capitalized film production costs 558 9
Credits from patent license, net of expense items (117) (495)
Changes in operating assets and liabilities:
Trade and other accounts receivable 1,193 (599)
Prepaid expenses and other current assets 256 30
Accounts payable (71) (261)
Income taxes payable 1,510 329
Film costs payable -- (76)
Accrued liabilities 1,634 (494)
Unearned revenue 172 482
-------- --------
Net cash provided by continuing operations 10,890 5,926
Net cash provided by (used in) discontinued operations 112 (228)
-------- --------
Net cash provided by operating activities 11,002 5,698
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,831) (183)
Maturities of investments in short-term securities 29,585 4,930
Purchases of short-term securities, net of unrealized losses (24,021) (19,001)
Capitalized film production costs (4,440) (43)
Change in other assets (399) (10)
-------- --------
Net cash used in investing activities (1,106) (14,307)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants, net 14,896 --
Repayment of note payable to shareholder -- (2,373)
Proceeds from exercised stock options 389 --
-------- --------
Net cash provided by (used in) financing activities 15,285 (2,373)
-------- --------
Net increase (decrease) in cash and cash equivalents 25,181 (10,982)
Cash and cash equivalents at beginning of period 44,648 97,286
-------- --------
Cash and cash equivalents at end of period $ 69,829 $ 86,304
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ -- $ 25
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Credits from patent license $ 148 $ 495
======== ========
Non-cash film production costs capitalized $ 8,235 $ 17
======== ========
Unrealized gain (loss) on investments $ 212 $ (60)
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-4-
<PAGE> 5
PIXAR
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements reflect
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of Pixar's financial condition, results of
operations, and cash flows for the periods presented. These financial statements
should be read in conjunction with the audited financial statements as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, including notes thereto, incorporated by reference into
Pixar's Annual Report on Form 10-K for the year ended December 31, 1996.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results expected for the current year or any other
period.
Certain amounts reported in previous periods have been reclassified to
conform to the 1997 financial statement presentation.
(2) NET INCOME PER SHARE
Net income per share is computed using net income from continuing
operations, and net loss from discontinued operations, and is based on the
weighted average number of shares of common stock outstanding and common
equivalent shares from stock options (under the treasury stock method, if
dilutive).
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128
requires the presentation of basic earnings per share (EPS) and, for companies
with potentially dilutive securities, such as options and warrants, diluted EPS.
SFAS No. 128 is effective for annual and interim periods ending after December
31, 1997. The Company expects basic EPS for profitable periods will be higher
than primary EPS as presented in the accompanying financial statements and
diluted EPS for profitable periods will not differ materially from primary EPS
as presented in the accompanying financial statements. Computations for loss
periods should not change significantly.
(3) PATENT LICENSING ARRANGEMENTS
In March 1996, Pixar delivered all rights to utilize certain technology
underlying a patent license to Silicon Graphics, Inc. (SGI), and received a
non-refundable fixed-fee payment of $6.0 million in cash and $5.0 million in the
form of credits for products to be purchased from SGI by Pixar over four years.
Following the release of the rights to utilize the patents to SGI, Pixar
maintained no significant vendor obligations to the licensee; therefore, as of
March 31, 1996, the Company recognized as revenue the fixed and determinable
amounts of the $6.0 million cash payment received, plus $495,000 which
represented that portion of the credits Pixar expected to use in the following
twelve months. For the period ended March 31, 1997, revenue of $148,000 was
recognized representing credits used by Pixar during that period. Since March
1996, Pixar has used a total of $3.3 million worth of credits, with $1.7 million
of credits remaining which may be used over the next three years.
(4) FEATURE FILM PRODUCTION AND CO-PRODUCTION AGREEMENT
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). The first feature film, Toy Story, was in production as of
December 31, 1994 and released in November 1995. Under the Feature Film
Agreement Pixar is entitled to receive compensation based on the revenue from
the distribution of animated feature films and related products, and recognized
revenues on Toy Story of $76,000 and $6.3 million for the three months ended
March 31, 1996 and March 31, 1997, respectively, for a total of $25.1 million
since the film's release.
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<PAGE> 6
Pixar incurred film production costs that were reimbursed by Disney,
inclusive of salaries and overhead. All payments to Pixar from Disney for costs
of feature film production were recorded as cost reimbursements; accordingly, no
revenues were recorded for such reimbursements; rather, Pixar netted the
reimbursements against the related costs.
CO-PRODUCTION AGREEMENT
On February 24, 1997, Pixar and Disney entered into a co-production
agreement (Co-Production Agreement) which will now govern the second and third
feature films, three additional films, sequels, and other derivative works. The
second and third feature films, and a made-for-home video sequel to Toy Story,
were in development as of March 31, 1997. Under the Co-Production Agreement,
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 all marketing and distribution costs
(which will be financed by Disney), a distribution fee paid to Disney and any
other fees or costs, including participations provided to talent and the like.
The Co-Production Agreement generally provides that Pixar will produce each
Picture and Disney will control all decisions relating to marketing, promotion,
publicity, advertising and distribution of each Picture. The first Picture under
the Co-Production Agreement is A Bug's Life. The Co-Production Agreement also
contemplates that with respect to 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.
(5) DISCONTINUED OPERATIONS
In 1996, Pixar entered into an agreement with Disney to develop and produce
up to three interactive CD-ROM titles based on Toy Story. Disney paid Pixar
development fees for development of two CD-ROM titles and Pixar is entitled to
receive a per-unit royalty on sales of these titles after a certain minimum
number of units has been sold. Amounts required to develop the titles in excess
of the development fees were funded by Pixar unless Disney agreed to provide
additional fees.
Pixar determined in 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. Net losses
from the CD-ROM division were $77,000 and $228,000 during the three months ended
March 31, 1997 and 1996, respectively. No gain or loss has been recorded for the
anticipated discontinuance of the CD-ROM division since the Company anticipates
future royalty income will exceed future expenses. Net assets of the
discontinued operations of $1.3 million and $1.5 million at March 31, 1997 and
December 31, 1996, respectively, primarily consist of reimbursements and
royalties receivable from Disney.
(6) SOFTWARE DEVELOPMENT COSTS
In accordance with 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.
(7) COMMON STOCK TRANSACTIONS
In connection with the Co-Production Agreement, Pixar sold to Disney
1,000,000 shares of the Company's 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 per
share, and another warrant to purchase 750,000 shares of Common Stock at $25 per
share. Pixar granted certain registration rights for the shares issuable upon
exercise of the warrants. Gross proceeds on the transactions were $15.0 million.
-6-
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about Pixar's industry, management's beliefs, and
assumptions made by management. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth in the Form 10-K (as defined below)
under "Certain Factors Affecting Business, Operating Results and Financial
Condition" on pages 15 through 26, as well as those noted in the documents
incorporated therein by reference. Particular attention should be paid to the
cautionary language 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.
The Company's operating performance each quarter is subject to various risks
and uncertainties as discussed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (the "Form 10-K"). The following discussion
should be read in conjunction with the sections entitled "Certain Factors
Affecting Business, Operating Results and Financial Condition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Form 10-K. In particular, the factors set forth below in "Factors Affecting
Operating Results and Financial Condition" could affect the Company's operating
results and financial condition.
NEW AGREEMENT WITH DISNEY
On February 24, 1997, Pixar and Walt Disney Pictures, a wholly owned
subsidiary of The Walt Disney Company (together with its subsidiaries and
affiliates collectively referred to herein as "Disney") entered into a
co-production agreement (the "Co-Production Agreement") pursuant to which Pixar,
on an exclusive basis, 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 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 "A Bug's Life". The Co-Production Agreement
also contemplates that with respect to 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. Pixar does not expect to receive revenues
under the Co-Production Agreement from either A Bug's Life nor the Toy Story
Video Sequel until 1999 at the earliest.
In May 1991, Pixar entered into a feature film agreement (the "Feature Film
Agreement") with Disney, pursuant to which Toy Story and the Toy Story home
video were developed, produced and distributed. The Feature Film Agreement was
largely superseded by the Co-Production Agreement above. However, the Feature
Film Agreement remains in effect with respect to Pixar's financial participation
in Toy Story and related products.
-7-
<PAGE> 8
RESULTS OF OPERATIONS
REVENUES
Total revenues decreased 5% to $7.9 million in the three months ended March
31, 1997 from $8.3 million in the same period of the prior year. This decrease
was primarily due to one-time patent licensing revenues of $6.5 million in the
three months ended March 31, 1996, largely offset by an increase of $6.2 million
of film revenue received in the three months ended March 31, 1997.
Software revenues consist mainly of software license revenue, principally
from RenderMan. Software revenues increased 56% to $1.4 million in the three
months ended March 31, 1997 from $911,000 in the prior year period. The increase
in software revenues resulted from a general increase in the number of RenderMan
software licenses sold, somewhat offset by a decline in revenue from prepackaged
software products other than RenderMan. Due to Pixar's focus on content creation
for animated feature films and related products, Pixar expects that revenue
derived from software licenses may decline. All historical and future royalty
income associated with Pixar's discontinued CD-ROM division is now and will
continue to be excluded from software revenue and presented in results of
discontinued operations. See "Loss From Discontinued Operations."
Animation services revenues of $785,000 in the three months ended March 31,
1996 include revenue generated from animated television commercials. In July
1996, Pixar announced plans to substantially discontinue its production of
television commercials for third parties and to redirect the talent in its
television commercial group to animated feature films and related products.
Pixar expects 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. However, due to the uncertain timing and frequency
of such projects, Pixar expects that revenue in this area will vary
significantly from quarter to quarter. There are likely to be individual
quarters, or possibly even prolonged periods of time, in which Pixar generates
no animation services revenue, as occurred in the three months ended March 31,
1997.
Film revenues increased to $6.3 million in the three months ended March 31,
1997 from $76,000 in the prior year period. First quarter 1997 film revenues
represent Pixar's share of Toy Story home video revenues as determined under the
original Feature Film Agreement. While the Toy Story home video was released in
October 1996, 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 did not begin until the first
quarter of 1997. Pixar continues to expect revenues from the Toy Story home
video through the second quarter of 1997. However, since the Toy Story home
video is the last major release window for Toy Story, and since Pixar's next
feature film is not targeted for release until the end of 1998 at the earliest,
Pixar's revenue and earnings will likely decrease in subsequent periods as
compared to 1996.
Patent licensing revenues of $148,000 in the three months ended March
31, 1997 and $6.5 million in the same period of the prior year were
attributable to a patent license with Silicon Graphics, Inc. ("SGI"), whereby
Pixar granted to SGI and its subsidiaries a non-exclusive license to use
certain of Pixar's patents covering techniques for creating computer-generated
photorealistic images. Under the agreement, SGI agreed to pay Pixar total
compensation of $11.0 million, of which $6.0 million was paid in cash in March
1996 and $5.0 million is to be paid in the form of purchase credits for SGI
hardware and software through the year 2000. Recognition of the $5.0 million in
credits depends upon purchases of the hardware and software to be obtained from
SGI in lieu of payment. In the three months ended March 31, 1996, Pixar
recognized the $6.0 million cash payment from Silicon Graphics, and $495,000
representing that portion of the $5.0 million in hardware and software credits
Pixar expected to use in the following twelve months. In the three months ended
March 31, 1997, revenue of $148,000 was recognized representing credits used
during that period, and Pixar has remaining credits of $1.7 million to be
recognized as revenue in future periods as hardware and software credits are
used.
In the three months ended March 31, 1996, Silicon Graphics accounted for 79%
of Pixar's total revenues. Disney accounted for 88% of Pixar's total revenues in
the three months ended March 31, 1997. Revenues from Disney consisted of film
and software revenues. Pixar expects to continue to be dependent upon Disney for
at least a majority of its revenue. The revenues from SGI were attributable to a
one-time patent license, and Pixar expects that similar levels of patent
licensing revenue will not be generated on an ongoing basis.
COST OF REVENUES
Cost of software revenues consists of the direct costs and manufacturing
overhead required to reproduce and package software products. Cost of software
revenues as a percentage of the related revenues decreased to 1% in the
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<PAGE> 9
three months ended March 31, 1997 from 6% in the prior year period due to
increased licensing of RenderMan in the first quarter of 1997, which carries a
higher gross margin than other software products. Cost of software revenues
includes no amortization of capitalized software development expenses.
Cost of animation services revenues consists of production costs, which
include salaries and benefits and, to a lesser extent, facility expenses and
department overhead costs. Costs of animation services revenues as a percentage
of related revenues was 91% in the three months ended March 31, 1996. The
Company decided in July 1996 to phase out the production of television
commercials which have lower overall profitability, and now plans to focus on
other short term animation projects related to its feature films. During the
three months ended March 31, 1997, there was no animation services revenue nor
related cost.
Cost of film revenues represent amortization of film costs capitalized by
Pixar. See "Capitalized Film Production Costs." Cost of film revenues as a
percentage of the related revenues was 9% for the three months ended March 31,
1997, as compared to 12% for the three months ended March 31, 1996.
There were no costs of revenue associated with patent licensing revenues,
which resulted in an unusually high overall gross margin for the three months
ended March 31, 1996.
OPERATING EXPENSES
While Pixar has continued to increase its spending levels, total operating
expenses for the three months ended March 31, 1997 were only slightly higher
than in the prior year for two primary reasons. First, operating expenses
associated with the CD-ROM business are now included in discontinued operations.
Second, as a result of the Co-Production Agreement, Disney pays half of total
film production costs, which include allocations of Pixar's operating expenses
that benefit the productions, such as research and development and certain
general and administrative expenses. The result is that Pixar's operating
expenses are now partially funded by Disney.
Pixar intends to continue to increase its spending levels in a number of
areas. First, as a result of intense competition for animators, Pixar has had to
pay higher salaries to attract new creative personnel and technical directors.
Pixar continues to expect compensation for such new and existing personnel to
continue to increase substantially. In the three months ended March 31, 1997,
Pixar 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 these areas. To the
extent that such expenses are not capitalized by Pixar, nor allocated to and
paid for by Disney under the Co-Production Agreement, 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.
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
certain other unreimbursed projects. Research and development expenses remained
flat at $1.1 million for the three months ended March 31, 1996 and 1997. This
reflects increased personnel offset by recovery of certain research and
development costs that were reimbursed by Disney under the Co-Production
Agreement. In addition, expenses related to the CD-ROM division are now excluded
from research and development and classified in discontinued operations. To
date, all software development costs have been expensed as incurred.
Sales and marketing expenses consist primarily of salaries and related
overhead, as well as advertising, technical support, public relations and trade
show costs required to support the software segment. Sales and marketing
expenses decreased 40% to $252,000 in the three months ended March 31, 1997 from
$419,000 in the same period of the prior year due to discontinued marketing
efforts in television commercials and in prepackaged software other than
RenderMan. Pixar expects that marketing expenses may increase in absolute
dollars in future periods, particularly in the areas of corporate marketing and
public relations.
General and administrative expenses consist primarily of salaries of
management and administrative personnel, insurance costs and professional fees.
General and administrative expenses increased 24% to $1.2 million in the three
months ended March 31, 1997 from $988,000 in the same period of the prior year.
The increase was primarily due to increased staffing, increased professional
fees associated with the protection of intellectual property and increased costs
associated with being a public company (such as expenses related to directors'
and officers' insurance and increased professional fees). Growth in these costs
is partially offset by the recovery of certain general and administrative costs
reimbursed by Disney under the Co-Production Agreement. Pixar continues to
expect
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<PAGE> 10
general and administrative expenses to increase in absolute dollars in
future periods as Pixar incurs additional costs to expand its administrative
staff and facilities.
OTHER INCOME (EXPENSE), NET
Other income, net was $2.1 million and $1.9 million in the three months
ended March 31, 1997 and 1996, respectively, consisting primarily of interest
income on investments of the net proceeds from Pixar's initial public offering
of common stock in November 1995.
INCOME TAXES
Income tax expense for the three months ended March 31, 1997 reflects
Pixar's federal and state income tax liability after utilization of available
federal net operating loss carryforwards and federal and state tax credits.
Income taxes increased in the three months ended March 31, 1997 due to expected
full utilization of net operating loss carryforwards.
LOSS FROM DISCONTINUED OPERATIONS
After the Co-Production Agreement was executed in February 1997, Pixar
evaluated the merits of staying in the business of producing CD-ROM products and
compared 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 will have greater potential than the 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 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. Because the CD-ROM business previously represented an
ongoing potential source of revenue, this decision is expected to have a
material adverse impact on Pixar's future revenues and results of operations in
the future.
Losses from the discontinued operations of its CD-ROM division were
$77,000 and $228,000, net of tax, in the three months ended March 31, 1997 and
respectively. The decrease in the loss in the first quarter of 1997 as compared
to the loss in the first quarter of 1996 was due primarily to royalty income of
$506,000 received in the three months ended March 31, 1997, which partially
offset net costs of $583,000. No royalty income was received in the same period
of the prior year. No gain or loss has been recorded for the anticipated
discontinuance of the CD-ROM division since the Company anticipates future
royalty income will exceed future expenses.
FACTORS AFFECTING 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.
-10-
<PAGE> 11
REDUCED CD-ROM ROYALTIES
Pixar also expects to receive less CD-ROM royalty income in 1997 and 1998
than was previously anticipated. Although its first two CD-ROM products were
successful on relative terms, Pixar determined in 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
income in 1997 or 1998, other than royalty income 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 has reassigned most of these employees to Picture productions
and other departments within Pixar.
TIMING OF A BUG'S LIFE AND TOY STORY VIDEO SEQUEL RELEASES
A Bug's Life is not expected to be released until the end of 1998 at the
earliest, and attributable revenue 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 A Bug's Life 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
its spending levels 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. To the
extent that such expenses are not capitalized by Pixar nor allocated to and paid
for by Disney, Pixar's operating expenses would significantly increase in 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 could 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.
-11-
<PAGE> 12
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.
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 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. 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 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.
-12-
<PAGE> 13
DEPENDENCE ON TOY STORY, A BUG'S LIFE 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 $25.1 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
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 royalty income
from its Toy Story CD-ROM products in 1997 and little or no income from such
products in 1998. Otherwise, Pixar expects little or no revenue in 1997 and 1998
from Toy Story or related products. Because A Bug's Life 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.
DEPENDENCE ON A BUG'S LIFE AND TOY STORY VIDEO SEQUEL
Beyond 1998, Pixar expects to be significantly dependent upon the success
of A Bug's Life 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 A Bug's Life 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 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 A BUG'S LIFE. Under the Co-Production Agreement,
Pixar shares the production costs of A Bug's Life 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 A Bug's Life's expected revenue
stream when revenue is recognized. If A Bug's Life 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 A Bug's Life 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, A Bug's Life and related products may not generate
significant revenue and operating results for Pixar, even if A Bug's Life is
critically acclaimed and achieves substantial, but not extraordinary, box office
success.
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
-13-
<PAGE> 14
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 A Bug's Life 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 A Bug's Life, 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 March 31, 1997, Pixar had
approximately $180.4 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 A
Bug's Life, 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.
CAPITALIZED FILM PRODUCTION COSTS
Although Disney funded the entire production of Toy Story, Pixar
contractually guaranteed certain of the film budget overages and was liable to
Disney for these amounts under the Feature Film Agreement. Because these are
"production costs" under Statement of Financial Accounting Standards (SFAS) No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films,"
the costs were capitalized and amortized against film revenue. In the three
months ended March 31, 1997, $558,000 of these costs were amortized against film
revenues. As of March 31, 1997, Pixar had approximately $15.1 million of
capitalized film production costs, consisting primarily of costs related to
films co-financed by Pixar under the Co-Production Agreement, but not yet
released, and $911,000 related to Toy Story.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased $19.4 million to $180.4 million
at March 31, 1997 from $161 million at December 31, 1996. Working capital
increased $5.8 million to $168.8 million at March 31, 1997 from $162.9 million
at December 31, 1996.
Net cash provided by operations in the three months ended March 31, 1997
was primarily attributable to cash received from film and other operations. Net
cash used in investing activities was due primarily to the funding of film
production costs of $4.4 million. Net cash provided by financing activities was
due primarily to $14.9 million of net proceeds from issuance of common stock and
warrants to Disney.
In May 1997, Pixar exercised its option (which option Pixar purchased in
1996) and paid $5.8 million to purchase land to build a new studio facility. To
construct the 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.
-14-
<PAGE> 15
As of March 31, 1997, Pixar's principal source of liquidity was
approximately $180.4 million in cash and short-term investments. Pixar believes
that these funds together with cash flows expected to be generated from
operations will be sufficient to meet the Company's operating requirements
through the next twelve months. Thereafter, if cash generated by operations is
insufficient to satisfy Pixar's liquidity requirements, Pixar may sell
additional equity or debt securities or obtain credit facilities. The sale of
additional equity or convertible debt securities will result in additional
dilution to Pixar's shareholders. There can be no assurance that financing will
be available to Pixar in an amount and on terms acceptable to Pixar.
-15-
<PAGE> 16
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In March 1997, in connection with entering into the Co-Production
Agreement, Pixar sold to Disney (i) 1,000,000 shares of Common Stock and (ii)
two warrants, each exercisable for five years: 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 received gross proceeds of $15.0 million from Disney.
The issuance of the Common Stock and warrants was not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and was deemed to be
exempt from registration in reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering. Disney represented its
intention to acquire the securities for investment only and had adequate access,
through its relationship with Pixar, to information about Pixar.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 Statement of Computation of Net Income Per Share.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Pixar during the quarter
ended March 31, 1997.
ITEMS 1, 3, 4 AND 5 are not applicable and have been omitted.
-16-
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PIXAR
Date: May 14, 1997 By: /s/ Lawrence B. Levy
----------------------------- ------------------------------------
Lawrence B. Levy,
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
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<PAGE> 18
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
11.1 Statement of Computation Of Net Income Per Share
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
PIXAR
STATEMENT OF COMPUTATIONS OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
--------- --------
<S> <C> <C>
Weighted average number of shares outstanding: 39,570 38,286
Number of common and common equivalent shares
issued in accordance with
Staff Accounting Bulletin No. 83 -- 8,765
Common stock equivalents 7,630 --
--------- --------
Total shares used in computing net income (loss) per share 47,200 47,051
========= ========
Net income from continuing operations $ 5,225 $ 6,507
========= ========
Net income per share from continuing operations $ 0.11 $ 0.14
========= ========
Net loss from discontinued operations $ (77) $ (228)
========= ========
Net loss per share from discontinued operations $ (--) $ (.01)
========= ========
Net income $ 5,148 $ 6,279
========= ========
Net income per share $ 0.11 $ 0.13
========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 69,829
<SECURITIES> 110,545
<RECEIVABLES> 3,435
<ALLOWANCES> (300)
<INVENTORY> 0
<CURRENT-ASSETS> 186,367
<PP&E> 8,833
<DEPRECIATION> (2,716)
<TOTAL-ASSETS> 208,773
<CURRENT-LIABILITIES> 17,548
<BONDS> 0
0
0
<COMMON> 202,593
<OTHER-SE> (11,368)
<TOTAL-LIABILITY-AND-EQUITY> 208,773
<SALES> 0
<TOTAL-REVENUES> 7,867
<CGS> 0
<TOTAL-COSTS> 567
<OTHER-EXPENSES> 2,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,875
<INCOME-TAX> 1,650
<INCOME-CONTINUING> 5,225
<DISCONTINUED> (77)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,148
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
