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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 0-26976
PIXAR
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 68-0086179
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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
10, 2000 was 47,163,243.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIXAR
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 1, JANUARY 1,
2000 2000
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<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 27,257 $ 31,170
Short-term investments...................................... 170,341 163,779
Receivables, net............................................ 41,636 16,740
Prepaid expenses and other assets........................... 3,025 3,888
Deferred income taxes....................................... 34,533 34,533
Property and equipment, net................................. 77,756 60,266
Capitalized film production costs........................... 55,267 64,529
-------- --------
Total assets...................................... $409,815 $374,905
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 3,968 $ 458
Income taxes payable........................................ 20,724 12,230
Payable to Disney........................................... 828 --
Accrued liabilities......................................... 11,057 16,475
Unearned revenue............................................ 1,530 1,299
-------- --------
Total liabilities................................. 38,107 30,462
-------- --------
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;
47,069,396 and 46,959,093 shares issued and outstanding
as of April 1, 2000 and January 1, 2000,
respectively........................................... 282,159 281,274
Accumulated other comprehensive loss........................ (668) (660)
Retained earnings........................................... 90,217 63,829
-------- --------
Total shareholders' equity........................ 371,708 344,443
-------- --------
Total liabilities and shareholders' equity........ $409,815 $374,905
======== ========
</TABLE>
See accompanying notes to financial statements.
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PIXAR
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------
APRIL 1, APRIL 3,
2000 1999
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<S> <C> <C>
Revenue:
Software.................................................. $ 2,739 $1,574
Animation services........................................ 333 222
Film...................................................... 57,906 1,645
------- ------
Total revenue..................................... 60,978 3,441
------- ------
Cost of revenue:
Software.................................................. 140 298
Animation services........................................ 189 154
Film...................................................... 14,846 272
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Total cost of revenue............................. 15,175 724
------- ------
Gross profit........................................... 45,803 2,717
------- ------
Operating expenses:
Research and development.................................. 1,413 1,346
Sales and marketing....................................... 390 348
General and administrative................................ 1,816 1,387
------- ------
Total operating expenses.......................... 3,619 3,081
------- ------
Income (loss) from continuing operations............... 42,184 (364)
Other income, net........................................... 2,837 1,865
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Income from continuing operations before income
taxes................................................. 45,021 1,501
Income tax expense.......................................... 18,683 601
------- ------
Net income from continuing operations.................. 26,338 900
Income from discontinued operations, net of taxes........... 50 --
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Net income............................................. $26,388 $ 900
======= ======
Basic net income per share from continuing operations....... $ 0.56 $ 0.02
Basic net income per share from discontinued operations..... -- --
------- ------
Basic net income per share.................................. $ 0.56 $ 0.02
------- ------
Shares used in computing basic net income per share......... 47,005 45,548
======= ======
Diluted net income per share from continuing operations..... $ 0.53 $ 0.02
Diluted net income per share from discontinued operations... -- --
------- ------
Diluted net income per share................................ $ 0.53 $ 0.02
======= ======
Shares used in computing diluted net income per share....... 49,927 51,506
======= ======
</TABLE>
See accompanying notes to financial statements.
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PIXAR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
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APRIL 1, APRIL 3,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 26,388 $ 900
Adjustments to reconcile net income to net cash provided
by (used in) continuing operating activities:
Discontinued operations................................ (50) --
Amortization of deferred compensation.................. -- 42
Depreciation and amortization.......................... 1,467 1,728
Amortization of capitalized film production costs...... 14,846 272
Gain on disposition of equipment....................... (8) --
Changes in operating assets and liabilities:
Receivables.......................................... (24,896) 61
Prepaid expenses and other assets.................... 743 (478)
Accounts payable..................................... 3,510 (978)
Income taxes payable................................. 8,494 733
Payable to Disney.................................... 828 (2,600)
Accrued liabilities.................................. (5,418) (2,229)
Unearned revenue..................................... 231 (51)
--------- --------
Net cash provided by (used in) continuing
operations...................................... 26,135 (2,600)
Net cash provided by discontinued operations...... 50 --
--------- --------
Net cash provided by (used in) operating
activities...................................... 26,185 (2,600)
--------- --------
Cash flows from investing activities:
Purchase of property and equipment and construction
costs.................................................. (19,227) (5,298)
Proceeds from sale of property and equipment.............. 398 290
Proceeds from sale of short-term securities............... 153,613 61,180
Investments in short-term securities...................... (160,183) (48,829)
Capitalized film production costs......................... (5,584) (7,366)
--------- --------
Net cash used in investing activities............. (30,983) (23)
--------- --------
Cash flows from financing activities:
Proceeds from exercised stock options..................... 885 859
--------- --------
Net cash provided by financing activities......... 885 859
--------- --------
Net decrease in cash and cash equivalents................... (3,913) (1,764)
Cash and cash equivalents at beginning of period............ 31,170 29,557
--------- --------
Cash and cash equivalents at end of period.................. $ 27,257 $ 27,793
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes...... $ 10,225 $ --
========= ========
Supplemental disclosure of non-cash investing and financing
activities:
Credits from patent licensing..................... $ 24 $ --
========= ========
Unrealized loss on investments.................... $ (8) $ (263)
========= ========
</TABLE>
See accompanying notes to financial statements.
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PIXAR
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements reflect
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of our financial condition, results of
operations, and cash flows for the periods presented. These financial statements
should be read in conjunction with the audited financial statements as of
January 1, 2000 and January 2, 1999, and for each of the years in the three-year
period ended January 1, 2000, including notes thereto, incorporated by reference
into our Annual Report on Form 10-K for the year ended January 1, 2000.
The results of operations for the quarter ended April 1, 2000 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 2000 financial statement presentation.
(2) FISCAL YEAR
Effective for fiscal year 1998, we adopted a 52 or 53-week fiscal year,
changing the year end date from December 31 to the Saturday nearest December 31.
Fiscal year 2000 will end on December 30, 2000 and will consist of 52 weeks.
(3) NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive common
equivalent shares outstanding during the period, using the treasury stock method
for options and warrants.
Reconciliation of basic and diluted net income per share (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
APRIL 1, 2000 APRIL 3, 1999
-------------------------- -------------------------
NET NET
INCOME SHARES EPS INCOME SHARES EPS
------- ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share.... $26,388 47,005 $0.56 $900 45,548 $0.02
Effect of dilutive shares:
Warrants/options............ -- 2,922 -- 5,958
------- ------ ---- ------
Diluted net income per
share....................... $26,388 49,927 $0.53 $900 51,506 $0.02
======= ====== ==== ======
</TABLE>
(4) FEATURE FILM AND CO-PRODUCTION AGREEMENTS
Feature Film Agreement
In 1991, we 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"). We were entitled to receive compensation based on the revenue
from the distribution of these films and related products. In 1995, we released
our first feature film under the terms of the Feature Film Agreement, Toy Story.
Based on the individual film forecast method, all significant Toy Story film
production costs were fully amortized by the year ended December 31, 1997.
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PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Co-Production Agreement
In February 1997, Pixar and Disney entered into a new co-production
agreement (the "Co-Production Agreement") which now governs all films made by us
since Toy Story. Under the Co-Production Agreement, we agreed, on an exclusive
basis, to produce five original computer-animated theatrical motion pictures
(the "Pictures") for distribution by Disney. A Bug's Life, released in 1998, and
Toy Story 2, released in November 1999, were the first films produced under this
agreement. Films in development or production at Pixar as of April 1, 2000, all
governed by this agreement, include our fourth film (with the working title
"Monsters, Inc."), our fifth film (Film Five) and our sixth film (Film Six). A
Bug's Life, Monsters, Inc., Film Five and Film Six count toward the five
original Pictures, whereas Toy Story 2 is a derivative work that will not count
towards the Pictures. However, under the Co-Production Agreement, all provisions
applicable to the Pictures also apply to derivative works such as Toy Story 2.
Pixar and Disney co-own, co-brand and co-finance the production costs of the
Pictures, and share equally in the profits of each Picture and any related
merchandise and other ancillary products, after recovery of all of Disney's
marketing, distribution and other predefined fees and costs. The Co-Production
Agreement generally provides that we will produce each Picture and Disney will
control decisions relating to film marketing and distribution.
(5) DISCONTINUED OPERATIONS
In 1997, we determined to discontinue our business of producing CD-ROM and
other interactive products. We immediately discontinued these operations and
reassigned all employees of this division. Since the measurement date and the
disposal date were virtually simultaneous, no income or loss was measured for
the intervening period. We had no activity from discontinued operations for the
quarter ended April 3, 1999. We recorded income from discontinued operations of
$50,000, net of income taxes for the quarter ended April 1, 2000, due to royalty
income received for the Toy Story CD-ROM products. We do not expect any
significant future CD-ROM royalty income in future periods.
(6) SEGMENT REPORTING
We adopted the provisions of SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. Our chief operating decision-maker is
considered to be our Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a summary basis accompanied by disaggregated
information about film revenue for purposes of making operating decisions and
assessing financial performance. The summary financial information reviewed by
the CEO is identical to the information presented in the accompanying statements
of operations and we have no foreign operations. Therefore, we operate in a
single operating segment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about Pixar's industry, management's beliefs, and
assumptions made by management. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "-- Dependence on Toy
Story 2, A Bug's Life and Toy Story in 2000," and "Risks Associated with
Adequacy of Cash Balances," as well as those noted in the section entitled "Risk
Factors" in our Annual Report on Form 10-K for the year ended January 1, 2000
(the "Form 10-K"). Particular attention should be paid to the cautionary
language in the section in the Form 10-K entitled "-- Dependence on Toy Story 2,
A Bug's Life and Toy Story in 2000," "-- Risks Associated with Adequacy of Cash
Balances," "-- Risks Associated with Scheduled Successive Release of Films" and
"-- Risks Associated with Co-Production Agreement." Unless required by law, we
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Our operating performance each quarter is subject to various risks and
uncertainties as discussed in our Form 10-K. The following discussion should be
read in conjunction with the sections entitled "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Form 10-K. In particular, the factors set forth below in "Risk Factors" could
affect our operating results and financial condition.
OVERVIEW
In February 1997, we entered into the Co-Production Agreement
("Co-Production 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"), pursuant to which we agreed, on an
exclusive basis, to produce five original computer-animated feature-length
theatrical motion pictures (the "Pictures") for distribution by Disney. Pixar
and Disney agreed to co-finance the production costs of the Pictures, co-own the
Pictures (with Disney having exclusive distribution and exploitation rights),
co-brand the Pictures and share equally in the profits of each Picture and any
related merchandise and other ancillary products, after recovery of all
marketing and distribution costs (which Disney finances), a distribution fee
paid to Disney and any other fees or costs, including participations provided to
talent and the like. The Co-Production Agreement generally provides that we will
produce each Picture and that Disney will control all decisions relating to
marketing, promotion, publicity, advertising and distribution of each Picture.
Our second feature film, A Bug's Life, was released in November 1998 and counts
as the first original Picture under the Co-Production Agreement. The
Co-Production Agreement also contemplates that with respect to theatrical
sequels, made-for-home video sequels, television productions, interactive media
products and other derivative works related to the Pictures, we will have the
opportunity to co-finance and produce such products or to earn passive royalties
on such products. We will not share in any theme park revenues generated as a
result of the Pictures. Pursuant to the Co-Production Agreement, in addition to
co-financing the production costs of the Pictures, Disney will reimburse us for
our share of certain general and administrative costs and certain research and
development costs that benefit the productions.
In November 1999, Toy Story 2, our third animated feature film, was
released. As a sequel, Toy Story 2 is a derivative work of the original Toy
Story; therefore, it is not counted toward the five original Pictures to be
produced under the Co-Production Agreement. However, as a derivative work, Toy
Story 2 will be treated as a Picture under the Co-Production Agreement and all
the provisions applicable to the five original Pictures apply.
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In May 1999, we began production of our fourth theatrical film with the
working title "Monsters, Inc." Also in 1999, we began story development on our
fifth animated feature film "Film Five", and concept development on our sixth
animated feature film, "Film Six." In fiscal year 2000 we will begin concept
development on our seventh animated feature film "Film Seven." These films will
be produced and distributed under the Co-Production Agreement and will count as
the second, third, fourth and fifth films of the five original films to be
produced under the Co-Production Agreement. We do not expect to release
Monsters, Inc. until the holiday season in 2001, at the earliest, and Film Five
until holiday 2002, at the earliest. Film Six and Seven are currently targeted
for release no earlier than the holiday seasons in 2003 and 2004, respectively.
Target Earnings per Share for Fiscal Year 2000
We are targeting diluted earnings per share of at least $1.25 for fiscal
year 2000. This is forward-looking information and actual results may differ
materially. Factors that could cause actual results to differ include but are
not limited to: (1) the timing and release of the Toy Story 2 home video in
domestic and foreign markets and the timing and amount of related revenues and
distribution costs; (2) the timing and amount of Toy Story 2 and A Bug's Life
merchandise sales; (3) the timing and amount of revenue and costs from the Buzz
Lightyear television series and related home video release; and (4) the amount
of our remaining revenues from the foreign theatrical release of Toy Story 2.
See "Risk Factors" set forth below for important factors that could cause actual
results to differ.
RESULTS OF OPERATIONS
Revenue
Total revenue for the three months ended April 1, 2000 was $61.0 million
compared to $3.4 million in the same period of the prior year. The increase was
primarily due to our share of film revenue from Toy Story 2 and A Bug's Life,and
an increase in software revenue.
Software revenue includes software license revenue, principally from
RenderMan, and royalty revenue from licensing Physical Effects, Inc. (PEI)
technology to a third party. Software revenue increased to $2.7 million for the
three months ended April 1, 2000 from $1.6 million in the corresponding prior
year period. The increase in software revenue resulted primarily from a general
increase in RenderMan software licensing, and to a lesser extent, from an
increase in the royalty revenue from licensing PEI technology to a third party.
PEI, a company we acquired in 1998, licensed certain of its technology to a
third party, from which we now receive associated royalty revenue on a quarterly
basis. Due to our focus on content creation for animated feature films and
related products, we have not increased the time and resources necessary to
generate significantly higher RenderMan sales. Therefore, we expect ongoing
variability in revenues derived from software licenses and that such revenue
will remain flat or possibly decline. All historical and future royalty income
associated with our discontinued CD-ROM division is now and will continue to be
excluded from software revenue and presented in results of discontinued
operations. See "Results of Discontinued Operations."
Animation services revenue includes revenue generated from short projects
related to our feature films. Animation services revenue increased slightly to
$333,000 for the three months ended April 1, 2000 from $222,000 in the
corresponding prior year period. Pixar expects that revenue in this area will
continue to vary significantly from quarter to quarter due to the sporadic
nature of this business and the need to utilize animation services employees on
other productions. For example, we transferred substantially all of our
animation services employees to assist in the completion of both A Bug's Life
and Toy Story 2 during peak production periods. There can be no assurance that
we will generate any animation services revenue during periods in which
animation services employees are devoted to feature films or other projects.
Film revenue increased to $57.9 million for the three months ended April 1,
2000 from $1.6 million in the corresponding prior year period. Under the
Co-Production Agreement, we share equally with Disney in the profits of Toy
Story 2 and A Bug's Life after Disney recovers its distribution costs and fees.
The information flow between Disney and Pixar has reached a point where we now
have the ability to estimate and record our
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share of film revenue and related costs on a more timely basis. Our film revenue
for the three months ended April 1, 2000 resulted primarily from our share of
worldwide theatrical revenues and related merchandise from Toy Story 2 of $53.9
million, and to a lesser extent, our share of home video and merchandise revenue
from A Bug's Life, of $2.1 million, offset by Disney's distribution costs and
fees. Also included in film revenue for the three months ended April 1, 2000,
was revenue of $1.9 million from Toy Story, including residual merchandise and
home video sales. See "Risk Factors -- Dependence on Toy Story 2, A Bug's Life
and Toy Story in 2000."
For the three months ended April 1, 2000, Disney accounted for 96% of our
total revenue. The revenue from Disney consisted of film and animation services
revenue. Due to the Co-Production Agreement, Disney is expected to continue to
represent significantly greater than 10% of our revenue in 2000 and for the
foreseeable future. A significant portion of the Disney revenue for the quarter
was included in net receivables and represented 94% of the balance at April 1,
2000. For the three months ended April 3, 1999, Disney accounted for 54% of
Pixar's total revenue, primarily from film and animation services revenue.
Cost of Revenue
Cost of software revenue consists of the direct costs and manufacturing
overhead required to reproduce and package our software products, as well as
amortization of purchased technology. Cost of software revenue includes no
amortization of capitalized software development expenses. Cost of software
revenue as a percentage of the related revenue decreased to 5% for the three
months ended April 1, 2000 from 19% in the prior year period, primarily due to a
significant increase in software and license sales that have low associated
costs. Included in cost of software revenue is $120,000 of amortization of
purchased technology associated with the acquisition of PEI. Over a period not
to exceed four years, we are amortizing this purchased technology against
related license revenue. As a result of the ongoing amortization of purchased
technology, our total software gross profit may be lower during the next few
years as compared to software gross profit prior to the 1998 acquisition. In
addition, if we determine that the license revenue generated by the purchased
technology will be lower than expected and that all or part of the purchased
technology asset may not be recoverable, we would, at that point, be required to
write off all or a significant portion of the unamortized purchased technology.
Cost of animation services revenue consists of production costs, which
include salaries, benefits, facility expenses and department overhead costs.
Cost of animation services revenue as a percentage of related revenue decreased
to 57% for the three months ended April 1, 2000 from 69% in the prior year
period. Animation services projects are negotiated individually and depending on
the complexity of the project, profit margins vary significantly from project to
project.
Cost of film revenue represents amortization of capitalized film costs. See
"Capitalized Film Production Costs." For the three months ended April 1, 2000,
cost of film revenue represents amortization of capitalized film costs
associated with Toy Story 2 and A Bug's Life, and represented 25.6% of total
film revenue. Due to higher than expected Toy Story film revenue, which resulted
in our amortizing all Toy Story related film costs by December 31, 1997, there
was no cost of revenue associated with the Toy Story revenue. For the three
months ended April 3, 1999, cost of film revenue represented amortized costs
from A Bug's Life, and was 16.5% of total film revenue.
Under the Feature Film Agreement all payments we received from Disney for
our efforts in the development and production of feature films were recorded as
cost reimbursements, and were netted against the related costs. Under the terms
of the Co-Production Agreement, in which we co-finance each film production,
amortized film production costs for Toy Story 2 and A Bug's Life have been
significantly higher, and gross profit margins on these and future films have
been and will continue to be substantially lower than those achieved on Toy
Story.
Operating Expenses
Total operating expenses for the three months ended April 1, 2000 were
higher than in the prior year, and we intend to continue to increase our
spending levels in a number of areas. With respect to general expense growth, as
a result of intense competition for animators, creative personnel, technical
directors and certain
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administrative personnel, we have had to pay higher salaries to attract new
creative, technical and other personnel. We expect compensation for such
personnel to continue to increase. In 2000, we will continue to expand our
creative development staff and facilities and expand other operations. Under the
Co-Production Agreement, Disney reimburses us for half of certain general and
administrative costs and certain research and development costs that benefit the
productions. The funding received from Disney is treated as operating expense
reimbursements. To the extent that personnel, facilities and other expenditures
are not capitalized by us nor allocated to and paid for by Disney, and precede
or are not subsequently followed by an increase in revenue, our business,
operating results and financial condition will be materially adversely affected.
Research and development expenses consist primarily of salaries and support
for personnel conducting research and development for the RenderMan product, for
our proprietary Marionette and Ringmaster animation and production management
software and for creative development of concepts for future films. Research and
development expenses totaled $1.4 million and $1.3 million for the three months
ended April 1, 2000 and April 3, 1999, respectively. Included in the three
months ended April 1, 2000 was a one-time $523,000 adjustment, which reduced our
research and development expenses from $1.9 million to $1.4 million. This
adjustment was due to an additional reimbursement from Disney under the
Co-Production Agreement for certain research and development expenses incurred
prior to fiscal year 2000. After allowing for this adjustment, the increase in
research and development expenses was due to our continued investment in
proprietary technology, short films and creative development. We expect research
and development expenses to increase in future periods. To date, all research
and development costs not reimbursed by Disney have been expensed as incurred.
Sales and marketing expenses consist primarily of salaries and related
overhead, as well as advertising, technical support, public relations and trade
show costs required to support the software segment. Sales and marketing
expenses increased to $390,000 for the three months ended April 1, 2000 from
$348,000 in the prior year period, due to increases in corporate marketing and
public relations. We believe that sales and marketing expenses will increase in
absolute dollars in future periods, particularly in the areas of public
relations and corporate marketing.
General and administrative expenses consist primarily of salaries of
management and administrative personnel, insurance costs and professional fees.
General and administrative expenses increased to $1.8 million for the three
months ended April 1, 2000 from $1.4 million in the same period of the prior
year. The increase was primarily due to general and administrative staffing and
public company costs. We expect general and administrative expenses to further
increase in absolute dollars in future periods.
Other Income, Net
Other income, net was $2.8 million and $1.9 million for the three months
ended April 1, 2000 and April 3, 1999, respectively, consisting primarily of
interest income on short-term investments. The increase is primarily due to an
increase in our average cash and short-term investment balances during the
second half of 1999 and continuing through April 1, 2000.
Income Taxes
Income tax expense from continuing operations for the three months ended
April 1, 2000 reflects our federal and state income tax liability of 41.5%,
consistent with statutory rates. The income tax rate increased for the three
months ended April 1, 2000 because in 1999, we utilized our remaining net
operating loss carryforwards, except those which originated from the exercise of
non-qualified employee stock options. The realization of tax benefits from the
exercise of non-qualified employee stock options will reduce the amount of our
tax payments and liabilities, but will not reduce our effective tax rate. We
expect our tax rate in the future to be at or near 42%, consistent with
statutory levels.
Results of Discontinued Operations
After the Co-Production Agreement was executed, we determined that the
resources devoted to our interactive products division would be better allocated
to other projects arising from the Co-Production
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Agreement. We determined in March 1997 to discontinue our business of producing
CD-ROM and other interactive products and redirected employees in that division
to film and related projects. For the three months ended April 1, 2000, we
recorded income from discontinued operations of $50,000, net of income taxes,
due to royalty income received. We do not expect to receive any significant
CD-ROM royalty income in future periods.
RISK FACTORS
The following is a discussion of certain factors which currently impact or
may impact our business, operating results and/or financial condition. Anyone
making an investment decision with respect to our capital stock or other
securities is cautioned to carefully consider these factors, along with the
factors discussed in our Form 10-K under the section entitled "Risk Factors."
DEPENDENCE ON TOY STORY 2, A BUG'S LIFE, AND TOY STORY IN 2000
In the remaining quarters of 2000, our revenue and operating results will
be largely dependent upon (1) the timing of release of Toy Story 2 on home video
in domestic and foreign markets and the timing and amount of related home video
revenues, (2) the amount and timing of our remaining revenues from merchandise
sales related to Toy Story 2, (3) the amount of our remaining revenues, if any,
from the foreign theatrical release of Toy Story 2, (4) the amount of remaining
revenue from domestic and foreign home video sales of A Bug's Life and related
merchandise, (5) the amount of domestic and international home video revenues
from the re-release of Toy Story on home video and residual revenues from Toy
Story, if any, and (7) our limited software and technology licensing revenue.
DEPENDENCE ON TOY STORY 2 AND A BUG'S LIFE IN 2000
Toy Story 2 Revenue
We will continue to be significantly dependent upon the success of Toy
Story 2 for the remaining quarters of fiscal year 2000. Toy Story 2, released in
November 1999, has achieved significant box office success, with worldwide box
office receipts of more than $481 million as of May 8, 2000. In the first
quarter of 2000, we began to see an improved ability, through information
available to us from Disney and other sources, to estimate and record our share
of film revenues and related costs. As a result, we recognized revenues from Toy
Story 2 of $53.9 million in the first quarter of 2000. While we anticipate this
improved ability will continue to allow us to recognize our share of film
revenues and costs on a more timely basis, we will remain dependent on the
timing and accuracy of the information provided by Disney, as well as on the
continuing commercial success of Toy Story 2 throughout the balance of fiscal
year 2000.
We have already recognized in the first quarter of 2000 the vast majority
of Toy Story 2 domestic theatrical revenues, and the majority of foreign
theatrical revenues, as well as a significant portion of related merchandise
licensing. As a result, we do not expect to recognize further significant
revenue from Toy Story 2, other than remaining revenues from foreign theatrical
and related merchandise sales, until the release of Toy Story 2 on home video in
October 2000, when we expect to recognize a portion of domestic and foreign home
video revenues. These future revenues of Toy Story 2 will be offset by
distribution and marketing costs for its domestic and foreign home video
releases, video cost of goods, Disney's distribution fee, and other distribution
costs such as talent participation and residuals. Fees and participations paid
to key talent on Toy Story 2 are substantially greater than for Toy Story or A
Bug's Life, which together with other increases in production costs will have
the effect of increasing the cost of the film when compared to our first two
films.
A Bug's Life Revenue
A Bug's Life was released in November 1998, and to date, we have recognized
related revenues of $112.4 million. Under the Co-Production Agreement, Pixar and
Disney share equally in the profits of A Bug's Life after Disney recovers its
distribution fee and its marketing and distribution costs. Correspondingly, our
film revenue to date has resulted primarily from the domestic and foreign
theatrical revenues from A Bug's Life, related domestic and foreign home video
revenue, and related merchandise licensing, offset by Disney's
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<PAGE> 12
distribution costs and its distribution fee. Distribution costs include
worldwide theatrical release costs, and Disney's costs to distribute A Bug's
Life on home video in the United States and foreign markets.
The majority of revenues we expect to receive from A Bug's Life have
already been reported in 1999 and through the three months ended April 1, 2000,
and includes revenues from the worldwide theatrical release of A Bug's Life, and
the majority of worldwide home video revenues and related merchandise revenues.
Sources of revenue for the balance of 2000 primarily include any remaining home
video sales, possibly some television revenues, and any future merchandise
royalties, all of which must be substantial in order for the film to generate
significant revenues in 2000. Moreover, potential future revenues will be offset
by associated distribution costs, which include home video distribution costs,
possibly television distribution costs, any remaining theatrical distribution
costs, Disney's distribution fee based on film-related revenues, and other
distribution costs such as residuals.
Difficulty in Forecasting Toy Story 2 and A Bug's Life Revenues
It is difficult to forecast the amount and timing of our future revenues
from Toy Story 2 and A Bug's Life in the remaining quarters of 2000. The amount
of future revenues depends not only on customer acceptance of the film in its
worldwide theatrical release, but also on customer acceptance of related
products in each separate release category -- home video, merchandise and
television being the most significant. While customer acceptance is initially
measured by box office success, customer acceptance within each follow-on
product category, such as home video, toys or television, depends on factors
unique to each type of product, such as pricing, competitive products, and the
time of year or state of the economy in which a product is released, among many
other factors. In addition, we have found that the degree of customer acceptance
varies widely among foreign countries. While box office success is often a good
indicator of general customer acceptance, the relative success of follow-on
products is not always directly correlated, and the degree of correlation is
difficult to predict. Disney's strategic distribution decisions also impact the
amount of our future revenues. For example, in the first half of 1999, Disney
reported general softness in its domestic home video sales and worldwide
merchandise licensing as compared to levels associated with many of its previous
blockbuster animated feature films. As a result, Disney recently implemented a
new strategy of releasing animated films on home video year round, and in
special editions in both VHS and DVD formats. However, the relative success of
that new strategy is not yet known. For this reason and all of the above
reasons, in spite of Toy Story 2's remarkable box office success, it is
difficult to predict how successful its home video release will be, or how
successful sales of other follow-on products will be in the remaining quarters
of 2000. Similarly, it is difficult to predict remaining video sales of A Bug's
Life in 2000.
With respect to the difficulty of forecasting the timing of revenues,
Disney distributes our films and film-related products and therefore determines
the timing of product releases. While the timing of theatrical releases is
typically known well in advance of release, the timing of release of follow-on
products is often decided just in advance of release, is subject to change, and
is therefore less predictable. For example, it was not until the first quarter
of fiscal year 2000 that it was determined that the Toy Story 2 home video would
be released in October 2000. In all product categories, timing of revenues is
particularly uncertain with respect to releases in foreign markets as a foreign
product release is often marked by a rollout across many countries over the
course of many months. Therefore, the timing of international revenues is
inherently more difficult to predict than the timing of domestic revenues.
Lastly, the amount of revenue recognized in any given quarter or quarters from
all of our films depends on the timing, accuracy, and sufficiency of the
information we receive from Disney to determine revenues and associated costs.
Due to these factors, the amount and timing of our future revenues from Toy
Story 2 and A Bug's Life are difficult to forecast, and it is possible, in any
given quarter or quarters remaining in 2000 that we will not recognize
sufficient film revenue to generate significant earnings.
Risks Associated with Toy Story 2 and A Bug's Life
Under the Co-Production Agreement, Pixar and Disney share the production
costs of Toy Story 2 and A Bug's Life. We initially capitalized our share of
these costs as film production costs, under Statement of Financial Accounting
Standards ("SFAS") No. 53, Financial Reporting by Producers and Distributors of
12
<PAGE> 13
Motion Picture Films. Our policy is to amortize these costs over the expected
revenue streams as we recognize revenues from the associated films. The amount
of film costs that will be amortized each quarter will depend on how much future
revenue we expect to receive from Toy Story 2 and A Bug's Life. Although Toy
Story 2 has achieved substantial domestic and foreign box office success, and we
have recognized significant theatrical revenues, we believe that the amount
spent by Disney for marketing and distribution has been and will continue to be
significant. It is possible that total revenue generated in all markets by Toy
Story 2 may not generate significant revenue and operating results for us in any
remaining given quarter in 2000, even though Toy Story 2 is critically acclaimed
and has achieved worldwide box office success. With respect to A Bug's Life, it
is difficult to predict how much additional revenue will be derived from home
video and merchandise sales, and from television airings. In any given quarter,
if our forecast changes with respect to total anticipated revenue from Toy Story
2 or A Bug's Life, and becomes lower than was previously forecasted, we would be
required to accelerate amortization of related film costs, resulting in lower
gross margins. Such lower gross margins would adversely impact our business,
operating results, and financial condition.
Toy Story Revenue
We have already recognized the majority of the revenue we expect to receive
from Toy Story. In the quarter ended April 1, 2000, we recognized Toy Story
revenues primarily from merchandise and home video sales. Disney re-released the
original Toy Story home video in January 2000; however, other than potential
revenue from this home video re-release, any additional worldwide television
airings, any additional merchandise sales, and other minor amounts of revenue in
subsequent periods, we do not expect to recognize further significant revenue
from Toy Story. Based on terms of the Feature Film Agreement, cash receipts
related to Toy Story are now received from Disney on a semi-annual basis (March
and September).
Software Revenue
We continue to reduce our emphasis on the commercialization of software
products. We are not increasing the time and resources necessary to generate
higher RenderMan licensing revenues; therefore, we expect that revenue from the
licensing of RenderMan will remain flat or possibly decline. In addition, from
the acquisition date of Physical Effects, Inc. ("PEI") in June 1998, through
April 1, 2000, we have received lower license revenue than expected related to
the purchased technology associated with the acquisition. If future license
revenue continues to be lower than originally estimated, we may be required to
write-off all or a significant portion of the unamortized purchased technology.
CD-ROM Revenue
In 1997 we discontinued our business of producing CD-ROM products in favor
of other opportunities arising, in part, as a result of entering into the
Co-Production Agreement. It is unlikely that we will recognize any further
significant royalty income from these products or from this discontinued
operation in future periods.
WE EXPECT OUR OPERATING RESULTS TO CONTINUE TO FLUCTUATE
Fluctuations in Revenue
We continue to expect significant fluctuations in our future annual and
quarterly revenues because of a variety of factors, including the following:
- the timing of the domestic and international releases of our animated
feature films,
- the success of our animated feature films (which can fluctuate
significantly from film to film),
- the timing of the release of related products into their respective
markets (such as home videos, television, and merchandising),
- the demand for such related products (which is often a function of the
success of the related animated feature film),
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<PAGE> 14
- Disney's costs to distribute and promote the feature films and related
products,
- Disney's success at marketing the feature films and related products,
- the timing and accuracy of information received from Disney and other
sources on which we base estimates of revenue to be recognized from our
animated feature films and related products by Disney,
- the introduction of new feature films or products by our competitors, and
- general economic conditions.
In particular, since our revenue under the Co-Production Agreement is
directly related to the success of a feature film, our operating results are
likely to fluctuate depending on the level of success of our animated feature
films and related products. The revenues derived from the production and
distribution of an animated feature film depend primarily on the film's
acceptance by the public, which cannot be predicted and does not necessarily
bear a direct correlation to the production or distribution costs incurred. The
commercial success of a motion picture also depends upon promotion and
marketing, production costs and other factors. Further, the theatrical success
of a feature film can be a significant factor in determining the amount of
revenues generated from the sale of the related products.
FLUCTUATIONS IN OPERATING EXPENSES
Increase in Our Operating Expenses and Effective Tax Rate
Over the last few years, we significantly increased our operating expenses,
and we plan to continue to increase our operating expenses to fund greater
levels of research and development and to expand operations. Specifically, we
expect our spending levels to increase significantly due to (1) continued
investment in proprietary software systems, (2) increased compensation costs as
a result of intense competition for animators, creative personnel, technical
directors and other personnel, (3) increased costs associated with the expansion
of our facilities, and (4) increased investment in creative development. A
portion of our operating expenses that are allocable to film productions is
either capitalized by us or reimbursed by Disney under the Co-Production
Agreement. To the extent that we do not capitalize (or Disney does not pay for)
the increases in expenses, our operating expenses will significantly increase in
2000. Finally, our tax rate in the first quarter of fiscal year 2000
approximates statutory levels and is likely to remain at that level in future
periods because we have utilized our remaining net operating loss carryforwards
except those which originated as non-qualified employee stock option costs. The
realization of tax benefits from non-qualified employee stock option costs will
not reduce our effective tax rate in the future.
Difficulty in Predicting Operating Expenses
Moreover, our operating expenses will continue to be extremely difficult to
forecast. We budget the direct costs of film productions with Disney, and we
share such costs equally. We capitalize our share of these direct costs of film
production in accordance with SFAS No. 53. A substantial portion of all of our
other costs are incurred for the benefit of feature films ("Overhead"),
including research and development expenses and general and administrative
expenses. Portions of our Overhead are included in the budgets for the Pictures,
and we share such costs equally with Disney under the Co-Production Agreement.
With respect to the portion of our Overhead that is not reimbursed by Disney, we
either (1) capitalize such portion as film production costs, if required under
SFAS No. 53, or (2) charge it to operating expense in the period incurred. Since
a substantial portion of our Overhead is related to the Pictures, and is
therefore reimbursed by Disney, and since we capitalize other amounts in
accordance with SFAS No. 53, our reported operating expenses for the first
quarter of fiscal year 2000 have not reflected, and future reported operating
expenses will not reflect, our true level of spending on the production of
animated feature films, related products and overhead.
RISKS ASSOCIATED WITH ADEQUACY OF CASH BALANCES
Pursuant to the Co-Production Agreement, we co-financed A Bug's Life and
Toy Story 2 and will co-finance the next four original animated feature films
which we produce, including Monsters, Inc., Film
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<PAGE> 15
Five, Film Six, and Film Seven. In the future, we may co-finance other
derivative works such as sequels, interactive products and television
productions. In addition, we are constructing new studio and headquarter
facilities in Emeryville, California, which are being financed by the use of our
cash and may continue to be financed by the use of our cash. The development and
production costs of Monsters, Inc., Film Five, Film Six, and Film Seven, and
costs of the new Emeryville facility may have an adverse impact on our cash and
short-term investment balances. As of April 1, 2000, we had approximately $197.6
million in cash and short-term investments. We believe that these funds will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures, including the development and production costs of Monsters, Inc.,
Film Five, Film Six, and Film Seven, until we receive any remaining proceeds
from the release of Toy Story 2 and A Bug's Life. See "-- Liquidity and Capital
Resources." To date, we have chosen to use our existing cash resources to fund
construction costs and film production costs. We may continue to use our cash
resources for such expenditures, or may choose to finance such capital
expenditures through issuance of additional equity or debt securities, by
obtaining a credit facility or by some other financing mechanism. The sale of
additional equity or convertible debt securities would result in additional
dilution to our shareholders. Moreover, we cannot provide any assurances that we
will be successful in obtaining future financing, or even if such financing is
available, that we will obtain it on favorable terms or on terms providing us
with sufficient funds to meet our obligations and objectives. If we fail to
obtain such financing, it would have a material adverse effect on our business,
operating results and financial condition.
CAPITALIZED FILM PRODUCTION COSTS
We had $55.3 million in capitalized film production costs as of April 1,
2000, consisting primarily of costs relating to Toy Story 2, A Bug's Life, and
Monsters, Inc., all of which are being co-financed by Disney under the
Co-Production Agreement. All Toy Story capitalized film costs were fully
amortized as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased $2.7 million to $197.6 million at
April 1, 2000 from $194.9 million at January 1, 2000 due primarily to our share
of proceeds from A Bug's Life, offset by film production spending and
construction spending on our new studio and headquarter facilities in
Emeryville, California. On March 16, 2000, we purchased an existing building on
1.76 acres in Emeryville for $7.7 million. While it was purchased for potential
future expansion, the building will serve as a rental property, is currently
occupied by commercial tenants and is expected to generate rental income.
Net cash provided by continuing operations for the three months ended April
1, 2000 was primarily attributable to net income of $26.4 million, the non-cash
impact of depreciation and amortization expense and amortization of capitalized
film production costs, totaling $16.3 million and increases in accounts payable
and income taxes payable of $12.0 million, offset by an increase in receivables
of $24.9 million, and a decrease in accrued liabilities of $5.4 million.
Receivables increased significantly due to recognition of film revenues on a
more timely basis than the associated cash receipts from Disney. Cash flows used
in investing activities were due primarily to investments in short-term
securities of $160.2 million, the purchase of property and equipment of $19.2
million and funding of film production costs of $5.6 million, offset by net
proceeds from maturities of short-term securities of $153.6 million. Cash flows
provided by financing activities were due to proceeds from the exercise of stock
options.
As of April 1, 2000, our principal source of liquidity was approximately
$197.6 million in cash and short-term investments. We believe that these funds
will be sufficient to meet our operating requirements through the next twelve
months.
THE YEAR 2000 ISSUES
As a result of our planning, testing and implementation efforts to date, we
have experienced no significant disruptions in our film development and
production efforts or our internal computer systems, and we believe those
systems successfully responded to the year 2000 date change. We are not aware of
any system failures of
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<PAGE> 16
third party systems that we rely on. The total cost incurred to date to evaluate
and remediate Year 2000 compliance issues have not been material and any future
costs to remediate any Year 2000 compliance issues are not anticipated to be
material to our results of operations, financial position or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest in a variety of investment grade, interest-bearing securities,
including fixed rate obligations of corporations, municipalities, and national
governmental entities and agencies. This diversification of risk is consistent
with our policy to ensure safety of our principal and maintain liquidity. We
only invest in securities with a maturity of 24 months or less, with only
government obligations exceeding 12 months. Our investments are fixed rate
obligations and carry a certain degree of interest rate risk. A rise in interest
rates could adversely impact the fair market value of these securities.
All of our financial instruments are held for purposes other than trading
and are considered "available for sale" per SFAS 115. The table below provides
information regarding our investment portfolio at April 1, 2000. The table
presents principal cash flows and related weighted-average fixed interest rates
presented by expected maturity date (dollars in thousands):
<TABLE>
<CAPTION>
LESS THAN OVER
1 YEAR 1 YEAR TOTAL
--------- ------- --------
<S> <C> <C> <C>
Available-for-sale securities............... $180,195 $14,810 $195,005
Weighted-average interest rate.............. 5.77% 5.86% 5.78%
</TABLE>
While our products are distributed in foreign markets by Disney and its
affiliates, we derive no direct revenues from foreign markets. We also have no
debt. As a result, our foreign currency rate fluctuation and market rate risks
are negligible.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
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
April 1, 2000.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PIXAR
By: /s/ ANN MATHER
------------------------------------
Ann Mather
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer And
Duly Authorized Officer)
Date: May 16, 2000
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<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 27,257
<SECURITIES> 170,341
<RECEIVABLES> 41,904
<ALLOWANCES> 268
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 91,477
<DEPRECIATION> 13,721
<TOTAL-ASSETS> 409,815
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 282,159
<OTHER-SE> 89,549
<TOTAL-LIABILITY-AND-EQUITY> 409,815
<SALES> 0
<TOTAL-REVENUES> 60,978
<CGS> 0
<TOTAL-COSTS> 15,175
<OTHER-EXPENSES> 3,619
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 45,021
<INCOME-TAX> 18,683
<INCOME-CONTINUING> 26,338
<DISCONTINUED> 50
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,388
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.53
</TABLE>
