-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G2RVcMhOW22h+E1J0cQCZUfzGDOGqbudx/bwUwUaWpZ793T554t/jaEB/ERqerhD dCzknkLXegJycXcvK78mow== 0000891618-96-001827.txt : 19960816 0000891618-96-001827.hdr.sgml : 19960816 ACCESSION NUMBER: 0000891618-96-001827 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIXAR \CA\ CENTRAL INDEX KEY: 0001002114 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 680086179 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26976 FILM NUMBER: 96614211 BUSINESS ADDRESS: STREET 1: 1001 WEST CUTTING BLVD CITY: RICHMOND STATE: CA ZIP: 94808 BUSINESS PHONE: 5102364000 MAIL ADDRESS: STREET 1: 1001 WEST CUTTING BLVD CITY: RICHMOND STATE: VA ZIP: 94804 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ____________________ Commission File Number: 0-26976 PIXAR (Exact name of registrant as specified in its charter) California 68-0086179 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1001 West Cutting Boulevard, Richmond, California 94804 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (510) 236-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) The number of shares outstanding of the registrant's Common Stock as of August 8, 1996 was 38,625,155. 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PIXAR BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31, 1996 1995 --------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 64,943 $ 97,286 Short-term investments 81,819 47,002 Trade and other accounts receivable, net 6,138 2,753 Prepaid expenses and other current assets 454 309 Capitalized film production costs 1,428 1,446 --------- --------- Total current assets 154,782 148,796 Property and equipment, net 2,468 1,552 Capitalized film production costs, net of current portion 1,267 2,170 Other assets 871 497 --------- --------- Total assets $ 159,388 $ 153,015 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 424 $ 742 Note payable to the majority shareholder and accrued interest -- 2,373 Income taxes payable 295 -- Film production costs payable -- 3,324 Accrued liabilities 3,441 3,400 Unearned revenue 635 269 --------- --------- Total current liabilities 4,795 10,108 --------- --------- Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized and no shares issued and outstanding -- -- Common stock, no par value; 100,000,000 shares authorized and 38,468,753 shares issued and outstanding 185,881 185,845 Unrealized gain (loss) on investments (101) 49 Deferred compensation (1,530) (2,261) Accumulated deficit (29,657) (40,726) --------- --------- Total shareholders' equity 154,593 142,907 ========= ========= Total liabilities and shareholders' equity $ 159,388 $ 153,015 ========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -2- 3 PIXAR STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 -------- -------- -------- -------- Revenues: Software $ 1,734 $ 910 $ 2,645 $ 1,892 Commercials 799 575 1,584 1,105 Film 5,000 -- 5,076 -- Patent licensing 396 6,500 6,891 6,500 -------- -------- -------- -------- Total revenues 7,929 7,985 16,196 9,497 -------- -------- -------- -------- Cost of revenues: Software 7 141 61 389 Commercials 785 277 1,501 662 Film 414 -- 423 -- -------- -------- -------- -------- Total cost of revenues 1,206 418 1,985 1,051 -------- -------- -------- -------- Gross margin 6,723 7,567 14,211 8,446 -------- -------- -------- -------- Operating expenses: Research and development 1,592 998 2,715 1,731 Sales and marketing 614 409 1,061 945 General and administrative 1,396 770 2,574 1,017 -------- -------- -------- -------- Total operating expenses 3,602 2,177 6,350 3,693 -------- -------- -------- -------- Income from operations 3,121 5,390 7,861 4,753 -------- -------- -------- -------- Other income (expense), net 1,922 (38) 3,790 (74) -------- -------- -------- -------- Income before income taxes 5,043 5,352 11,651 4,679 Income taxes 253 229 582 229 -------- -------- -------- -------- Net income $ 4,790 $ 5,123 $ 11,069 $ 4,450 ======== ======== ======== ======== Net income per share (see Note 2) $ 0.10 $ 0.13 $ 0.24 $ 0.11 ======== ======== ======== ======== Shares used in computing net income per share 47,002 39,671 47,028 39,669 ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -3- 4 PIXAR STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six Months Ended June 30, 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 11,069 $ 4,450 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred compensation 704 524 Non-cash revenue attributable to film overbudget (2,324) -- Provision for returns and doubtful accounts 12 -- Depreciation and amortization 251 224 Amortization of capitalized film production costs 423 -- Accrued interest payable -- 87 Licenses exchanged for equipment (891) -- Changes in operating assets and liabilities: Trade and other accounts receivable (3,397) (343) Prepaid expenses and other current assets (145) 97 Accounts payable (318) (348) Income tax payable 295 229 Accrued liabilities 41 179 Unearned revenue 366 25 -------- -------- Net cash provided by operating activities 6,086 5,124 -------- -------- Cash flows from investing activities: Purchase of property and equipment (276) (536) Maturities of investments in short-term securities 42,032 -- Purchases of short-term securities, net of unrealized losses (76,999) -- Capitalized film production costs (475) -- Change in other assets (374) (200) -------- -------- Net cash used in investing activities (36,092) (736) -------- -------- Cash flows from financing activities: Repayment of note payable to shareholder (2,373) -- Proceeds from note payable to shareholder -- 2,225 Proceeds from exercised stock options 36 -- -------- -------- Net cash provided by (used in) financing activities (2,337) 2,225 -------- -------- Net increase (decrease) in cash and cash equivalents (32,343) 6,613 Cash and cash equivalents at beginning of period 97,286 41 -------- -------- Cash and cash equivalents at end of period $ 64,943 $ 6,654 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 305 $ -- ======== ======== Supplemental disclosure of non-cash investing and financing activities: Credits used to purchase equipment $ 891 $ -- ======== ======== Film overbudget reductions $ 3,324 $ -- ======== ======== Film production costs capitalized $ 27 $ -- ======== ======== Unrealized gain (loss) on investments $ (150) $ 30 ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -4- 5 PIXAR NOTES TO FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of Pixar's financial condition, results of operations, and cash flows for the periods presented. These financial statements should be read in conjunction with Pixar's audited financial statements as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, including notes thereto, included in Pixar's Annual Report on Form 10-K for the year ended December 31, 1995. The results of operations for the three months ended June 30, 1996, and the six months ended June 30, 1996 are not necessarily indicative of the results expected for the current year or any other period. (2) NET INCOME PER SHARE Net income per share is computed using net income, and is based on the weighted average number of shares of common stock outstanding and common equivalent shares from stock options (under the treasury stock method, if dilutive). In accordance with SEC Staff Accounting Bulletins, such computations include all common and common equivalent shares issued within twelve months of Pixar's initial public offering of common stock, ("IPO"), for all periods presented prior to November 1995. Net income for the three months ended June 30, 1995 and the six months ended June 30, 1995 is presented on a pro forma basis, and assumes C corporation income tax expense. (3) PATENT LICENSING ARRANGEMENTS For the six months ended June 30, 1996, fees of $6.9 million were recognized with respect to the licensing of certain patents. The Company delivered all rights to utilize the technology underlying the license to the licensee, and received a non-refundable fixed-fee cash payment of $6.0 million in cash and $5.0 million in the form of credits for products to be purchased from the licensee by Pixar over the next four years. Following the release of the rights to utilize the patents to the licensee, Pixar maintained no significant vendor obligations to the licensee, so the Company recognized as revenue the fixed and determinable amounts of the $6.0 million cash payment received, plus $891,000 that represents the portion of the credits Pixar has used in the last six months. (4) FEATURE FILM AND CD-ROM PRODUCTION FEATURE FILM AGREEMENT In 1991, Pixar entered into an agreement with a film entertainment company to develop and produce a computer animated feature film. The film entertainment company has two successive options to extend the term of the agreement for up to two additional feature films. The first feature film was in production as of December 31, 1994 and released in November 1995, and the film entertainment company exercised the option in July 1995 for the development and production of a second feature film. Pixar is entitled to receive compensation based on revenue from the distribution of animated feature films and related products. The Company recognized revenues on the first feature film of $5.1 million for the six months ended June 30, 1996. -5- 6 Pixar incurs film production costs that are reimbursed by the film entertainment company, inclusive of salaries and overhead. All payments to Pixar from the film entertainment company for costs of feature film production have been recorded as cost reimbursements; accordingly, no revenues have been recorded for such reimbursements; rather, Pixar has netted the reimbursements against the related costs. Total film production costs reimbursed to Pixar for the six months ended June 30, 1995 and June 30, 1996, were $1,794,000 and $52,000, respectively, for the first motion picture, and $595,000 and $3,597,000, respectively, for the second motion picture. The reimbursements receivable from the film entertainment company for the first motion picture and the second motion picture were $2,000 and $371,000, respectively, as of June 30, 1996. CD-ROM AGREEMENT Pixar has entered into an agreement with the above-mentioned film entertainment company to develop and produce interactive CD-ROM titles based on the first motion picture. The film entertainment company pays Pixar a development fee for the development of the titles and Pixar is entitled to receive a per-unit royalty on sales of the CD-ROM titles after a certain minimum number of units has been sold. Pixar recognized $1,012,000 of royalties from sales of the first CD-ROM title for the six months ended June 30, 1996. Amounts required to develop the titles in excess of the development fees are funded by Pixar and are recorded as research and development fees, unless the film entertainment company agrees to provide additional fees. Total development fees recorded as an offset in research and development pursuant to this agreement were $2,182,000 for the six months ended June 30, 1996. (5) SOFTWARE DEVELOPMENT COSTS In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. After technological feasibility is established, additional costs would be capitalized. To date, Pixar has not capitalized any software development costs after technological feasibility has been established on its software products since Pixar believes its process for developing software is essentially completed concurrently with the establishment of technological feasibility and costs incurred thereafter have not been material. -6- 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's operating performance each quarter is subject to various risks and uncertainties as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "Form 10-K"). The following discussion should be read in conjunction with the sections entitled "Certain Factors Affecting Business, Operating Results and Financial Condition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K. In particular, the factors set forth below in "Factors Affecting Operating Results" could affect the Company's operating results. RESULTS OF OPERATIONS REVENUES Total revenues decreased by 1% to $7.9 million in the three months ended June 30, 1996 from $8.0 million in the same period of the prior year, and increased by 71% to $16.2 million in the six months ended June 30, 1996 from $9.5 million in the same period of the prior year. Total revenue for the three months ended June 30, 1995 included a one-time patent licensing fee of $6.5 million, which is compared to film and CD-ROM revenues of $5.0 million and $1.0 million, respectively, recognized in the three months ended June 30, 1996. The increase in total revenues for the six months ended June 30, 1996 over the same period in the prior year was primarily attributable to film revenue of $5.1 million and CD-ROM revenue of $1.0 million. Software revenues include software license revenue, principally from RenderMan, software development contract revenues and royalties received from the April 1996 release of Pixar's first CD-ROM, Disney's Animated Storybook, Toy Story, which was developed by Pixar's interactive division and marketed and distributed by Disney Interactive, Inc., a subsidiary of the Walt Disney Company (along with its subsidiaries hereinafter referred to as "Disney"). Software revenues increased 91% to $1.7 million in the three months ended June 30, 1996 from $910,000 in the same period of the prior year, and increased by 40% to $2.6 million in the six months ended June 30, 1996 from $1.9 million in the same period of the prior year. The increases in software revenues over the same periods of the prior year resulted from CD-ROM royalty revenues of $1.0 million in the three months ended June 30, 1996, and an increase in software license revenue from RenderMan offset by a decline in revenue from software development contracts and prepackaged software products other than RenderMan. In January 1996, Pixar raised the list price of RenderMan, which could adversely affect sales of RenderMan. Further, due to Pixar's focus on content creation for animated feature films and related products, Pixar expects that revenue derived from software licenses may decline. In addition, in 1995, Pixar completed work under all of the software development contracts that generated revenues in 1995, and Pixar does not expect to recognize any further revenues under these agreements nor does Pixar intend to pursue future software development work for third parties. Revenue attributable to animated television commercials increased 39% to $799,000 in the three months ended June 30, 1996 from $575,000 in the same period of the prior year, and increased 43% to $1.6 million in the six months ended June 30, 1996 from $1.1 million in the same period of the prior year. Fees for animated television commercials, which are fixed in advance, depend on the relative complexity and length of each commercial as well as the market and competitive conditions. The increases in commercial revenue over the same periods of the prior year were due to an increase in the average fee charged due to the increased complexity of the commercials produced. On July 8, 1996, Pixar announced plans to substantially discontinue its production of commercials for third parties after fulfilling its current commitments and to redirect the talent in its television commercial group to animated feature films and related products. Although most of the 18 employees in the commercial division have been moved to other projects, Pixar expects some ongoing activity in this area due to projects related to Pixar's films. -7- 8 Patent licensing revenues of $396,000 in the three months ended June 30, 1996, and $6.9 million in the six months ended June 30, 1996 were attributable to a patent license with Silicon Graphics, Inc., ("SGI"), whereby Pixar granted to SGI and its subsidiaries a non-exclusive license to use certain of Pixar's patents covering techniques for creating computer-generated photorealistic images. Under the agreement, SGI will pay Pixar total compensation of $11.0 million, of which $6.0 million is to be paid in cash and $5.0 million is to be paid in the form of purchase credits for SGI hardware and software over the next four years. Recognition of the $5.0 million in credits will depend upon purchases and usage of the hardware and software to be obtained from SGI in lieu of payment. In the six months ended June 30, 1996, Pixar recognized revenue of $6.9 million, which included $6.0 million received in cash, plus $891,000 representing the portion of the $5.0 million in hardware and software credits actually used. The remaining $4.1 million will be recognized as revenue in future periods as hardware and software credits are used. Patent licensing revenues of $6.5 million for the three and six months ended June 30, 1995, were attributable to a one-time patent license with Microsoft Corporation, ("Microsoft"). Based on the terms of the feature film agreement ("the Feature Film Agreement") between Pixar and Disney, film revenues of $5.0 and $5.1 million were recognized for the three and six months ended June 30, 1996, respectively. These amounts represented a portion of the total revenues Pixar expects to receive from the November 1995 release of its first computer animated feature film, Toy Story. Future film revenues may fluctuate significantly from quarter to quarter, and may be higher or lower than amounts recognized in the three months ended June 30, 1996. In the three months ended June 30, 1996, and in the six months ended June 30, 1996, Disney accounted for 77% and 38%, respectively, of Pixar's total revenues. The revenues from Disney consisted primarily of film revenues and CD-ROM royalties. SGI accounted for 43% of total revenues for the six months ended June 30, 1996. In the three months ended June 30, 1995, and in the six months ended June 30, 1995, Microsoft accounted for 81% and 68%, respectively, of total revenues. The revenues from Microsoft and SGI were attributable to one-time patent licenses, and Pixar expects that similar levels of patent licensing revenue will not be generated on an ongoing and regular basis. COST OF REVENUES Cost of software revenues consists of the direct costs and manufacturing overhead required to reproduce and package software products and the cost of salaries and overhead associated with the software development contracts. Cost of software revenues as a percentage of the related revenues decreased to less than 1% in the three months ended June 30, 1996 from 15% in the same period of the prior year and decreased to 2% in the six months ended June 30, 1996 from 21% in the same period of the prior year. The decreases over the same periods of the prior year were due to increased CD-ROM royalty revenues which have no associated costs, a substantial reduction in revenue from software development contracts, which have higher associated costs relative to commercialized software costs, and to increased licensing of RenderMan, which carries a higher gross margin than other software products. Cost of software revenues includes no amortization of capitalized software development expenses. Cost of commercial revenues consists of costs of production of commercials, primarily salaries and benefits and, to a lesser extent, facility expenses and department overhead costs. Cost of commercial revenues as a percentage of the related revenues increased to 98% in the three months ended June 30, 1996 from 48% in the same period of the prior year and increased to 95% in the six months ended June 30, 1996 from 60% in the same period of the prior year. The increases over the same periods of the prior year were primarily attributable to the higher costs associated with the increased complexity of the commercials produced and increased market competition, which resulted in lower overall profitability. Cost of film revenues consists primarily of the amortization of certain film budget overages capitalized by Pixar. See "Capitalized Film Production Costs." Cost of film revenues as a percentage of the related revenues was 8% for each of the three and six months ended June 30, 1996. -8- 9 There were no costs of revenue associated with patent licensing revenues, which resulted in an abnormally high overall gross margin for all periods presented, especially the three and six months ended June 30, 1995, where patent licensing revenue accounted for approximately 81% and 68%, respectively, of total revenues. OPERATING EXPENSES Pixar intends to increase operating expenses in a number of areas. First, as a result of intense competition for animators, creative personnel and technical directors, Pixar expects compensation for such personnel to increase substantially. Pixar also plans to fund greater levels of research and development, expand its administrative staff and facilities, expand other operations and incur other significant costs related to being a public company. To the extent that such expenses precede or are not subsequently followed by an increase in revenues, Pixar's business, operating results and financial condition will be materially adversely affected. RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of salaries and support for personnel conducting research and development for the RenderMan product, for Pixar's proprietary Marionette and Ringmaster software and for Pixar's interactive products. Research and development expenses increased 60% in the three months ended June 30, 1996 to $1.6 million from $1.0 million in the same period of the prior year, and increased 57% in the six months ended June 30, 1996 to $2.7 million from $1.7 million in the same period of the prior year. The increases over the same periods of the prior year primarily resulted from increased personnel, as well as deferred compensation charges of $135,000 and $285,000 recorded in the three and six months ended June 30, 1996, respectively, in connection with stock option grants. To date, all software development costs have been expensed as incurred. With respect to CD-ROM development, under the CD-ROM agreement with Disney ("the CD-ROM Agreement"), development costs in excess of the budgeted maximum amounts, unless reimbursed, will be recorded as research and development expenses. Pixar has incurred over budget amounts in the development of the first CD-ROM title, a portion of which Disney has reimbursed. Pixar believes that research and development expenses will increase substantially in absolute dollars in future periods, particularly in the areas of development of CD-ROM titles and CD-ROM tools as well as the improvement and upgrading of Pixar's Marionette, Ringmaster and RenderMan software systems. SALES AND MARKETING Sales and marketing expenses consist primarily of salaries and related overhead, as well as advertising, technical support, public relations and trade show costs required to support the software segment. Sales and marketing expenses increased 50% in the three months ended June 30, 1996 to $614,000 from $409,000 in the same period of the prior year, and increased 12% in the six months ended June 30, 1996 to $1.1 million from $945,000 in the same period of the prior year. The increases over the same periods of the prior year were due to costs associated with being a public company such as public relations and increased corporate marketing offset by a reduction in salaries and advertising costs as Pixar focused on content creation, primarily for animated feature films. Pixar believes that sales and marketing expenses may increase in absolute dollars in future periods, particularly in the areas of corporate marketing and public relations. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of salaries of management and administrative personnel, insurance costs and professional fees. All or a portion of the salaries of certain of Pixar's executives are charged as film production costs and are reimbursed by Disney and are not included in general and administrative expenses. General and administrative expenses increased 81% in the three months ended June 30, 1996 to $1.4 million from $770,000 in the same period of the prior year, and increased 153% in the six months ended June 30, 1996 to $2.6 million from $1.0 million in the same period of the prior year. The increases over the same periods of the prior year were primarily due to deferred compensation expense recorded in connection with stock option grants, -9- 10 increased staffing, increased professional fees associated with the protection of intellectual property and increased costs associated with being a public company (such as expenses related to directors' and officers' insurance, and increased professional fees). Pixar expects general and administrative expenses to increase in absolute dollars in future periods as Pixar incurs additional costs related to being a public company, continues amortization of deferred compensation expense and expands its administrative staff and facilities. OTHER INCOME (EXPENSE), NET Other income, net was $1.9 million and $3.8 million in the three and six months ended June 30, 1996, respectively, consisting primarily of interest income on investments of the net proceeds from Pixar's IPO in November 1995. Other expense, net was $38,000 and $74,000 in the three and six months ended June 30, 1995, respectively, and was primarily attributable to interest expense accrued on a promissory note issued by Pixar to its majority shareholder. INCOME TAXES Income tax expense for the three and six months ended June 30, 1996 reflects the alternative minimum tax liability after utilization of available net operating loss carryforwards. Pixar elected to be treated as an S corporation for federal income tax purposes as of January 1, 1992, whereby income was taxed to the individual shareholder. In April 1995, the S corporation status was terminated as a result of a recapitalization of Pixar. Accordingly, Pixar was taxed as a C corporation after the recapitalization. Income tax expense for the three and six months ended June 30, 1995, is presented on a pro forma basis, and assumes C corporation income tax expense. FACTORS AFFECTING OPERATING RESULTS Pixar intends to generate a substantial majority of its future revenue from the development and production of animated feature films and related products. Pixar's annual and quarterly revenue will depend upon the timing and market acceptance of the animated feature films and related products and upon the costs to distribute and promote such films and 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, the availability of alternative forms of entertainment and leisure time activities, critical reviews, unpredictable public taste, the success of films released by competitors, general economic conditions, and other tangible and intangible factors, all of which change and cannot be predicted with certainty. 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. Accordingly, Pixar's annual and quarterly revenues are and will continue to be extremely difficult to forecast. Moreover, Pixar's expense levels are based in part on expectations regarding future revenues and are, to a large extent, fixed. Pixar may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue from Pixar's feature films and related products in relation to Pixar's expectations would have an immediate material adverse effect on Pixar's business, operating results and financial condition. Pixar plans to increase its operating expenses to fund greater levels of research and development, CD-ROM development and to expand operations. In addition, as a result of intense competition for animators, creative personnel and technical directors, Pixar expects compensation for such personnel to increase substantially, along with corresponding increases in Pixar's operating expenses and film production budgets. Since compensation for a substantial number of Pixar's employees is reimbursed by Disney (within approved budgets) under the Feature Film Agreement, if Pixar was not reimbursed or if the budget for a project funded by Disney was exceeded, Pixar would experience a further significant increase in operating expenses. To the extent that such expenses precede or are not subsequently followed by increased revenues, Pixar's business, operating results and financial condition will be materially adversely affected. Pixar expects to experience significant fluctuations in its future annual and quarterly operating results that may be caused by many factors, including the timing of the domestic and international releases of the animated feature films, the success of the animated feature films (which can fluctuate significantly from film to film), the timing of the release of related products into their respective markets, the demand for the related products (which is -10- 11 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 of receipt of proceeds from the animated feature film and related products by Disney, the timing of revenue recognition under the Feature Film Agreement, the timing of revenue recognition under any distribution agreements for related products, the introduction of new feature films or products by Pixar's competitors, the timing of significant operating expenses and capital expenditures, the level of unreimbursed film production and CD-ROM development costs in excess of budgeted maximum amounts and general economic conditions. In particular, since Pixar's compensation rate under the Feature Film Agreement escalates as the revenues from each animated feature film and the related products increase, Pixar's operating results are likely to fluctuate depending on the level of success of its animated feature films and related products. As a result, Pixar believes that period-to-period comparisons of its results of operations are not necessarily meaningful, and its annual and quarterly results of operations should not be relied upon as any indication of future performance. Due to all of the foregoing factors, it is likely that in some future period Pixar's operating results will be below the expectations of public market analysts or investors. In such event, the price of Pixar's Common Stock would likely be materially adversely affected. Under the Feature Film Agreement, Pixar's compensation rate for Toy Story and its related products escalates as the revenues from Toy Story and the related products increase. Under this formula, Pixar's compensation is insignificant until such time as the revenues earned by Disney from distribution of Toy Story and the related products are sufficient to cover specified costs and distribution fees to Disney associated with Toy Story and the related products. Once such costs and distribution fees have been covered, Pixar's compensation rate escalates substantially. In particular, the production costs, the general level of marketing and distribution costs and the timing of the international theatrical and home video releases affect Pixar's compensation, and many of these factors are controlled by and determined solely by Disney. Disney's marketing and distribution costs for Toy Story were higher than originally anticipated by Pixar which would have the effect of delaying the time at which Pixar's compensation rate escalates. In addition, notwithstanding the success of Toy Story in foreign markets, Pixar believes that the international box office for Toy Story might be lower than originally anticipated. Pixar further believes that these two factors, particularly the higher level of Disney's marketing and distribution costs, will have a material adverse impact on Pixar's compensation from Toy Story revenues and results of operations for 1997. Because Pixar expects that revenues from RenderMan may not grow and may even decline, that television commercial production will be substantially discontinued, and that patent licensing revenues will not be generated on an ongoing and regular basis, if Pixar does not receive significant compensation under the Feature Film Agreement and the CD-ROM Agreement, Pixar's revenues and net income will decline from historical levels, and Pixar's business, operating results and financial condition will be materially adversely affected. CAPITALIZED FILM PRODUCTION COSTS Although Disney funded the entire production of Toy Story, Pixar contractually guaranteed certain of the film budget overages and was liable to Disney for these amounts under the Feature Film Agreement. Because these are "production costs" under Statement of Financial Accounting Standards (SFAS) No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films," the costs were capitalized and amortized against film revenue. In the three and six months ended June 30, 1996, $414,000 and $423,000 of these costs, respectively, were amortized against film revenues. As of June 30, 1996, Pixar had approximately $2.7 million of capitalized film production costs, consisting primarily of costs related to Toy Story. As of March 31, 1996, Pixar had approximately $3.2 million recorded as a liability for Pixar-related overages paid by Disney. In the three months ended June 30, 1996, this liability was reduced by $1.0 million as a result of a reduction in the final Toy Story budget and the balance of $2.2 million was satisfied through a deduction from the amount due from Disney to Pixar for Pixar's compensation, which is based on Toy Story revenues. Pixar is entitled to recover any overages that it has funded, through its compensation under the Feature Film Agreement, if Toy Story meets certain predefined criteria. -11- 12 LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments increased $2.5 million to $146.8 million at June 30, 1996 from $144.3 million at December 31, 1995. Working capital increased $11.3 million to $150.0 million at June 30, 1996 from $138.7 million at December 31, 1995. Net cash provided by operations in the six months ended June 30, 1996 was primarily attributable to net cash received of $6.0 million from patent licensing fees, and cash received from film and other operations. Net cash used in investing activities in the six months ended June 30, 1996 was due primarily to the purchase of short-term investments of $77.0 million less cash received from maturities of $42.0 million. Net cash used in financing activities in the six months ended June 30, 1996 was attributable to the repayment of the note payable to Pixar's majority shareholder. As of June 30, 1996, Pixar's principal source of liquidity was approximately $146.8 million in cash and short-term investments. Pixar believes that these funds together with cash flows expected to be generated from operations will be sufficient to meet the Company's operating requirements through the next twelve months. Thereafter, if cash generated by operations is insufficient to satisfy Pixar's liquidity requirements, Pixar may sell additional equity or debt securities or obtain credit facilities. The sale of additional equity or convertible debt securities will result in additional dilution to Pixar's shareholders. There can be no assurance that financing will be available to Pixar in an amount and on terms acceptable to Pixar. During the three months ended June 30, 1996, Pixar entered into a new lease agreement to expand the total square footage of its corporate headquarters by approximately 26,000 square feet. This agreement will result in additional cash commitments for lease payments of approximately $528,000 beginning August 10, 1996, and continuing through July 10, 1999. Tenant improvements and capital equipment purchases related to the expansion are expected to total up to $800,000 for the year ended December 31, 1996. -12- 13 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to the shareholders at the Company's Annual Meeting of Shareholders held May 29, 1996. Each of these matters was approved by a majority of shares present at the meeting. 1. The uncontested election of four directors to serve a one-year term until their successors are duly elected and qualified. The following is a summary of the nominees and voting results:
Votes For Votes Withheld --------- -------------- Steven P. Jobs 36,657,492 48,139 Larry W. Sonsini 36,653,780 51,851 Skip M. Brittenham 36,653,072 52,559 Joseph A. Graziano 36,653,010 52,621
2. The ratification of the appointment of KPMG Peat Marwick LLP as the independent auditors for the Company for the fiscal year ending December 31, 1996. Results of the voting included 36,641,180 shares for, 35,017 shares against and 29,434 shares abstained. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 11.1 Statement of Computation of Net Income Per Share. 27.1 Financial Data Schedule. (a) REPORTS ON FORM 8-K No reports on Form 8-K were filed by Pixar during the quarter ended June 30, 1996. ITEMS 1, 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. -13- 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PIXAR Date: August 9, 1996 By: /s/ Lawrence B. Levy -------------------------------------- Lawrence B. Levy, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) -14- EX-11.1 2 STATEMENT OF COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 PIXAR STATEMENT OF COMPUTATION OF NET INCOME PER SHARE (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 ------- ------- ------- ------- Weighted average number of shares outstanding: Preferred stock -- 20,000 -- 20,000 Common stock and common equivalent shares 38,350 10,000 38,318 10,000 Number of common shares issued in accordance with Staff Accounting Bulletin No. 83 -- 9,671 -- 9,669 Common stock equivalents 8,652 -- 8,710 -- ------- ------- ------- ------- Total shares used in computing net income per share 47,002 39,671 47,028 39,669 ======= ======= ======= ======= Net income $ 4,790 $ 5,123 $11,069 $ 4,450 ======= ======= ======= ======= Net income per share $ 0.10 $ 0.13 $ 0.24 $ 0.11 ======= ======= ======= =======
-15- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 0001002114 BOWNE-MICHAEL LOGAN 1,000 U.S. DOLLAR 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 64,943 81,819 6,406 268 0 154,782 4,720 2,252 159,388 4,795 0 0 0 185,881 (31,288) 159,388 9,305 16,196 1,985 1,985 6,350 0 0 11,651 582 0 0 0 0 11,069 0.24 0.24
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