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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
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.)
1200 PARK AVENUE, EMERYVILLE, CALIFORNIA 94608
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 752-3000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 2001, there were 47,783,625 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 15, 2001) was approximately
$576,704,788. Shares of Common Stock held by each executive officer and director
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the
2001 Annual Meeting of Stockholders are incorporated by reference to Part III of
this Form 10-K to the extent stated herein.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
Risk Factors................................................ 14
ITEM 2. PROPERTIES.................................................. 29
ITEM 3. LEGAL PROCEEDINGS........................................... 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 29
Executive Officers of the Company........................... 31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS..................................................... 33
ITEM 6. SELECTED FINANCIAL DATA..................................... 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............. 41
ITEM 11. EXECUTIVE COMPENSATION...................................... 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 41
SIGNATURES............................................................
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This Annual Report on Form 10-K contains forward-looking statements that
have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on current
expectations, estimates and projections about our industry, management's
beliefs, and assumptions made by management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict; therefore, actual results and outcomes may differ
materially from what is expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein under "
Risk Factors" on pages 14 through 29. Particular attention should be paid to the
cautionary language in Risk Factors "-- To meet our fiscal 2001 diluted earning
per share target, we must receive sufficient revenues primarily from our feature
films and, to a lesser extent, our non-film related sources," "-- Our operating
results have fluctuated in the past and we expect such fluctuations to continue,
"-- Our scheduled successive releases of feature films will continue to place a
strain on our resources," and "-- The Co-Production Agreement imposes several
risks and restrictions on us." Unless required by law, Pixar undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Pixar was formed in 1986 when Steve Jobs purchased the computer division of
Lucasfilm and incorporated it as a separate company. We are a leading digital
animation studio with the creative, technical and production capabilities to
create a new generation of animated feature films and related products. Our
objective is to create, develop and produce computer-animated feature films with
a new three-dimensional appearance, heartwarming stories and memorable
characters that appeal to audiences of all ages. Through the creation of
entertaining, enduring and successful films, we seek to become a leading brand
in animated feature films. We created and produced our first three films, Toy
Story, A Bug's Life and Toy Story 2, which were marketed and distributed by The
Walt Disney Company (along with its subsidiaries hereinafter referred to as
"Disney"). Toy Story was released in 1995 and generated over $191 million in
domestic box office revenue. Our second animated feature film, A Bug's Life, was
released in 1998 and generated over $162 million in domestic box office revenue.
Our third and latest animated feature film, Toy Story 2, was released in
November 1999 and generated over $245 million in domestic box office revenue,
making it the second highest domestic grossing animated feature film of all
time.
In 1997, we extended our existing relationship with Disney (under which Toy
Story was created and produced) by entering into the Co-Production Agreement.
Under the Co-Production Agreement, we agreed to produce, on an exclusive basis,
five original computer-animated feature films (the "Pictures") for distribution
by Disney. Pixar and Disney agreed to co-finance and co-brand the films and
share equally in the profits of each film and any related merchandise and other
ancillary products, after recovery of all marketing and distribution costs and
fees. The first original film produced under the Co-Production Agreement was A
Bug's Life, and we will produce four additional original animated feature films
under this agreement, including Monsters, Inc., Finding Nemo, Film Six and Film
Seven. As a sequel, Toy Story 2 does not count toward the five original films;
however, it was produced under the Co-Production Agreement and is afforded the
same financial terms as the five original films. See "-- Relationship with
Disney -- Co-Production Agreement."
RECENT DEVELOPMENTS
Ed Catmull Named President. In January 2001, we announced the appointment
of Ed Catmull to President. Ed Catmull has served as a member of our executive
team and Chief Technical Officer since the incorporation of the company in 1986.
Additionally, in March 2001, he was honored by the Academy of Motion Picture
Arts & Sciences, along with two other Pixar employees, Loren Carpenter, Senior
Scientist,
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and Rob Cook, Senior Scientist, with an Oscar(R) "for significant advancements
to the field of motion picture rendering as exemplified in RenderMan(R)."
BUSINESS MODEL AND PRODUCTS
Our goal is to become a leading brand in family entertainment through the
development and production of high quality animated films and related products,
such as toys, soundtracks, interactive games, and apparel. To achieve this goal,
we have entered into a Co-Production Agreement with Disney. This agreement
allows us to focus on the production and creative development of the films while
utilizing Disney's marketing expertise and substantial distribution
infrastructure to market and distribute our co-branded feature films and related
products.
Animated Feature Films. Our first animated feature film, Toy Story, was
released in November 1995. In November 1998, we released A Bug's Life, our
second animated feature film with Disney. A Bug's Life was the first of five
original films (the "Pictures") to be developed and distributed under our
Co-Production Agreement with Disney. In November 1999, we released Toy Story 2,
our third animated feature film produced for distribution by Disney. While not
counting as one of the five original Pictures, Toy Story 2 is subject to the
same terms as the five Pictures developed and produced under the Co-Production
Agreement.
We intend to continue to develop computer-animated feature films for the
family entertainment market. In 1999, we began production on our fourth animated
feature film, Monsters, Inc. and concept development on our sixth animated
feature film, "Film Six." In 2000, we began production on our fifth animated
feature film, Finding Nemo and concept development on our seventh animated
feature film, "Film Seven." These films will be produced and distributed under
the Co-Production Agreement and will count as the second, third, fourth and
fifth films of the original five films to be produced under the Co-Production
Agreement. We plan to release Monsters, Inc. in November 2001, and we do not
expect to release Finding Nemo until summer 2003, at the earliest. Film Six and
Film Seven are currently targeted for release no earlier than 2004 and 2005,
respectively. See "Risk Factors -- Our scheduled successive releases of feature
films will continue to place a strain on our resources."
Home Videos. Following their theatrical release, Toy Story, A Bug's Life,
and Toy Story 2 were released on home video. Disney initially released Toy Story
on home video, in the VHS format, in October 1996. In April 1999, A Bug's Life
was released on home video in VHS and DVD formats. In 2000, Disney implemented a
new home video strategy whereby many of the animated titles distributed by the
studio will be available on a year-round basis. Pursuant to this strategy, the
VHS format of Toy Story was re-released domestically in January 2000 as part of
Disney's Home Video "Gold Collection." Similarly, both formats of A Bug's Life
were re-released domestically as part of the "Gold Collection" in August 2000.
In October 2000, Disney released Toy Story 2 in the VHS and DVD formats.
The Toy Story 2 DVD release occurred simultaneously with the Toy Story DVD
release as both films were packaged into a 2-disc pack and a 3-disk Collector's
Edition, which includes a third disk with additional behind-the-scenes footage.
Distribution of home video versions of the animated feature films developed and
produced under the Co-Production Agreement will also be governed by the
Co-Production Agreement.
Television. The television market for our feature films generally follow
the theatrical and home video release. Toy Story aired on ABC in 1997 to kick
off ABC's Wonderful World of Disney. It also aired on The Disney Channel for
several months following its television debut on ABC. In October 2000, A Bug's
Life became the first major animated title distributed by Disney to air on
Pay-Per-View. Similarly, Toy Story 2 began its Pay-Per-View window in March
2001. Distribution of television rights for the animated feature films developed
and produced under the Co-Production Agreement are governed by the Co-Production
Agreement.
Merchandise and Soundtracks. We believe the characters, story, and music
created in our animated feature films provide significant revenue generation
opportunities through various consumer products such as toys and interactive
games. Distribution of consumer products and licensing of merchandising and
music rights based on the animated feature films developed and produced under
the Co-Production Agreement are governed by the Co-Production Agreement.
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Short Films. In addition to feature films, we have developed a number of
short films since our inception, and plan to continue to invest in developing
new short films. Although short films have had few commercial opportunities to
date, we believe it is an important investment for the development of creative
talent and computer animation technology. For example, in 1997, we created and
produced a short film titled, Geri's Game. Geri's Game enabled us to further our
technology in computer-generated skin and cloth. This technological advancement
was applied to Toy Story 2 and will be applied to subsequent films.
Furthermore, such short films provide opportunities for valuable publicity
and critical acclaim to heighten the visibility of the Pixar brand and to
enhance our standing and reputation in the creative community, which allows us
to attract the best talent. For example, Geri's Game won an Academy Award(R) for
Best Animated Short Film. In addition, Geri's Game was released theatrically
worldwide as the preceding short film to A Bug's Life. Similarly, Luxo Jr., our
first ever short film produced in 1986 and an Academy Award(R) nominee for Best
Animated Short Film, was the preceding short film to Toy Story 2 during its
theatrical release. Finally, For the Birds, our latest short film, will be shown
preceding Monsters, Inc. during its worldwide theatrical release.
RenderMan(R). We have been selling our RenderMan(R) software for nearly
thirteen years. In March 2001, our President Ed Catmull, along with two other
Pixar employees, Loren Carpenter, Senior Scientist and Rob Cook, Senior
Scientist, were honored by the Academy of Motion Picture Arts & Sciences, with
an Oscar(R) "for significant advancements to the field of motion picture
rendering as exemplified in Pixar's RenderMan(R)." RenderMan(R) has helped
visual effects studios create visual effects such as creatures appearing in Star
Wars Episode 1: The Phantom Menace, certain dinosaurs in Jurassic Park, the
metal cyborg in Terminator 2 and the hoard of horsemen charging over the hill in
Mulan. In addition, RenderMan(R) has been used to create other critically
acclaimed box office hits such as Star Trek 2: The Wrath of Khan, Titanic, The
Matrix, Perfect Storm and Gladiator.
RenderMan(R) runs on Unix-based workstations from Silicon Graphics, Inc.
("SGI"), Sun Microsystems, Inc. ("Sun"), Digital Equipment Corp. ("DEC") and on
personal computers (PC's) under Linux and Windows NT. Examples of RenderMan(R)
customers include movie and special effects studios such as Disney, Lucasfilm
Ltd. through its affiliate Industrial Light and Magic ("ILM"), Sony Pictures
Imageworks and Tippett Studios. RenderMan(R) is also used in television
broadcasting. Customers also include government agencies and universities around
the world. See "-- Technology -- RenderMan(R)" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Animation Services. We produce short animation projects, primarily derived
from our films, such as the Tree of Life which is currently on display at the
Animal Kingdom in Disney World, the vignettes of A Bug's Life and Toy Story 2
for Disney's new California Adventure theme park, and the animation for the
advertising of McDonald's Happy Meals which were tied in to the promotion of A
Bug's Life and Toy Story 2. Moreover, we believe that there may continue to be
other opportunities to produce short animation projects for Disney in connection
with work performed under the Co-Production Agreement, and these animation
projects help develop awareness of the characters in our films and help Disney
promote the films. In the past, we produced animated or partially animated
television commercials, including commercials for products such as Coca-Cola,
Listerine and Gummi-Savers (a LifeSavers product). However, in 1996, we largely
discontinued our business of producing commercials in favor of other
opportunities.
COMPUTER ANIMATION PROCESS
The development and production of animated feature films is extremely
complex and time consuming due to the very large number of frames and intricate
detail of each frame. At 24 frames per second, a 94-minute animated feature film
such as Toy Story 2 requires approximately 135,000 individual frames. Animation
for feature films has traditionally been created through hand-drawn cels,
requiring hundreds of people working for two to three years. Although computers
have been used to assist in some elements of cel animation during the past
several years, most frames are still hand-drawn.
We believe that our proprietary technology, which allows animators to
manipulate hundreds of motion control points within a single character, allows
for more intricacy and subtlety of character and personality
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than traditional two-dimensional cel-based animation. This technology also
facilitates the manipulation, editing and re-use of animated images.
We make our computer-animated feature films and other projects in four
stages: creative development, pre-production, production and post-production.
Because this process is iterative, there is continual reworking of the film. The
basic elements of this highly complex process are outlined below.
CREATIVE DEVELOPMENT
STORY CONCEPT TREATMENT OUTLINE SCREEN PLAY
Creative development is an iterative process in which the story and its
characters are created and developed. The first step in creative development
involves the development of a story concept, which often takes the form of a
story summary or outline known as a "treatment." After numerous iterations and
research into the story and characters, a first draft of a screenplay is
written.
PRE-PRODUCTION
STORY BOARD STORY REEL EDITING VOICE RECORDING
The pre-production stage begins when the screenplay is turned into story
boards, which are panels filled with thousands of sketches that represent the
story to be animated. The story boards are then transferred to film or video so
that they can be electronically edited into a photo play of the film called
story reels, a process that enables editing of the film before the production
phase begins. Voices are then selected, recorded and added to the story reels.
Throughout the creative development and pre-production processes, plans are
developed for the style, colors and look of the film.
PRODUCTION
Modeling Layout Animation Shading and Lighting Rendering Film Recording
Our production stage consists of six phases: modeling, layout, animation,
shading and lighting, rendering and film recording. In the modeling phase,
digitized models of each set and character are created by defining their shapes
in three dimensions (height, width and depth) and by adding animation control
points that allow the model to be moved or animated. In some cases, a model has
hundreds of animation controls. In the layout stage, artists place the digital
models into a scene and position the digital cameras at the angles from which
the three-dimensional shot is to be seen. The assembled shot is then given to
the animator together with the prerecorded voice.
In the animation stage, the digitized models are animated, or "brought to
life," in three dimensions to create a motion sequence. The next step in
completing a scene requires attaching, to each object and model, a description
of its surface characteristics. These "shaders" describe the pattern, texture,
finish and color for every object in the scene. Next, lighting is added by
placing digital lights into the scene. In the rendering phase, the renderer
takes the modeling, layout, animation, shading and lighting data and, for each
frame in the sequence, computes a three-dimensional image of what the scene
looks like at that point in time from the point of view of the camera. The final
rendering of a single frame takes an average of one to four hours, but a small
percentage of more complex frames can take much longer, between 20 and 40 hours
each or more. The final rendered digital image is then sent to our film
recorders to be photographed onto film. While film is the primary means of
distributing motion pictures to theaters, digital electronic projectors have
recently achieved the brightness and high resolution necessary to project movies
on theater screens without the use of film. As our films are produced digitally,
they are uniquely suited to this method of presentation. Toy Story 2 was shown
digitally in twelve theaters worldwide, making it the first completely
computer-animated feature film to be shown digitally.
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POST-PRODUCTION
Sound Effects Design Print Musical Score Sound Mixing Color
Correction Delivery of Print
The post-production stage consists of two parallel processes: the picture
process and the sound process. In the picture process, images are put on film,
the film is sent to a laboratory for color correction and final prints are made.
If the film is shown digitally, as was the case in a small number of theaters
with Toy Story 2, we transfer the original rendered data for each frame onto a
digital image compression device which is then used to project the movie
electronically. In the sound process, the sound effects and musical score are
added and the final sound is mixed. Our post-production is simpler than
post-production in a live-action film, which requires more significant editing.
In most live-action films, many hours of film are shot, and the film is then
significantly edited and re-edited in the post-production stage to create a
feature film. We, like other animation studios, edit the film throughout the
entire creative development and production process. Thus post-production
involves only final editing.
CREATIVE DEVELOPMENT GROUP
Our creative and technical personnel have collaborated since 1986 to
produce three-dimensional computer-animated films. The principal objective of
our creative group is to create heartwarming stories with memorable characters
that are targeted for family entertainment, utilizing the medium of computer
animation. The members of our creative and technical teams have been nominated
for and received a number of awards. In 1986, the short animated film Luxo Jr.
earned an Academy Award(R) nomination for Best Animated Short Film. In 1988,
another of our short films, Tin Toy, became the first computer-animated film to
win the Academy Award(R) for Best Animated Short Film. In 1998, our animated
short film, Geri's Game(R), also won an Academy Award(R) for Best Short Animated
Film. In 2000, Toy Story 2 won a Golden Globe Award for Best Picture, Musical or
Comedy.
The creative team at Pixar is under the direction of John Lasseter, an
Academy Award(R)-winning director and animator, the Director of Toy Story, A
Bug's Life, and Toy Story 2. In March 1996, Mr. Lasseter received a Special
Achievement Oscar(R) from the Academy of Motion Picture Arts and Sciences for
the development and application of techniques that made possible the first
feature-length computer-animated film, Toy Story. In addition, during 2000, we
added acclaimed animation director Brad Bird to our creative development group.
Brad Bird previously directed and wrote the screenplay of the critically
acclaimed animated feature The Iron Giant.
We have built an entire creative team consisting of highly skilled story
artists, animators and other artists highly skilled in the art of animation,
especially computer animation. Our story department is responsible for a
project's concept, treatment, outline, script, story boards and story reels. The
art department is responsible for the visual development of a project, including
the design of characters, sets, color, textures, shading and lighting. It is
also quite common for creative contributions to come from the technical group.
Along with the story department and the art department, the creative team at
Pixar includes animators. We strive to hire animators who have superior ability
to make characters and inanimate objects come to life and to appear as though
they have their own thought processes. Our proprietary software tools enable
artists unfamiliar with computers to quickly become skilled in the art of
three-dimensional animation. All groups work closely together in an iterative
process. To encourage collaboration, we have created a cooperative working
environment and a non-hierarchical culture whereby each member of the creative
team, regardless of position or department, considers the ideas of any other
member of the team. See "Risk Factors -- Our success depends on certain key
employees."
The success of each animated film developed and produced by us will depend
in large part upon our creative team's ability to predict the type of content
that will appeal to a broad audience and to develop stories and characters that
will achieve broad market acceptance. Traditionally, it has been extremely
difficult. While we have enjoyed tremendous box office success with Toy Story, A
Bug's Life, and Toy Story 2, there can be no assurance that similar levels of
success will be achieved by our subsequent films, including Monsters, Inc.,
Finding Nemo, Film Six and Film Seven. In addition, there can be no assurance
that voices and other
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intellectual property rights used in the animated feature film will be available
for use in any sequel or other products related to such feature film. For
example, we were unable to obtain the rights to use certain voices from Toy
Story in the two CD-ROM products based on Toy Story. See "Risk Factors -- In
order for our feature films and related products to be successful, we must
develop appealing creative content".
TECHNOLOGY
We have three core proprietary technologies: (1) Marionette(TM), an
animation software system for articulation, animating and lighting, (2)
Ringmaster(TM), a production management software system for scheduling,
coordinating and tracking of a computer animation project and (3) RenderMan(R),
a rendering software system for high quality photo-realistic image synthesis
that Pixar uses internally and licenses to third parties. Each of these systems
is critical to the production of our animated feature films and other animation
products.
Marionette(TM). Marionette(TM) is our software system for articulation,
animation and lighting for computer animation. Marionette(TM) is the primary
software tool of every animator and technical director at Pixar. In contrast to
many commercially available animation systems, which are designed to address
product design, computer video games or cinematic special effects,
Marionette(TM) has been designed and optimized for character articulation and
animation. Marionette(TM) is portable across many of the standard Unix
workstations, including those from SGI and Sun.
Ringmaster(TM). Ringmaster(TM) is a production management software system
for scheduling, coordinating and tracking a computer animation project. Due to
the enormous amount of data required in three-dimensional animation, accurate
production information is essential for producing high quality animation. Our
production coordination staff uses Ringmaster(TM) to plan and track projects
ranging from short animation projects to animated feature films.
A key component of Ringmaster(TM) is a distributed rendering system for
managing the huge quantity of images and data that must be rendered to create
our products. We do our rendering on an array of powerful Unix processors, which
are dedicated to rendering 24 hours a day. These machines, which we call the
RenderFarm, are connected via a local area network. To achieve the desired
quality level, the average time to render a single frame at film resolution is
between one and four hours. Since an animated feature film contains well over
100,000 frames, each of which may be rendered several times in the production
process, we typically have a large number of frames to render at any given time.
To manage this process, Ringmaster(R) coordinates and schedules all the
processors in the RenderFarm. Ringmaster(TM) includes a compositing system and
also maintains an array of disk drives as a central data repository for the
digital image files generated by the rendering and compositing steps of the
production process. Finally, Ringmaster(TM) controls the filming phase of
production and is responsible for backing up shots for archival purposes.
RenderMan(R). RenderMan(R) is a rendering software system for high quality
photo-realistic image synthesis that we use internally and also license to third
parties. Today, RenderMan(R) is used by many major film studios and special
effects firms. Examples of projects which have used RenderMan(R) include Star
Wars Episode 1: The Phantom Menace, Mulan, Apollo 13, The Matrix, Stuart Little,
Jurassic Park, Terminator 2, Star Trek 2: The Wrath of Khan, Titanic, Perfect
Storm and Gladiator. By licensing RenderMan(R) to film studios, special or
visual effects studios, commercial production facilities and other computer
animation companies, we believe that RenderMan(R) has been established as a de
facto industry standard for high quality rendering.
RenderMan(R) was designed to be easily portable. It runs on a wide variety
of Unix workstations, including those from SGI, Sun and Digital Equipment and on
PC's under Linux and Windows NT platforms.
RELATIONSHIP WITH DISNEY
A critical component of our objective to become a leading brand in the
animated feature film market is to secure strong promotion, marketing and
distribution of our films and related products. We believe that Disney is the
leader in marketing and distribution of animated feature films and related
products and one of the
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industry's most widely recognized brand names. Consequently, in 1997 we extended
our existing relationship with Disney by entering into the Co-Production
Agreement. This arrangement allows us to focus on the story and other creative
and production elements of making animated feature films while utilizing
Disney's significant promotion, marketing and distribution capabilities.
Prior Agreements
Our relationship with Disney dates to 1986, when we entered into a joint
technical development effort with Disney that resulted in the Computer Animated
Production System ("CAPS"), a production system owned and used by Disney in
certain of its two-dimensional cel-based animated feature films. Disney first
used CAPS for The Rescuers Down Under and has continued to use it for all of its
subsequent animated feature films, such as The Lion King and Tarzan. In 1992,
certain employees of Pixar and Disney were jointly awarded an Academy Award(R)
for Scientific and Engineering Achievement for CAPS.
In May 1991, we entered into the Feature Film Agreement with Walt Disney
Pictures, a wholly-owned subsidiary of Disney, which provided for the
development, production and distribution of up to three feature-length motion
pictures (the "Feature Film Agreement"). It is pursuant to the Feature Film
Agreement that Toy Story was developed, produced and distributed. In August
1995, we entered into a non-exclusive CD-ROM development and publishing
agreement with Disney Interactive, Inc., a wholly-owned subsidiary of Disney,
for the development, production and distribution of CD-ROM titles based on Toy
Story (the "CD-ROM Agreement"). It is pursuant to the CD-ROM Agreement that two
Toy Story CD-ROM products were developed, produced and distributed.
Co-Production Agreement
The following is a summary of the Co-Production Agreement, which was filed
as an exhibit to our Annual Report on Form 10-K for the year ended December 31,
1996 (the "1996 Form 10-K"). The following summary is not complete, and
reference is made to the Co-Production Agreement filed as an exhibit to the 1996
Form 10-K. This summary is qualified in all respects by such reference.
Prospective investors in our Common Stock are encouraged to read the
Co-Production Agreement.
Overview. On February 24, 1997, we entered into the Co-Production Agreement
with Disney pursuant to which we, on an exclusive basis, agreed to produce five
original computer-animated feature-length theatrical motion pictures (the
"Pictures") for distribution by Disney. Pixar and Disney agreed to co-finance
the production costs of the Pictures, co-own the Pictures (with Disney having
exclusive distribution and exploitation rights), co-brand the Pictures and share
equally in the profits of each Picture and any related merchandise and other
ancillary products, after recovery of all marketing and distribution costs
(which are financed by Disney), a distribution fee paid to Disney and any other
fees or costs, including any participations provided to talent and the like. The
Co-Production Agreement generally provides that we are responsible for the
production of each Picture and that Disney is responsible for the marketing,
promotion, publicity, advertising and distribution of each Picture. The first
original Picture under the Co-Production Agreement was A Bug's Life, which was
released in November 1998. The second and third original Pictures governed by
the Co-Production Agreement will be Monsters, Inc. and Finding Nemo, which are
scheduled for release in November 2001 and summer 2003, respectively. Toy Story
2, the theatrical sequel to Toy Story, was released in November 1999, and is
also governed by the Co-Production Agreement, although it does not count towards
the five original pictures. 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.
Production. The Co-Production Agreement provides a mechanism for our
submission and the mutual selection of treatments that will be developed and
produced as Pictures. After the selection of a treatment, we have final control
over the production of each Picture. Disney is entitled to designate a
representative at Pixar to monitor the production and production costs of the
Pictures.
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Financing of Development and Production. Pixar and Disney equally share all
production costs. Production costs are defined in the Co-Production Agreement to
mean all costs and expenses we incur directly related to or fairly allocable to
the creation, development, pre-production, production, post-production and
delivery to Disney of the Pictures. Production costs, whether capitalized as
film costs or expensed as incurred, include, among other things, all carrying
costs we incur for retention of employees for production purposes and their
associated overhead expenses, the costs of all treatments we prepare for
submission to Disney, all costs of computer hardware and software used to
develop the Pictures, and fair allocations of all costs and expenses we incur
that are associated with or benefiting the Picture, including research and
development, general and administrative and overhead expenses. The Co-Production
Agreement provides mechanisms for Disney and us to agree upon the budgets for
treatments, development and production of each Picture. We may not exceed
production budgets (which may be revised with mutual approval) without Disney's
written approval, subject to certain limited exceptions.
Distribution. Disney is solely responsible for financing the costs and
expenses of the marketing, promotion, publicity, advertising and distribution of
each Picture, subject to certain requirements, and has final control over all
related decisions. However, Disney is to consult with us regarding all such
major marketing and distribution decisions, and we are entitled to designate a
representative to monitor marketing and distribution of the Pictures. Provided,
in general, that Disney has agreed on the treatment to be developed into each
Picture, Disney has committed to initially release each Picture within certain
windows and not to release other Disney family films during certain windows.
Further, each Picture is to be distributed and marketed under the Walt Disney
Pictures brand (or the then current Disney brand for premiere Disney movies) and
is to be distributed and marketed by Disney in all markets and media and on a
worldwide basis in a manner similar to that in which Disney then currently
distributes and markets its premiere animated movies. In addition, the costs for
marketing, distribution and promotion of the films and related products are
incurred well in advance of the release of such films and products, and we will
experience a delay in the receipt of cash proceeds from such films and products
until after Disney recovers such costs.
Division of Gross Receipts. Pixar and Disney are entitled to share equally
in all gross receipts remaining after deduction of: (1) a distribution fee to
Disney, (2) mutually agreed participations (payments to third parties such as
actors, composers and other artists contingent upon the success of the
Pictures), if any, paid by either Disney or us, and (3) Disney's distribution
costs. Gross receipts include all revenues or other consideration received by
Disney from the exploitation of the Pictures and any related merchandise, books,
soundtracks and other tangible personal property based upon the Pictures, as
more specifically provided in the Co-Production Agreement (collectively,
"Merchandise"), subject to certain exceptions relating primarily to receipts
from Disney's affiliates. The distribution fee payable to Disney is
substantially lower than under the prior Feature Film Agreement and reflects our
commitment to finance half of the production costs of the Pictures. Distribution
costs are broadly defined in the Co-Production Agreement to include
out-of-pocket costs paid (or in certain instances, accrued for payment) to a
third party (or in certain instances, to Disney's affiliates) by Disney or
certain of its affiliates, provided that such out-of-pocket costs are directly
related or fairly allocable to the distribution of the Picture and Merchandise.
Pursuant to the Co-Production Agreement, we will receive statements and payments
of our share of gross receipts monthly within 45 days after the end of each
calendar month, subject to certain exceptions, and we have the right to audit
Disney's books and records relating to the Pictures and Merchandise.
Derivative Works. Subject to certain exceptions, Disney and Pixar have
mutual control of the decision to develop, produce or otherwise exploit any
derivative works (or to transfer or license any rights to exploit any derivative
works) during the term of the Co-Production Agreement or thereafter. Derivative
works include theatrical sequels such as Toy Story 2, made-for-home video
sequels, television productions such as Buzz Lightyear of Star Command,
interactive media products such as Toy Story 2 Activity Center, and other
derivative works as more specifically provided in the Co-Production Agreement
(collectively, "Derivative Works"). Except in certain very limited
circumstances, in the event of a disagreement over whether to proceed with a
Derivative Work, Disney's decision governs. We are to be given the option to
co-finance and produce, or to participate on a passive financial basis with
respect to, a Derivative Work that is (1) a theatrical motion picture, (2) a
made-for-home video production, (3) a television production, (4) location-based
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entertainment which uses unique characters or other elements from any of the
Pictures or Toy Story as its primary theme, or (5) an interactive product such
as CD-ROMs, DVDs, video games and arcade games (collectively, "Interactive
Products").
If we elect to co-finance and produce a Derivative Work, such as we did
with Toy Story 2, the Co-Production Agreement provides for the following:
(1) with respect to theatrical motion pictures and made-for-home video
productions, the terms and conditions of the Co-Production Agreement are to
be extended to cover such Derivative Works, subject to certain exceptions;
(2) with respect to (A) location-based entertainment using characters
or other elements from a Picture or Toy Story as its primary theme and (B)
television productions, Pixar and Disney are to mutually agree upon the
terms and the conditions under which such work will be financed, produced
and distributed, subject to certain specified requirements in the case of
television productions; and
(3) with respect to Interactive Products, Disney and Pixar are to
mutually agree upon the terms and conditions under which such Interactive
Products shall be financed, produced and distributed, subject to certain
commitments by Disney with respect to marketing and distribution and
provided that there will be no distribution fee payable to Disney.
For live entertainment such as stage plays or ice shows, we are entitled to
participate on a passive financial basis as specified in the Co-Production
Agreement. For all other Derivative Works except theme parks, we are entitled to
participate on a passive financial basis in such work and to receive a
reasonable royalty to be mutually agreed upon if the work is a revenue-producing
work. Disney has the sole and exclusive right in perpetuity to use, without
compensation to us, each Picture, the characters therefrom and any story
elements thereof in theme parks, location-based entertainment for which Picture
or Toy Story characters or elements are not the primary theme and cruise ships.
A Derivative Work that is a theatrical motion picture would not count
towards the five Pictures to be produced under the Co-Production Agreement.
Accordingly, Toy Story 2 does not count as one of the five Pictures to be
produced. However, under the Co-Production Agreement, all provisions applicable
to the original five Pictures apply to Toy Story 2 as well.
Creative Controls. Creative controls and decisions with respect to
developing and producing Pictures are generally subject to the mutual approval
of Pixar and Disney. The Co-Production Agreement provides for certain dispute
resolution procedures in the event of disagreement.
Brand/Credit. The Co-Production Agreement sets forth Disney's and Pixar's
intent that the Pixar brand be established as a co-equal brand to the Disney
brand in connection with the Pictures, Merchandise and Derivative Works. The
Co-Production Agreement provides that the Pixar logo, animated logo and credit
shall be used in a manner which is perceptually equal to the Disney logo,
animated logo and credit, subject to certain specific requirements as set forth
in the Co-Production Agreement.
Exclusivity. We have agreed not to release or authorize the release of any
feature-length animated theatrical motion picture we produce, other than the
Pictures and Derivative Works we produce under the Co-Production Agreement,
until twelve months from delivery of the fifth Picture under the Co-Production
Agreement. We have further agreed that we will not enter into any agreement with
any third party for the development, production or distribution of any feature
length animated theatrical motion picture until after we have delivered the
third Picture to Disney under the Co-Production Agreement. We have also agreed
that we will not develop or produce any rides or attractions for major theme
parks not owned or operated by Disney, and to give Disney a right to negotiate
with respect to animated television productions or animated made-for-home video
productions that we propose to produce during the term of the Co-Production
Agreement. Disney, however, is not similarly restricted by the exclusivity
provisions that bind us under the Co-Production Agreement and, therefore, may
develop, produce, or distribute other feature-length animated and computer-
animated theatrical motion pictures itself or enter into similar agreements with
third parties. See "-- Competition."
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Proprietary Rights. Under the Co-Production Agreement, the copyrights,
trademarks and other intellectual property rights in and to the Pictures, all
new and unique characters and story elements thereof and the audio-visual images
thereof, and ancillary rights relating thereto, shall be jointly owned by Disney
and Pixar on an undivided 50/50 basis, subject to our ownership rights in the
technology and excluding any intellectual property rights previously owned by us
or Disney. Notwithstanding the foregoing, Disney has the exclusive distribution
and exploitation rights with respect to the Pictures, Derivative Works and
ancillary rights relating thereto. We own the copyright and all other
intellectual property rights in and to all computer programs and other
technology we develop or discover before, during or after the term of the
Co-Production Agreement.
Term and Termination. The Co-Production Agreement continues until delivery
to Disney of the fifth Picture produced and financed under the Co-Production
Agreement, unless earlier terminated. Disney is entitled to terminate the
Co-Production Agreement in the event that Disney and Pixar fail to agree on a
treatment for a Picture within one year after the initial theatrical release of
the last Picture for which a treatment has been approved or selected, subject to
certain exceptions. Disney is also entitled to terminate the Co-Production
Agreement in the event that certain types of competitors directly or indirectly
acquire or control a 50% or greater ownership interest in Pixar or we merge or
consolidate into such a competitor. Upon termination by Disney pursuant to
either of the last two sentences, Disney has certain rights to compel us to
complete works in production. In the event of termination, the Co-Production
Agreement provides that its terms and conditions continue to apply with respect
to Pictures, Merchandise and Derivative Works which we have delivered to Disney
or which Disney elects to have completed, as well as all future Merchandise and
future Derivative Works relating thereto, but otherwise terminates.
Effect on Prior Agreements. All Derivative Works based on Toy Story
including Toy Story 2 are to be governed by the Co-Production Agreement and not
the original Feature Film Agreement or the CD-ROM Agreement. The original
Feature Film Agreement now applies only to the rights and obligations of Disney
and Pixar relating to the financial participation in, and the production and
distribution of, the theatrical motion picture Toy Story and the financial
participation in certain Merchandise related to Toy Story (unless gross receipts
in any given month exceed a certain amount, in which case they will be subject
to the Co-Production Agreement), subject to certain exceptions, and otherwise
has no further force or effect. The original CD-ROM Agreement remains in full
force and effect with respect to the first and second CD-ROM products developed
under that agreement, but otherwise has no force or effect.
COMPETITION
We experience intense competition with respect to animated feature films,
animation products and software.
Movie Studios. Our animated feature films compete and will continue to
compete with feature films and other family-oriented entertainment products
produced by major movie studios, including Disney (as somewhat limited by the
Co-Production Agreement), DreamWorks SKG ("DreamWorks") (which continues to
target the animated film market), Warner Bros. Inc., Sony Pictures Entertainment
("Sony"), Twentieth Century Fox Film Corporation ("Twentieth Century Fox"),
Paramount Pictures ("Paramount"), Lucasfilm Ltd. ("Lucasfilm"), Universal
Studios, Inc. and MGM/UA, as well as numerous other independent motion picture
production companies.
In 1999 and 2000, competition continued to intensify in the animated
feature film market. Family-oriented animated feature films released in the
domestic theatrical market in 1999 and 2000 included the following.
Released in 1999:
- Doug's First Movie by Disney,
- Tarzan by Disney,
- Iron Giant by Warner Bros., and
- Pokemon: The First Movie by Warner Bros.
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Released in 2000:
- The Tigger Movie by Disney,
- The Road to El Dorado by Dreamworks,
- Dinosaurs by Disney,
- Chicken Run by Dreamworks,
- Titan A.E. by Twentieth Century Fox,
- Pokemon 2 by Warner Bros.,
- Digimon: the Movie by Twentieth Century Fox,
- Rugrats in Paris by Paramount, and
- The Emperor's New Groove by Disney.
The release of Toy Story 2 in 1999 was highly successful, resulting in
domestic box office revenues exceeding $245 million. However, other animated
family-oriented feature films released during 1999, such as Pokemon: The First
Movie, Tarzan, and Iron Giant, achieved domestic box office revenues of over $86
million, $171 million, and $23 million, respectively. We also experienced
competition from a non-animated family-oriented film, Stuart Little, which was
released by Sony during the 1999 holiday season. Stuart Little combined live
action with computer-animated characters, and earned over $140 million in
domestic box office receipts. In addition to box office competition, other
family-oriented films may continue to compete with Toy Story 2 with respect to
related merchandise, home video sales, and other future revenue sources. For
example, in the home video market, Toy Story 2 experienced competition from the
animated film, Chicken Run, as well as the direct-to-video animated feature
Little Mermaid II: Return to Sea.
We expect competition from animated feature films and family oriented
feature films will continue to intensify over the next several years that will
directly compete with Monsters, Inc. and Finding Nemo, which are targeted for
release in November 2001 and summer 2003, respectively. For example, Harry
Potter and The Sorcerer's Stone, produced and distributed by Warner Brothers, is
targeted for domestic theatrical release in November 2001 and will compete
directly with Monsters, Inc. Due to a potentially large number of family
oriented films scheduled for release over the next two years, it is possible
that the market for these films, whether animated or live action, will become
further saturated before we can release Monsters, Inc. and Finding Nemo. This
could result in failure of such films to achieve the extraordinary commercial
success required for us to profit from such films.
Our films will continue to compete with the feature films of other movie
studios for optimal release dates, audience acceptance, and exhibition outlets.
In addition, we compete and will continue to compete with other movie studios
for the acquisition of literary properties, the services of performing artists,
and the services of other creative and technical personnel, particularly in the
fields of animation and technical direction. Some of the other movie studios
with which we compete have significantly greater financial, marketing and other
resources than we do.
At least three of these movie studios, Disney, DreamWorks and Lucasfilm,
have developed their own internal computer animation capability which may be
used for special effects in animated films and live action films. For example,
DreamWorks (with PDI) successfully produced Antz in 1998, and is currently (with
PDI) developing and producing the animated film Shrek, scheduled for release in
May 2001. In addition, Disney released Dinosaur in May 2000, a film which
combined live action backgrounds with computer-animated dinosaurs and special
effects. Other movie studios may internally develop, license or sub-contract
three-dimensional animation capability. Further, we believe that continuing
enhancements in commercially available computer hardware and software technology
have lowered and will continue to lower barriers to entry for studios or special
effects companies which intend to produce computer-animated feature films or
other products. For example, SGI's Alias/Wavefront subsidiary licenses "Maya,"
which is its next generation three-
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dimensional software for creating high quality animation and visual effects.
"Maya" incorporates many new features and could be used to make a
computer-animated feature film.
The Co-Production Agreement provides that we will develop and produce five
original computer-animated feature films. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the "Walt Disney Pictures" label, and enjoys the financial benefits in the
event that such films achieve significant box office revenues, we believe that
Disney desires such films to be successful. Nonetheless, during its long
history, Disney has been a very successful producer and distributor of its own
animated feature films. While the Co-Production Agreement imposes restrictions
prohibiting Disney from releasing G-rated films, whether live action or
animated, within certain release windows for our films, it is likely that other
family-oriented motion pictures distributed by Disney or its affiliates will
overlap in the market and compete with our animated feature films. For example,
Mighty Joe Young, released during the 1998 holiday season, competed with A Bug's
Life in the domestic theatrical market. Our contractual agreement with Disney
also presents other risks. See "Risk Factors -- The Co-Production Agreement
imposes several risks and restrictions on us."
We believe that the primary competitive factors in the market for animated
feature films include creative content and talent, product quality, technology,
access to distribution channels and marketing resources. Due in part to our
creative and technical resources and to the Co-Production Agreement with Disney,
pursuant to which Disney co-finances the production of the feature films,
markets the feature films and provides creative assistance and access to
significant distribution channels, we believe that we presently compete
favorably with respect to each of these factors.
Computer Graphics Special Effects Firms. We also expect to compete with
computer graphics special effects firms, including ILM, Rhythm & Hues/VIFX,
Tippett Studios, Digital Domain, and Sony Pictures Imageworks. These computer
graphics special effects firms may be capable of creating their own three-
dimensional computer animated feature films or may produce three-dimensional
computer-animated feature films for movie studios that compete with us. For
example, ILM has already created and produced three-dimensional character
animation which was used for several central characters in the live action film
Star Wars Episode 1: The Phantom Menace, and ILM has a royalty-free, paid-up
license to use our RenderMan(R) software and to obtain at no cost all
enhancements and upgrades thereto. Other computer graphics special effects firms
have licensed or may license RenderMan(R). Accordingly, our RenderMan(R)
software may not provide us with a competitive advantage. We also compete, or
may in the future compete, with the above firms with respect to animation
products other than feature films. We believe that the primary competitive
factors in the market for three-dimensional computer animation for animated
feature films and other animation products include creative content and talent,
product quality, technology, access to distribution channels and marketing
resources. We believe that we presently compete favorably with respect to each
of these factors.
Software Publishers. We also experience intense competition with respect to
our RenderMan(R) software product. In particular, we compete with makers of
computer graphics imaging and animation software, principally SGI (which
acquired Wavefront Technologies, Inc. ("Wavefront") and Alias Research, Inc.
("Alias")), MentalImage GMD and Avid Technologies (which distributes the
MentalImage product). MentalImage, Avid and SGI, (which through it's
Alias/Wavefront subsidiary licenses "Maya", its three-dimensional software for
creating high quality animation and visual effects), are each marketing
competing rendering software products, usually at lower prices than ours. SGI
has licensed several of our patents that cover certain rendering techniques and
may therefore be better able to market products that compete with our
RenderMan(R) software. Under appropriate circumstances, we might elect to
license our rendering technology patents to other companies, some of which may
compete with us. In addition, as PC's become more powerful, software suppliers
may also be able to introduce products for PC's that would be competitive with
RenderMan(R) in terms of price and performance for professional users. We
believe that the primary competitive factors in the market for rendering
software include product quality, price/performance, technology, functionality,
breadth of features and customer service and support. We believe that we
presently compete favorably with respect to each of these factors.
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We expect competition to persist, intensify and increase in each of our
business areas in the future. Some of our current and potential competitors have
longer operating histories, larger installed customer bases and significantly
greater financial, technical, marketing and other resources than we do. There
can be no assurance that we will be able to compete successfully against current
or future competitors. Such competition could materially adversely affect our
business, operating results or financial condition.
PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon our
proprietary technology. While we rely on a combination of patents, copyright and
trade secret protection, nondisclosure agreements and cross-licensing
arrangements to establish and protect our proprietary rights, we believe that
factors such as the technical and creative skills of our personnel are more
essential to our success and ability to compete. We currently own sixteen
patents issued in the United States and eight issued in foreign countries. In
addition, we have a number of patent applications pending in the United States
and in foreign countries. There can be no assurance that patents will issue from
any of these pending applications or that, if patents do issue, any claims
allowed will be sufficiently broad to protect our technology. In addition, there
can be no assurance that any patents that have been issued to us, or that we may
license from third parties, will not be challenged, invalidated or circumvented,
or that any rights granted thereunder would provide proprietary protection to
us.
The source code for our proprietary software is protected both as trade
secrets and as a copyrighted work. We generally enter into confidentiality or
license agreements with our employees, consultants and vendors, and generally
control access to and distribution of our software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our proprietary information,
products or technology without authorization, or to develop similar or superior
technology independently. Policing unauthorized use of our products is
difficult. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. To license our RenderMan(R)
software product, we primarily rely on "shrink wrap" licenses that are not
signed by the end-user and, therefore, may be unenforceable under the laws of
certain jurisdictions. There can be no assurance that the steps we take will
prevent misappropriation of our technology or that our confidentiality or
license agreements will be enforceable. In addition, litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Any such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results or
financial condition.
One of the risks of the film production business are claims that our
productions infringe the intellectual property rights of third parties with
respect to previously developed films, stories, characters or other
entertainment. In addition, our technology and software may be subject to
patent, copyright or other intellectual property claims of third parties. We
have received, and are likely to receive in the future, notice of claims of
infringement of other parties' proprietary rights. There can be no assurance
that infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted or prosecuted against us or that
any assertions or prosecutions will not materially adversely affect our
business, financial condition or results of operations. Irrespective of the
validity or the successful assertion of such claims, we would incur significant
costs and diversion of resources with respect to the defense thereof which could
have a material adverse effect on our business, financial condition or results
of operations. If any claims or actions are asserted against us, we may seek to
obtain a license under a third party's intellectual property rights. There can
be no assurance, however, that under such circumstances a license would be
available on reasonable terms or at all.
We also rely on certain technology that we license from third parties,
including software that is integrated and used with internally developed
software. There can be no assurance that these third party technology licenses
will continue to be available to us on commercially reasonable terms. The loss
of or inability to maintain any of these technology licenses could result in
delays in feature film releases or product shipments until equivalent technology
could be identified, licensed and integrated. Any such delays in feature film
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releases or product shipments could materially adversely affect our business,
operating results or financial condition.
In 1996, we entered into a license agreement with SGI whereby we granted to
SGI and its subsidiaries a non-exclusive license to use certain of our patents
covering techniques for creating computer-generated photo-realistic images.
These same patents were licensed to Microsoft Corporation in 1995. These patents
relate to pseudo-random point sampling techniques in computer graphics, which
are incorporated into our RenderMan(R) software. The license agreements with SGI
and Microsoft will expire no later than the year 2010. SGI and Microsoft may use
the licensed technology in rendering products, which compete with our
RenderMan(R) software, and could adversely impact sales of RenderMan(R).
EMPLOYEES
As of March 15, 2001, we had a total of 581 employees. Although none of our
employees are represented by a labor union, it is common for animators and
actors at film production companies to belong to a union. There can be no
assurance that our employees will not join or form a labor union or that we, for
certain purposes, will not be required to become a union signatory. Further, we
may be directly or indirectly dependent upon union members, and work stoppages
or strikes organized by such unions could materially adversely impact our
business, financial condition or results of operations. For example, many of the
actors who provide voice talent for the Pictures and Derivative Works are
members of the Screen Actors Guild ("SAG") and/or American Federation of
Television and Radio Artists ("AFTRA"). See "Risk Factors -- Work stoppages by
the Screen Actors Guild and the American Federation of Television and Radio
Artists could adversely affect our operations." We have not experienced any work
stoppages, and we consider relations with our employees to be good.
Our success depends to a significant extent on the performance of a number
of senior management personnel and other key employees, especially our
animators, creative personnel and technical directors. In particular, we are
dependent upon the services of Steve Jobs, John Lasseter, Ed Catmull, Sarah
McArthur and Ann Mather. We do not maintain "key person" life insurance for any
of our employees. We do have an employment agreement with Mr. Lasseter, who is
fundamental to our relationship with Disney. However, this employment agreement
does not necessarily assure his services. We believe that it may be particularly
difficult to retain key employees, especially animators, creative personnel and
technical directors, during periods in which we are not developing animated
feature films. The loss of the services of any of Messrs. Jobs, Lasseter, Dr.
Catmull, Ms. McArthur, Ms. Mather or of other key employees, especially our
animators, creative personnel and technical directors, could have a material
adverse effect on our business, operating results or financial condition.
RISK FACTORS
The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. You
should carefully consider these factors before making an investment decision
with respect to our Common Stock.
TO MEET OUR FISCAL 2001 DILUTED EARNINGS PER SHARE TARGET, WE MUST RECEIVE
SUFFICIENT REVENUES PRIMARILY FROM OUR FEATURE FILMS AND, TO A LESSER EXTENT,
OUR NON-FILM RELATED SOURCES.
In 2001, our revenue and operating results will be largely dependent upon
(1) the timing and amount of worldwide television revenues for A Bug's Life, Toy
Story, and Toy Story 2, (2) the timing and amount of related revenues from Toy
Story 2 domestic and foreign home video sales, (3) the timing and amount of
Monsters, Inc., Toy Story franchise, and A Bug's Life merchandise sales and
ancillary royalties, (4) the timing and amount of revenue from the Buzz
Lightyear of Star Command television series and related home video release, (5)
the timing and amount of our remaining revenues from the home video releases of
A Bug's Life and Toy Story as part of Disney's Gold Collection, (6) the timing
of the theatrical release of Monsters, Inc. and the amount of related revenues,
(7) the timing and amount of distribution costs incurred in all markets for
Monsters, Inc., Toy Story 2, Toy Story, and A Bug's Life, (8) the timing,
accuracy, and sufficiency of the
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information we receive from Disney to determine revenues and associated gross
profits, and (9) the timing and amount of non-film related revenues, such as
licensing our software and interest income; and (10) the market price of our
common stock and related volatility.
DEPENDENCE ON REVENUE FROM OUR FEATURE FILMS.
Under the Co-Production Agreement, Pixar and Disney share equally in the
profits of A Bug's Life, Toy Story 2, and Monsters, Inc. after Disney recovers
its distribution fee and its marketing and distribution costs. Distribution
costs include worldwide theatrical release costs, costs related to merchandise,
Disney's costs to distribute home videos in the United States and foreign
markets, Disney's distribution fee, and other distribution costs including
talent participation and residuals.
Beginning with the first quarter of 2000, we have an improved ability,
through information available to us from Disney and other sources, to estimate
and record our share of film revenues and gross profits. While we anticipate
this improved ability will continue to allow us to recognize our share of film
revenues and gross profits on a more timely basis, we will remain dependent on
the timing, accuracy, and sufficiency of the information provided by Disney.
For our business to be successful, our films must achieve extraordinary box
office success. It is rare for animated feature films to achieve extraordinary
box office success. While we have been successful in the release of our first
three feature films, this level of success is unusual in the motion picture
industry, and our future releases may not achieve similar results. Beyond 2001,
we will be dependent on the future success of Monsters, Inc., Finding Nemo, Film
Six, and Film Seven (together referred to as the "Current Projects"). Unless
Monsters, Inc. and Finding Nemo achieve extraordinary box office success and
also achieve success in home video and merchandise sales, they may not generate
significant revenue and operating results for us in future years.
Dependence on Toy Story franchise and A Bug's Life. We will continue to be
significantly dependent upon the success of Toy Story 2 in fiscal year 2001. In
2000, we recognized essentially all of Toy Story 2 worldwide theatrical
revenues, as well as a substantial amount of anticipated related merchandise
revenue. Toy Story 2 was released on home video domestically on October 17,
2000, and was released in various major international markets, including the
U.K. and Japan, in November 2000. Consequently, a significant amount of expected
lifetime worldwide home video revenues from Toy Story 2 was recognized in the
fourth quarter of 2000. We also recognized a significant amount of expected
revenues from the Buzz Lightyear of Star Command television series and related
home video release in the third and fourth quarter of 2000. In fiscal year 2001,
we anticipate revenues from continuing worldwide home video sales, ancillary
merchandising revenue from our library titles, as well as some television
revenues. However, there can be no assurance that such revenues will be
sufficient to meet our targeted earnings.
A Bug's Life was released in November 1998, and we have recognized film
revenues to date of $114.8 million resulting primarily from the domestic and
foreign theatrical revenues from A Bug's Life, related domestic and foreign home
video revenue, related merchandise licensing, and some television revenue,
offset by Disney's marketing and distribution costs and its distribution fee.
This revenue from A Bug's Life represents a significant amount of the revenue we
expect to recognize over the lifetime of A Bug's Life. However, in line with
Disney's new home video strategy, by which more titles will be available on a
year-round basis, A Bug's Life VHS and DVD were repackaged and released as part
of Disney's Gold Collection on August 1, 2000. We expect sources of revenue in
fiscal year 2001 to include any remaining revenues from these home video sales,
possibly some television revenues, and any remaining ancillary merchandise
royalties; however, there can be no assurance that such revenues will be
sufficient to meet our targeted earnings for 2001.
Dependence on Monsters, Inc. While we anticipate Monsters, Inc. will be
released as targeted in November 2001, we cannot guarantee Monsters, Inc. will
be released at the scheduled time, and if it is released as scheduled, whether
it will be a box office success. A significant portion of our anticipated
revenues for fiscal year 2001, are based on the assumption that Monsters, Inc.
will be released November 2001, and that it will be an extraordinary box office
success. If Monsters, Inc. is not released as scheduled or is not an
extraordinary box office success, it would significantly and adversely impact
our 2001 operating results.
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FORECASTING REVENUE FROM OUR FEATURE FILMS IS EXTREMELY DIFFICULT.
It is difficult to forecast the amount and timing of our future revenues
from Toy Story, A Bug's Life, Toy Story 2 and Monsters, Inc. for fiscal year
2001. The amount of future revenues depends not only on customer acceptance of a
film in its worldwide theatrical release, but also on customer acceptance of
related products in each separate release category -- home video, merchandise
and television collectively, being the most significant. While customer
acceptance is initially measured by box office success, customer acceptance
within each follow-on product category, such as home video, merchandise or
television, depends on factors unique to each type of product, such as pricing,
competitive products, and the time of year or state of the economy in which a
product is released, among many other factors. In addition, we have found that
the degree of customer acceptance varies widely among foreign countries. While
box office success is often a good indicator of general customer acceptance, the
relative success of follow-on products is not always directly correlated, and
the degree of correlation is difficult to predict. Disney's strategic
distribution decisions also impact the amount of our future revenues. For
example, in the first half of 1999, Disney reported general softness in its
domestic home video sales and worldwide merchandise licensing as compared to
levels associated with many of its previous blockbuster animated feature films.
As a result, in 2000 Disney implemented a new strategy of releasing animated
films on home video year round, and in special editions in both VHS and DVD
formats. However, the relative success of 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 for fiscal year 2001. Similarly, it is difficult to predict remaining
video sales or television revenue from A Bug's Life in 2001. It is also
difficult to predict theatrical revenue and related merchandise revenue from the
anticipated release of Monsters, Inc. in November 2001.
With respect to the difficulty of forecasting the timing of revenues,
Disney distributes our films and film-related products and therefore determines
the timing of product releases. While the timing of theatrical releases is
typically known well in advance of release, the timing of release of follow-on
products is often decided just in advance of release, is subject to change, and
is therefore less predictable. For example, it was not until the first quarter
of fiscal year 2000 that is was determined that the Toy Story 2 home video would
be released domestically on October 17, 2000. In all product categories, timing
of revenues is particularly uncertain with respect to releases in foreign
markets as a foreign product release is often marked by a rollout across many
countries over the course of many months. Therefore, the timing of international
revenues is inherently more difficult to predict than the timing of domestic
revenues. In addition, the amount of revenue recognized in any given quarter or
quarters form all of our films depends on the timing, accuracy, and sufficiency
of the information we receive from Disney to determine revenues and associated
gross profits. Although we obtain from Disney the most current information
available to recognize our share of revenue and to determine our film gross
profit, Disney may make subsequent adjustments to the information that it has
provided which could have a material impact on us in later periods. For
instance, towards the end of the life cycle for a revenue stream, Disney may
inform us of additional distribution costs to those previously forecasted, as
occurred in the second quarter of fiscal year 2000. Such adjustments have and
may continue to impact our revenue share and our film gross profit. In addition,
through information we obtain from other sources, we may make certain judgments
and/or assumptions and adjust the information we receive from Disney. Due to
these factors, the amount and timing of our future revenues from Toy Story 2, A
Bug's Life and Monsters, Inc. are difficult to forecast, and it is possible, in
any given quarter, that we will not recognize sufficient film revenue to
generate significant earnings.
Under the Co-Production Agreement, Pixar and Disney share the production
costs of our feature films. We initially capitalize our share of these costs as
film production costs. Our policy is to amortize these costs over the expected
revenue streams as we recognize revenues from the associated films. The amount
of film costs that will be amortized each quarter will depend on how much future
revenue we expect to receive from each film. In any given quarter, if our
forecast changes with respect to total anticipated revenue from any individual
feature film and becomes lower than was previously forecasted, we would be
required to accelerate amortization of related film costs, resulting in lower
gross margins. Such lower gross margins would adversely impact our business,
operating results, and financial condition.
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SOFTWARE REVENUE.
Although software revenue increased in 2000, this may not be indicative of
future trends. We continue to reduce our emphasis on the commercialization of
software products. We are not increasing the time and resources necessary to
generate higher RenderMan(R) licensing revenues; therefore, we expect that
revenue from the licensing of RenderMan(R) will remain flat or possibly decline.
However, to meet our fiscal 2001 diluted earnings per share target, our revenue
estimates include revenues attributable to non-film related sources including
software revenue. There can be no assurance that the timing and amount of such
revenues will be sufficient to meet our targeted earnings.
OUR OPERATING RESULTS HAVE FLUCTUATED IN THE PAST, AND WE EXPECT SUCH
FLUCTUATIONS TO CONTINUE.
OUR REVENUES FLUCTUATE SIGNIFICANTLY.
We continue to expect significant fluctuations in our future annual and
quarterly revenues because of a variety of factors, including the following:
- the timing of the domestic and international releases of our animated
feature films,
- the success of our animated feature films, which can fluctuate
significantly from film to film,
- the timing of the release of related products into their respective
markets, such as home videos, television, and merchandising,
- the demand for such related products, which is often a function of the
success of the related animated feature film,
- Disney's costs to distribute and promote the feature films and related
products,
- Disney's success at marketing the films and related products,
- the timing and accuracy of information received from Disney and other
sources on which we base estimates of revenue to be recognized from our
animated feature films and related products by Disney,
- the introduction of new feature films or products by our competitors,
- general economic conditions, and
- timing and amount of non-film related revenues such as licensing of our
software and interest income.
In particular, since our revenue under the Co-Production Agreement is
directly related to the success of a feature film, our operating results are
likely to fluctuate depending on the level of success of our animated feature
films and related products. The revenues derived from the production and
distribution of an animated feature film depend primarily on the film's
acceptance by the public, which cannot be predicted and does not necessarily
bear a direct correlation to the production or distribution costs incurred. The
commercial success of a motion picture also depends upon promotion and
marketing, production costs and other factors. Further, the theatrical success
of a feature film can be a significant factor in determining the amount of
revenues generated from the sale of the related products.
OUR OPERATING EXPENSES FLUCTUATE.
Our operating expenses and effective tax rate continue to
fluctuate. Although operating expenses for 2000 remained relatively flat, we
plan to continue to increase our operating expenses to fund greater levels of
research and development, to build to our goal of producing one feature film per
year and to expand operations. Specifically, we expect our spending levels 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, (4) number of
personnel required to support studio growth and (5) increased investment in
creative development. A portion of our operating expenses that are allocable to
film productions is either capitalized by us or reimbursed by Disney under the
Co-Production Agreement. To
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the extent that we do not capitalize (or Disney does not pay for) the increases
in expenses, our operating expenses will significantly increase in 2001.
Finally, our annual tax rate in 2000 approximates statutory levels and we expect
our tax rate in 2001 to be slightly lower due to the realization of certain tax
benefits. We realize tax benefits from the exercise of non-qualified employee
stock options that reduce the amount of our tax payments and liabilities, but
will not reduce our future effective tax rates.
Forecasting our operating expenses is extremely difficult. Moreover, our
operating expenses will continue to be extremely difficult to forecast. We
budget the direct costs of film productions with Disney, and we share such costs
equally. We capitalize our share of these direct costs of film production in
accordance with SFAS No. 53 and under SOP 00-2 which will be adopted in the
first quarter of 2001. A substantial portion of all of our other costs are
incurred for the benefit of feature films ("Overhead"), including research and
development expenses and general and administrative expenses. Portions of our
Overhead are included in the budgets for the Pictures, and we will share such
costs equally with Disney under the Co-Production Agreement. With respect to the
portion of our Overhead that is not reimbursed by Disney, we either (1)
capitalize such portion as film production costs, if required under 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 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.
Film production budgets are likely to continue to increase, and film
production spending may exceed such budgets. Given the (1) escalation in
compensation rates of people required to work on the Current Projects, (2)
number of personnel required to work on the Current Projects, and (3) equipment
needs, the budget for the Current Projects and subsequent films and related
products may continue to be greater than the budgets for Toy Story, A Bug's
Life, and Toy Story 2. We will continue to finance these budgets equally with
Disney under the Co-Production Agreement. In addition, due to production
exigencies which are often difficult to predict, we believe that it is not
uncommon for film production spending to exceed film production budgets, and the
Current Projects may not be completed within the budgeted amounts. For example,
to meet the production schedule of Toy Story 2, we reassigned employees from
other projects, including Monsters, Inc., to complete Toy Story 2. This resulted
in a larger production staff than originally anticipated and it increased
production costs. In addition, when production of each film is completed, we may
incur significant carrying costs associated with transitioning personnel on
creative and development teams from one project to another, which, although
shared with Disney, are treated as film costs, which increase overall production
budgets and could have a material adverse effect on our results of operations
and financial condition.
OUR SCHEDULED SUCCESSIVE RELEASES OF FEATURE FILMS WILL CONTINUE TO PLACE A
SIGNIFICANT STRAIN ON OUR RESOURCES.
In order to meet our obligations pursuant to the Co-Production Agreement,
we have established parallel creative teams so that we can develop more than one
film at a time. These teams are currently working on Monsters, Inc., which is
currently targeted for release in November 2001, and Finding Nemo, which is
currently targeted for release in summer 2003. We also plan to have parallel
creative teams for Film Six and Film Seven and further to work towards producing
one feature film per year. We have only produced three prior feature films to
date and have limited experience with respect to producing animated feature
films in parallel. We have been required, and will continue to be required, to
expand our employee base, increase capital expenditures and procure additional
resources and facilities in order to accomplish the scheduled release of these
two feature films. This period of rapid growth and expansion has placed, and
continues to place, a significant strain on our resources. We cannot provide any
assurances that Monsters, Inc. or Finding Nemo will be released as targeted or
that this strain on resources will not have a material adverse effect on our
business, financial condition or results of operations. For example, to meet the
production schedule of A Bug's Life, we reassigned employees from other
projects, including Toy Story 2, to A Bug's Life. Similarly, to meet the
production schedule of Toy Story 2, we reassigned employees from other projects,
including Monsters, Inc., to Toy Story 2. In addition, John Lasseter, who was
previously providing creative oversight for Toy Story 2 in his role as Executive
Vice President, Creative, assumed the role of Director of Toy Story 2 in order
to expedite development and production of the film. Using the personnel of
future films to meet the immediate
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deadlines of films nearing release, as we have for both A Bug's Life and Toy
Story 2, is likely to have the long term impact of pushing out the targeted
release dates of future films, substantially increasing film budgets, and
adversely impacting our ability to generate creative concepts for subsequent
films on a timely basis.
In addition, as Director of Toy Story 2, John Lasseter was focused on Toy
Story 2 until its completion in 1999, and was less available to assist on
Monsters, Inc. during its development phase. John Lasseter's availability has
been a key ingredient in the successful completion of our prior films. A lack of
his availability may adversely impact our ability to release future films as
targeted.
If we are able to release films in 2001 and 2003, we cannot provide any
assurances that we will release our next film in 2004. Due to the strain on our
personnel from the effort required for the release of Monsters, Inc. and Finding
Nemo and the time required for creative development of a new film, it is
possible that we would be unable to release a successive new film in 2004. It is
too early to determine the rate at which any future films are to be released,
and we cannot provide any assurances that we will release a film in each
successive year or in any particular year.
To continue to accommodate growth, we will be required to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, including improvement and maintenance of our accounting system, other
internal management systems and backup systems. In addition, this growth and
these diversification activities, along with the corresponding increase in the
number of our employees and rapidly increasing costs, have resulted in increased
responsibility for our management team. We will need to continue to improve our
operational, financial and management information systems and to hire, train,
motivate and manage our employees, to integrate them into Pixar and to provide
adequate facilities and other resources for them. We cannot provide any
assurance we will be successful in accomplishing all of these activities on a
timely and cost-effective basis. Any failure to accomplish one or more of these
activities on a timely and cost-effective basis would have a material adverse
effect on our business, financial condition and results of operations.
THE CO-PRODUCTION AGREEMENT IMPOSES SEVERAL RISKS AND RESTRICTIONS ON US.
WE ARE DEPENDENT ON DISNEY FOR THE DISTRIBUTION AND PROMOTION OF OUR FEATURE
FILMS AND RELATED PRODUCTS.
The decisions regarding the timing of the theatrical release and related
products and which of Disney's motion pictures and related products will receive
extensive promotional support from the studio are important factors in
determining the success of our motion picture and related products. Under the
terms of the Co-Production Agreement, we have some general protections with
respect to the marketing and distribution of the feature films in the form of
commitments by Disney as to release windows, the timing of release of other
Disney family films and marketing obligations. However, we ultimately do not
control (1) the manner in which Disney distributes our animated feature films
and related products, (2) the number of theaters to which Disney distributes our
feature films, (3) the specific timing of release of the feature films and
related products or (4) the specific amount or quality of promotional support of
the feature films and related products and the associated promotional and
marketing budgets. Because Disney co-finances the films developed and produced
under the Co-Production Agreement, distributes the films under the "Walt Disney
Pictures" label and enjoy potential financial benefits in the event that such
films achieve significant box office revenues, we believe that Disney desires
such films to be successful. Nonetheless, Disney could make certain decisions as
to marketing, distribution or promotion of the animated feature films or related
products or the marketing and promotion of its own animated or other family
films that could have a material adverse effect on our business, operating
results or financial condition. In addition, the costs for marketing,
distribution and promotion of the films and related products are incurred well
in advance of the release of such films and products, and we will experience a
delay in the receipt of proceeds from such films and products until after Disney
recovers such costs. We are also dependent on Disney for receiving accurate
information on a timely basis on which we base estimates to recognize revenue
from the animated feature films and related products. If we failed to receive
accurate information from Disney, or failed to receive it on a timely basis, it
could have a material adverse effect on our business, operating results or
financial condition.
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DISNEY HAS AN EXCLUSIVE ARRANGEMENT WITH US.
We have agreed not to release or authorize the release of any of our
feature length animated theatrical motion pictures, other than the feature films
that we produced under the Co-Production Agreement, until twelve months from our
delivery of the fifth original feature film under the Co-Production Agreement.
We currently anticipate that we will not deliver the fifth Picture until 2005 at
the earliest. We have further agreed that we will not enter into any agreement
with any third party for the development, production or distribution of any
feature length animated theatrical motion picture until after we have delivered
the third original feature film to Disney under the Co-Production Agreement. We
have also agreed that we will not develop or produce any rides or attractions
for major theme parks not owned or operated by Disney, and to give Disney a
right to negotiate with respect to animated television productions or animated
made-for-home video productions that we propose to produce during the term of
the Co-Production Agreement. Disney, however, is not similarly restricted by the
exclusivity provisions that bind us under the Co-Production Agreement and,
therefore, may develop, produce, or distribute other feature length animated and
computer animated theatrical motion pictures itself or enter into similar
agreements with third parties. See "Business -- Competition," and "-- We
experience intense competition with respect to our animated feature films,
animation products, and software."
WE HAVE AN OBLIGATION TO CO-FINANCE PRODUCTION COSTS.
Under the Co-Production Agreement, unlike the Feature Film Agreement which
is applicable to Toy Story, we will continue to co-finance each of the four
remaining original animated feature films and may co-finance other related
products to be developed and produced pursuant to the Co-Production Agreement.
We co-financed A Bug's Life and Toy Story 2 and are currently co-financing
Monsters, Inc., Finding Nemo, Film Six and Film Seven under the Co-Production
Agreement. Accordingly, unlike the Feature Film Agreement, we will incur
significant production costs, which must be offset by proceeds generated by the
animated feature films and related products. If the feature films and related
products do not generate proceeds sufficient to more than offset our share of
their production costs, our business, operating results and financial condition
will be materially adversely effected.
DISNEY RETAINS THE EXCLUSIVE DISTRIBUTION AND EXPLOITATION RIGHTS.
We share equally with Disney in the profits of each Picture and any related
merchandise after Disney recovers certain costs; however, Disney retains the
exclusive distribution and exploitation right to all feature films, all
characters and story elements of the feature films and all related products we
develop under the Co-Production Agreement. Accordingly, except in certain
specified circumstances, we are not able to exploit or distribute any of the
feature films or characters or elements of any of the feature films or related
products developed under the Co-Production Agreement without a license from
Disney. We cannot provide any assurances that such a license would be available
to us on commercially reasonable terms or at all.
DISNEY CAN TERMINATE THE AGREEMENT UNDER VARIOUS CIRCUMSTANCES.
Under the terms of the Co-Production Agreement, Disney may terminate the
agreement under certain circumstances. For example, Disney is entitled to
terminate the Co-Production Agreement in the event that we fail to agree with
Disney on a treatment for a Picture within one year after the initial theatrical
release of the last Picture for which a treatment has been approved or selected,
subject to certain exceptions. Disney is also entitled to terminate the
Co-Production Agreement in the event that certain types of competitors directly
or indirectly acquire or control a 50% or greater ownership interest in Pixar or
Pixar merges or consolidates into such a competitor. We cannot provide any
assurances that Disney would not terminate the Co-Production Agreement under
these circumstances. Disney would not lose any of its rights to distribute and
exploit all feature films and all characters and elements of the feature films
and other products we develop under the Co-Production Agreement, except for
feature film(s) or related products then in development or production as to
which Disney does not elect to proceed, as to which we would regain the rights
subject to a lien in favor of Disney for the costs advanced to date. Further, in
the event that Disney terminated the Co-Production Agreement, we would be
required to seek alternative channels for distribution of our animated feature
films and related products. We cannot provide any assurances that we would be
able to find a third party to finance,
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distribute and promote our animated feature films and related products on terms
acceptable to us, if at all. See "Business -- Relationship with Disney."
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE MOTION PICTURE INDUSTRY.
THE COMMERCIAL SUCCESS OF A MOTION PICTURE IS EXTREMELY UNPREDICTABLE.
The motion picture industry involves a substantial degree of risk. Each
motion picture is an individual artistic work, and its commercial success is
primarily determined by audience reaction, which is unpredictable. The
commercial success of a motion picture also depends upon other factors, such as:
- distribution strategy and the number of screens on which it is shown,
- the quality and acceptance of other competing films released into the
marketplace at or near the same time,
- critical reviews,
- the availability of alternative forms of entertainment and leisure time
activities,
- general economic conditions,
- weather conditions, and
- other tangible and intangible factors.
All of these factors can change and cannot be predicted with certainty. In
addition, motion picture attendance is seasonal, with the greatest attendance
typically occurring during the summer and holidays. The release of a film during
a period of relatively low theater attendance is likely to affect the film's box
office receipts adversely. However, under the terms of the Co-Production
Agreement, Pixar is guaranteed theatrical release either during the summer or
holiday period. Further, due to the expected release of a large number of
animated films by Disney and other movie studios in the next several years, it
is possible that further saturation of the animated film market may adversely
impact the commercial success of our films, and therefore have a material
adverse effect on our business, financial condition and results of operations.
See "Business -- Competition."
THE COMPLETION OF A MOTION PICTURE IS SUBJECT TO NUMEROUS RISKS AND
UNCERTAINTIES.
The production, completion and distribution of motion pictures is subject
to numerous uncertainties, including financing requirements, personnel
availability and the release schedule of competitive films. We are concurrently
developing and producing two animated feature films, Monsters, Inc. and Finding
Nemo, and developing Film Six and Film Seven, which compounds these
uncertainties and jeopardizes the successful, timely and cost-effective
production and completion of each film. Under the Co-Production Agreement, we
have increased our financial involvement in the production costs of motion
pictures, which subjects us to substantial financial risks relating to the
production, completion and release of the motion pictures. In addition, a
significant amount of time will elapse between our expenditure of funds and our
receipt of proceeds from the animated feature films.
IN ORDER FOR OUR FEATURE FILMS AND RELATED PRODUCTS TO BE SUCCESSFUL, WE MUST
DEVELOP APPEALING CREATIVE CONTENT.
The success of each animated film developed and produced by us will depend
in large part upon our creative team's ability to predict the type of content
that will appeal to a broad audience and to develop stories and characters that
will achieve broad market acceptance. Traditionally, it has been extremely
difficult. While we have enjoyed tremendous box office success with Toy Story, A
Bug's Life, and Toy Story 2 , there can be no assurance that similar levels of
success will be achieved by our subsequent films, including Monsters, Inc.,
Finding Nemo, Film Six and Film Seven. In addition, there can be no assurance
that voices and other intellectual property rights used in the animated feature
film will be available for use in any sequel or other products related to such
feature film. For example, we were unable to obtain the rights to use certain
voices
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from Toy Story in the two CD-ROM products based on Toy Story . See "Risk
Factors -- In order for our feature films and related products to be successful,
we must develop appealing creative content".
WE EXPERIENCE INTENSE COMPETITION WITH RESPECT TO OUR ANIMATED FEATURE FILMS,
ANIMATION PRODUCTS, AND SOFTWARE.
We experience intense competition with respect to our animated feature
films, animation products, and software.
MOVIE STUDIOS.
Our animated feature films compete and will continue to compete with
feature films and other family-oriented entertainment products produced by major
movie studios, including Disney (as somewhat limited by the Co-Production
Agreement), DreamWorks SKG ("DreamWorks") (which continues to target the
animated film market), Warner Bros. Inc., Sony Pictures Entertainment ("Sony"),
Twentieth Century Fox Film Corporation ("Twentieth Century Fox"), Paramount
Pictures ("Paramount"), Lucasfilm Ltd. ("Lucasfilm"), Universal Studios, Inc.
and MGM/UA, as well as numerous other independent motion picture production
companies.
In 1999 and 2000, competition continued to intensify in the animated
feature film market. Family-oriented animated feature films released in the
domestic theatrical market in 1999 and 2000 included the following.
Released in 1999:
- Doug's First Movie by Disney
- Tarzan by Disney,
- Iron Giant by Warner Bros., and
- Pokemon: The First Movie by Warner Bros.
Released in 2000:
- The Tigger Movie by Disney,
- The Road to El Dorado by Dreamworks,
- Dinosaurs by Disney,
- Chicken Run by Dreamworks,
- Titan A.E. by Twentieth Century Fox,
- Pokemon 2 by Warner Bros.,
- Digimon: the Movie by Twentieth Century Fox,
- Rugrats in Paris by Paramount, and
- The Emperor's New Groove by Disney.
The release of Toy Story 2 in 1999 was highly successful, resulting in
domestic box office revenues exceeding $245 million. However, other animated
family-oriented feature films released during 1999, such as Pokemon: The First
Movie, Tarzan, and Iron Giant, achieved domestic box office revenues of over $86
million, $171 million, and $23 million, respectively. We also experienced
competition from a non-animated family-oriented film, Stuart Little, which was
released by Sony during the 1999 holiday season. Stuart Little combined live
action with computer-animated characters, and earned over $140 million in
domestic box office receipts. In addition to box office competition, other
family-oriented films may continue to compete with Toy Story 2 with respect to
related merchandise, home video sales, and other future revenue sources. For
example,
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in the home video market, Toy Story 2 also experienced competition from the
animated feature film, Chicken Run, as well as the direct-to-video animated
feature Little Mermaid II: Return to the Sea.
We expect competition from animated feature films and family oriented
feature films will continue to intensify over the next several years that will
directly compete with Monsters, Inc. and Finding Nemo, which are targeted for
release in November 2001 and summer 2003, respectively. For example, Harry
Potter and The Sorcerer's Stone, produced and distributed by Warner Bros., is
targeted for domestic theatrical release in November 2001 and will compete
directly with Monsters, Inc. Due to a potentially large number of family
oriented films scheduled for release over the next two years, it is possible
that the market for these films, whether animated or live action, will become
further saturated before we can release Monsters, Inc. and Finding Nemo. This
could result in failure of such films to achieve the extraordinary commercial
success required for us to profit from such films.
Our films will continue to compete with the feature films of other movie
studios for optimal release dates, audience acceptance, and exhibition outlets.
In addition, we compete and will continue to compete with other movie studios
for the acquisition of literary properties, the services of performing artists,
and the services of other creative and technical personnel, particularly in the
fields of animation and technical direction. Some of the other movie studios
with which we compete have significantly greater financial, marketing and other
resources than we do.
At least three of these movie studios, Disney, DreamWorks and Lucasfilm,
have developed their own internal computer animation capability which may be
used for special effects in animated films and live action films. For example,
DreamWorks (with PDI) successfully produced Antz in 1998, and is currently (with
PDI) developing and producing the animated film Shrek, scheduled for release in
May 2001. In addition, Disney released Dinosaur in May 2000, a film which
combined live action backgrounds with computer-animated dinosaurs and special
effects. Other movie studios may internally develop, license or sub-contract
three-dimensional animation capability. Further, we believe that continuing
enhancements in commercially available computer hardware and software technology
have lowered and will continue to lower barriers to entry for studios or special
effects companies which intend to produce computer-animated feature films or
other products. For example, SGI's Alias/Wavefront subsidiary licenses "Maya,"
which is its next generation three-dimensional software for creating high
quality animation and visual effects. "Maya" incorporates many new features and
could be used to make a computer-animated feature film.
The Co-Production Agreement provides that we will develop and produce five
original computer-animated feature films. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the "Walt Disney Pictures" label and enjoys financial benefits in the
event that such films achieve significant box office revenues, we believe that
Disney desires such films to be successful. Nonetheless, during its long
history, Disney has been a very successful producer and distributor of its own
animated feature films. While the Co-Production Agreement imposes restrictions
prohibiting Disney from releasing G-rated films, whether live action or
animated, within certain release windows from our films, it is likely that other
family-oriented motion pictures distributed by Disney or its affiliates will
overlap in the market and compete with our animated feature films. For example,
Mighty Joe Young, released during the 1998 holiday season, competed with A Bug's
Life in the domestic theatrical market. Our contractual arrangement with Disney
also presents other risks. See "Risk Factors -- The Co-Production Agreement
imposes several risks and restrictions on us."
We believe that the primary competitive factors in the market for animated
feature films include creative content and talent, product quality, technology,
access to distribution channels and marketing resources. Due in part to our
creative and technical resources and to the Co-Production Agreement with Disney,
pursuant to which Disney co-finances the production of the feature films,
markets the feature films and provides creative assistance and access to
significant distribution channels, we believe that we presently compete
favorably with respect to each of these factors.
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COMPUTER GRAPHICS SPECIAL EFFECTS FIRMS.
We also expect to compete with computer graphics special effects firms,
including ILM, Rhythm & Hues/VIFX, Tippett Studios, Digital Domain, and Sony
Pictures Imageworks. These computer graphics special effects firms may be
capable of creating their own three-dimensional computer animated feature films
or may produce three-dimensional computer-animated feature films for movie
studios that compete with us. For example, ILM has already created and produced
three-dimensional character animation which was used for several central
characters in the live action film Star Wars Episode 1: The Phantom Menace, and
ILM has a royalty-free, paid-up license to use our RenderMan(R) software and to
obtain at no cost all enhancements and upgrades thereto. Other computer graphics
special effects firms have licensed or may license RenderMan(R). Accordingly,
our RenderMan(R) software may not provide us with a competitive advantage. We
also compete, or may in the future compete, with the above firms with respect to
animation products other than feature films. We believe that the primary
competitive factors in the market for three-dimensional computer animation for
animated feature films and other animation products include creative content and
talent, product quality, technology, access to distribution channels and
marketing resources. We believe that we presently compete favorably with respect
to each of these factors.
SOFTWARE PUBLISHERS.
We also experience intense competition with respect to our RenderMan(R)
software product. In particular, we compete with makers of computer graphics
imaging and animation software, principally SGI (which acquired Wavefront
Technologies, Inc. ("Wavefront") and Alias Research, Inc. ("Alias")),
MentalImage GMD and Avid Technologies (which distributes the MentalImage
product). MentalImage, Avid and SGI, which through it's Alias/Wavefront
subsidiary licenses "Maya", its three-dimensional software for creating high
quality animation and visual effects, are each marketing competing rendering
software products, usually at lower prices than Pixar. SGI has licensed several
of our patents that cover certain rendering techniques and may therefore be
better able to market products that compete with our RenderMan(R) software.
Under appropriate circumstances, we might elect to license our rendering
technology patents to other companies, some of which may compete with us. In
addition, as PC's become more powerful, software suppliers may also be able to
introduce products for PC's that would be competitive with RenderMan(R) in terms
of price and performance for professional users. We believe that the primary
competitive factors in the market for rendering software include product
quality, price/performance, technology, functionality, breadth of features and
customer service and support. We believe that we presently compete favorably
with respect to each of these factors.
We expect competition to persist, intensify and increase in each of our
business areas in the future. Some of our current and potential competitors have
longer operating histories, larger installed customer bases and significantly
greater financial, technical, marketing and other resources than we do. There
can be no assurance that we will be able to compete successfully against current
or future competitors. Such competition could materially adversely affect our
business, operating results or financial condition.
WE HAVE A LIMITED OPERATING HISTORY.
Until 1996, we had generated recurring revenue primarily from the license
of our RenderMan(R) software, amounts we received under software development
contracts and fees for animated television commercial development. However, we
continue to expect to generate a substantial majority of our future revenue from
the development and production of animated feature films and related products,
as we have since 1996. We have, to date, developed and produced only three
animated feature films, Toy Story, A Bug's Life, and Toy Story 2, and only two
related products (both CD-ROM titles, which we no longer intend to produce).
Accordingly, we have only a limited operating history in implementing our
business model upon which an evaluation of Pixar and our prospects can be based.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the early stages of a
business enterprise, particularly companies in highly competitive markets. To
address these risks, we must, among other things, respond to changes in the
competitive environment, continue to attract, retain and motivate qualified
persons,
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and continue to upgrade our technologies. We cannot provide any assurances that
we will be successful in addressing such risks.
OUR CURRENT AND FUTURE COMMITMENTS MAY HAVE AN ADVERSE IMPACT ON OUR 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., Finding Nemo, 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 recently
constructed a new studio and headquarters facility in Emeryville, California,
which was financed by the use of our cash. The development and production costs
of Monsters, Inc., Finding Nemo, Film Six and Film Seven and any additional
remaining costs of the new Emeryville facility may have an adverse impact on our
cash and short-term investment balances. As of December 30, 2000, we had
approximately $202.8 million in cash and short-term investments. We believe that
these funds, along with cash provided by operating activities, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures, including the development and production costs of Monsters, Inc.,
Finding Nemo, Film Six and Film Seven. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in Item 7 of this Form 10-K. 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.
OUR SUCCESS DEPENDS ON CERTAIN KEY EMPLOYEES.
Our success depends to a significant extent on the performance of a number
of senior management personnel and other key employees, especially our
animators, creative personnel and technical directors. In particular, we are
dependent upon the services of Steve Jobs, John Lasseter, Edwin E. Catmull, Ann
Mather, and Sarah McArthur. We do not maintain "key person" life insurance for
any of our employees. We do have an employment agreement with Mr. Lasseter, who
is fundamental to Pixar's relationship with Disney. However, such employment
agreement does not necessarily assure the services of Mr. Lasseter. Moreover,
although it is standard in the motion picture industry to rely on employment
agreements as a method of retaining the services of key employees, we have not
required our employees, other than Mr. Lasseter, to enter into employment
agreements. We believe that it may be particularly difficult to retain our key
employees, especially our animators, creative personnel and technical directors,
during periods in which we are not developing animated feature films. The loss
of the services of any of Messrs. Jobs, Lasseter, Dr. Catmull, Ms. Mather, Ms.
McArthur or of other key employees, especially our animators, creative personnel
and technical directors, could have a material adverse effect on our business,
operating results or financial condition. Although none of our employees is
represented by a labor union, it is common for animators and actors at film
production companies to belong to a union. Further, we may be directly or
indirectly dependent upon union members, and work stoppages or strikes organized
by such unions could materially adversely impact our business, financial
condition or results of operations. For example, many of the actors who provide
voice talent for the Pictures and Derivative Works are members of the Screen
Actors Guild and the current SAG contract expires June 30, 2001. If a work
stoppage did occur, it could have a material adverse affect on completing our
films. There can be no assurance that our employees will not join or form a
labor union, or that we will not be directly or indirectly impacted by industry
related work stoppages or that we, for certain purposes, will not be required to
become a union signatory. See "Business -- Employees" and
"Management -- Directors and Executive Officers of the Company."
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OUR CHIEF EXECUTIVE OFFICER HAS DIVIDED RESPONSIBILITIES.
Pixar's Chief Executive Officer and Chairman, Steve Jobs, is also Chief
Executive Officer at Apple Computer, Inc. Although Mr. Jobs spends time at Pixar
and is active in our management, he does not devote his full time and resources
to Pixar.
TO BE SUCCESSFUL, WE NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our success continues to depend to a significant extent on our ability to
identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that we will be successful in identifying,
attracting, hiring, training and retaining such personnel in the future. The
competition for quality animators, creative personnel and technical directors is
especially intense because the entertainment market for such talent has
significantly expanded over the past several years. If we were unable to hire,
assimilate and retain qualified personnel in the future, particularly animators,
creative personnel and technical directors, such inability would have a material
adverse effect on our business, operating results and financial condition. See
"Business -- Employees" and "Management -- Executive Officers of the Company."
WE FACE VARIOUS DISTRIBUTION RISKS WITH RESPECT TO OUR FEATURE FILMS.
Disney is required to distribute the remaining four animated feature films
to be produced pursuant to the Co-Production Agreement. Distribution of a motion
picture generally involves domestic and foreign licensing for (1) theatrical
exhibition, (2) home video, (3) presentation on television, including pay,
network, basic cable and syndication, (4) non-theatrical exhibition, which
includes airlines, schools and armed forces facilities and (5) marketing of
other rights of the picture, which may include merchandising, such as CD-ROM
titles, toys and soundtrack recordings. Although the Co-Production Agreement
provides us with some protection, we cannot provide any assurances that the
feature films made under the Co-Production Agreement will be distributed through
all of these outlets. For example, Disney has traditionally not made its
animated feature films available on premium pay television such as HBO,
Showtime, Encore, Starz and Cinemax. See "Business -- Business Model and
Products."
WE DEPEND ON OUR PROPRIETARY TECHNOLOGY AND COMPUTER SYSTEMS FOR THE TIMELY AND
SUCCESSFUL DEVELOPMENT OF OUR FEATURE FILMS AND RELATED PRODUCTS.
We cannot provide any assurances that we will not experience difficulties
that could delay or prevent the successful development or production of future
animated feature films or other related products. Among other things, because we
are dependent upon a large base of software and a large number of computers for
the development and production of our animated feature films and related
products, an error or defect in the software, a failure in the hardware or a
failure of the backup facilities could result in a significant delay in one or
more productions in process which, in turn, could result in potentially
significant delays in the release dates of our feature films or other products.
For example, early in 1998 we experienced a failure of our backup systems for
Toy Story 2 which resulted in substantial effort to restore data and a loss of
certain data, but which did not have a material impact on the schedule for
production or release of Toy Story 2. However, significant delays in production
and significant delays in release dates could have a material adverse effect on
our business, operating results or financial condition. Further, because we rely
mostly on internally developed software, we would not be able to rely upon
assistance from third parties in the event that the software fails. See
"Business -- Technology."
A SINGLE SHAREHOLDER OWNS A LARGE PERCENTAGE OF OUR OUTSTANDING STOCK.
Our Chief Executive Officer, Steve Jobs, beneficially owns approximately
63% of our outstanding Common Stock as of March 15, 2001. As a result, Mr. Jobs,
acting alone, is able to exercise sole discretion over all matters requiring
shareholder approval, including the election of the entire board of directors
and approval of significant corporate transactions, including an acquisition of
Pixar. Such concentration of ownership may also have the effect of delaying or
preventing a change in control of Pixar, impeding a merger,
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consolidation, takeover or other business combination involving Pixar, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Pixar.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR OPERATIONS.
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. We are
currently expanding our detailed disaster recovery plan. Our facilities in the
State of California are currently subject to electrical blackouts as a
consequence of a shortage of available electrical power. In the event these
blackouts continue or increase in severity, they could disrupt the operations of
our affected facilities. In connection with the shortage of available power,
prices for electricity have risen dramatically, and will likely continue to
increase for the foreseeable future. Such price changes will increase our
operating costs, which could in turn adversely affect our profitability.
Although we carry business interruption insurance, there can be no assurance
that such insurance will be sufficient to compensate us for losses that may
occur and any losses or damages incurred by us could have a material adverse
effect on our business.
WORK STOPPAGES BY THE SCREEN ACTORS' GUILD AND THE AMERICAN FEDERATION OF
TELEVISION AND RADIO ARTISTS COULD ADVERSELY AFFECT OUR OPERATIONS.
Although none of our employees are represented by a labor union, it is
common for animators and actors at film production companies to belong to a
union. There can be no assurance that our employees will not join or form a
labor union or that we, for certain purposes, will not be required to become a
union signatory. We are directly or indirectly dependent upon certain union
members, and work stoppages or strikes organized by such unions could materially
adversely impact our business, financial condition or results of operations. For
example, many of the actors who provide voice talent for the Pictures and
Derivative Works are members of the SAG and/or AFTRA and the current SAG and
AFTRA contract expires June 30, 2001. If a work stoppage did occur, it could
have a material adverse effect on the completion of our films as currently
scheduled and on our operations.
TO BE SUCCESSFUL, WE WILL NEED TO CONTINUOUSLY ENHANCE OUR EXISTING PROPRIETARY
TECHNOLOGY AND DEVELOP NEW TECHNOLOGY.
Substantially all of our revenues have been derived, and substantially all
of our future revenues are expected to be derived, from the use and license of
our proprietary technologies. We expect that we will be required to enhance
these technologies and to develop new technologies in order to be successful in
our industry and in the licensing of our RenderMan(R) software. We cannot
provide any assurances that we will be successful in enhancing our existing
technologies or in developing and utilizing new technologies, or that
competitors will not develop technology that is equivalent or superior to our
technologies or that makes our technologies obsolete. If we are unable to
develop enhancements to our existing technologies or new technologies as
required, our business, operating results or financial condition could be
materially adversely affected. See "Business -- Technology" and
"Business -- Competition -- Movie Studios."
THERE ARE VARIOUS RISKS ASSOCIATED WITH OUR PROPRIETARY RIGHTS.
OUR EFFORTS TO PROTECT OUR PROPRIETARY TECHNOLOGIES MAY NOT SUCCEED.
Our success and ability to compete is dependent in part upon our
proprietary technology. While we rely on a combination of patents, copyright and
trade secret protection, nondisclosure agreements and cross-licensing
arrangements to establish and protect our proprietary rights, we believe that
factors such as the technical and creative skills of our personnel are more
essential to our success and ability to compete. We currently own sixteen
patents issued in the United States and eight issued in foreign countries. In
addition, we have a number of patent applications pending in the United States
and in foreign countries. We cannot provide any assurances that patents will
issue from any of these pending applications or that, if patents do issue, any
claims allowed will be sufficiently broad to protect our technology. In
addition, we cannot provide any assurances that any patents that have been
issued to us, or that we may license from third parties, will not be
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challenged, invalidated or circumvented, or that any rights granted thereunder
would provide us with any proprietary protection. Failure of the patents to
provide protection of our technology may make it easier for our competitors to
offer technology equivalent to or superior to our technology. See
"Business -- Proprietary Rights."
The source code for our proprietary software is protected both as trade
secrets and as a copyrighted work. We generally enter into confidentiality or
license agreements with our employees, consultants and vendors, and generally
control access to and distribution of our software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our proprietary information,
products or technology without authorization, or to develop similar or superior
technology independently. Policing unauthorized use of our products is
difficult. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. To license our RenderMan(R)
software product, we primarily rely on "shrink wrap" licenses that are not
signed by the end-user and, therefore, may be unenforceable under the laws of
certain jurisdictions. We cannot provide any assurances that the steps we take
will prevent misappropriation of our technology or that our confidentiality or
license agreements will be enforceable. See "Business -- Proprietary Rights."
ENFORCING OUR PROPRIETARY RIGHTS MAY REQUIRE LITIGATION.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Any such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our
business, operating results or financial condition. See "Business -- Proprietary
Rights."
OTHERS MAY ASSERT INFRINGEMENT CLAIMS AGAINST US.
One of the risks of the film production business is the possibility of
claims that our productions infringe the intellectual property rights of third
parties with respect to previously developed films, stories, characters or other
entertainment. In addition, our technology and software may be subject to
patent, copyright or other intellectual property claims of third parties. We
have received, and are likely to receive in the future, notice of claims of
infringement of other parties' proprietary rights. There can be no assurance
that infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted or prosecuted against us, or that
any assertions or prosecutions will not materially adversely affect our
business, financial condition or results of operations. Irrespective of the
validity or the successful assertion of such claims, we would incur significant
costs and diversion of resources with respect to the defense thereof which could
have a material adverse effect on our business, financial condition or results
of operations. If any claims or actions are asserted against us, we may seek to
obtain a license under a third party's intellectual property rights. We cannot
provide any assurances, however, that under such circumstances a license would
be available on reasonable terms or at all. See "Business -- Proprietary
Rights."
THIRD-PARTY TECHNOLOGY LICENSES MAY NOT CONTINUE TO BE AVAILABLE TO US IN THE
FUTURE.
We also rely on certain technology that we license from third parties,
including software that we integrate and use with our internally developed
software. We cannot provide any assurances that these third party technology
licenses will continue to be available to us on commercially reasonable terms.
The loss of or inability to maintain any of these technology licenses could
result in delays in feature film releases or product releases until equivalent
technology could be identified, licensed and integrated. Any such delays in
feature film releases or product releases could materially adversely affect our
business, operating results and financial condition. See
"Business -- Proprietary Rights."
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THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE IN THE PAST, AND WE
EXPECT SUCH VOLATILITY TO CONTINUE.
The market price of our Common Stock is highly volatile and is subject to
wide fluctuations in response to a wide variety of factors including the
publication of box office results for our feature films and those of our
competitors, fluctuations in our quarterly or annual results of operations,
changes in financial estimates by securities analysts, announcements made by us,
Disney, or our competitors, budget increases, delays in or cancellation of
feature film or other product release dates, or other events or factors. For
example, since January 2, 2000, our Common Stock has closed as low as $26.50 and
as high as $40.00 per share. Moreover, in recent years, the stock market in
general, and the shares of technology companies in particular, have experienced
extreme price and volume fluctuations, some of which have been unrelated or
disproportionate to the operating performances of such companies. These broad
market and industry fluctuations may adversely affect the market price of our
Common Stock. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company. If brought against Pixar, such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on our business, operating
results or financial condition. See "Market for Registrant's Common Stock and
Related Shareholder Matters."
We believe that period-to-period comparisons of our results of operations
may not be necessarily meaningful as described in "Risk Factors -- Our operating
results have fluctuated in the past and we expect such fluctuations to
continue." Accordingly, you should not rely on our annual and quarterly results
of operations as any indication of future performance. As a result, it is likely
that in some future period our operating results will be below the expectations
of public market analysts and investors. In such event, the price of our Common
Stock would likely be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Form 10-K.
ITEM 2. PROPERTIES
In November 2000, we moved our offices from leased facilities in Richmond,
California to our new 215,000 square foot headquarters and studio facility in
Emeryville, California. Through December 30, 2000, we incurred total capital
expenditures of $98.6 million for the purchase of the land and to construct our
studio facility. 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 occupied by
commercial tenants and is expected to generate rental income. We used existing
cash resources to fund these facility-related costs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Item 7 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
We are involved in claims arising in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, we believe these
matters will be resolved without material adverse effect on our financial
position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposals were submitted to shareholders at our Annual
Meeting of Shareholders held October 26, 2000. Each of these proposals was
approved by a majority of the shares present at the meeting.
1. To approve an amendment to our Bylaws to increase the authorized
number of directors to a range of six to eleven directors, with the exact
number to be fixed at eight. Results of the voting included 43,919,526
shares for, 141,846 shares against and 42,936 shares abstained.
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2. To re-elect seven directors and elect one new director to serve for
the ensuing year or until their successors are duly elected and qualified.
SHARES FOR SHARES WITHHELD
---------- ---------------
Steve Jobs....................................... 44,042,536 61,772
Larry W. Sonsini................................. 43,739,113 365,195
Skip M. Brittenham............................... 44,022,054 82,254
Joseph A. Graziano............................... 44,023,619 80,689
Jill E. Barad.................................... 43,988,213 116,095
Edwin E. Catmull................................. 44,042,001 62,307
Lawrence B. Levy................................. 44,038,150 66,158
Joe Roth......................................... 44,034,954 69,354
3. To approve an amendment to our 1995 Stock Plan to increase the
number of shares reserved for issuance thereunder by 3,350,000 shares.
Results of the voting included 31,613,594 shares for, 5,963,492 shares
against, 36,409 shares abstained and 6,490,813 broker no votes.
4. To ratify the appointment of KPMG LLP as our independent auditors
for the fiscal year ended December 30, 2000. Results of the voting included
44,063,095 shares for, 25,809 shares against and 15,404 shares abstained.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of Pixar and their ages as of March 15, 2001 are as
follows:
NAME AGE POSITION
---- --- --------
Steve Jobs........................... 46 Chairman and Chief Executive Officer
Edwin E. Catmull..................... 55 President
Ann Mather........................... 40 Executive Vice President, Chief Financial Officer and
Secretary
John Lasseter........................ 44 Executive Vice President, Creative Development
Sarah McArthur....................... 44 Executive Vice President, Production
Pixar's executive officers are appointed by, and serve at the discretion
of, the Board of Directors. Each executive officer is an employee of Pixar.
There is no family relationship between any executive officer or director of
Pixar.
Mr. Jobs is a co-founder of Pixar and has served as its Chairman since
March 1991 and as its Chief Executive Officer since 1986. He has been a director
of Pixar since 1986. In addition, Mr. Jobs currently serves as Chief Executive
Officer and as a member of the Board of Directors of Apple Computer, Inc.
("Apple"). Mr. Jobs was also a co-founder of NeXT Software, Inc. ("NeXT"), which
developed and marketed object-oriented software for client/server business
applications and the Internet, and served as the Chairman and Chief Executive
Officer of NeXT from October 1985 until February 1997, when NeXT was acquired by
Apple. Mr. Jobs then served as an advisor on a limited basis, then interim Chief
Executive Officer to Apple until assuming his current role as Chief Executive
Officer of Apple. Mr. Jobs has also served as a director of Gap Inc. since
September 1999.
Dr. Catmull is a co-founder of Pixar and in January 2001 was promoted to
President of Pixar. Dr. Catmull had served as Executive Vice President and Chief
Technical Officer since June 1995. From March 1991 to February 1995, he served
as President, from November 1988 to March 1991 he served as Chairman and from
February 1986 to November 1988 he served as President. Prior to joining Pixar,
he was Vice President of the Computer Division of Lucasfilm. In March 2001, Dr.
Catmull, along with two other Pixar employees, received an Oscar(R) from the
Academy of Motion Pictures Arts and Sciences for Scientific and Technical
Achievement for his work in developing our RenderMan(R) software. Dr. Catmull
received the Scientific and Engineering Award from The Academy of Motion Picture
Arts and Sciences in 1992 and also received the SIGGRAPH Coons Award for
lifetime contributions in 1993. Dr. Catmull was inducted into the National
Academy of Engineering in 2000 and is a member of the Scientific and Technical
Awards Committee of The Academy of Motion Picture Arts and Sciences. Dr. Catmull
received B.S. degrees in computer science and physics and a Ph.D. in computer
science from the University of Utah.
Ms. Mather has served as Executive Vice President and Chief Financial
Officer since September 1999. Ms. Mather has served as Secretary of Pixar since
October 1999. Prior to joining Pixar, she was Executive Vice President and Chief
Financial Officer of Village Roadshow Pictures. From 1992 to 1999, Ms. Mather
held various executive positions at The Walt Disney Company including Senior
Vice President of Finance and Administration of its Buena Vista International
Theatrical Division (the division that markets and distributes all of Disney's
theatrical films outside of the U.S. and Canada). From 1991 to 1992, she was the
European Controller for Alico, a division of AIG, Inc. From 1989 to 1991, she
was Director of Finance for Polo Ralph Lauren Europe and from 1984 to 1988, Ms.
Mather was at Paramount Pictures Corporation where she held various executive
positions in London, Amsterdam and New York. Ms. Mather is a graduate of
Cambridge University in England and is a chartered public accountant.
Mr. Lasseter is a two-time Academy Award(R)-winning director and animator.
In addition to serving as head of all of Pixar Animation Studios' creative
projects, he directed Toy Story, the first feature-length computer animated film
(for which he won a special Achievement Academy Award(R)), A Bug's Life and Toy
Story 2. He is currently in development on his fourth feature film. For Toy
Story, Mr. Lasseter received the first Oscar(R) nomination ever given to an
animated film for Best Original Screenplay. Mr. Lasseter has written and
directed a number of short films and television commercials while at Pixar; Luxo
Jr. (1986 Academy
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Award nominee), Red's Dream (1987), Tin Toy (1988 Academy Award Winner) and
Knickknack (1989), which was produced as a 3D stereoscopic film. Tin Toy was the
first computer animated film to win an Oscar(R), when it won the 1988 Academy
Award(R) for Best Animated Short Film. Mr. Lasseter also designed and animated
the Stained Glass Knight character in the 1985 Steven Spielberg production,
Young Sherlock Holmes. Mr. Lasseter joined Lucasfilm's Computer Division in
1984, and was a founding member of Pixar when it was formed in February, 1986.
Prior to this, he spent five years as an animator at The Walt Disney Company,
where he worked on such films as The Fox and the Hound and Mickey's Christmas
Carol. He earned his B.F.A. in film from the California Institute of the Arts
where he produced two animated films, each winners of the student Academy
Award(R) for Animation; Lady and the Lamp in 1979 and Nightmare in 1980. His
very first award came at the age of five when he won $15.00 from the Model
Grocery Market in Whittier, California for a crayon drawing of the Headless
Horseman.
Ms. McArthur has served as Vice President, Production since May 1997 and
was promoted to Executive Vice President, Production on February 4, 1999. Ms.
McArthur oversees all Pixar production teams and manages all aspects of making
the films. From 1989 to April 1997, Ms. McArthur worked at The Walt Disney
Company, where she was most recently Vice President of Production for Disney
Feature Animation, overseeing the production of feature animation films in
Disney's California, Florida and Paris studios. During Ms. McArthur's eight
years at Disney, she was the Production Manager on The Rescuers Down Under, went
on to be the Associate Producer on Beauty and the Beast and an Executive
Producer on The Lion King. She was appointed Director of Production in late 1991
and promoted to Vice President of Production in 1994. Prior to working at
Disney, Ms. McArthur worked at the Mark Taper Forum as their Production Manager
of special projects. Ms. McArthur earned her B.A. degree in Theatre from the
University of California, Santa Barbara, and she attended Carnegie-Mellon
University's M.F.A. program in Theater Arts.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock trades on The Nasdaq Stock Market's Nasdaq National Market
under the trading symbol "PIXR." The following table sets forth the high and low
sale prices per share of our Common Stock for the periods indicated.
HIGH LOW
------ ------
1999
First Quarter............................................ $45.00 $36.06
Second Quarter........................................... $49.75 $33.63
Third Quarter............................................ $49.88 $33.50
Fourth Quarter........................................... $50.00 $35.38
2000
First Quarter............................................ $39.88 $33.25
Second Quarter........................................... $40.50 $32.20
Third Quarter............................................ $37.88 $31.31
Fourth Quarter........................................... $33.94 $25.63
As of March 15, 2001, we had approximately 3,225 shareholders of record.
Because many of our shares of Common Stock are held by brokers and other
institutions on behalf of shareholders, we are unable to estimate the total
number of shareholders. The price for the Common Stock as of the close of
business on March 15, 2001 was $34.25 per share. We have never paid any cash
dividends on our Common Stock. We intend to retain any earnings for use in our
business and do not anticipate paying any cash dividends on our Common Stock in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from our financial
statements. This data should be read in conjunction with the Financial
Statements and Notes thereto, and with Management's Discussion and Analysis of
Financial Condition and Results of Operations.
FISCAL YEAR
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue............................. $ 35,218 $ 34,699 $ 14,307 $121,037 $172,267
Net income from continuing
operations........................ 26,342 21,956 7,464 49,102 78,027
Net income.......................... 25,319 22,190 7,822 49,224 78,433
Basic net income per share from
continuing operations............. 0.68 0.53 0.17 1.06 1.65
Basic net income per share.......... 0.66 0.54 0.18 1.07 1.66
Diluted net income per share from
continuing operations............. 0.56 0.46 0.14 0.99 1.56
Diluted net income per share........ 0.54 0.46 0.15 0.99 1.57
Total assets.............. 176,941 231,068 250,806 374,905 479,779
Total shareholders'
equity.................. 170,804 217,300 235,147 344,443 435,896
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Pixar was formed in 1986 when Steve Jobs purchased the computer division of
Lucasfilm and incorporated it as a separate company. Until 1996, Pixar generated
its recurring revenue primarily from the license of RenderMan(R) software,
software development contracts and fees for animated television commercials. In
1991, we entered into a feature film agreement (the "Feature Film Agreement")
with Walt Disney Pictures, a wholly owned subsidiary of The Walt Disney Company
(together with its subsidiaries and affiliates collectively referred to herein
as "Disney"), for the development and production of up to three animated feature
films to be marketed and distributed by Disney. As a result, in 1992, we began
to place more emphasis on products sold for their content, especially feature
films, and the continued development of our proprietary software. We reduced
emphasis on the commercialization of software and contract development work and
moved away from producing computer-animated commercials. This shift in focus
resulted in a new business model, which we have implemented over the last eight
years, where we develop and produce original animated feature films.
Adoption of this new business model did not materially impact our results
of operations and financial condition until 1996, when we first recognized film
revenue and cost of film revenue attributable to our first animated feature
film, Toy Story, which was released in November 1995. Our share of revenues and
expenses from Toy Story was governed by the terms of the Feature Film Agreement.
This agreement was superseded in February 1997 by the Co-Production Agreement,
described below. All films produced subsequent to Toy Story are subject to the
terms of the Co-Production Agreement. See "Business -- Risk Factors" in Item 1
of this Form 10-K.
In February 1997, we entered into the Co-Production Agreement
("Co-Production Agreement") with Disney pursuant to which we, on an exclusive
basis, agreed to produce five original computer-animated feature-length
theatrical motion pictures (the "Pictures") for distribution by Disney. Pixar
and Disney agreed to co-finance the production costs of the Pictures, co-own the
Pictures (with Disney having exclusive distribution and exploitation rights),
co-brand the Pictures, and share equally in the profits of each Picture and any
related merchandise as well as other ancillary products, after recovery of all
marketing and distribution costs (which Disney finances), a distribution fee
paid to Disney and any other fees or costs, including any participations
provided to talent and the like. The Co-Production Agreement generally provides
that we will be responsible for the production of each Picture, while Disney
will be responsible for the marketing, promotion, publicity, advertising and
distribution of each Picture. Our second feature film, A Bug's Life, was
released in November 1998 and counts as the first original Picture under the
Co-Production Agreement. The Co-Production Agreement also contemplates that with
respect to theatrical sequels, made-for-home video sequels, television
productions, interactive media products and other derivative works related to
the Pictures, we will have the opportunity to co-finance and produce such
products or to earn passive royalties on such products. We will not share in any
theme park revenues generated as a result of the Pictures. Pursuant to the
Co-Production Agreement, in addition to co-financing the production costs of the
Pictures, Disney will reimburse us for our share of certain general and
administrative costs and certain research and development costs that benefit the
productions. See Note 4 of Notes to Financial Statements.
In November 1999, Toy Story 2, our third animated feature film was
released. As a sequel, Toy Story 2 is a derivative work of the original Toy
Story and therefore it does not count toward the five original Pictures to be
produced under the Co-Production Agreement. However, as a derivative work, Toy
Story 2 is treated as a Picture under the Co-Production Agreement, and all the
provisions applicable to the five original Pictures apply.
In 1999, we began production on our fourth theatrical film, Monsters, Inc.
and concept development on our sixth animated feature film, "Film Six." In 2000,
we began production on our fifth animated feature film, Finding Nemo and concept
development on our seventh animated feature film, "Film Seven." These films will
be produced and distributed under the Co-Production Agreement and will count as
the second, third, fourth, and fifth films of the five original films to be
produced under the Co-Production Agreement. We expect to
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release Monsters, Inc. in November 2001, and Finding Nemo in summer 2003, at the
earliest. Film Six and Film Seven are currently targeted for release no earlier
than 2004 and 2005, respectively.
RESULTS OF OPERATIONS
REVENUE
In 2000, we derived revenue from Toy Story 2, A Bug's Life, Toy Story, from
software licenses and from fees for other animation services. Revenue from
feature films is recognized as earned and reasonably estimable. Beginning in
2000, we have had an improved ability, through information available to us from
Disney and other sources, to estimate and record our share of film revenues and
gross profits. 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
marketing, distribution and other predefined costs and fees. See
"Business -- Risk Factors -- Dependence on revenue from our feature films." All
payments to us from Disney for development and production of Toy Story under the
Feature Film Agreement, and A Bug's Life, Toy Story 2, Monsters, Inc., Finding
Nemo, Film Six, and Film Seven under the Co-Production Agreement have been
recorded as cost reimbursements. Accordingly, no revenue has been recognized for
such reimbursements; rather, we have netted the reimbursements against the
related costs. These reimbursed costs through the end of 2000 are set forth in
Note 4 of Notes to Financial Statements. Software license revenue is recognized
upon shipment. Animation services revenue is recognized on the
percentage-of-completion method of accounting. See Note 1 of Notes to Financial
Statements.
Total revenue was $14.3 million in 1998, increased to $121.0 million in
1999, and increased to $172.3 million in 2000. The increase in total revenue
from 1998 to 1999 was due primarily to revenue recognized in 1999 generated by
the release of A Bug's Life in November 1998. No revenues attributable to Toy
Story 2 were recognized in 1999. The increase in total revenue from 1999 to 2000
was due primarily to revenue recognized in 2000 generated by the release of Toy
Story 2 in November 1999.
Film and animation services revenue increased from $10.4 million in 1998 to
$115.3 million in 1999, and increased to $163.2 million in 2000. Film revenue
increased from $9.8 million in 1998 to $114.4 million in 1999, and increased to
$162.3 million in 2000. Film revenue in 1998 was derived primarily from residual
merchandise sales from Toy Story under the Feature Film Agreement. The increase
in 1999 resulted primarily from A Bug's Life theatrical, home video and
merchandise revenues, offset by Disney's related distribution costs and fees.
The significant increase from 1999 to 2000 was primarily due to the tremendous
success of Toy Story 2 in both theatrical and home video markets. Revenues for
2000 were also derived from our library titles, and additional revenues related
to the Toy Story franchise, including royalties from the direct-to-video release
of Buzz Lightyear of Star Command, and royalties from the Buzz Lightyear of Star
Command television series.
Animation services revenue includes revenue generated from short projects
related to our feature films. Fees for animation services, which are fixed in
advance, depend on the relative complexity and length of each production and may
also depend on the market and other competitive conditions. Animation services
revenue increased from $630,000 in 1998 to $873,000 in 1999, and remained
relatively flat at $882,000 in 2000. We expect that revenue in this area will
continue to vary significantly from year to year 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.
Software revenue includes software license revenue, principally from
RenderMan(R), and royalty revenue from licensing Physical Effects, Inc. (PEI)
technology to a third party. Software revenue increased from $3.9 million in
1998 to $5.7 million in 1999, and increased to $9.1 million in 2000. Software
revenue increased in both years due primarily to an increase in RenderMan(R)
software license revenue, 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
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royalty revenue on a quarterly basis. In spite of the increase in software
revenue for the year 2000, our primary focus is on content creation for animated
feature films and related products, and as a result, we have not increased the
time and resources necessary to generate significantly higher RenderMan(R)
license revenues. Therefore, we continue to expect ongoing variability in
revenue derived from software licenses and that such revenue will remain flat or
possibly decline. All historical and future royalty income, if any, 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."
For fiscal years 1998 and 1999, Disney accounted for 76% and 95%,
respectively, of our revenue from continuing operations, attributable to film
related revenue, animation services and software revenue. For fiscal year 2000,
Disney accounted for 95% of our revenue from continuing operations, primarily
attributable to revenue generated from the theatrical and home video release of
Toy Story 2, and related merchandise.
COST OF REVENUE
Cost of film and animation services revenue increased to $31.0 million in
1999 from $141,000 in 1998, and increased to $36.4 million in 2000. Cost of film
revenue represents amortization of capitalized film costs. Higher than expected
Toy Story film revenue in prior years resulted in our amortizing all Toy Story
film costs by December 31, 1997. As a result, there was no cost of film revenue
for Toy Story in 1998, only cost of animation services revenue. Cost of film
revenue for fiscal year 1999 included amortization of capitalized film costs
associated with A Bug's Life, and represented 27% of total film revenue. Cost of
film revenue for fiscal year 2000 included amortization of capitalized film
costs associated with A Bug's Life and Toy Story 2, and represented 22% of total
film revenue. The decline in cost of film revenue as a percentage of total film
revenue in 2000 from 1999 can be attributed to revenue related to Toy Story for
which there was no corresponding cost, as well as a lower amortization
percentage for Toy Story 2 relative to A Bug's Life due to its success in the
marketplace.
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 the related revenue
increased from 22% in 1998 to 59% in 1999, and decreased slightly to 56% in
2000. In 1996, we decided to largely discontinue our business of producing a
number of animated television commercials, in favor of working on a fewer number
of animation services projects related to our feature films. The variation in
gross profit reflects the fact that animation services projects are negotiated
individually and depending on the complexity of the project, profit margins may
vary significantly from project to project.
Cost of software revenue consists of the direct cost and manufacturing
overhead required to reproduce and to package our software products, as well as
amortization of purchased technology. Cost of software revenue includes no
amortization of internal software development expenses since no such expenses
have been capitalized. Cost of software revenue as a percentage of the related
revenue decreased from 18% in 1998 to 12% in 1999, and decreased further to 6%
in 2000. Cost of software revenue in all three years was due primarily to the
amortization of purchased technology associated with the acquisition of Physical
Effects, Inc. ("PEI"). Approximately $2.7 million of the PEI purchase price was
assigned to purchased technology, which PEI licensed to a third party. As a
result of the ongoing amortization of this purchased technology, it is likely
that our software gross profit will vary from year to year as compared to
software gross profit prior to the 1998 acquisition.
OPERATING EXPENSES
Operating expenses increased from $12.1 million in 1998 to $14.8 million in
1999, and to $14.9 million in 2000. We intend to continue to increase operating
expenses in a number of areas. With respect to general expense growth, as a
result of competition we have had to pay higher salaries for technical and
administrative personnel. We expect compensation for such personnel to continue
to increase. Despite the flat year-over-year comparison in operating expenses
from 1999 to 2000, we still expect future operating expenses to reflect the
growth of the studio as we prepare for the release of Monsters, Inc. and as we
ramp up toward our goal of producing one feature film per year. Under the
Co-Production Agreement, Disney reimburses us for half of
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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. See Note 4 of Notes to Financial
Statements. 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.
We recorded amortization of deferred compensation for the difference
between the grant price and the deemed fair value of our common stock for
options granted during 1995. Amortization of deferred compensation of $310,000
and $104,000 was expensed in 1998 and 1999, respectively. As of January 1, 2000,
all deferred compensation has been amortized.
Research and Development. Research and development expenses consist
primarily of salaries and support for personnel conducting research and
development for the RenderMan(R) product, for our proprietary Marionette(TM) and
Ringmaster(TM) animation and production management software. Research and
development expenses increased from $3.9 million in 1998 to $6.3 million in 1999
due to our increased investment in creative development, an increase in
employee-related costs associated with the release of Toy Story 2 and increased
investment in proprietary technology and short film projects in 2000. Research
and development expenses declined to $5.6 million due primarily to diverting
personnel and other resources to the current productions and a decrease in
employee costs related to Toy Story 2, which were reflected in 1999. In
addition, there was a decrease in costs associated with the short film projects
resulting from a one-time $523,000 additional reimbursement from Disney under
the Co-Production Agreement for certain research and development expenses
incurred prior to fiscal year 2000. We expect research and development expenses
to increase in future periods due to our continued investment in internal
technology. To date, all research and development costs not reimbursed by Disney
have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and overhead, as well as public relations, advertising, technical
support and trade show costs required to support the software segment. In 1999
and 2000, sales and marketing expenses increased to $1.5 million and $1.6
million, respectively, from $1.3 million in 1998 primarily due to increases in
corporate marketing and public relations costs, as well as to sales expenses
associated with an increase in software license revenues. We believe that sales
and marketing expenses will continue to increase in absolute dollars in future
periods, particularly in the areas of public relations and corporate marketing.
General and Administrative. General and administrative expenses consist
primarily of salaries of management and administrative personnel, insurance
costs and professional fees. General and administrative expenses remained level
at $7.0 million in 1998 and 1999, and increased to $7.7 million in 2000. The
increase in general and administrative expenses from 1999 to 2000 was primarily
due to increased general and administrative headcount and related compensation,
costs necessary to support our infrastructure and public company related costs.
We expect general and administrative expenses to further increase in future
periods.
OTHER INCOME, NET
Other income, net was $8.8 million in 1998, $7.5 million in 1999, and $13.0
million in 2000. Other income, net consisted primarily of interest income from
investments. The decrease from 1998 to 1999 was due to an average decline in
cash balances in the first half of 1999 as cash was being used to fund film
production and the construction of our new Emeryville facility. The increase
from 1999 to 2000 is primarily due to an increase in interest rates and an
increase in our average cash, cash equivalents and short-term investment
balances during the year.
INCOME TAXES
Income tax expense from continuing operations of $2.6 million, $32.9
million and $55.4 million reflects our effective tax rates of 26.1%, 40.1% and
41.5% for 1998, 1999, and 2000, respectively. Due to the increase in earnings
and the use of all net operating loss carryforwards by the first quarter of
1999, income tax expense has increased significantly. We expect that our
effective tax rate will be reduced in the near future due to the
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utilization of research and experimentation credits for federal and state tax
purposes, as well as the utilization of certain other state credits and
exemptions. See Note 6 of Notes to Financial Statements.
RESULTS OF DISCONTINUED OPERATIONS
After the Co-Production Agreement was executed, we determined that, despite
the fact that our first CD-ROM titles were successful on relative terms, the
resources devoted to our interactive products division would be better allocated
to other projects arising from the Co-Production Agreement. We determined in
March 1997 to discontinue our business of producing CD-ROM and other interactive
products and redirected the approximately 60 employees in that division to film
and related projects within Pixar. We recorded income from discontinued
operations, net of taxes, of $358,000 in 1998, $122,000 in 1999 and $406,000 in
2000 due to royalty income received. Although income from discontinued
operations for 2000 increased, we do not expect to receive significant CD-ROM
royalty income in future periods. See Note 11 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased from $194.9 million at January 1,
2000 to $202.8 million at December 30, 2000. The increase was due primarily to
cash received from Disney for our share of film revenue, as well as software
revenue and interest income. This increase was partially offset by film
production spending and construction expenditures on our new studio and
headquarter facilities in Emeryville, California. In 1998, cash provided by
operating activities largely consisted of net income of $7.8 million, primarily
resulting from film revenue related to Toy Story. In 1999, cash provided by
operating activities was primarily attributable to net income of $49.2 million
primarily resulting from film revenue related to A Bug's Life, the non-cash
impact of deferred income taxes and tax benefit from option exercises of $19.6
million, and the non-cash impact of depreciation and amortization expense and
amortization of capitalized film production costs, totaling $36.5 million. In
2000, cash provided by operating activities was primarily attributable to net
income of $78.4 million resulting primarily from film revenue related to Toy
Story 2, cash provided by unearned revenue totaling $14.1 million, the non-cash
impact of deferred income taxes and tax benefit from option exercises of $14.7
million, and the non-cash impact of depreciation and amortization expense and
amortization of capitalized film production costs, totaling $40.3 million. Cash
provided by operating activities for 2000 was partially offset by receivables
from Disney of $61.8 million. In 1998, 1999 and 2000 cash used in investing
activities primarily consisted of investments in short-term securities,
capitalized film production costs and purchase of property and equipment, as
described below, offset by net proceeds from sales of short-term investments. In
1998, 1999 and 2000, cash provided by financing activities primarily consisted
of proceeds from exercised stock options.
At December 30, 2000, our capital commitments primarily consisted of
obligations to fund production costs of films and derivative products under the
Co-Production Agreement and additional remaining costs related to our new studio
and headquarter facilities, both discussed below. We also have obligations to
pay portions of any revenue derived from each feature film produced under the
Co-Production Agreement to our entertainment law firm in consideration for
services rendered and we have obligations under operating leases. See Note 8 of
Notes to Financial Statements. We expect 2001 cash expenditures for capital
equipment to be approximately $3.7 million, excluding costs related to our new
studio and headquarter facilities discussed below.
Film Production Costs Under Co-Production Agreement. In fiscal 2001, we
expect to spend approximately $48.7 million, net of Disney's film cost
reimbursements, on direct film costs and other costs to fund our ongoing film
projects under the Co-Production Agreement, which will directly impact working
capital. However, there can be no assurance that such costs would not change
based on revised estimates.
New Studio and Headquarter Facilities. In November 2000, we moved our
offices from leased facilities in Richmond, California to our new headquarters
and studio facility in Emeryville, California. As of December 30, 2000, we
incurred capital expenditures of approximately $98.6 million to purchase the
land and to construct our studio and headquarter facility. In order to complete
construction and furnish and equip our
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Emeryville facility, we expect to incur capital expenditures ranging from $5
million to $7 million in 2001. 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
occupied by commercial tenants and is expected to generate rental income.
As of December 30, 2000, our principal source of liquidity was
approximately $202.8 million in cash, cash equivalents and short-term
investments. Pursuant to the Co-Production Agreement, we will co-finance the
next four original animated feature films, which we produce, including Monsters,
Inc., Finding Nemo, Film Six and Film Seven. In the future, we may co-finance
other derivative works such as theatrical sequels, direct to home video sequels,
interactive products and television productions. We believe that our current
available funds and forecasted cash from operations in 2001 will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures,
including the production costs of Monsters, Inc., Finding Nemo, Film Six and
Film Seven. However, there can be no assurance that current and forecasted cash
from operations will be sufficient to fund operations. To date, we have chosen
to use our existing cash resources to fund both facility 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the AICPA issued Statement of Position (SOP) 00-2,
"Accounting by Producers or Distributors of Films." The guidance in this SOP
applies to all types of films, and is applicable to all producers or
distributors that own or hold rights to distribute or exploit films. For
purposes of this SOP, films are defined as feature films, television specials,
television series, or similar products including animated films and television
programming that are sold, licensed or exhibited, whether produced on film,
videotape, digital, or other video recording format. SOP 00-2, which we plan to
adopt in the first quarter of fiscal year 2001, is effective for financial
statements for fiscal years beginning after December 15, 2000. We have evaluated
the pro forma effects of SOP 00-2, and based on that evaluation, we do not
believe SOP 00-2 will have a material effect on our financial statements,
liquidity, or results of operations upon implementation in the first quarter of
2001.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), which as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities, Deferral of the Effective Date of FASB
Statement No. 133, and Amendment of FASB Statement No. 133" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB No. 133," issued in June 2000, will be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 generally provides for matching the
timing of gain or loss recognition of (a) the changes in the fair value of the
hedged asset or liability that are attributed to the hedged risk or (b) the
earnings effect of hedged forecasted transactions.. We do not believe that
adoption of this statement will have a material effect on our financial
statements upon implementation in the first quarter of 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio. We invest in a variety of investment grade,
interest-bearing securities, including fixed-rate obligations of corporations,
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.
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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 December 30, 2000. The table
presents principal cash flows and related weighted-average fixed interest rates
presented by expected maturity date (dollars in thousands):
LESS THAN OVER
1 YEAR 1 YEAR TOTAL
--------- ------- --------
Available-for-sale securities....................... $105,710 $33,804 $139,514
Weighted-average interest rate...................... 6.00% 6.40% 6.10%
Impact of Foreign Currency Rate Changes. While our products are distributed
in foreign markets by Disney and its affiliates, we are not directly exposed to
foreign currency rate fluctuations. However, we recognize revenues from foreign
territories based on an average foreign currency exchange rate used by Disney
for revenue reporting. This rate may differ from the actual exchange rate at the
time cash is remitted to Disney and subsequently to us. Therefore, there may be
some indirect foreign currency exchange rate exposure as managed by Disney.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this item are included in
Part IV, Item 14 of this Form 10-K and are presented beginning on page F-1. The
supplementary financial information required by this item is included in the
notes to the financial statements under the subsection entitled "Quarterly
Financial Information (Unaudited), beginning on page F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
Please see the information set forth in the sections entitled "Proposal
One -- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
our fiscal year ended December 30, 2000 (the "2001 Proxy Statement"), which we
are incorporating into this Form 10-K by reference.
EXECUTIVE OFFICERS
The information required by this item concerning our executive officers is
incorporated by reference to the information set forth in the section entitled
"Executive Officers of the Company" at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Please see the information set forth in the sections entitled "Proposal
One -- Election of Directors -- Director Compensation" and "Executive Officer
Compensation" in our 2001 Proxy Statement, which we are incorporating into this
Form 10-K by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Please see the information set forth in the section entitled "Share
Ownership of Principal Shareholders and Management" in our 2001 Proxy Statement,
which we are incorporating into this Form 10-K by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please see the information set forth in the section entitled "Transactions
with Management" in our 2001 Proxy Statement, which we are incorporating into
this Form 10-K by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) We have filed the following documents as part of this Form 10-K:
1. Financial Statements.
Independent Auditors' Report................................ F-1
Balance Sheets as of January 1, 2000 and December 30,
2000...................................................... F-2
Statements of Income for the years ended January 2, 1999,
January 1, 2000 and December 30, 2000..................... F-3
Statements of Shareholders' Equity for the years ended
January 2, 1999, January 1, 2000 and December 30, 2000.... F-4
Statements of Cash Flows for the years ended January 2,
1999, January 1, 2000 and December 30, 2000............... F-5
Notes to Financial Statements............................... F-6
2. Financial Statement Schedule. We have filed the following financial
statement schedule for the years ended January 2, 1999, January 1, 2000 and
December 30, 2000 as part of this Form 10-K. It should be read in
conjunction with our Financial Statements, and related notes.
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Independent Auditors' Report on Financial Statement
Schedule.................................................. S-1
Schedule II -- Valuation and Qualifying Accounts and
Reserves.................................................. S-2
We have omitted schedules not listed above since they are either not
required, not applicable, or the information is otherwise included.
3. Exhibits. See Item 14(c) below.
(b) Reports on Form 8-K. We filed no reports on Form 8-K during the fourth
quarter ended December 30, 2000.
(c) Exhibits. We have filed, or incorporated into the Form 10-K by
reference, the exhibits listed on the accompanying Index to Exhibits immediately
following the signature page of this Form 10-K.
(d) Financial Statement Schedule. See Item 14(a) above.
42
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Pixar:
We have audited the accompanying balance sheets of Pixar as of January 1,
2000 and December 30, 2000 and the related statements of income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 30, 2000. These financial statements are the responsibility of Pixar's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pixar as of January 1, 2000
and December 30, 2000, and the results of its operation and its cash flows for
each of the years in the three-year period ended December 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
San Francisco, California
February 2, 2001
F-1
46
PIXAR
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JANUARY 1, DECEMBER 30,
2000 2000
---------- ------------
Cash and cash equivalents................................... $ 31,170 $ 63,241
Short-term investments...................................... 163,779 139,514
Trade accounts receivable, net of allowance for returns and
doubtful accounts of $224 and $170 as of 1999 and 2000,
respectively.............................................. 714 1,136
Due from Disney............................................. 12,057 73,850
Other receivables........................................... 3,969 3,121
Prepaid expenses and other assets........................... 3,888 4,903
Deferred income taxes....................................... 34,533 26,091
Property and equipment, net................................. 60,266 110,891
Capitalized film production costs........................... 64,529 57,032
-------- --------
Total assets...................................... $374,905 $479,779
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 458 $ 1,622
Income taxes payable........................................ 12,230 9,650
Accrued liabilities......................................... 16,475 17,229
Unearned revenue............................................ 1,299 15,382
-------- --------
Total liabilities................................. 30,462 43,883
-------- --------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized
and no shares issued and outstanding................... -- --
Common stock, no par value; 100,000,000 shares authorized;
46,959,093 and 47,633,372 shares issued and outstanding
as of January 1, 2000, and December 30, 2000,
respectively........................................... 281,274 293,209
Accumulated other comprehensive income (loss)............. (660) 425
Retained earnings......................................... 63,829 142,262
-------- --------
Total shareholders' equity........................ 344,443 435,896
-------- --------
Total liabilities and shareholders' equity........ $374,905 $479,779
======== ========
See accompanying notes to financial statements.
F-2
47
PIXAR
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30,
1999 2000 2000
---------- ---------- ------------
Revenue:
Film and animation services............................. $10,389 $115,291 $163,154
Software................................................ 3,918 5,746 9,113
------- -------- --------
Total revenue................................... 14,307 121,037 172,267
------- -------- --------
Cost of revenue:
Film and animation services............................. 141 31,016 36,433
Software................................................ 723 689 571
------- -------- --------
Total cost of revenue........................... 864 31,705 37,004
------- -------- --------
Gross profit.................................... 13,443 89,332 135,263
------- -------- --------
Operating expenses:
Research and development................................ 3,862 6,281 5,562
Sales and marketing..................................... 1,301 1,501 1,615
General and administrative.............................. 6,956 7,016 7,686
------- -------- --------
Total operating expenses........................ 12,119 14,798 14,863
------- -------- --------
Income from continuing operations............... 1,324 74,534 120,400
Other income, net......................................... 8,777 7,469 12,978
------- -------- --------
Income from continuing operations before
taxes......................................... 10,101 82,003 133,378
Income tax expense........................................ 2,637 32,901 55,351
------- -------- --------
Net income from continuing operations........... 7,464 49,102 78,027
Income from discontinued operations (includes income tax
expense of $127, $62 and $279 in 1998, 1999 and 2000,
respectively)........................................... 358 122 406
------- -------- --------
Net income...................................... $ 7,822 $ 49,224 $ 78,433
======= ======== ========
Basic net income per share from continuing operations..... $ 0.17 $ 1.06 $ 1.65
Basic net income per share from discontinued operations... 0.01 0.01 0.01
------- -------- --------
Basic net income per share................................ $ 0.18 $ 1.07 $ 1.66
======= ======== ========
Shares used in computing basic net income per share....... 44,185 46,148 47,280
======= ======== ========
Diluted net income per share from continuing operations... $ 0.14 $ 0.99 $ 1.56
Diluted net income per share from discontinued
operations.............................................. 0.01 0.00 0.01
------- -------- --------
Diluted net income per share.............................. $ 0.15 $ 0.99 $ 1.57
======= ======== ========
Shares used in computing diluted net income per share..... 51,338 49,810 49,851
======= ======== ========
See accompanying notes to financial statements.
F-3
48
PIXAR
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE TOTAL
----------------- INCOME DEFERRED RETAINED SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT (LOSS) COMPENSATION EARNINGS EQUITY INCOME
------ -------- ------------- ------------ -------- ------------- -------------
BALANCES, DECEMBER 31, 1997......... 42,411 $210,902 $ 29 $(414) $ 6,783 $217,300
Exercise of stock options, including
tax benefit....................... 2,865 6,895 -- -- -- 6,895
Amortization of deferred
compensation...................... -- -- -- 310 -- 310
Acquisition of PEI.................. 60 2,600 2,600
Other comprehensive income:
Holding gains on securities
arising during the period,
net............................. -- -- 223 -- -- 223
Less: reclassification adjustment
for gains included in income.... -- -- (3) -- -- (3)
------ -------- ------ ----- -------- --------
Unrealized gain on investments...... -- -- 220 -- -- 220 $ 220
Net income.......................... -- -- -- -- 7,822 7,822 7,822
------ -------- ------ ----- -------- -------- -------
BALANCES, JANUARY 2, 1999........... 45,336 220,397 249 (104) 14,605 235,147 $ 8,042
=======
Exercise of stock options, including
tax benefit....................... 1,623 60,877 -- -- -- 60,877
Amortization of deferred
compensation...................... -- -- -- 104 -- 104
Other comprehensive income:
Holding loss on securities arising
during the period, net.......... -- -- (850) -- -- (850)
Less: reclassification adjustment
for gains included in income.... -- -- (59) -- -- (59)
------ -------- ------ ----- -------- --------
Unrealized loss on investments...... -- -- (909) -- -- (909) $ (909)
Net income.......................... -- -- -- -- 49,224 49,224 49,224
------ -------- ------ ----- -------- -------- -------
BALANCES, JANUARY 1, 2000........... 46,959 281,274 (660) -- 63,829 344,443 $48,315
=======
Exercise of stock options, including
tax benefit....................... 674 11,935 -- -- -- 11,935
Other comprehensive income:
Holding gains on securities
arising during the period,
net............................. -- -- 1,084 -- -- 1,084
Less: reclassification adjustment
for losses included in income... -- -- 1 -- -- 1
------ -------- ------ ----- -------- --------
Unrealized income on investments.... -- -- 1,085 -- -- 1,085 $ 1,085
Net income.......................... -- -- -- -- 78,433 78,433 78,433
------ -------- ------ ----- -------- -------- -------
BALANCES, DECEMBER 30, 2000......... 47,633 $293,209 $ 425 $ -- $142,262 $435,896 $79,518
====== ======== ====== ===== ======== ======== =======
See accompanying notes to financial statements.
F-4
49
PIXAR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30,
1999 2000 2000
---------- ---------- ------------
Cash flows from operating activities:
Net income................................................ $ 7,822 $ 49,224 $ 78,433
Adjustments to reconcile net income to net cash provided
by operating activities:
Discontinued operations................................... (358) (122) (406)
Amortization of deferred compensation, net of
capitalization.......................................... 310 104 --
Amortization of purchased technology...................... 630 630 480
Depreciation and amortization............................. 5,826 6,046 4,312
Amortization of capitalized film production costs......... -- 30,503 35,940
Licenses exchanged for equipment.......................... (114) -- --
Loss on disposition of property and equipment............. 311 706 16
Tax benefit from option exercises......................... 3,636 53,150 6,282
Deferred income taxes..................................... (988) (33,545) 8,442
Changes in operating assets and liabilities:
Trade accounts receivable............................... 726 (119) (422)
Due from Disney......................................... (146) (11,606) (61,793)
Other receivables....................................... (477) (1,130) 848
Prepaid expenses and other assets....................... (1,491) 366 (1,495)
Accounts payable........................................ 921 (2,157) 1,164
Accrued liabilities..................................... 2,221 4,716 754
Income taxes payable.................................... (1,679) 12,133 (2,580)
Unearned revenue........................................ 103 111 14,083
--------- --------- ---------
Net cash provided by continuing operations............ 17,253 109,010 84,058
Net cash provided by discontinued operations.......... 358 122 406
--------- --------- ---------
Net cash provided by operating activities............. 17,611 109,132 84,464
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (16,576) (38,060) (55,352)
Proceeds from sale of property and equipment.............. 741 2,172 399
Proceeds from sale of short-term securities............... 150,381 140,701 321,241
Investments in short-term securities...................... (195,454) (185,898) (295,891)
Capitalized film production costs......................... (32,252) (34,161) (28,443)
--------- --------- ---------
Net cash used in investing activities............... (93,160) (115,246) (58,046)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from exercised stock options..................... 3,259 7,727 5,653
--------- --------- ---------
Net cash provided by financing activities........... 3,259 7,727 5,653
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (72,290) 1,613 32,071
Cash and cash equivalents at beginning of period............ 101,847 29,557 31,170
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 29,557 $ 31,170 $ 63,241
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes................ $ 1,796 $ 1,900 $ 43,486
========= ========= =========
Supplemental disclosure of non-cash investing and financing
activities:
Credits used to purchase equipment.......................... $ 120 $ -- $ --
========= ========= =========
Non-cash film production costs capitalized.................. $ -- $ -- $ 396
========= ========= =========
Value of common stock and liabilities assumed for purchase
of PEI.................................................... $ 3,000 $ -- $ --
========= ========= =========
Unrealized gain (loss) on investments....................... $ 220 $ (909) $ 1,085
========= ========= =========
See accompanying notes to financial statements.
F-5
50
PIXAR
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF PIXAR AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Pixar was incorporated in the state of California on December 9, 1985.
Pixar is a leading digital animation studio with the creative, technical and
production capabilities to create a new generation of animated feature films and
related products.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents as of
December 30, 2000 consisted primarily of U.S. Treasury Bills, demand notes,
commercial paper and government agency bonds.
Short-Term Investments
Investments are accounted under Statement of Financial Accounting Standards
in Debt and Equity Instruments (SFAS 115) and are classified as
"available-for-sale." Such investments are recorded at fair value, and
unrealized gains and losses, if material, are reported as a component of
comprehensive income (loss) until realized. Interest income is recorded using an
effective interest rate with the associated premium or discount amortized to
interest income. The cost of securities sold is based upon the specific
identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over estimated useful
lives ranging from two to thirty years. Leasehold improvements are amortized
over the lesser of the related lease term or the life of the improvement.
Management evaluates these assets for impairment whenever changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Impaired assets and assets to be disposed of are reported at the
lower of carrying values or fair values, less costs of disposal.
Film Production Costs
Film production costs include costs to develop and produce computer
animated motion pictures, mainly salaries, equipment and overhead. Film
production costs in excess of reimbursable amounts from Disney are capitalized.
Once a film is released, any film production costs capitalized will be amortized
in the proportion that the revenue during the year for each film bears to the
estimated revenue to be received from all sources under the individual film
forecast method. Estimates of anticipated total gross revenues are reviewed
periodically and revised when necessary. Unamortized film production costs are
compared with net realizable value each reporting period on a film-by-film
basis. If estimated gross revenues are not sufficient to recover the unamortized
film production costs, the unamortized film production costs will be written
down to net realizable value.
Impairment of Long-lived Assets
The Company reviews for impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. If an asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The Company
has not identified any such impairment losses.
F-6
51
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Research and Development Costs
Research and development costs, net of reimbursable expenses, are charged
to operations as incurred. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," development costs related to software
products are expensed as incurred until the technological feasibility of the
product has been established. After technological feasibility is established,
additional costs would be capitalized. To date, the Company has not capitalized
any software development costs after technological feasibility has been
established on its software products since it believes the process for
developing software is essentially completed concurrently with the establishment
of technological feasibility and costs incurred thereafter have not been
material.
Revenue Recognition
Revenue from the distribution of animated feature films and related
products is recognized as earned and reasonably estimable. The related revenue
cycle is generally five to ten years, with the substantial majority expected to
be recognized in the first four years. Any revenue received in advance from
Disney is deferred and recorded as revenue when earned.
Revenue for software licenses are in compliance with the American Institute
of Certified Public Accountants Statement of Position (SOP) 97-2 "Software
Revenue Recognition" and SOP 98-9 "Modification of SOP 97-2, with respect to
certain transactions." SOP 97-2 requires that revenue recognized from software
arrangements be allocated to each element of the arrangement based on the
relative fair values of the elements. SOP 98-9 allows the use of the residual
method when fair value exists for all undelivered elements. SOP 98-9 was
implemented in fiscal year 2000 and did not have a material effect on results of
operations and financial position. Software maintenance is recorded as deferred
revenue and is recognized ratably over the term of the agreement, which is
generally twelve months.
Animation services revenue is recognized on the percentage-of-completion
method of accounting.
Financial Instruments and Concentration of Credit Risk
The carrying value of financial instruments, including marketable
securities and accounts receivable, approximate fair value. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash equivalents, short-term investments and trade
accounts receivable. The Company invests its excess cash in a variety of
investment grade, interest-bearing securities with major banks. This
diversification of risk is consistent with its policy to ensure safety of
principal and maintain liquidity.
Excluding the software business, revenue is concentrated in one large
customer, Disney, as outlined in Note 9. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
Fiscal Year
Effective for the fiscal year 1998, the Company adopted a 52 or 53-week
fiscal year, changing the year end date from December 31 to the Saturday nearest
December 31. The 2000 fiscal year ended December 30, 2000 and consisted of 52
weeks. The 1998 and 1999 fiscal years ended January 2, 1999 and January 1, 2000,
and consisted of 53 and 52 weeks, respectively.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-7
52
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Income Taxes
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes reflect the impact of such temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes.
Net Income per Share
In accordance with SFAS No. 128, "Earnings per Share," basic net income per
share is computed using the weighted-average number of common shares outstanding
during the period. Diluted net income per share is computed using the weighted
average number of common and dilutive potential common shares outstanding during
the period and using the treasury stock method for options and warrants (see
Note 10).
Segment Reporting
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes annual and interim
reporting standards for operating segments of a company (see Note 9).
Comprehensive Income (Loss)
In fiscal year 1999, the Company adopted SFAS 130, "Reporting Comprehensive
Income", which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. SFAS 130 requires classification of other comprehensive income
separately from retained earnings and additional paid-in-capital. Other
comprehensive income includes primarily unrealized gains and losses on
available-for-sale securities.
Reclassifications
Certain amounts reported in previous years have been reclassified to
conform to the 2000 financial statement presentation.
Stock Option Plans
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans.
Additionally, pursuant to SFAS No. 123, stock issued to non-employees is
accounted for at the fair value of the equity instruments issued.
In April 2000, the FASB issued Interpretation No. 44 (FIN 44) "Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
APB Opinion No. 25." This interpretation, which is effective from July 1, 2000,
is intended to clarify certain problems that have arisen in practice since the
issuance of APB 25. The adoption of FIN 44 did not have a material impact on the
Company's financial statements.
Recent Accounting Pronouncements
In June 2000, the AICPA issued Statement of Position (SOP) 00-2,
"Accounting by Producers or Distributors of Films." The guidance in this SOP
applies to all types of films, and is applicable to all producers or
distributors that own or hold rights to distribute or exploit films. For
purposes of this SOP, films are defined
F-8
53
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
as feature films, television specials, television series, or similar products
including animated films and television programming that are sold, licensed or
exhibited, whether produced on film, videotape, digital, or other video
recording format. SOP 00-2, which the Company plans to adopt in the first
quarter of fiscal year 2001, is effective for financial statements for fiscal
years beginning after December 15, 2000. The Company has evaluated the pro forma
effects of SOP 00-2, and based on that evaluation, the Company does not believe
SOP 00-2 will have a material effect on our financial statements, liquidity, or
results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
SFAS No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities", which as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities, Deferral of the Effective Date of FASB
Statement No. 133, and Amendment of FASB Statement No. 133" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB No. 133," issued in June 2000, will be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 generally provides for matching the
timing of gain or loss recognition of (a) the changes in the fair value of the
hedged asset or liability that are attributed to the hedged risk or (b) the
earnings effect of hedged forecasted transactions. The Company does not believe
that adoption of this statement will have a material effect on its financial
statements upon implementation in the first quarter of 2001.
(2) SHORT-TERM INVESTMENTS
All investments were considered available-for-sale securities and consisted
of the following (in thousands):
UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
-------- -------------- ----------
JANUARY 1, 2000:
U. S. Treasury Bills............................ $ 9,882 $ (4) $ 9,878
U. S. Treasury Notes............................ 66,024 (512) 65,512
Commercial paper................................ 73,848 (10) 73,838
Federal agency obligations...................... 14,685 (134) 14,551
-------- ----- --------
164,439 (660) 163,779
======== ===== ========
DECEMBER 30, 2000:
U. S. Treasury Bills............................ $ 2,463 -- $ 2,463
U. S. Treasury Notes............................ 58,242 $ 114 58,356
Commercial paper................................ 2,091 (4) 2,087
Federal agency obligations...................... 76,293 315 76,608
-------- ----- --------
139,089 425 139,514
======== ===== ========
The contractual maturities of available-for-sale debt securities as of
December 30, 2000, regardless of their balance sheet classification, are as
follows (in thousands):
ESTIMATED
COST FAIR VALUE
-------- ----------
Due within one year.................................... $105,597 $105,710
Due after one year through two years................... 33,492 33,804
-------- --------
$139,089 $139,514
======== ========
F-9
54
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) BALANCE SHEET COMPONENTS
Selected balance sheet components are as follows (in thousands):
JANUARY 1, DECEMBER 30,
2000 2000
---------- ------------
Property and equipment:
Building and Land.................................. $ 7,498 $101,431
Furniture, fixtures and equipment.................. 18,216 22,222
Construction in process............................ 47,115 372
------- --------
72,829 124,025
Less accumulated depreciation and amortization....... 12,563 13,134
------- --------
$60,266 $110,891
======= ========
Accrued liabilities:
Facilities construction in process................. $ 2,919 $ 8,262
Employee-related expenses.......................... 10,835 4,648
Professional services.............................. 1,788 2,316
Other.............................................. 933 2,003
------- --------
$16,475 $ 17,229
======= ========
(4) FEATURE FILM AND CO-PRODUCTION AGREEMENTS
Feature Film Agreement
In 1991, the Company entered into a feature film agreement with Walt Disney
Pictures, a wholly owned subsidiary of Walt Disney Pictures and Television
(together with its subsidiaries and affiliates collectively referred to herein
as "Disney"), to develop and produce up to three computer-animated feature films
(the "Feature Film Agreement"). The Company is entitled to receive compensation
based on revenue from the distribution of these films and related products. In
1995, the Company released its first feature film under the terms of the Feature
Film Agreement, Toy Story. Based on the individual film forecast method, all
significant Toy Story film production costs were fully amortized by the year
ended December 31, 1997.
Co-Production Agreement
In February 1997, Pixar and Disney entered into a new Co-Production
Agreement (the "Co-Production Agreement") which now governs all films made by
the Company since Toy Story. Under the Co-Production Agreement, Pixar, on an
exclusive basis, agreed to produce five original computer-animated theatrical
motion pictures (the "Pictures") for distribution by Disney. Pixar and Disney
co-own, co-brand and co-finance the production costs of the Pictures, and share
equally in the profits of each Picture and any related merchandise and other
ancillary products, after recovery of all of Disney's marketing, distribution
and other predefined fees and costs. The Co-Production Agreement generally
provides that Pixar is responsible for the production of each Picture and Disney
is responsible for the marketing, promotion, publicity, advertising and
distribution of each Picture. The first original film produced under the
Co-Production Agreement was A Bug's Life. Films in development or production at
Pixar governed by this agreement, include Monsters, Inc., Finding Nemo, Film Six
and Film Seven. A Bug's Life, Monsters, Inc., Finding Nemo, Film Six and Film
Seven count toward the five original Pictures, whereas Toy Story 2, as a sequel,
is a derivative work that will not count toward the Pictures. However, under the
Co-Production Agreement, all provisions applicable to the Pictures also apply to
derivative works such as Toy Story 2.
All payments to Pixar from Disney for development and production of Toy
Story under the Feature Film Agreement, and A Bug's Life, Toy Story 2, Monsters,
Inc., Finding Nemo, Film Six, and Film Seven under the
F-10
55
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Co-Production Agreement have been recorded as cost reimbursements. Accordingly,
no revenue has been recognized for such reimbursements; rather, the Company has
netted the reimbursements against the related costs.
Creative Development Group
In addition to the films produced and in process under the Co-Production
Agreement, Pixar's creative development group is working on concept development
for several new projects that do not come under the Co-Production Agreement.
Costs related to these projects are therefore not shared or reimbursed by
Disney. Such costs are capitalized as film costs and will be amortized under the
film forecast method assuming the concept development leads to a successful
concept and realization of a film project. In the event a film is not produced,
such costs will be expensed.
The total film production costs and related amounts capitalized are as
follows (in thousands):
1998 AND TOTAL THROUGH
PRIOR 1999 2000 2000
-------- ------- ------- -------------
RELEASED FILMS:
Pixar production costs......................... $ 56,015 $26,470 $ 1,535 $ 84,020
Disney production funding and reimbursement
(unaudited).................................. 83,737 26,470 1,535 111,742
-------- ------- ------- ---------
Total film production costs
(unaudited)........................ $139,752 $52,940 $ 3,070 195,762
======== ======= =======
Disney reimbursements of production costs
(unaudited).................................. (109,417)
Amortization of deferred compensation.......... 360
Participation fees............................. 1,050
Amortization of film production costs.......... (69,479)
---------
Total film production costs
capitalized for released films..... 18,276
---------
FILMS IN PRODUCTION:
Pixar production costs......................... $ 4,272 $ 7,190 $24,530 35,992
Disney production funding and reimbursement
(unaudited).................................. 4,272 7,190 24,530 35,992
-------- ------- ------- ---------
Total film production costs
(unaudited)........................ $ 8,544 $14,380 $49,060 71,984
======== ======= =======
Disney reimbursements of production costs
(unaudited).................................. (35,992)
---------
Total film production costs
capitalized for films in
production......................... 35,992
---------
FILMS IN DEVELOPMENT OR PREPRODUCTION:
Pixar production costs......................... $ 305 $ 280 $ 2,179 2,764
Disney production funding and reimbursement
(unaudited).................................. 305 280 1,889 2,474
-------- ------- ------- ---------
Total film production costs
(unaudited)........................ $ 610 $ 560 $ 4,068 5,238
======== ======= =======
Disney reimbursements of production costs
(unaudited).................................. (2,474)
---------
Total film production costs
capitalized for films in
development or preproduction....... 2,764
---------
Total film production costs
capitalized........................ $ 57,032
=========
F-11
56
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Under the Co-Production Agreement, certain operating expenses benefiting
the productions, such as certain research and development and certain general
and administrative expenses, are paid half by Pixar and half by Disney. From the
date of the Co-Production Agreement, the Company recorded the following amounts
reimbursed by Disney as offsets to the following expense categories (in
thousands):
YEARS ENDED
FEBRUARY 24 TO ------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Research and development............... $4,830 $4,070 $4,606
General and administrative............. 3,476 2,593 2,918
------ ------ ------
Total........................ $8,306 $6,663 $7,524
====== ====== ======
At January 1, 2000, and December 30, 2000, due from Disney aggregated $12.1
million and $73.9 million, respectively, which consists of a receivable from
Disney for film revenue, advances net of Disney's actual share of expenditures
for all films, amounts due for animation services and miscellaneous
reimbursements.
(5) RELATED PARTY TRANSACTIONS
In conjunction with signing the Co-Production Agreement in March 1997,
Disney purchased for cash 1,000,000 shares of Pixar common stock, which Disney
has agreed to hold for at least three years, and 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 granted
certain registration rights for the shares issuable upon exercise of the
warrants. Upon consummation of the Co-Production Agreement in March 1997, the
Company received net proceeds of $14,885,000.
(6) INCOME TAXES
The components of income taxes from continuing operations are as follows
(in thousands):
YEARS ENDED
----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30,
1999 2000 2000
---------- ---------- ------------
Income taxes:
Current:
Federal...................................... $ -- $ 9,523 $32,117
State........................................ 2 3,740 8,428
Foreign...................................... 79 33 82
------ -------- -------
Total current taxes..................... 81 13,296 40,627
------ -------- -------
Deferred:
Federal...................................... (786) (26,527) 6,364
State........................................ (202) (7,018) 2,078
------ -------- -------
Total deferred taxes.................... (988) (33,545) 8,442
------ -------- -------
Charge in lieu of taxes attributable to employer
stock option plans........................... 3,544 53,150 6,282
------ -------- -------
Total tax provision..................... $2,637 $ 32,901 $55,351
====== ======== =======
F-12
57
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following tabulation reconciles the statutory corporate federal income
tax expense (benefit) (computed by multiplying income from continuing operations
before income taxes by 35%) to income tax expense (in thousands):
YEARS ENDED
-------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Expected income tax expense............ $3,535 $28,701 $46,682
State income taxes, net of federal tax
effect............................... 421 4,757 7,715
Change in beginning of year valuation
allowance............................ (1,688) (1,085) --
Other, net............................. 369 528 954
------ ------- -------
Income taxes........................... $2,637 $32,901 $55,351
====== ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Deferred tax assets:
Deferred compensation....................... $ 398 $ 559
Capitalized film costs...................... 29,866 27,627
Capitalized research expenses............... 119 --
Property and equipment...................... 1,267 1,957
Reserves and accruals....................... 2,883 3,051
------- -------
Deferred tax assets................. 34,533 33,194
Deferred tax liabilities...................... -- (7,103)
------- -------
Net deferred tax assets................ $34,533 $26,091
======= =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of taxable income during the periods in which
temporary differences become deductible. At December 31, 2000, based on
historical taxable income and projections of future taxable income, the Company
believes it is more likely than not that the Company will realize the benefits
of its deferred tax assets, and therefore no valuation allowance against those
assets has been provided.
(7) SHAREHOLDERS' EQUITY
Deferred Compensation
The Company recorded deferred compensation for the difference between the
grant price and the deemed fair value of the common stock underlying certain
options granted in 1995. This amount was amortized over the vesting period of
the individual options, generally four years. Amortization of deferred
compensation was approximately $310,000 and $104,000 for the years ended January
2, 1999, and January 1, 2000, respectively. In 1998 and 1999, the entire amounts
of $310,000 and $104,000, respectively, were charged to expense. As of January
1, 2000, deferred compensation was fully amortized.
Stock Option Plans
The Company has stock option plans for employees, consultants and
non-employee directors which provide incentive and nonstatutory stock options.
The option exercise price for incentive stock options is not less than the fair
market value at the grant date. Nonstatutory options are granted at prices and
terms determined by the Board of Directors, or a committee of the Board of
Directors. Employee and consultant
F-13
58
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
options generally vest 25% per year over four years. Initial grants to
non-employee directors, vest one-third annually for three years; subsequent
grants vest after one year. All options have a term not greater than 10 years
from the date of grant. As of December 30, 2000, the Company had 56,409 shares
reserved and available for issuance under the plans.
A summary of activity under the option plans during 1998, 1999, and 2000
are as follows:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
OUTSTANDING AT DECEMBER 31, 1997................ 8,374,618 $ 5.28
Granted....................................... 3,235,922 26.08
Exercised..................................... (2,864,595) 1.14
Forfeited..................................... (288,926) 13.11
----------
OUTSTANDING AT JANUARY 2, 1999.................. 8,457,019 14.38
Granted....................................... 2,130,077 34.98
Exercised..................................... (1,623,323) 4.76
Forfeited..................................... (207,854) 21.50
----------
OUTSTANDING AT JANUARY 1, 2000.................. 8,755,919 21.00
Granted....................................... 5,424,584 28.16
Exercised..................................... (674,279) 8.39
Forfeited..................................... (394,371) 26.18
----------
OUTSTANDING AT DECEMBER 30, 2000................ 13,111,853 24.46
==========
For various price ranges, weighted-average characteristics of outstanding
stock options at December 30, 2000 were as follows:
OPTIONS OUTSTANDING OPTIONS VESTED
-------------------------------------------- ----------------------------
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ---------- ------------ ---------------- --------- ----------------
$0.20 to $1.25................. 1,031,697 4.38 $ 0.31 1,030,044 $ 0.31
$9.60 to $14.25................ 1,424,557 5.57 11.98 1,298,491 11.81
$14.50 to $21.95............... 2,113,786 6.84 20.12 777,004 18.84
$23.13 to $29.88............... 4,590,266 9.72 26.78 105,357 26.64
$30.75 to $37.63............... 3,480,027 8.77 33.80 540,270 34.09
$38.88 to $61.50............... 471,520 7.88 42.76 191,581 43.11
---------- ---------
13,111,853 8.07 24.46 3,942,747 15.16
========== =========
At December 30, 2000, there were 3,942,747 shares exercisable at a weighted
average exercise price of $15.16. At January 2, 1999 and January 1, 2000 there
were 3,264,159 and 3,091,152 shares exercisable, respectively, at a weighted
average exercise price of $5.02 and $9.11, respectively.
F-14
59
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company uses the intrinsic value-based method to account for all of
employee stock-based compensation plans. Had compensation cost for our stock
option plans been determined consistent with SFAS No. 123, net income and net
income per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
FISCAL YEAR
-----------------------------
1998 1999 2000
------- ------- -------
Pro forma net income (loss)........................... $(2,635) $40,083 $66,081
Pro forma basic net income (loss) per share........... $ (0.06) $ 0.87 $ 1.40
Pro forma diluted net income (loss) per share......... $ (0.06) $ 0.81 $ 1.33
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The weighted-average fair value of
options granted was $11.75, $15.62, and $12.66 for fiscal years 1998, 1999, and
2000, respectively. Values were estimated using zero dividend yield for all
years; expected volatility of 50% for all years; risk-free interest rates of
4.96%, 5.78%, and 5.36% for 1998, 1999, and 2000, respectively; and
weighted-average expected lives of 4.29 years, 3.92 years, and 4.00 years for
1998, 1999, and 2000, respectively for both plans.
Employee Benefit Plans
In 1992, the Company adopted a 401(k) Profit Sharing Plan (the 401(k) Plan)
that is intended to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended. The 401(k) Plan covers substantially all employees.
Participants may elect to contribute a percentage of their compensation to this
plan, up to the statutory maximum amount. The Company may make discretionary
contributions to the 401(k) Plan; none have been made to date. For the plan year
commencing January 1, 2001 and ending on December 31, 2001, the employer match
shall be 50% of deferrals up to 5% of eligible plan compensation, with a maximum
contribution of $2,000. Employer match contributions will vest immediately.
(8) COMMITMENTS AND CONTINGENCIES
Lease Commitments
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 30, 2000
were as follows (in thousands):
FISCAL YEAR
2001...................................................... $699
2002...................................................... 65
2003...................................................... 61
----
Total minimum lease payments...................... $825
====
Rental expense from operating leases amounted to approximately $2,697,000,
$2,957,000 and $3,301,000 for the years ended January 2, 1999, January 1, 2000,
and December 30, 2000, respectively.
Participation Commitment
The Company is obligated to pay 5% of revenue from the distribution of each
of the Pictures under the Co-Production Agreement to a third party in
consideration for services rendered. The compensation is subject to a cap of
$500,000 for each theatrical motion picture and a cap of $200,000 for each
sequel or remake, with a total aggregate cap of $3,000,000. The Company paid
participation fees of $250,000 in 1999 and $200,000 in 2000 under this
obligation. No payments were made in 1998.
F-15
60
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Legal Matters
The Company is involved in claims arising in the ordinary course of
business. While the outcome of these claims cannot be predicted with certainty,
management believes these matters will be resolved without material adverse
effect on the Company's financial position, results of operations or cash flows.
(9) SIGNIFICANT CUSTOMERS AND SEGMENT REPORTING
Significant Customers
The following table summarizes the annual percentage contribution to
revenue by customers when revenue from such customers exceeded 10% of total
revenue in 1998, 1999 or 2000, and the amounts due from these customers as a
percentage of total accounts receivable at the corresponding year end:
PERCENTAGE OF PERCENTAGE OF TOTAL
TOTAL REVENUES ACCOUNTS RECEIVABLE AS OF
-------------------- --------------------------
1998 1999 2000 1998 1999 2000
---- ---- ---- ------ ------ ------
Disney................................... 76% 95% 95% 12% 72% 95%
Segment Reporting
The Company adopted the provisions of SFAS 131, Disclosures about Segments
of an Enterprise and Related Information (see Note 1). The chief operating
decision-maker is considered to be the Company's Chief Executive Officer
("CEO"). The CEO reviews financial information presented on a summary basis
accompanied by disaggregated information about film revenue for purposes of
making operating decisions and assessing financial performance. The summary
financial information reviewed by the CEO is identical to the information
presented in the accompanying statement of operations and the Company has no
foreign operations. Therefore, the Company operates in a single operating
segment.
The Company's revenue segment information by film category follows (in
thousands):
FISCAL YEAR
-------------------------------
1998 1999 2000(1)
------- -------- --------
Toy Story 2......................................... -- -- $143,596
A Bug's Life........................................ -- $110,344 --
Library titles...................................... $ 9,759 4,074 18,676
Animation services.................................. 630 873 882
------- -------- --------
$10,389 $115,291 $163,154
======= ======== ========
- ---------------
(1) A Bug's Life revenue has been classified as "Library titles" in 2000.
(10) EARNINGS PER SHARE CALCULATION
Reconciliation of basic and diluted net income per share (in thousands,
except per share data):
FISCAL YEAR
-------------------------------------------------------------------------------------
1998 1999 2000
------------------------- -------------------------- --------------------------
NET NET NET
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------- ------ ----- ------- ------ -----
Basic net income per share...... $7,822 44,185 $0.18 $49,224 46,148 $1.07 $78,433 47,280 $1.66
Effect of dilutive shares:
Warrants/options.............. -- 7,153 -- 3,662 -- 2,571
------ ------ ----- ------- ------ ----- ------- ------ -----
Diluted net income per
share....................... $7,822 51,338 $0.15 $49,224 49,810 $0.99 $78,433 49,851 $1.57
====== ====== ===== ======= ====== ===== ======= ====== =====
F-16
61
PIXAR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) DISCONTINUED OPERATIONS
In March 1997, the Company discontinued its business of producing CD-ROM
and other interactive products. Since the measurement date and disposal date
were virtually simultaneous, no income or loss was measured for the intervening
period. The Company recorded revenues of $485,000, $184,000, and $685,000 in
1998, 1999, and 2000, respectively and recorded income from discontinued
operations of $358,000, $122,000 and $406,000 in 1998, 1999, and 2000,
respectively, net of income taxes, primarily due to royalty income received for
the Toy Story CD-ROM products. The Company does not expect any significant
future CD-ROM royalty income in future periods.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited financial statements have been prepared on substantially the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods (in thousands, except per share data).
QUARTER ENDED
--------------------------------------------------
APRIL 3 JULY 3 OCTOBER 2 JANUARY 1(1)
------- ------- ------------ ------------
1999
Revenue....................................... $ 3,441 $13,479 $79,235 $24,882
Gross profit.................................. 2,717 9,772 57,427 19,416
Net income.................................... 900 6,442 32,287 9,595
Basic net income per share.................... 0.02 0.14 0.70 0.21
Diluted net income per share.................. 0.02 0.13 0.63 0.19
QUARTER ENDED
--------------------------------------------------
APRIL 1 JULY 1 SEPTEMBER 30 DECEMBER 30
------- ------- ------------ ------------
2000
Revenue....................................... $60,978 $18,333 $17,296 $75,659
Gross profit.................................. 45,803 14,628 15,106 59,726
Net income.................................... 26,388 8,020 8,821 35,204
Basic net income per share.................... 0.56 0.17 0.19 0.74
Diluted net income per share.................. 0.53 0.16 0.18 0.71
- ---------------
(1) Fourth Quarter Adjustment. For the quarter ended January 1, 2000, and as a
result of events that occurred during that quarter, we revised the estimated
revenue to be received from all sources under the individual film forecast
method for A Bug's Life. This change in estimate resulted in an additional
$.02 basic and diluted net income per share for the quarter ended and for
the year ended January 1, 2000.
F-17
62
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Shareholders
Pixar:
Under date of February 2, 2001, we reported on the balance sheets of Pixar
as of January 1, 2000 and December 30, 2000, and the related statements of
income, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 30, 2000, which are included in the annual
report on Form 10-K. In connection with our audits of the aforementioned
financial statements, we also audited the related financial statement schedule
included herein. This financial statement schedule is the responsibility of
Pixar's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG LLP
San Francisco, California
February 2, 2001
S-1
63
PIXAR
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT DEDUCTIONS:
BEGINNING WRITE OFF OF BALANCE AT
CLASSIFICATION OF YEAR ADDITIONS ACCOUNTS END OF YEAR
-------------- ---------- --------- ------------ -----------
Allowance for returns and doubtful accounts
Year ended January 2, 1999................... $257 $ -- $(28) $229
==== ==== ==== ====
Year ended January 1, 2000................... $229 $ -- $ (5) $224
==== ==== ==== ====
Year ended December 30, 2000................. $224 $ -- $(54) $170
==== ==== ==== ====
S-2
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 30th day of
March, 2001.
PIXAR
By: /s/ ANN MATHER
--------------------------------------
Ann Mather
Executive Vice President
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steve Jobs, Ann Mather and Edwin E.
Catmull and each of them, jointly and severally, his or her attorneys-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEVE JOBS Chairman of the Board and March 30, 2001
- ----------------------------------------------------- Chief Executive Officer
Steve Jobs (Principal Executive Officer)
/s/ ANN MATHER Executive Vice President and March 30, 2001
- ----------------------------------------------------- Chief Financial Officer
Ann Mather (Principal Financial and
Accounting Officer)
/s/ JILL E. BARAD Director March 30, 2001
- -----------------------------------------------------
Jill E. Barad
/s/ SKIP M. BRITTENHAM Director March 30, 2001
- -----------------------------------------------------
Skip M. Brittenham
/s/ EDWIN E. CATMULL President and Director March 30, 2001
- -----------------------------------------------------
Edwin E. Catmull
/s/ JOSEPH A. GRAZIANO Director March 30, 2001
- -----------------------------------------------------
Joseph A. Graziano
/s/ LAWRENCE B. LEVY Director March 30, 2001
- -----------------------------------------------------
Lawrence B. Levy
/s/ JOE ROTH Director March 30, 2001
- -----------------------------------------------------
Joe Roth
/s/ LARRY W. SONSINI Director March 30, 2001
- -----------------------------------------------------
Larry W. Sonsini
65
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
------- --------
3.1 Amended and Restated Articles of Incorporation (which is
incorporated herein by reference to Exhibit 3.3 to the
Registrant's Form S-1 Registration Statement No. 33-97918)
3.2 Amended and Restated Bylaws
4.1 See Exhibit 3.1
4.2 See Exhibit 3.2
4.3 Specimen Common Stock Certificate (which is incorporated
herein by reference to Exhibit 4.5 to the Registrant's Form
S-1 Registration Statement No. 33-97918)
4.4 Common Stock and Warrant Purchase Agreement between the
Registrant and Disney Enterprises, Inc. dated as of February
23, 1997 (which is incorporated herein by reference to
Exhibit 4.6 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, Commission File No.
0-26976)
4.5 Form of Common Stock Purchase Warrant to be issued to Disney
Enterprises, Inc. (which is incorporated herein by reference
to Exhibit 4.7 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, Commission File
No. 0-26976)
4.6 Form of Registration Rights Agreement by and between the
Registrant and Disney Enterprises, Inc. (which is
incorporated herein by reference to Exhibit 4.8 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, Commission File No. 0-26976)
10.1* 1995 Stock Plan, as amended (which is incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998,
Commission File No. 0-26976)
10.2* 1995 Director Option Plan (which is incorporated herein by
reference to Exhibit 10.2 to the Registrant's Form S-1
Registration Statement No. 33-97918)
10.3* Form of Indemnification Agreement entered into between the
Registrant and each of the executive officers and directors
(which is incorporated herein by reference to Exhibit 10.3
to the Registrant's Form S-1 Registration Statement No.
33-97918)
10.4 Agreement between the Registrant and Walt Disney Pictures
dated May 3, 1991, as amended (which is incorporated herein
by reference to Exhibit 10.4 to the Registrant's Form S-1
Registration Statement No. 33-97918)(1)
10.5 Employment Agreement between the Registrant and John
Lasseter dated February 24, 1997 (which is incorporated
herein by reference to Exhibit 10.10 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-26976)(1)
10.6 Co-Production Agreement between the Registrant and Walt
Disney Pictures and Television dated February 24, 1997
(which is incorporated herein by reference to Exhibit 10.16
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, Commission File No. 0-26976)(1)
10.7 Agreement of Purchase and Sale between the Registrant and
Del Monte Corporation dated as of September 6, 1996, as
amended (which is incorporated herein by reference to
Exhibit 10.19 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, Commission File
No. 0-26976)
23.1 Consent of Independent Auditors
- ---------------
(1) Documents for which confidential treatment has been granted for certain
portions of these exhibits.
* Indicates management compensatory plan, contract or arrangement.