Pixar is a very new company with not nearly enough cash to pay all the associated expenses related to film production. They have an impressive looking balance sheet due to an absence of debt. They have an equally impressive income statement due to an absense of production expenses and distribution costs.
Read the 10-K: Particularly pages 8 through 12 which outline their relationship and agreement with Disney. Pages 21 and on are equally interesting.
This is what was filed with the SEC - NOT what they give us if we call them for an annual report.
http://corporate.pixar.com/EdgarDet...91618-03-1511&SID=03-00#F88774ORE10VK_HTM_009
Some key excerpts:
Relationship with Disney
A critical component of our objective to maintain our position as a leading brand in the animated feature film market is to secure strong promotion, marketing and distribution of our films and related products. We believe that Disney is a leader in the marketing and distribution of animated feature films and related products and one of the industrys most widely recognized brand names. We have enjoyed a long relationship with Disney that dates back to 1986, when we entered into a joint technical development effort with Disney that resulted in the Computer Assisted Production System (CAPS), a production system owned and used by Disney in some of its two-dimensional cel-based animated feature films. Disney first used CAPS for The Rescuers Down Under and has continued to use it for its subsequent animated feature films, such as The Lion King and Tarzan . In 1992, certain employees of Pixar and Disney were jointly awarded an Academy Award ® for Scientific and Engineering Achievement for the development of CAPS.
In May 1991, we entered into the Feature Film Agreement with Walt Disney Pictures, a wholly-owned subsidiary of Disney, which provided for the development, production and distribution of up to three feature-length motion pictures (the Feature Film Agreement). It was pursuant to the Feature Film Agreement that Toy Story was developed, produced and distributed. In 1997, we extended our existing relationship with Disney by entering into the Co-Production Agreement. This agreement generally provides that we will be responsible for the development, pre-production and production of each Picture, while Disney will be responsible for the marketing, promotion, publicity, advertising and distribution of each Picture. The profits from the Pictures are shared equally between Pixar and Disney after Disney recovers a distribution fee and pre-agreed distribution costs. The term of this arrangement continues until the delivery of Cars to Disney, which we expect to occur in 2005
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Due to the recent success of CGI animated films, several movie studios have developed their own internal computer animation capability which may be used for special effects in animated films and live action films. For example, DreamWorks SKG (with PDI) successfully produced Antz in 1998 and Shrek in 2001. In addition, Fox successfully produced, through its subsidiary Blue Sky, Ice Age, which was released in March 2002. Other movie studios may internally develop, license or sub-contract three-dimensional animation capability, or enter into co-production agreements with other studios capable of developing and producing 3-dimensional CGI animated films. Further, we believe that continuing enhancements in commercially available computer hardware and software technology have lowered and will continue to lower barriers to entry for studios or special effects companies which intend to produce computer-animated feature films or other products. For example, SGIs Alias/Wavefront subsidiary licenses Maya, which is its next generation three-dimensional software for creating high quality animation and visual effects. Maya incorporates many new features and could be used to make a computer-animated feature film.
The Co-Production Agreement provides that we will develop and produce original computer-animated feature films. Because Disney co-finances the films developed and produced under the Co-Production Agreement, distributes the films under the Walt Disney Pictures label and enjoys financial benefits in the event that such films achieve significant box office revenues, we believe that Disney desires such films to be successful.
Nonetheless, during its long history, Disney has been a very successful producer and distributor of its own animated feature films. While the Co-Production Agreement imposes restrictions prohibiting Disney from releasing G-rated films, whether live action or animated, within certain release windows from our films, it is likely that other family-oriented motion pictures distributed by Disney or its affiliates will overlap in the market and compete with our animated feature films.
For example, Mighty Joe Young, released during the 1998 holiday season, competed with A Bugs Life in the domestic theatrical market, and Pirates of the Caribbean, currently schedule for release in July 2003, may compete with Finding Nemo . Our contractual arrangement with Disney also presents other risks.
There are significant risks associated with the motion picture industry.
The completion and commercial success of a motion picture is extremely unpredictable, and the motion picture industry involves a substantial degree of risk. Each motion picture is an individual artistic work, and its commercial success is primarily determined by audience reaction, which is unpredictable. The completion and commercial success of a motion picture also depends upon other factors, such as:
personnel availability,
financing requirements,
distribution strategy, including the time of the year and the number of screens on which it is shown,
the number, quality and acceptance of other competing films released into the marketplace at or near the same time,
critical reviews,
the availability of alternative forms of entertainment and leisure time activities,
general economic conditions and political events,
weather conditions, and
other tangible and intangible factors.
All of these factors can change and cannot be predicted with certainty. In addition, motion picture attendance is seasonal, with the greatest attendance typically occurring during the summer and holidays. The release of a film during a period of relatively low theater attendance is likely to affect the films box office receipts adversely.
Under the terms of the Co-Production Agreement, Pixar is guaranteed theatrical release either during the summer or holiday period. Finding Nemo, which is scheduled for domestic theatrical release on May 30, 2003, is our first film to be released domestically during the summer months, as all of our previous film releases occurred during holiday periods. It is difficult to predict what impact a summer release date may have on the films domestic box office receipts or other ancillary revenue streams such as merchandising, relative to our other films.
Further, due to the expected release of a large number of family films by Disney and other movie studios in the next several years, it is possible that further saturation of the family film market, particularly those films created by CGI, may adversely impact the commercial success of our films, and therefore have a material adverse effect on our business, financial condition and results of operations.
We face various distribution risks with respect to our feature films.
Under the Feature Film Agreement and the Co-Production Agreement, Disney is required to distribute the animated feature films in a manner consistent with those of Disneys premier animated films. Currently, distribution of our films generally include (1) worldwide theatrical exhibition, (2) worldwide home video sales, (3) worldwide television licensing, including Pay-Per-View, pay television, network, basic cable and syndication, (4) non-theatrical exhibition, such as airlines, schools and armed forces facilities and (5) marketing of other rights of the picture, which may include licensing of merchandise, such as toys, interactive games and soundtrack recordings. Although the Co-Production Agreement provides us with some protection, we cannot provide any assurances that our feature films made under the Co-Production Agreement will be distributed through all of these outlets. See Business Business Model and Products.
Although we have enjoyed a tremendously successful track record with our first four feature films, we cannot provide any assurances that our future films will enjoy the same level of success. Currently, Disney shares our financial risks associated with the production of the films under the Co-Production Agreement. As our co-production partner,
Disney is currently sharing the risk of our films by financing 50% of the production costs. In addition, under the Co-Production Agreement, Disney is responsible for financing 100% of the costs related to the marketing and distribution of the films. In the event that a film does not generate sufficient revenues to offset such costs, Pixar is not responsible for any losses Disney incurs. We cannot provide any assurances that future distribution agreements will provide us with the same level of risk minimization. In addition, as additional entrants emerge in the animation marketplace, there may be increased competition for distribution partners.
We have a limited operating history.
Until 1996, we had generated recurring revenue primarily from the license of our RenderMan® software, amounts we received under software development contracts and fees for animated television commercial development. We expect to generate a substantial majority of our future revenue from the development and production of animated feature films and related products, as we have since 1996. We have, to date, developed, produced and released only four animated feature films, Toy Story, A Bugs Life, Toy Story 2, and Monsters, Inc. Accordingly, we have only a limited operating history in implementing our business model upon which an evaluation of our prospects can be based. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of a business enterprise, particularly companies in highly competitive markets. To address these risks, we must, among other things, respond to changes in the competitive environment, continue to attract, retain and motivate qualified persons, and continue to upgrade our technologies. We cannot provide any assurances that we will be successful in addressing such risks.
Our current and future commitments may have an adverse impact on our cash balances.
Pursuant to the Co-Production Agreement, we co-financed A Bugs Life, Toy Story 2 and Monsters, Inc., and we are co-financing our next three original animated feature films, Finding Nemo, The Incredibles and Cars . In the future, we may co-finance other derivative works such as sequels and television productions. The development and production costs of Finding Nemo, The Incredibles, Cars and films beyond, and any possible future expansion of our studio and headquarters in Emeryville, California, may have an adverse impact on our cash and investment balances. We expect to fully finance films for release after Cars . As of December 28, 2002, we had approximately $339.1 million in cash and investments. We believe that these funds, along with cash provided by operating activities, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures, including the development and production costs of Finding Nemo, The Incredibles and Cars, as well as development and pre-production costs for our first film beyond the Co-Production Agreement. See Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources in Item 7 of this Form 10-K. To date, we have chosen to use our existing cash resources to fund construction costs and film production costs.
We may continue to use our cash resources for such expenditures, or may choose to finance such capital expenditures through issuance of additional equity or debt securities, by obtaining a credit facility or by some other financing mechanism. The sale of additional equity or convertible debt securities would result in additional dilution to our shareholders. Moreover, we cannot provide any assurances that we will be successful in obtaining future financing, or even if such financing is available, that we will obtain it on favorable terms or on terms providing us with sufficient funds to meet our obligations and objectives.
We depend on our proprietary technology and computer systems for the timely and successful development of our feature films and related products.
We cannot provide any assurances that we will not experience difficulties that could delay or prevent the successful development or production of future animated feature films or other related products. Among other things, because we are dependent upon a large base of software and a large number of computers for the development and production of our animated feature films and related products, an error or defect in the software, a failure in the hardware or a failure of the backup facilities could result in a significant delay in one or more productions in process which, in turn, could result in potentially significant delays in the release dates of our feature films or other products. In the past we have experienced minor delays as a result of such matters. Significant delays in production and significant delays in release dates could have a material adverse effect on our business, operating results or financial condition. Further, because we rely mostly on internally developed software, we would not be able to rely upon assistance from third parties in the event that the software fails. See Business Technology.
A single shareholder owns a large percentage of our outstanding stock.
Our Chief Executive Officer, Steve Jobs, beneficially owns approximately 56% of our outstanding Common Stock as of March 4, 2003. As a result, Mr. Jobs, acting alone, is able to exercise sole discretion over all matters requiring shareholder approval, including the election of the entire board of directors and approval of significant corporate transactions, including an acquisition of Pixar. Such concentration of ownership may also have the effect of delaying or preventing a change in control of Pixar, impeding a merger, consolidation, takeover or other business combination involving Pixar, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of Pixar.
