PIXAR \CA\ - 10-Q Quarterly Report

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, 2004

¨	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* *Incorporation or organization)*		*(I.R.S. Employer* *Identification No.)*

1200 Park Avenue,
Emeryville, California		94608
*(Address of principal executive offices)*		*(Zip code)*

(510) 752-3000

(Registrant’s telephone number, including area code)

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 (the “Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨.

The number of shares outstanding of the Registrant’s Common Stock as of November 3, 2004 was 57,792,678.

Pixar

FORM 10-Q

Index


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
	Balance Sheets as of October 2, 2004 and January 3, 2004	Page 2
	Statements of Income for the Quarter and Nine Months Ended October 2, 2004 and September 27, 2003	Page 3
	Statements of Cash Flows for the Nine Months Ended October 2, 2004 and September 27, 2003	Page 4
	Notes to Financial Statements	Page 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 11
	Risk Factors	Page 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk		Page 35
Item 4. Controls and Procedures		Page 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		Page 37
Item 4. Submission of Matters to a Vote of Security Holders		Page 37
Item 6. Exhibits		Page 38
SIGNATURE		Page 39
EXHIBIT INDEX		Page 40
	EXHIBIT 3.2
	EXHIBIT 31.1
	EXHIBIT 31.2
	EXHIBIT 32.1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PIXAR

BALANCE SHEETS

(Unaudited, in thousands, except share data)


	October 2, 2004			January 3, 2004
ASSETS
Cash and cash equivalents	$	27,545		$	48,320
Investments		805,646			473,603
Trade receivables, net		2,828			2,152
Receivable from Disney		16,855			206,569
Other receivables		6,028			4,465
Prepaid expenses and other assets		16,637			1,047
Deferred income taxes		52,414			51,496
Property and equipment, net		121,002			115,026
Capitalized film production costs, net		131,529			107,667

Total assets	$	1,180,484		$	1,010,345

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	1,514		$	1,803
Income taxes payable		—			37,595
Accrued liabilities		14,584			13,007
Unearned revenue		45,035			17,430

Total liabilities		61,133			69,835

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; 57,539,819 and 55,473,176 issued and outstanding as of October 2, 2004 and January 3, 2004, respectively		640,715			546,999
Accumulated other comprehensive (loss) income		(1,109	)		314
Retained earnings		479,745			393,197

Total shareholders’ equity		1,119,351			940,510

Total liabilities and shareholders’ equity	$	1,180,484		$	1,010,345

See accompanying notes to financial statements.

PIXAR

STATEMENTS OF INCOME

(Unaudited, in thousands, except per share data)


	Quarter Ended				Nine Months Ended
	October 2, 2004		September 27, 2003		October 2, 2004		September 27, 2003
Revenue:
Film	$	40,416	$	27,481	$	155,221	$	89,038
Software		4,047		2,702		9,355		8,678

Total revenue		44,463		30,183		164,576		97,716

Cost of revenue		4,204		4,289		16,545		15,044

Gross profit		40,259		25,894		148,031		82,672

Operating expenses:

Research and development		4,218		3,066		11,770		11,986
Sales and marketing		737		803		1,744		1,769
General and administrative		3,828		2,935		9,921		9,944

Total operating expenses		8,783		6,804		23,435		23,699

Income from operations		31,476		19,090		124,596		58,973
Other income		3,088		2,717		8,473		8,622

Income before income taxes		34,564		21,807		133,069		67,595
Income tax expense		12,143		8,614		46,521		26,700

Net income	$	22,421	$	13,193	$	86,548	$	40,895

Basic net income per share	$	0.39	$	0.24	$	1.54	$	0.76

Shares used in computing basic net income per share		56,901		54,722		56,326		53,818

Diluted net income per share	$	0.38	$	0.23	$	1.46	$	0.72

Shares used in computing diluted net income per share		59,672		58,030		59,114		57,034

See accompanying notes to financial statements.

PIXAR

STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended
	October 2, 2004			September 27, 2003
Cash flows from operating activities:
Net income	$	86,548		$	40,895
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		5,387			5,889
Capitalized film production costs		(39,797	)		(39,764	)
Amortization of capitalized film production costs		15,935			14,591
Tax benefit from stock option exercises		36,046			33,623
Deferred income taxes		(918	)		(1,117	)
Gain on sales of investments		(435	)		(1,350	)
Changes in operating assets and liabilities:
Trade and other receivables, net		(2,239	)		1,468
Receivable from Disney		189,714			80,440
Prepaid expenses and other assets		(15,590	)		(12,514	)
Accounts payable		(289	)		(1,179	)
Income taxes payable		(37,595	)		—
Accrued liabilities		1,577			883
Unearned revenue		27,605			3,085

Net cash provided by operating activities		265,949			124,950

Cash flows from investing activities:
Purchases of property and equipment		(11,363	)		(3,418	)
Proceeds from sale of investments		488,940			518,021
Purchases of investments		(821,971	)		(665,639	)

Net cash used in investing activities		(344,394	)		(151,036	)

Cash flows from financing activities:
Proceeds from exercised stock options		57,670			56,291

Net cash provided by financing activities		57,670			56,291

Net (decrease) increase in cash and cash equivalents		(20,775	)		30,205
Cash and cash equivalents at beginning of period		48,320			44,431

Cash and cash equivalents at end of period	$	27,545		$	74,636

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	65,100		$	7,350

Supplemental disclosure of non-cash investing and financing activities:
Unrealized loss on investments, net of taxes	$	(1,423	)	$	(1,711	)

See accompanying notes to financial statements.

PIXAR

NOTES TO FINANCIAL STATEMENTS

(1) Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the financial condition, results of operations, and cash flows of Pixar (or the “Company”) for the periods presented. These financial statements should be read in conjunction with the audited financial statements as of January 3, 2004 and for each of the years in the three-year period ended January 3, 2004, including notes thereto. These audited financial statements are included in Pixar’s Annual Report on Form 10-K for the year ended January 3, 2004 as filed with the Securities and Exchange Commission.

The results of operations for the quarter and nine months ended October 2, 2004 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 2004 financial statement presentation.

(2) Fiscal Year

Pixar operates on a 52 or 53-week fiscal year, whereby the fiscal year ends on the Saturday nearest December 31. Fiscal 2004 will end on January 1, 2005 and will consist of 52 weeks.

(3) Stock Option Accounting

The Company has elected to continue using the intrinsic-value method of accounting for stock-based compensation plans in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted those provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which require disclosure of the pro forma effects on net income and net income per share as if compensation cost had been recognized based upon the fair value-based method at the date of grant of options awarded.

The following table reflects pro forma net income and net income per share had the Company elected to adopt the fair value-based method (in thousands, except per share data):


	Quarter Ended						Nine Months Ended
	October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Net income:
As reported	$	22,421		$	13,193		$	86,548		$	40,895
Fair value-based compensation cost, net of taxes		(4,052	)		(3,053	)		(13,033	)		(8,295	)

Pro forma net income	$	18,369		$	10,140		$	73,515		$	32,600

Basic net income per share:
As reported	$	0.39		$	0.24		$	1.54		$	0.76
Pro forma	$	0.32		$	0.19		$	1.31		$	0.61

Diluted net income per share:
As reported	$	0.38		$	0.23		$	1.46		$	0.72
Pro forma	$	0.31		$	0.18		$	1.27		$	0.59

These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The pro forma amounts assume that the Company had been following the fair value-based method since the beginning of 1996.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pr

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