-----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, L4jtCkoQp88XZnEgYMFthLkus97gIcPw94mOf9vPcgbKTMtpA6BXUekR0eWcjY9L GFRmoelpzmqphdAcGwLjew== 0000891618-99-005280.txt : 19991117 0000891618-99-005280.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891618-99-005280 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 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: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26976 FILM NUMBER: 99758763 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 ENDING 10/02/99 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 OCTOBER 2, 1999. 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, 94804 CALIFORNIA (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 November 11, 1999 was 46,473,300. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PIXAR BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 2, JANUARY 2, 1999 1999 ---------- ----------
ASSETS Cash and cash equivalents................................... $ 21,298 $ 29,557 Short-term investments...................................... 167,167 119,491 Receivables, net............................................ 10,549 3,885 Prepaid expenses and other assets........................... 4,479 4,884 Deferred income taxes....................................... 13,117 988 Capitalized film production costs........................... 60,553 60,841 Property and equipment, net................................. 50,852 31,160 -------- -------- Total assets...................................... $328,015 $250,806 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable............................................ $ 300 $ 2,615 Income taxes payable........................................ 24,752 97 Payable to Disney........................................... 202 3,363 Accrued liabilities......................................... 10,000 8,396 Unearned revenue............................................ 829 1,188 -------- -------- Total liabilities................................. 36,083 15,659 -------- -------- 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; 46,401,078 and 45,335,770 shares issued and outstanding as of October 2, 1999 and January 2, 1999, respectively........................................... 238,228 220,397 Accumulated other comprehensive income (loss)............... (529) 249 Deferred compensation....................................... -- (104) Retained earnings........................................... 54,233 14,605 -------- -------- Total shareholders' equity........................ 291,932 235,147 -------- -------- Total liabilities and shareholders' equity........ $328,015 $250,806 ======== ========
See accompanying notes to financial statements. 2 3 PIXAR STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED NINE MONTHS ENDED --------------------------- --------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 1999 1998 ---------- ------------- ---------- ------------- Revenue: Software.................................... $ 1,738 $ 1,214 $ 4,553 $ 2,740 Animation services........................ 185 -- 408 171 Film...................................... 77,312 1,260 91,195 8,208 Patent licensing.......................... -- -- -- 120 ------- ------- ------- ------- Total revenue..................... 79,235 2,474 96,156 11,239 ------- ------- ------- ------- Cost of revenue: Software.................................. 136 302 567 438 Animation services........................ 120 -- 274 38 Film...................................... 21,552 -- 25,399 -- ------- ------- ------- ------- Total cost of revenue............. 21,808 302 26,240 476 ------- ------- ------- ------- Gross profit...................... 57,427 2,172 69,916 10,763 ------- ------- ------- ------- Operating expenses: Research and development.................. 1,597 928 4,263 2,740 Sales and marketing....................... 338 311 989 963 General and administrative................ 1,761 1,731 4,703 5,276 ------- ------- ------- ------- Total operating expenses.......... 3,696 2,970 9,955 8,979 ------- ------- ------- ------- Income (loss) from continuing operations...................... 53,731 (798) 59,961 1,784 Other income, net........................... 1,913 1,924 5,571 6,487 ------- ------- ------- ------- Income from continuing operations before income taxes............. 55,644 1,126 65,532 8,271 Income tax expense.......................... 23,370 259 25,984 1,903 ------- ------- ------- ------- Net income from continuing operations...................... 32,274 867 39,548 6,368 Income from discontinued operations, net of taxes..................................... 13 -- 80 374 ------- ------- ------- ------- Net income........................ $32,287 $ 867 $39,628 $ 6,742 ======= ======= ======= ======= Basic net income per share from continuing operations................................ $ 0.70 $ 0.02 $ 0.86 $ 0.14 Basic net income per share from discontinued operations................................ 0.00 -- 0.00 0.01 ------- ------- ------- ------- Basic net income per share.................. $ 0.70 $ 0.02 $ 0.86 $ 0.15 ======= ======= ======= ======= Shares used in computing basic net income per share................................. 46,355 44,519 45,975 43,836 ======= ======= ======= ======= Diluted net income per share from continuing operations................................ $ 0.63 $ 0.02 $ 0.77 $ 0.12 Diluted net income per share from discontinued operations................... 0.00 -- 0.00 0.01 ------- ------- ------- ------- Diluted net income per share................ $ 0.63 $ 0.02 $ 0.77 $ 0.13 ======= ======= ======= ======= Shares used in computing diluted net income per share................................. 51,223 51,733 51,253 51,227 ======= ======= ======= =======
See accompanying notes to financial statements. 3 4 PIXAR STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED --------------------------- OCTOBER 2, SEPTEMBER 26, 1999 1998 ---------- ------------- Cash flows from operating activities: Net income.................................................. $ 39,628 $ 6,742 Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities: Discontinued operations............................... (80) (374) Depreciation and amortization......................... 5,128 4,577 Loss on disposition of property and equipment......... -- 258 Amortization of capitalized film production costs..... 25,398 -- Credits from patent licensing, net of expense items... -- (114) Deferred income tax................................... 2,034 -- Changes in operating assets and liabilities: Receivables........................................ (6,664) (306) Prepaid expenses and other assets.................. (105) (424) Accounts payable................................... (2,315) 546 Income taxes payable............................... 24,655 217 Payable to Disney.................................. (3,161) (2,152) Accrued liabilities................................ 1,604 (1,940) Unearned revenue................................... (359) (450) --------- --------- Net cash provided by continuing operations....... 85,763 6,580 Net cash provided by discontinued operations..... 80 374 --------- --------- Net cash provided by operating activities........ 85,843 6,954 --------- --------- Cash flows from investing activities: Purchase of property and equipment........................ (25,803) (8,751) Proceeds from sale of equipment........................... 994 247 Proceeds from sale of short-term securities............... 110,529 103,066 Investments in short-term securities...................... (158,983) (164,693) Capitalized film production costs......................... (24,507) (23,846) --------- --------- Net cash used in investing activities................. (97,770) (93,977) --------- --------- Cash flows from financing activities: Proceeds from exercised stock options..................... 3,668 2,150 --------- --------- Net cash provided by financing activities............. 3,668 2,150 --------- --------- Net decrease in cash and cash equivalents................... (8,259) (84,873) Cash and cash equivalents at beginning of period............ 29,557 101,847 --------- --------- Cash and cash equivalents at end of period.................. $ 21,298 $ 16,974 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for income taxes............ $ -- $ 1,796 ========= ========= Supplemental disclosure of non-cash investing and financing activities: Value of common stock issued and liabilities assumed for purchase of PEI........................................ $ -- $ 3,000 ========= ========= Loss on equipment disposals capitalized as film production costs....................................... $ (603) $ -- ========= ========= Credits from patent licensing........................... $ -- $ 120 ========= ========= Unrealized gain (loss) on investments................... $ (778) $ 396 ========= ========= Tax benefit from disqualifying dispositions............. $ 14,163 $ -- ========= =========
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 the audited financial statements as of January 2, 1999 and for each of the years in the three-year period ended January 2, 1999, including notes thereto, incorporated by reference into Pixar's Annual Report on Form 10-K for the year ended January 2, 1999. The results of operations for the three and nine months ended October 2, 1999 are not necessarily indicative of the results expected for the current year or any other period. Certain amounts reported in previous periods have been reclassified to conform to the 1999 financial statement presentation. (2) FISCAL YEAR Effective in fiscal year 1998, Pixar adopted a 52 or 53-week fiscal year, changing the year end date from December 31 to the Saturday nearest December 31. As a result, fiscal year 1998 ended on January 2, 1999 and consisted of 53 weeks. The third quarter of 1999 represents the thirteen-week period ended October 2, 1999, and fiscal year 1999 will end on January 1, 2000 and consist of 52 weeks. (3) EARNINGS PER SHARE CALCULATION Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period, using the treasury stock method for options and warrants. Reconciliation of basic and diluted net income per share (in thousands, except per share amounts):
QUARTER ENDED ------------------------------------------------------ OCTOBER 2, 1999 SEPTEMBER 26, 1998 ------------------------- ------------------------- NET NET INCOME SHARES EPS INCOME SHARES EPS ------- ------ ---- ------ ------ ----- Basic net income per share............. $32,287 46,355 $.70 $867 44,519 $0.02 Effect of dilutive shares: Warrants/options..................... -- 4,868 -- 7,214 ------- ------ ---- ------ Diluted net income per share........... $32,287 51,223 $.63 $867 51,733 $0.02 ======= ====== ==== ======
NINE MONTHS ENDED ------------------------------------------------------ OCTOBER 2, 1999 SEPTEMBER 26, 1998 ------------------------- ------------------------- NET NET INCOME SHARES EPS INCOME SHARES EPS ------- ------ ---- ------ ------ ----- Basic net income per share............. $39,628 45,975 $.86 $6,742 43,836 $0.15 Effect of dilutive shares: Warrants/options..................... -- 5,278 -- 7,391 ------- ------ ------ ------ Diluted net income per share........... $39,628 51,253 $.77 $6,742 51,227 $0.13 ======= ====== ====== ======
5 6 PIXAR NOTES TO FINANCIAL STATEMENTS (CONTINUED) (4) FEATURE FILM AND CO-PRODUCTION AGREEMENTS Feature Film Agreement In 1991, Pixar entered into a feature film agreement with Walt Disney Pictures, a wholly owned subsidiary of The Walt Disney Company (together with its subsidiaries and affiliates collectively referred to herein as "Disney") to develop and produce up to three computer-animated feature films (the "Feature Film Agreement"). Pixar is entitled to receive compensation based on the revenue from the distribution of these films and related products. In 1995, Pixar 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 governs five original films made by Pixar after 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's first film produced under this agreement was A Bug's Life. Films in development or production at Pixar as of October 2, 1999, which include Toy Story 2 and Pixar's fourth film (with the working title "Monsters, Inc.") are also governed by this agreement. A Bug's Life and Monsters, Inc. count toward the five Pictures, whereas Toy Story 2 is a derivative work that will not count towards the Pictures. However, Pixar and Disney have agreed that all provisions of the Co-Production Agreement applicable to the Pictures will also apply to Toy Story 2. Pixar and Disney co-own, co-brand and co-finance the production costs of the Pictures, and share equally in the profits of each Picture and any related merchandise and other ancillary products, after recovery of all of Disney's marketing, distribution and other predefined fees and costs. The Co-Production Agreement generally provides that Pixar will produce each Picture and Disney will control decisions relating to film marketing and distribution. (5) INCOME TAXES Pixar's tax rate of 42% for the three months ended October 2, 1999 reflects Pixar's expected tax rate for fiscal year 1999. In the second quarter, Pixar recorded a non-recurring tax benefit related to the reversal of certain deferred tax asset valuation allowances which has lowered Pixar's effective tax rate for the nine months ended October 2, 1999 to 40%. Prior to the second quarter, Pixar believed that there was sufficient uncertainty regarding the realizability of its deferred tax assets to warrant the valuation allowances. Pixar believes that it has sufficient confidence in the amount and timing of its anticipated participation revenues from A Bug's Life and the amount and timing of certain offsetting tax-related expenses in the foreseeable future to project that a portion of these deferred tax assets will be realized, and thus a favorable adjustment for such has been recognized on Pixar's balance sheet and in its tax rate in the second quarter. (6) DISCONTINUED OPERATIONS In March 1997, Pixar determined to discontinue its business of producing CD-ROM and other interactive products. Pixar immediately discontinued these operations and reassigned all employees of this division. Since the measurement date and the disposal date were virtually simultaneous, no income or loss was measured for the intervening period. Pixar recorded income from discontinued operations of $374,000 and $80,000, net of income taxes, for the nine months ended September 26, 1998 and October 2, 1999, respectively, due to royalty income received for the Toy Story CD-ROM products. Pixar does not expect to receive significant Toy Story CD-ROM royalty income in future periods. 6 7 PIXAR NOTES TO FINANCIAL STATEMENTS (CONTINUED) (7) SEGMENT REPORTING Pixar adopted the provisions of SFAS 131, Disclosures about Segments of an Enterprise and Related Information. Pixar's chief operating decision-maker is considered to be Pixar's Chief Executive Officer ("CEO"). The CEO reviews financial information accompanied by disaggregated information about film revenue for purposes of making operating decisions and assessing financial performance, which is summarized as follows (in thousands):
NINE MONTHS ENDED -------------------------------------- OCTOBER 2, 1999 SEPTEMBER 26, 1998 ---------------- ------------------- Film revenue: Toy Story................................................. $ 4,073 $8,208 A Bug's Life.............................................. 87,122 -- ------- ------ Total film revenue..................................... $91,195 $8,208 ======= ======
The financial information reviewed by the CEO is identical to the information presented in the accompanying statements of operations and Pixar has no foreign operations. Therefore, the Company operates as a single operating segment. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about Pixar's industry, management's beliefs, and assumptions made by management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under "Dependence on Toy Story, A Bug's Life, Toy Story 2 and Monsters, Inc.," and "Risks Associated with Adequacy of Cash Balances," as well as those noted in the section entitled "Risk Factors" in Pixar's Annual Report on Form 10-K for the year ended January 2, 1999 (the "Form 10-K"). Particular attention should be paid to the cautionary language in the section in the Form 10-K entitled "Risk Factors -- Our Dependence on Toy Story, Our Dependence on A Bug's Life and Our Dependence on Toy Story 2 and Film Four," "-- Risks Associated with Adequacy of Cash Balances," "-- Risks Associated with Scheduled Successive Release of Films" and "-- Risks Associated with Co-Production Agreement." Unless required by law, Pixar undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Pixar's operating performance each quarter is subject to various risks and uncertainties as discussed in the Company's Form 10-K. The following discussion should be read in conjunction with the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K. In particular, the factors set forth below in "Risk Factors" could affect the Company's operating results and financial condition. CO-PRODUCTION AGREEMENT In February 1997, Pixar and Walt Disney Pictures, a wholly owned subsidiary of The Walt Disney Company (together with its subsidiaries and affiliates collectively referred to herein as "Disney"), entered into a co-production agreement (the "Co-Production Agreement") pursuant to which Pixar, on an exclusive basis, agreed to produce five original computer-animated feature-length theatrical motion pictures (the "Pictures") for distribution by Disney over approximately ten years. Pixar and Disney agreed to co-finance the production costs of the Pictures, co-own the Pictures (with Disney having exclusive distribution and exploitation rights), co-brand the Pictures and share equally in the profits of each Picture and any related merchandise and other ancillary products, after recovery of all marketing and distribution costs (which Disney finances), a distribution fee paid to Disney and any other fees or costs, including participations provided to talent and the like. The Co-Production Agreement generally provides that Pixar will produce each Picture and that Disney will control all decisions relating to marketing, promotion, publicity, advertising and distribution of each Picture. Pixar's second feature film, A Bug's Life, was released on November 25, 1998 and is the first 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, Pixar has the opportunity to co-finance and produce such products or to earn passive royalties on such products. Pixar 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 Pixar for its share of certain general and administrative costs and certain research and development costs that benefit the productions. In February 1998, Pixar and Disney agreed to produce a theatrical motion picture sequel to Toy Story, entitled "Toy Story 2." Toy Story 2 will be Pixar's third feature film and is scheduled for release on November 24, 1999. Because Toy Story 2 is a derivative work of the original Toy Story, it will not be counted toward the five Pictures to be produced under the Co-Production Agreement. However, for all other purposes, Toy Story 2 will be treated as a Picture under the Co-Production Agreement. Accordingly, Toy Story 2 has 8 9 been added to the definition of Pictures produced and financed under the Co-Production Agreement and all the provisions applicable to the other five Pictures apply. In May 1999, Pixar began production of its fourth theatrical film (with the working title "Monsters, Inc."). This film will be produced and distributed under the Co-Production Agreement and will count as the second of the five original films to be produced under the Co-Production Agreement. Pixar is targeting the release of Monsters, Inc. in 2001. RESULTS OF OPERATIONS Revenue Total revenue for the three and nine months ended October 2, 1999 was $79.2 million and $96.2 million, respectively, compared to $2.5 million and $11.2 million in the corresponding periods of the prior year. The increases were primarily due to revenue from the theatrical and home video releases of A Bug's Life and related merchandise. Software revenue includes software license revenue, principally from RenderMan. Software revenue increased 43% to $1.7 million for the quarter ended October 2, 1999 from $1.2 million in the corresponding prior year period and increased 66% to $4.6 million in the nine months ended October 2, 1999 from $2.7 million in the corresponding prior year period. The increase in software revenue resulted from a general increase in RenderMan software licensing. Due to Pixar's focus on content creation for animated feature films and related products, Pixar has not increased the time and resources necessary to generate significantly higher RenderMan sales. Therefore, Pixar expects ongoing variability in revenues derived from software licenses and that such revenue will remain flat or possibly decline. All historical and future royalty income associated with Pixar's discontinued CD-ROM division is now and will continue to be excluded from software revenue and will be presented in results of discontinued operations. See "Results of Discontinued Operations." Animation services revenue includes revenue generated from short projects related to Pixar's films. Animation services revenue was $185,000 for the quarter ended October 2, 1999. No revenue from animation services was recognized in the corresponding prior year period. Animation services revenue increased to $408,000 for the nine months ended October 2, 1999 from $171,000 in the corresponding prior year period. Pixar expects that revenue in this area will continue to vary significantly from quarter to quarter due to the sporadic nature of this business and the need to utilize animation services employees on other productions. For example, as occurred with A Bug's Life, Pixar transferred substantially all of its animation services employees to assist in the completion of Toy Story 2. There can be no assurance that Pixar will generate any animation services revenues during periods in which its animation services employees are devoted to feature films or other projects. Film revenue for the quarter ended October 2, 1999 was $77.3 million compared with $1.3 million in the corresponding prior year period. Film revenue for the nine months ended October 2, 1999 was $91.2 million compared with $8.2 million in the corresponding prior year period. Under the Co-Production Agreement, Pixar and Disney share equally in the profits of A Bug's Life after Disney recovers its distribution costs and its distribution fee. Therefore, Pixar's film revenue of $91.2 for the nine months ended October 2, 1999 resulted primarily from A Bug's Life domestic home video revenue, theatrical revenues from A Bug's Life, and related merchandise, offset by Disney's distribution costs and its distribution fee. Distribution costs reported to date primarily include worldwide theatrical distribution costs, and the majority of domestic home video distribution costs. Pixar's film revenue for the three months ended October 2, 1999 of $77.3 million was derived primarily from domestic home video sales of A Bug's Life, offset by Disney's distribution costs and fees. Also included in film revenue for the three and nine months ended October 2, 1999 was revenue from Toy Story, primarily from related merchandising, of $3.5 million and $4.1 million, respectively. Film revenue of $1.3 million for the three months ended September 26, 1998 primarily represented proceeds from Toy Story merchandise sales. Film revenue of $8.2 million for the nine months ended September 26, 1998 consisted of proceeds from Toy Story television airings, merchandise and home video sales. 9 10 Patent licensing revenue of $120,000 for the nine months ended September 26, 1998 consisted primarily of purchase credits related to an agreement with Silicon Graphics, Inc. ("SGI"). As of the end of 1998, Pixar had used substantially all of the related credits and does not expect patent licensing revenue to be generated on an on-going basis. For the three and nine months ended October 2, 1999, Disney accounted for 98% and 95%, respectively, of Pixar's total revenue. The revenue from Disney consisted primarily of film revenue. Due to the Co-Production Agreement, Disney is expected to continue to represent significantly in excess of 10% of Pixar's revenue in 1999 and for the foreseeable future. A portion of the Disney revenue for the quarter was included in receivables and represented 71% of the balance at October 2, 1999. For the three and nine months ended September 26, 1998, Disney accounted for 70% and 79%, respectively, of Pixar's total revenue, primarily from film and animation services revenue. Cost of Revenue Cost of software revenue consists of the direct costs and manufacturing overhead required to reproduce and package Pixar's software products, as well as amortization of purchased technology. Cost of software revenue includes no amortization of capitalized software development expenses. Cost of software revenue as a percentage of the related revenue was 8% and 12% for the three and nine months ended October 2, 1999, compared to 25% and 16% for the three and nine month corresponding prior year periods. The percentage decrease for the nine months ended October 2, 1999 was due to increased revenue and a decrease in amortization of purchased technology associated with the June 1998 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 Pixar's total software gross profit will be substantially lower during the next few years as compared to software gross profit prior to the acquisition. In addition, if Pixar determines that the license revenue generated by the purchased technology will be lower than expected and that all or part of the purchased technology asset may not be recoverable, Pixar would, at that point, be required to write off all or a significant portion of the unamortized purchased technology. Cost of animation services revenue consists of production costs, which include salaries, benefits, facility expenses and department overhead costs. Cost of animation services revenue as a percentage of related revenue increased to 67% for the nine months ended October 2, 1999 from 22% in the prior year period. Animation services projects are negotiated individually and depending on the complexity of the project, profit margins vary significantly from project to project. Cost of film revenue represents amortization of capitalized film costs associated with A Bug's Life and represented 29% of A Bug's Life revenue in the three and nine months ended October 2, 1999. See "Capitalized Film Production Costs." Due to higher than expected Toy Story film revenue, which resulted in Pixar's amortizing all Toy Story related film costs by December 31, 1997, there was no cost of revenue associated with the Toy Story revenue for the nine months ended October 2, 1999 or September 26, 1998. Under the agreement between Pixar and Disney that governs Toy Story, all payments to Pixar from Disney for Pixar's efforts in the development and production of Toy Story were recorded as cost reimbursements, which offset most of Pixar's related costs. Since Pixar co-finances production costs under the terms of the Co-Production Agreement, amortized film production costs for A Bug's Life and future feature films will be significantly higher, and the related gross profit margins will be substantially lower than those achieved on Toy Story. There is no cost of revenue associated with patent licensing revenue. Operating Expenses Total operating expenses for the three and nine months ended October 2, 1999 increased as compared to the prior year, and Pixar intends to continue to increase its spending levels in a number of areas. As a result of competition for animators, creative personnel, technical directors and certain administrative personnel, Pixar 10 11 has had to pay higher salaries to attract new creative, technical and other personnel, and compensation for such personnel may continue to increase. In addition, Pixar expects increases in systems and facilities costs and to expand other operations. Under the Co-Production Agreement, Disney reimburses Pixar for its share of certain general and administrative costs and certain research and development costs that benefit the productions. The funding received from Disney is treated as operating expense reimbursements. Further, a portion of Pixar's general and administrative overhead costs which benefit the productions are capitalized by Pixar. In addition, because Disney is responsible for paying all film marketing costs under the Co-Production Agreement, to the extent that Pixar incurs film marketing costs, Disney is responsible for reimbursing Pixar for such costs. To the extent that personnel, facilities and other expenditures are not capitalized by Pixar nor allocated to and paid for by Disney, and precede or are not subsequently followed by an increase in revenue, Pixar's business, operating results and financial condition will be materially adversely affected. Research and development expenses consist primarily of salaries and support for personnel conducting research and development for the RenderMan product and for Pixar's proprietary Marionette and Ringmaster animation software, for production management software, for short film projects, for creative development efforts and for other projects. Research and development expenses increased 72% to $1.6 million in the three months ended October 2, 1999 from $928,000 in the corresponding prior year period and increased 56% to $4.3 million in the nine months ended October 2, 1999 from $2.7 million in the corresponding prior year period. The increases are due to Pixar's continued investment in proprietary technology, short film development projects, and creative development. Pixar is now spending an increasing amount of time and dedicating certain key resources to developing creative concepts for future films. Such very early stage concept development is expensed as incurred. Sales and marketing expenses consist primarily of salaries and related overhead, as well as advertising, technical support, public relations and trade show costs required to support software sales and complement film activities. Sales and marketing expenses increased by 9% to $338,000 for the three months ended October 2, 1999 from $311,000 in the corresponding prior year period and increased 3% to $989,000 for the nine months ended October 2, 1999 from $963,000 in the corresponding prior year period. General and administrative expenses consist primarily of salaries of management and administrative personnel, insurance costs and professional fees. General and administrative expenses increased 2% to $1.8 million for the three months ended October 2, 1999 from $1.7 million in the corresponding prior year period and decreased 11% to $4.7 million for the nine months ended October 2, 1999 from $5.3 million in the corresponding prior year period. Pixar expects general and administrative expenses to increase in future periods as Pixar incurs additional costs to expand its administrative staff and facilities. Other Income, Net Other income, net consists primarily of interest income on Pixar's short-term investments. Other income, net was $1.9 million and $5.6 million for the three and nine months ended October 2, 1999, respectively, and $1.9 million and $6.5 million for the three and nine months ended September 26, 1998, respectively. The decrease is primarily due to a decline in Pixar's average cash and short-term investment balances. Income Taxes Income tax expense from continuing operations for the nine months ended October 2, 1999 reflects Pixar's federal and state income tax liability after recognition of a non-recurring tax benefit recorded in the second quarter of 1999. This one-time adjustment reflected Pixar's sufficient confidence in anticipated revenue from A Bug's Life such that Pixar will realize the benefit of certain tax assets. Pixar's tax rate for the three months ended October 2, 1999 was 42%, reflecting its expected statutory rate, and the combined rate for the nine months ended October 2, 1999 was 40%. 11 12 Results of Discontinued Operations Pixar determined in March 1997 to discontinue its business of producing CD-ROM and other interactive products and redirected all employees in that division to film and related projects within Pixar. Pixar recorded income from discontinued operations of $80,000 and $374,000, net of income taxes, for the nine months ended October 2, 1999 and September 26,1998, respectively. This income is due to royalty income received from the Toy Story CD-ROM products. Pixar does not expect to receive significant CD-ROM royalty income in future periods, if any. RISK FACTORS The following is a discussion of certain factors that currently impact or may impact Pixar's business, operating results and/or financial condition. Anyone making an investment decision with respect to Pixar's capital stock or other securities is cautioned to carefully consider these factors, along with the factors discussed in Pixar's Form 10-K under the section entitled "Risk Factors." DEPENDENCE ON TOY STORY, A BUG'S LIFE, TOY STORY 2 AND MONSTERS, INC. DEPENDENCE ON A BUG'S LIFE FOR THE BALANCE OF 1999 AND THE FIRST HALF OF 2000 For the balance of 1999 and the first half of 2000, Pixar's revenue and operating results will be largely dependent upon (1) Pixar's share of revenue from foreign home video sales of A Bug's Life and to a lesser extent from domestic home video sales of A Bug's Life and related merchandise, (2) residual revenues from Toy Story, if any, and (3) Pixar's software and animation services revenue, from which Pixar expects limited revenue. A Bug's Life Revenue A Bug's Life was released in November 1998, and for the three and nine months ended October 2, 1999, Pixar received a significant share of film revenues. Under the Co-Production Agreement, Pixar and Disney share equally in the profits of A Bug's Life after Disney recovers its distribution costs and its distribution fee. Correspondingly, Pixar's film revenue for the nine months ended October 2, 1999 resulted primarily from the domestic and foreign theatrical revenues from A Bug's Life (most of which have already been reported by Disney), domestic home video revenue and related merchandise licensing, offset by Disney's distribution costs and its distribution fee. Distribution costs reported to date include the majority of worldwide theatrical marketing and distribution costs, and the majority of Disney's costs to distribute A Bug's Life on home video in the United States. While A Bug's Life has done extremely well in its theatrical release, earlier this year 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. In addition, Pixar believes that A Bug's Life faced an unusually high number of competing films released during the 1998 holiday season, such as, Antz, The Rugrats Movie and Prince of Egypt, and that the related home video and/or merchandise sales from these films have adversely impacted sales of A Bug's Life products. As a result, Pixar continues to expect that worldwide revenues associated with A Bug's Life home video sales and merchandise licensing could be adversely impacted by these factors. For the remainder of 1999 and the first half of 2000, Pixar expects to be significantly dependent upon the success of A Bug's Life. Because most revenues from the worldwide theatrical release of A Bug's Life have been reported by Disney, sources of future revenues primarily include foreign home video sales, any remaining domestic home video sales, and any future merchandise royalties, all of which must be substantial in order for the film to generate significant revenues. Revenue from any future television airings of A Bug's Life is not expected until a few years after release of the film, at the earliest. Moreover, potential future revenues will be offset by future distribution costs, which primarily include marketing costs for the foreign home video release, video cost of goods, remaining distribution costs for the international theatrical release of A Bug's Life, Disney's distribution fee based on film-related revenues, and other distribution costs such as residuals. It is difficult to predict the amount and timing of Pixar's future revenues from A Bug's Life, particularly in the last quarter of 1999 and the first half of 2000, because of the many variables involved. Such variables include the 12 13 timing of related product releases, as determined by Disney, and the amount and timing of related revenue and distribution cost flows. For example, the timing of release of A Bug's Life video in foreign countries is particularly uncertain since the video is released in various countries over the course of six months or more. All decisions regarding its international release are made by Disney and such decisions are subject to change. It is possible, in any given quarter or quarters for the remainder of 1999 and in 2000 that Pixar will not recognize sufficient revenue from A Bug's Life to generate significant earnings. Toy Story Revenue Pixar has already recognized the vast majority of revenue it expects to receive from Toy Story. While Pixar may receive minor amounts of revenue in subsequent periods, Pixar does not expect to recognize any further significant revenue from Toy Story. Based on terms of the Feature Film Agreement, future film revenue from Toy Story, if any, will be received from Disney on a semi-annual basis (March and September) going forward. Software Revenue As a result of Pixar's shift in focus to products sold for their content, Pixar has reduced emphasis on the commercialization of software products. Pixar is not increasing the time and resources necessary to generate higher RenderMan licensing revenues; therefore, Pixar expects that revenue from the licensing of RenderMan will remain flat or possibly decline. In addition, from the acquisition date of PEI on June 16, 1998, through October 2, 1999, Pixar has received lower license revenue than expected related to the purchased technology associated with the acquisition. If future license revenue continues to be lower than originally estimated, Pixar may be required to write off all or a significant portion of the unamortized purchased technology. RISK ASSOCIATED WITH A BUG'S LIFE Under the Co-Production Agreement, Pixar shares with Disney the production costs of A Bug's Life. These costs were initially capitalized as film production costs under SFAS No. 53, and Pixar is amortizing these costs over the expected revenue stream as Pixar recognizes revenue from the film. The amount of film costs that will be amortized each quarter will depend on how much future revenue Pixar expects to receive from A Bug's Life. Although A Bug's Life has achieved substantial domestic and foreign box office success and has done well in its domestic home video release, the home video has not been substantially released in foreign markets, nor have any significant foreign home video proceeds been received by Pixar. It is difficult to predict how much additional revenue will be derived from merchandise sales and from television airings of A Bug's Life. In addition, Pixar believes that the amount spent by Disney for marketing and distribution, particularly for distribution of the home video, will continue to be significant. In any given quarter, if Pixar's forecast changes with respect to total revenue from A Bug's Life, and becomes lower than was previously forecasted, Pixar would be required to accelerate amortization of related film costs, resulting in lower gross margins. Such lower gross margins from A Bug's Life would adversely impact Pixar's business, operating results, and financial condition. DEPENDENCE ON TOY STORY 2 AND MONSTERS, INC. Pixar expects to receive the majority of the proceeds from A Bug's Life by the end of 2000. In addition, while Toy Story 2 is scheduled for release on November 24, 1999, Pixar does not expect to recognize any revenue from Toy Story 2 until six to twelve months after its release. Therefore, Pixar is unlikely to recognize any revenue from Toy Story 2 until the second half of 2000. Beyond 2000, Pixar expects to be largely 13 14 dependent upon the success of Toy Story 2 and Monsters, Inc. (together referred to as the "Current Projects"). Pixar cannot provide any assurances that the Current Projects will be successfully produced and released when targeted. Pixar is currently scheduled to complete production of Monsters, Inc. in 2001. Disney has not formally scheduled the theatrical release of Monsters, Inc., and Pixar cannot provide any assurances as to when the film will be released. Pixar cannot provide any assurances that it will not experience difficulties that could delay or prevent the successful development or production of any of the Current Projects or subsequent animated feature films or related products. If Pixar is unable to produce and develop on a timely basis the Current Projects and subsequent animated feature films and related products that meet with broad market acceptance, its business, operating results and financial condition will be materially adversely affected. RISKS ASSOCIATED WITH TOY STORY 2 It is rare for animated feature films to achieve extraordinary box office success. Pixar believes, based on available information, that there is a reasonable basis to conclude that of the more than 40 animated feature films introduced since 1990, only three films generated domestic box office revenues greater than A Bug's Life and Toy Story, and all of those films were produced and distributed solely by Disney. During at least the last five years, Pixar believes that The Rugrats Movie and The Prince of Egypt are the only fully-animated feature films (other than Toy Story and A Bug's Life) produced or developed by a studio other than Disney that have achieved more than $100 million in domestic box office revenues. Unless Toy Story 2 achieves extraordinary box office success and also achieves success in home video and merchandise sales, Toy Story 2 may not generate significant revenue and operating results. As a sequel, there are also risks unique to Toy Story 2. With a theatrical sequel, the story concept and characters are not as novel as the original film. In the vast majority of cases in which a film that achieved domestic box office receipts of greater than $100 million was followed by the release of a sequel, the sequel did not perform as well at the box office as the original. This was the case for sequels to such films as Jurassic Park, Home Alone, Jaws, Batman, Raiders of the Lost Ark, Beverly Hills Cop, Ghostbusters and Back to the Future, among others. In many cases, sequels substantially under-perform the original film. In far fewer cases have sequels performed as well or better than the original blockbuster feature film, and in almost all of these cases, the original feature films and related sequels were action-adventure films, such as Lethal Weapon and Die Hard. Accordingly, Pixar cannot provide any assurances that Toy Story 2 will perform as well as Toy Story at the box office. It is possible that Toy Story 2 will substantially under-perform the original feature film. In addition, fees and participations paid to key talent on Toy Story 2 are substantially greater than for the original film, which together with other increases in production costs will have the effect of increasing the cost of the film when compared to Toy Story. As a result of these factors, Toy Story 2 and related products may not generate significant revenue and operating results for Pixar, even if Toy Story 2 is critically acclaimed and achieves substantial, but not extraordinary, box office success. RISKS ASSOCIATED WITH PRODUCTION BUDGETS Given (1) the escalation in compensation rates of people required to work on the Current Projects, (2) the number of people required to work on the Current Projects, and (3) the equipment needs, the budget for the Current Projects and subsequent films and related products are and will continue to be substantially greater than the budgets for Toy Story and A Bug's Life. Pixar 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, Pixar believes that it is not uncommon for film production spending to exceed film production budgets, and Pixar cannot provide any assurances that any of the Current Projects can be completed within the budgeted amounts. For example, in order to meet the production schedule for Toy Story 2, Pixar reassigned employees from its animation services group and from Monsters, Inc. to Toy Story 2 for the completion of its production, which resulted in a larger production staff than originally anticipated and which generated additional production costs. In addition, when production of each film is completed, if completed, Pixar may incur significant carrying costs associated with transitioning personnel on creative and 14 15 development teams from one project to another which, although shared with Disney, are generally treated as film costs which increase overall production budgets and could have a material adverse effect on results of operations and financial condition. RISKS ASSOCIATED WITH ADEQUACY OF CASH BALANCES Pursuant to the Co-Production Agreement, Pixar will co-finance the next four animated feature films that it produces, including Monsters, Inc. Pixar has co-financed Toy Story 2 on the same basis as the other theatrical films. In the future, Pixar may co-finance other derivative works such as sequels and television productions. In addition, Pixar is building a new headquarters and studio facility in Emeryville, California, which is being financed by the use of cash and may continue to be financed by the use of cash. For the foreseeable future, the development and production costs of the Current Projects and the costs of the new Emeryville facility will have a material adverse impact on Pixar's cash and short-term investment balances. As of October 2, 1999, Pixar had approximately $188.5 million in cash and short-term investments. Pixar believes that these funds, along with any further cash received from the release of A Bug's Life, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures, including the development and production costs of the Current Projects, until cash is received from the future release of additional films. However, even if these films generate cash in future quarters, unless each film is a success such that Pixar recovers on a timely basis its share of the production costs, as well as other operating expenses and capital expenditures, Pixar may be required to seek financing for its ongoing commitments under the Co-Production Agreement and any other requirements of its operations. Pixar may also seek additional financing in connection with the construction of its new facility. See also "-- Liquidity and Capital Resources." The sale of additional equity or convertible debt securities would result in additional dilution to Pixar's shareholders. Moreover, there can be no assurance that Pixar will be successful in obtaining future financing, or even if such financing is available, that it will be obtained on terms favorable to Pixar or on terms providing Pixar with sufficient funds to meet its obligations and objectives. The failure to obtain such financing would have a material adverse effect on Pixar's business, operating results and financial condition. PIXAR EXPECTS OPERATING RESULTS TO CONTINUE TO FLUCTUATE In addition to the factors set forth above, Pixar continues to expect significant fluctuations in future annual and quarterly operating results because of a variety of factors, including the following: - the timing of the domestic and international releases of animated feature films, - the success of its 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 and merchandising), - the demand for such related products (which is often a function of the success of the related animated feature film), - film production costs, - Disney's costs to distribute and promote the feature films and related products, - Disney's success at marketing the films and related products, - the timing of receipt of proceeds from its animated feature films and related products by Disney, - the timing of revenue recognition under the Co-Production Agreement and the Feature Film Agreement, as the case may be, - the introduction of new feature films or products by Pixar's competitors, and - general economic conditions. In particular, since Pixar's revenue under the Co-Production Agreement is directly related to the success of a feature film, operating results are likely to fluctuate depending on the level of success of Pixar's animated 15 16 feature films and related products. The revenue derived from the production and distribution of an animated feature film depends primarily on the film's acceptance by the public, which cannot be predicted and does not necessarily bear a direct correlation to the production or distribution costs incurred. The commercial success of a motion picture also depends upon promotion and marketing, production costs and other factors. Further, the theatrical success of a feature film can be a significant factor in determining the amount of revenues generated from the sale of the related products. Moreover, Pixar's operating expenses will continue to be extremely difficult to forecast. Pixar budgets the direct costs of film productions with Disney, and shares such costs equally. Pixar capitalizes its share of these direct costs of film production in accordance with Statement of Financial Accounting Standards ("SFAS") No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. A substantial portion of all of Pixar's other costs are incurred for the benefit of feature films ("Overhead"), including research and development expenses and general and administrative expenses. Portions of overhead are included in the budgets for the Pictures, and Pixar will share such costs equally with Disney under the Co-Production Agreement. With respect to the portion of overhead that is not reimbursed by Disney, Pixar either (1) capitalizes such portion as film production costs, if required under SFAS No. 53, or (2) charges it to operating expense in the period incurred. Since a substantial portion of overhead is related to the Pictures and is, therefore, reimbursed by Disney, and since Pixar capitalizes other amounts in accordance with SFAS No. 53, reported operating expenses for the first nine months of 1999 have not reflected, and future reported operating expenses will not reflect, the true level of spending on the production of animated feature films, related products and overhead. Although Pixar was profitable for financial statement purposes, Pixar has not been profitable for federal income tax purposes for each of fiscal 1996, 1997 and 1998 due to additional tax deductible items and the utilization of federal net operating loss carryforwards. Pixar was profitable for state income tax purposes for each of 1996 and 1997, but at levels significantly lower than those reported for financial statement purposes. Pixar maintains a valuation allowance that offsets a portion of its deferred tax asset, given the dependence on the success of A Bug's Life and future films, which continues to be uncertain. In addition, Pixar's effective tax rate increased in 1998 and is likely to return to statutory rates in the 42% range for the remainder of 1999. As a result of the factors discussed above, Pixar believes that period-to-period comparisons of its results of operations are not necessarily meaningful, and one should not rely on Pixar's annual and quarterly results of operations as any indication of future performance. Due to the factors discussed above, it is likely that in some future period Pixar's operating results will be below the expectations of public market analysts and investors. In such event, the price of Pixar's Common Stock would likely be materially adversely affected. CAPITALIZED FILM PRODUCTION COSTS Pixar had $60.6 million in capitalized film production costs as of October 2, 1999, consisting primarily of costs relating to A Bug's Life, Toy Story 2 and Monsters, Inc., all of which are being co-financed by Disney under the Co-Production Agreement. All Toy Story capitalized film costs were fully amortized as of December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments increased by $39.5 million to $188.5 million at October 2, 1999 from $149.0 million at January 2, 1999 due primarily to Pixar's share of A Bug's Life film revenue, offset by film production spending and construction spending on Pixar's new studio facility in Emeryville, California. Net cash provided by continuing operations for the nine months ended October 2, 1999 was primarily attributable to net income of $39.6 million, and the non-cash impacts of depreciation and amortization expense, and amortization of capitalized film production costs, totaling $30.5 million. Cash used in investing activities of $97.8 million was due primarily to funding of film production costs of $24.5 million, the purchase of property and equipment of $24.8 million, net of sale proceeds, and investments in short-term securities, net of proceeds from sales, of $48.5 million. Cash provided by financing activities was due to proceeds from the exercise of stock options. 16 17 As of October 2, 1999, Pixar's principal source of liquidity was approximately $188.5 million in cash and short-term investments. Pixar believes that these funds will be sufficient to meet the Company's operating requirements through at least the next twelve months. THE YEAR 2000 The Year 2000 problem is the result of computer programming using two digits rather than four to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a major system failure or miscalculation. Pixar has formed a committee to address Year 2000 issues and the committee is currently reviewing Pixar's products, Pixar's internal computer systems and the systems of third parties on which Pixar relies for handling the Year 2000. This committee is composed of senior management and personnel from the systems department and the finance and administration staff. The committee's strategy for identifying and addressing Year 2000 issues involves five phases: Phase 1 -- Inventory: Prepare an inventory of software, hardware, third party services and building systems used by Pixar and determine Year 2000 compliance. For third party software, hardware and services, vendors are contacted and written certification is obtained to verify that such items are Year 2000 compliant. This phase was completed in April 1999. To date, most items in the inventory are either Year 2000 compliant or will be with minor modifications. Phase 2 -- Assessment: Determine which of the inventory items identified in Phase 1 are critical or important as they relate to Pixar's business. For third party software, hardware and services that are deemed to be critical or important, Pixar is reviewing the written certification provided by vendors and performing internal testing where possible. This phase was completed in May 1999. To date, Pixar has identified a few non-critical third party systems that are not Year 2000 compliant. Phase 3 -- Strategy: Prepare strategies to modify or replace systems that are not Year 2000 compliant. To date, the few items in the inventory that have been identified as not being Year 2000 compliant are software items that can be made compliant by upgrading to the most recent versions of the software. This phase also includes monitoring the Year 2000 compliance programs of third parties whose services have been deemed to be critical to Pixar's business. This phase was completed in August 1999. Phase 4 -- Remediation: Initiate remediation strategies. Pixar is planning to upgrade certain of its systems to the most recent versions of the software and most required fixes are underway. This phase is approximately 95% complete, and is anticipated to be complete in November 1999. Phase 5 -- Testing: Test and certify all critical and certain important systems where appropriate. Testing schedules have been set for Pixar's financial systems and studio tools. This phase is approximately 95% complete, and is anticipated to be complete in November 1999. Based on information available to date, Pixar believes that it will be able to complete its Year 2000 compliance review and make any necessary modifications to its internal systems prior to the end of 1999. Pixar expects that the total costs associated with resolving its Year 2000 issues will not be material and does not expect such costs to exceed $500,000. The majority of these costs will result from consultants, software upgrades and dedicated program equipment. Pixar's most significant Year 2000 risk results from Pixar's relationship with Disney, a public company. Pixar relies on Disney for the distribution and marketing of its films. Toy Story 2 is expected to be released at the end of 1999. The disruption of Disney's distribution activities as a result of Year 2000 problems could result in lost revenues for Toy Story 2 and related merchandise. In addition, if the accounting and financial systems of Disney are adversely affected by Year 2000 issues and Disney is unable to issue revenue reports to Pixar, Pixar's recognition of its share of the revenue generated pursuant to the Co-Production Agreement and the Feature Film Agreement could be delayed. There can be no assurance that the failure of any third parties to have systems that are Year 2000 compliant would not have a material adverse effect on Pixar's financial position or results of operations. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pixar invests in a variety of investment grade, interest-bearing securities, including fixed rate obligations of corporations, municipalities, and national governmental entities and agencies. This diversification of risk is consistent with Pixar's policy to ensure safety of its principal and maintain liquidity. Pixar only invests in securities with a maturity of 24 months or less, with only government obligations exceeding 12 months. Pixar's investments are fixed rate obligations and carry a certain degree of interest rate risk. A rise in interest rates could adversely impact the fair market value of these securities. All of Pixar's financial instruments are held for purposes other than trading and are considered "available for sale" per SFAS 115. The table below provides information regarding Pixar's investment portfolio at October 2, 1999. The table presents principal amounts and related weighted average fixed interest rates presented by expected maturity date (dollars in thousands):
< 1 YEAR > 1 YEAR TOTAL -------- -------- -------- Available-for-sale securities....................... $137,862 $45,486 $183,348 Weighted-average interest rate...................... 5.46% 5.09% 5.37%
18 19 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to the shareholders at Pixar's Annual Meeting of Shareholders held July 23, 1999. Each of these matters was approved by a majority of the shares present at the meeting. 1. The uncontested election of seven 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 ---------- -------------- Steve Jobs.......................................... 41,930,065 102,086 Larry W. Sonsini.................................... 41,928,983 103,168 Skip M. Brittenham.................................. 41,929,777 102,374 Joseph A. Graziano.................................. 41,929,836 102,315 Jill E. Barad....................................... 41,929,968 102,183 Edwin E. Catmull.................................... 41,929,958 102,193 Lawrence B. Levy.................................... 41,923,770 108,381
2. The ratification of the appointment of KPMG LLP as the independent auditors for the Company for the 1999 fiscal year ending January 1, 2000. Results of the voting included 41,996,473 shares for, 14,791 shares against and 20,887 shares abstained. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.4 Amended and Restated Bylaws, as amended 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by Pixar during the quarter ended October 2, 1999. ITEMS 1, 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 19 20 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: November 16, 1999 By: /s/ ANN MATHER ------------------------------------ Ann Mather, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 20 21 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule
EX-3.4 2 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF PIXAR ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the third Wednesday of May in each year at 10 am. However, if such day falls on a legal holiday, then the meeting 2 shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper -2- 3 matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders' meeting, or (iv) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal -3- 4 executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of -4- 5 Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, -5- 6 shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the writ- -6- 7 ten consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: -7- 8 (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION -8- 9 Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding -9- 10 shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be not less than two (2) nor more than three (3). The exact number of directors shall be two (2) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the authorized number of directors is five (5) or more, an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may -10- 11 elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and -11- 12 all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. -12- 13 A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board -13- 14 of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS* The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; - -------- * This section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code. -14- 15 (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS -15- 16 The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES -16- 17 A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence or non-existence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY -17- 18 The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. -18- 19 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending any civil or criminal action -19- 20 or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 6.5 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.6 CONFLICTS No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -20- 21 ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of -21- 22 California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent -22- 23 by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any -23- 24 independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS -24- 25 From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and can- -25- 26 celled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS 9.1 AMENDMENT BY SHAREHOLDERS New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors. -26- 27 AMENDED AND RESTATED BYLAWS OF PIXAR 28 AMENDED AND RESTATED BYLAWS OF PIXAR TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES.................................................................. 1 1.1 PRINCIPAL OFFICE............................................................. 1 1.2 OTHER OFFICES................................................................ 1 ARTICLE II - MEETINGS OF SHAREHOLDERS.......................................................... 1 2.1 PLACE OF MEETINGS............................................................ 1 2.2 ANNUAL MEETING............................................................... 1 2.3 SPECIAL MEETING.............................................................. 2 2.4 NOTICE OF SHAREHOLDERS' MEETINGS............................................. 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................................. 3 2.6 QUORUM....................................................................... 4 2.7 ADJOURNED MEETING; NOTICE.................................................... 4 2.8 VOTING....................................................................... 4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT............................ 5 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...................................................................... 6 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS..................................................................... 7 2.12 PROXIES...................................................................... 7 2.13 INSPECTORS OF ELECTION....................................................... 8 ARTICLE III - DIRECTORS........................................................................ 9 3.1 POWERS....................................................................... 9 3.2 NUMBER OF DIRECTORS.......................................................... 9 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS..................................... 9 3.4 RESIGNATION AND VACANCIES.................................................... 10 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..................................... 10 3.6 REGULAR MEETINGS............................................................. 11 3.7 SPECIAL MEETINGS; NOTICE..................................................... 11 3.8 QUORUM....................................................................... 11 3.9 WAIVER OF NOTICE............................................................. 12 3.10 ADJOURNMENT.................................................................. 12 3.11 NOTICE OF ADJOURNMENT........................................................ 12
-i- 29 TABLE OF CONTENTS (Continued)
Page ---- 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............................ 12 3.13 FEES AND COMPENSATION OF DIRECTORS........................................... 12 3.14 APPROVAL OF LOANS TO OFFICERS................................................ 13 ARTICLE IV - COMMITTEES........................................................................ 13 4.1 COMMITTEES OF DIRECTORS...................................................... 13 4.2 MEETINGS AND ACTION OF COMMITTEES............................................ 14 ARTICLE V - OFFICERS........................................................................... 14 5.1 OFFICERS..................................................................... 14 5.2 ELECTION OF OFFICERS......................................................... 15 5.3 SUBORDINATE OFFICERS......................................................... 15 5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................................... 15 5.5 VACANCIES IN OFFICES......................................................... 15 5.6 CHAIRMAN OF THE BOARD........................................................ 15 5.7 PRESIDENT.................................................................... 16 5.8 VICE PRESIDENTS.............................................................. 16 5.9 SECRETARY.................................................................... 16 5.10 CHIEF FINANCIAL OFFICER...................................................... 17 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS....................................................... 17 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................... 17 6.2 INDEMNIFICATION OF OTHERS.................................................... 18 6.3 PAYMENT OF EXPENSES IN ADVANCE............................................... 18 6.4 INDEMNITY NOT EXCLUSIVE...................................................... 18 6.5 INSURANCE INDEMNIFICATION.................................................... 19 6.6 CONFLICTS.................................................................... 19 ARTICLE VII - RECORDS AND REPORTS.............................................................. 19 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER................................. 19 7.2 MAINTENANCE AND INSPECTION OF BYLAWS......................................... 20 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS...................................................................... 20 7.4 INSPECTION BY DIRECTORS...................................................... 21 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER........................................ 21 7.6 FINANCIAL STATEMENTS......................................................... 21
-ii- 30 TABLE OF CONTENTS (Continued)
Page ---- 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............................... 22 ARTICLE VIII - GENERAL MATTERS................................................................. 22 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING....................................................................... 22 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................................... 23 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........................... 23 8.4 CERTIFICATES FOR SHARES...................................................... 23 8.5 LOST CERTIFICATES............................................................ 24 8.6 CONSTRUCTION; DEFINITIONS.................................................... 24 ARTICLE IX - AMENDMENTS........................................................................ 24 9.1 AMENDMENT BY SHAREHOLDERS.................................................... 24 9.2 AMENDMENT BY DIRECTORS....................................................... 24
-iii- 31 AMENDMENTS TO PIXAR'S BYLAWS Effective upon this corporation's becoming a "listed corporation" within the meaning of Section 301.5 of the California Corporations Code, Section 2.8 of the Bylaws of this corporation shall be amended in its entirety to read as follows: "2.8 VOTING The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any share holder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation." No shareholder entitled to vote at any election of directors shall be entitled to cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. This paragraph shall become effective only when the corporation becomes a "listed corporation" within the meaning of Section 301.5 of the California Corporations Code. This paragraph may not be modified, amended, rescinded or repealed except by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of the holders of a majority of the outstanding shares entitled to vote." 32 CERTIFICATE OF THE SECRETARY OF PIXAR I, Larry W. Sonsini, being the duly elected and acting Secretary of Pixar (the "Company"), do hereby certify that the following is a true and correct copy of a resolution adopted by the Company's Board of Directors by unanimous written consent dated June 1, 1995, and by the Company's sole shareholder by written consent effective June 1, 1995 and that such resolution has not been amended or rescinded, and is now in full force and effect: RESOLVED: That the Board approves the amendment of Article III, Section 3.2 of the Corporation's Bylaws such that the first two sentences of such section shall read in full as follows: "The number of directors of the corporation shall be not less than four (4) nor more than seven (7). The exact number of directors shall be four (4) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders." IN WITNESS WHEREOF, I have hereunto subscribed my name. DATE: June 1, 1995 /s/ Larry W. Sonsini ----------------------------------- Larry W. Sonsini Secretary -2- 33 CERTIFICATE OF THE SECRETARY OF PIXAR I, Lawrence B. Levy, being the duly elected and acting Secretary of Pixar (the "Company"), do hereby certify that the following is a true and correct copy of a resolution of the Company adopted by the Board of Directors by unanimous written consent dated July 7, 1997, and that such resolution has not been amended or rescinded, and is now in full force and effect: RESOLVED: That the Board hereby approves an amendment to Article III, Section 3.2 of the Company's Bylaws such that the second sentence of the section shall read in full as follows: "The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders." IN WITNESS WHEREOF, I have hereunto subscribed my name. DATE: July 15, 1997 /s/ Lawrence B. Levy ----------------------------------- Lawrence B. Levy Secretary -3- 34 CERTIFICATE OF THE ASSISTANT SECRETARY OF PIXAR I, Sarah Flatley, being the duly elected and acting Assistant Secretary of Pixar (the "Company"), do hereby certify that the following is a true and correct copy of a resolution adopted by the Company's Board of Directors on April 7, 1999 and that such resolution has not been amended or rescinded, and is now in full force and effect: RESOLVED: That the Board approves the amendment to Article III, Section 3.2 of the Company's Bylaws such that the second sentence of the section shall read in full as follows: "The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders." IN WITNESS WHEREOF, I have hereunto subscribed my name. DATE: April 8, 1999 /s/ Sarah Flatley ----------------------------------- Sarah Flatley Assistant Secretary -4- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JAN-01-2000 JAN-03-1999 OCT-02-1999 21,298 167,167 10,840 291 0 0 62,141 11,289 328,015 0 0 0 0 238,228 53,704 328,015 0 96,156 0 26,240 9,955 0 0 65,532 25,984 39,548 80 0 0 39,628 0.86 0.77
-----END PRIVACY-ENHANCED MESSAGE-----