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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 April 3, 2004 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(State or other jurisdiction of Incorporation or organization)
    
    68-0086179(I.R.S. Employer Identification No.)
 1200 Park Avenue, Emeryville, California(Address of principal executive offices)
    
    94608(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
May 5, 2004 was 56,227,655.




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PixarFORM 10-QIndex PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited):Balance Sheets as of April 3, 2004 and January 3, 2004
    
    Page 2Statements of Income for the Quarters Ended April 3, 2004 and March 29, 2003
    
    Page 3Statements of Cash Flows for the Quarters Ended April 3, 2004 and March 29, 2003
    
    Page 4Notes to Financial Statements
    
    Page 5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    Page 9Risk Factors
    
    Page 15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    Page 24Item 4. Controls and Procedures
    
    Page 25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    Page 26Item 6. Exhibits and Reports on Form 8-K
    
    Page 26SIGNATURE
    
    Page 27EXHIBIT INDEX
    
    Page 28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  1




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PART I  FINANCIAL INFORMATION 
 Item 1.Financial Statements PIXAR 
 BALANCE SHEETS (Unaudited, in thousands, except share data) April 3,
    
    January 3,2004
    
    2004ASSETSCash and cash equivalents
    
    $
    52,398
    
    
    $
    48,320Investments
    
    
    489,508
    
    
    
    473,603Trade receivables, net
    
    
    1,467
    
    
    
    2,152Receivable from Disney
    
    
    197,672
    
    
    
    197,177Other receivables
    
    
    3,404
    
    
    
    4,465Prepaid expenses and other assets
    
    
    2,349
    
    
    
    1,047Deferred income taxes
    
    
    51,738
    
    
    
    51,496Property and equipment, net
    
    
    115,161
    
    
    
    115,026Capitalized film production costs
    
    
    115,992
    
    
    
    107,667Total assets
    
    $
    1,029,689
    
    
    $
    1,000,953LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable
    
    $
    2,310
    
    
    $
    1,803Income taxes payable
    
    
    11,579
    
    
    
    37,595Accrued liabilities
    
    
    11,679
    
    
    
    13,007Unearned revenue
    
    
    6,142
    
    
    
    8,038Total liabilities
    
    
    31,710
    
    
    
    60,443Shareholders 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; 56,174,231 and 55,473,176 issued and
outstanding as of April 3, 2004 and January 3, 2004, respectively
    
    
    578,102
    
    
    
    546,999Accumulated other comprehensive income (loss)
    
    
    (62
    )
    
    
    314Retained earnings
    
    
    419,939
    
    
    
    393,197Total shareholders equity
    
    
    997,979
    
    
    
    940,510Total liabilities and shareholders equity
    
    $
    1,029,689
    
    
    $
    1,000,953
 See accompanying notes to financial statements. 2




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PIXAR 
 STATEMENTS OF INCOME (Unaudited, in thousands, except per share data) Quarter EndedApril 3,
    
    March 29,2004
    
    2003Revenue:Film
    
    $
    51,092
    
    
    $
    16,375Software
    
    
    2,732
    
    
    
    2,282Total revenue
    
    
    53,824
    
    
    
    18,657Cost of revenue
    
    
    5,904
    
    
    
    2,950Gross profit
    
    
    47,920
    
    
    
    15,707Operating expenses:Research and development
    
    
    3,398
    
    
    
    2,321Sales and marketing
    
    
    372
    
    
    
    388General and administrative
    
    
    3,076
    
    
    
    2,385Total operating expenses
    
    
    6,846
    
    
    
    5,094Income from operations
    
    
    41,074
    
    
    
    10,613Other income
    
    
    2,896
    
    
    
    2,904Income before income taxes
    
    
    43,970
    
    
    
    13,517Income tax expense
    
    
    17,228
    
    
    
    5,339Net income
    
    $
    26,742
    
    
    $
    8,178Basic net income per share
    
    $
    0.48
    
    
    $
    0.15Shares used in computing basic net income per share
    
    
    55,791
    
    
    
    53,046Diluted net income per share
    
    $
    0.46
    
    
    $
    0.15Shares used in computing diluted net income per share
    
    
    58,607
    
    
    
    56,161
 See accompanying notes to financial statements. 3




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PIXAR 
 STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Quarter EndedApril 3,
    
    March 29,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    26,742
    
    
    $
    8,178Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,764
    
    
    
    1,961Capitalized film production costs
    
    
    (14,137
    )
    
    
    (12,661
    )Amortization of capitalized film production costs
    
    
    5,812
    
    
    
    2,856Tax benefit from stock option exercises
    
    
    10,955
    
    
    
    4,198Deferred income taxes
    
    
    (242
    )
    
    
    (389
    )Gain on sales of investments
    
    
    (648
    )
    
    
    (207
    )Changes in operating assets and liabilities:Trade and other receivables, net
    
    
    1,746
    
    
    
    1,533Receivable from Disney
    
    
    (495
    )
    
    
    101,445Prepaid expenses and other assets
    
    
    (1,302
    )
    
    
    1,067Accounts payable
    
    
    507
    
    
    
    (510
    )Income taxes payable
    
    
    (26,016
    )
    
    
    Accrued liabilities
    
    
    (1,328
    )
    
    
    1,381Unearned revenue
    
    
    (1,896
    )
    
    
    (162
    )Net cash provided by operating activities
    
    
    1,462
    
    
    
    108,690Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,899
    )
    
    
    (1,743
    )Proceeds from sale of investments
    
    
    313,739
    
    
    
    55,787Purchases of investments
    
    
    (329,372
    )
    
    
    (142,095
    )Net cash used in investing activities
    
    
    (17,532
    )
    
    
    (88,051
    )Cash flows from financing activities:Proceeds from exercised stock options
    
    
    20,148
    
    
    
    8,214Net cash provided by financing activities
    
    
    20,148
    
    
    
    8,214Net increase in cash and cash equivalents
    
    
    4,078
    
    
    
    28,853Cash and cash equivalents at beginning of period
    
    
    48,320
    
    
    
    44,431Cash and cash equivalents at end of period
    
    $
    52,398
    
    
    $
    73,284Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    33,875
    
    
    $
    Supplemental disclosure of non-cash investing and financing activities:Unrealized loss on investments, net of taxes
    
    $
    (376
    )
    
    $
    (571
    )
 See accompanying notes to financial statements. 4




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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 filed with the Securities and Exchange Commission on March 18, 2004. The results of operations for the quarter ended April 3, 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 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 EndedApril 3,
    
    March 29,2004
    
    2003Net income:As reported
    
    $
    26,742
    
    
    $
    8,178Fair value-based compensation cost, net of taxes
    
    
    (4,510
    )
    
    
    (1,612
    )Pro forma net income
    
    $
    22,232
    
    
    $
    6,566Basic net income per share:As reported
    
    $
    0.48
    
    
    $
    0.15Pro forma
    
    $
    0.40
    
    
    $
    0.12Diluted net income per share:As reported
    
    $
    0.46
    
    
    $
    0.15Pro forma
    
    $
    0.39
    
    
    $
    0.12
 5




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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-pricing model. The weighted-average fair value
of options granted was $26.47 and $23.87 for the quarters ended April 3, 2004
and March 29, 2003, respectively. Values were estimated using zero dividend
yield for all years; expected volatility of 42% and 51% for the quarters ended
April 3, 2004 and March 29, 2003, respectively; risk-free interest rates of
3.09% and 2.84% for the quarters ended April 3, 2004 and March 29, 2003,
respectively; and weighted-average expected lives of 5.0 years. (4) Net Income per Share Basic net income per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income per share
is computed using the weighted-average number of common and dilutive potential
common shares outstanding during the period, using the treasury stock method
for options. Of the outstanding options to purchase shares of common stock,
for the quarters ended April 3, 2004 and March 29, 2003, options to purchase
approximately 374,000 shares and 52,000 shares, respectively, of common stock
were not included in the computation of diluted net income per share because
the options exercise price was greater than the average market price of the
common shares. The reconciliation of basic and diluted net income per share is as follows
(in thousands, except per share amounts): Quarter EndedApril 3,
    
    March 29,2004
    
    2003Net
    
    
    
    
    
    
    
    
    
    NetNet
    
    
    
    
    
    Income
    
    Net
    
    
    
    
    
    IncomeIncome
    
    Shares
    
    per Share
    
    Income
    
    Shares
    
    per ShareBasic net income per share
    
    $
    26,742
    
    
    
    55,791
    
    
    $
    0.48
    
    
    $
    8,178
    
    
    
    53,046
    
    
    $
    0.15Effect of dilutive shares:Options
    
    
    
    
    
    
    2,816
    
    
    
    
    
    
    
    
    
    
    
    3,115Diluted net income per share
    
    $
    26,742
    
    
    
    58,607
    
    
    $
    0.46
    
    
    $
    8,178
    
    
    
    56,161
    
    
    $

    0.15
 (5) Comprehensive Income Other comprehensive income (loss) consists of unrealized holding gains or
losses on the Companys investments. The following table sets forth the
calculation of comprehensive income, net of income taxes (in thousands): Quarter EndedApril 3,
    
    March 29,2004
    
    2003Net income
    
    $
    26,742
    
    
    $
    8,178Unrealized holding losses on investments, net of tax benefit
    
    
    (376
    )
    
    
    (571
    )Comprehensive income
    
    $
    26,366
    
    
    $
    7,607
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(6) Feature Film and Co-Production Agreements Feature Film Agreement In 1991, the Company entered into a feature film agreement with Walt
Disney Pictures, a wholly owned subsidiary of Walt Disney Pictures and
Television (together with its subsidiaries and affiliates collectively referred
to herein as Disney), to develop and produce up to three computer-animated
feature films (the Feature Film Agreement). In 1995, the Company released its
first and only feature film under the terms of the Feature Film Agreement, Toy
Story.The Company continues to receive compensation based on revenue from the
distribution of Toy Storyand related products. Based on the
individual-film-forecast-computation method, all significant Toy Storyfilm
production costs were fully amortized by the year ended December 31, 1997. Co-Production Agreement In 1997, the Company extended its original relationship with Disney (under
which Toy Storywas created and produced) by entering into the Co-Production
Agreement. Under the Co-Production Agreement, the Company agreed to produce, on
an exclusive basis, five original computer-animated feature films (the
Pictures) for distribution by Disney. Pixar and Disney agreed to co-finance,
co-own and co-brand the Pictures and share equally in the profits of each
Picture and any related merchandise and other ancillary products, after Disney
recovers all marketing and distribution costs and fees. The first three
original Pictures produced under the Co-Production Agreement were A Bugs Life,
Monsters, Inc.and Finding Nemo. The Company is currently in various stages of
production on the final two Pictures under this agreement: The Incrediblesand
Cars. As a sequel, Toy Story 2did not count toward the Pictures; however, it
was produced under the Co-Production Agreement and is afforded the same
financial terms as the Pictures. The term of the Co-Production Agreement
continues until delivery to Disney of the fifth Picture, Cars, which is
currently targeted for a 2005 holiday release. All payments to Pixar from Disney for development and production of Toy
Storyunder the Feature Film Agreement, and A Bugs Life, Toy Story 2,
Monsters, Inc., Finding Nemo, The Incrediblesand Carsunder the Co-Production
Agreement have been recorded as cost reimbursements. Accordingly, no revenue
has been recognized for such reimbursements; rather, the Company has netted the
reimbursements against the related costs. Creative Development Group In addition to the films produced and in process under the Co-Production
Agreement, Pixars creative development group is working on concept
development, pre-production and production for new projects that are not
governed by the Co-Production Agreement. Costs related to these projects,
including for example, the first feature film produced outside the existing
Disney relationship (Project 2006), are therefore neither shared nor
reimbursed by Disney. Such costs are capitalized as film costs and will be
amortized under the individual-film-forecast-computation method assuming the
concept development leads to a successful concept and realization of a film
project, when it is expected that the film will be set for production. In the
event a film is not set for production within three years from the time of the
first capitalized transaction, such costs will be expensed. Components of Capitalized Film Production Costs The total film production costs and related amounts capitalized are as
follows (in thousands): Total ThroughApril 3,
    
    January 3,2004
    
    2004Released films
    
    $
    188,021
    
    
    $
    187,210Less: Cumulative amortization of film production costs
    
    
    (163,502
    )
    
    
    (157,690
    )Total film production costs capitalized for released films
    
    
    24,519
    
    
    
    29,520Films in production
    
    
    90,217
    
    
    
    77,301Films in development or pre-production
    
    
    1,256
    
    
    
    846Total film production costs capitalized
    
    $
    115,992
    
    
    $
    107,667
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Under the Co-Production Agreement, certain operating expenses benefiting
the productions, such as certain research and development and certain general
and administrative expenses, are paid half by Pixar and half by Disney. From
the beginning of each respective fiscal year, the Company recorded the
following amounts reimbursed by Disney as offsets to the following expense
categories (in thousands): Quarter EndedApril 3,
    
    March 29,2004
    
    2003Research and development
    
    $
    1,874
    
    
    $
    1,723General and administrative
    
    
    911
    
    
    
    998Total
    
    $
    2,785
    
    
    $
    2,721
 For released films, the Company expects to amortize, based on current
estimates, approximately $9 million to $12 million in capitalized film
production costs over the succeeding twelve-month period. This forecast does
not include amortization for The Incredibles, which is targeted for release on
November 5, 2004. The Company has amortized more than 80% of each released
films original production costs as of April 3, 2004, with the exception of
Finding Nemo, which is projected to reach the 80% milestone by the end of
fiscal 2004. At April 3, 2004 and January 3, 2004, receivables from Disney aggregated
$197.7 million and $197.2 million, respectively, which consists of receivables
for film revenue, advances net of Disneys actual share of production
expenditures for all films under the Co-Production Agreement and amounts due
for miscellaneous reimbursements. (7) Segment Reporting The chief operating decision-maker is considered to be the Companys Chief
Executive Officer (CEO). The CEO reviews financial information presented on a
summary basis accompanied by disaggregated information about film revenue for
purposes of making operating decisions and assessing financial performance. The
summary financial information reviewed by the CEO is identical to the
information presented in the accompanying statement of income and the Company
has no foreign operations. Therefore, the Company operates in a single
operating segment. The Companys revenue segment information by film category follows (in
thousands): Quarter EndedApril 3,
    
    March 29,2004
    
    2003Finding Nemo
    
    $
    40,183
    
    
    $
    Monsters, Inc.
    
    
    2,443
    
    
    
    8,573Library titles (1)
    
    
    8,332
    
    
    
    7,711Animation services
    
    
    134
    
    
    
    91$
    51,092
    
    
    $
    16,375
  (1)
    
    Library titles include Toy Story, A Bugs Lifeand Toy Story 2. 8




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(8) New Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB)
determined that stock-based compensation should be recognized as a cost
in the financial statements and that such cost be measured according to the
fair value of the stock options. The FASB has not as yet determined
the methodology for calculating fair value and plans to issue an accounting
standard that would become effective in 2005. The Company
will continue to monitor communications on this subject from the FASB in order
to determine the impact on the Companys financial statements. In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition, which supersedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104s primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the
SECs Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers(the FAQ) issued with SAB 101 that had been codified in SAB Topic
13, Revenue Recognition. Selected portions of the FAQ have been incorporated
into SAB 104. While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of SAB 104 in December 2003
did not materially affect the Companys revenue recognition policies, or the
Companys results of operations, financial position or cash flows. In March 2004, the FASBs Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.Issue No. 03-1 states that companies
carrying debt and equity securities at amounts higher than the securities fair
values will soon have to use more detailed criteria to evaluate whether to
record a loss and will have to disclose additional information about unrealized
losses. Issue No. 03-1 is effective for reporting periods beginning after June
15, 2004 and the disclosure requirements are effective for annual reporting
periods ending after June 15, 2004. The Company believes that the adoption of
EITF No. 03-1 will not have a material effect on its results of operations,
financial position or cash flows. 
 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, particularly statements referencing the targeted release dates of our
feature films, our target earnings per share for the second quarter of fiscal
2004, our anticipated revenues and operating expenses, our expectations on DVD
penetration and the resulting effect on our home video sales and our
expectations regarding any future distribution agreement into which we may
enter. In some cases, forward-looking statements can be identified by the use
of words such as may, could, would, might, will, should, expect,
forecast, predict, potential, continue, anticipates, expects,
intends, plans, believes, seeks, estimates, is scheduled for,
targeted, and variations of such words and similar expressions. Such
forward-looking statements are based on current expectations, estimates, and
projections about our industry, managements beliefs, and assumptions made by
management. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under Risk Factors on pages
15 through 24. Particular attention should be paid to the cautionary language
in Risk Factors  To meet our fiscal 2004 earnings projections, we are
dependent on our feature films and the accuracy of our forecasts,  Our
operating results have fluctuated in the past, and we expect such fluctuations
to continue,  Our scheduled successive releases of feature films will
continue to place a significant strain on our resources, and  The
Co-Production Agreement imposes several risks and restrictions on us. Unless
required by law, Pixar undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following discussion should be read in conjunction with the section
entitled Risk Factors on pages 15 through 24 below and Managements
Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the year ended January 3, 2004 in addition
to our interim financial statements and notes included elsewhere in this
report. Overview Pixar was formed in 1986 when Steve Jobs purchased the computer division
of Lucasfilm and incorporated it as a separate company. In 1991, we entered
into a feature film agreement (the Feature Film Agreement) with Walt Disney
Pictures, a wholly owned subsidiary of the Walt Disney Company (together with
its subsidiaries and affiliates collectively referred to herein as Disney),
for the development and production of up to three animated feature films to be
marketed and distributed by Disney. It was pursuant to the Feature Film
agreement that Toy Storywas developed, produced, and distributed. Our share
of revenues and expenses from Toy Storyis governed by the terms of the Feature
Film Agreement. In February 1997, we entered into the Co-Production Agreement (which,
except for certain economic provisions applicable to Toy Story, superseded the
Feature Film Agreement) with Disney pursuant to which we, on an exclusive
basis, agreed to produce five original computer-animated feature-length
theatrical motion pictures (the Pictures) for distribution by Disney. Pixar
and Disney agreed to co-finance the production costs of the Pictures, co-own
the Pictures (with Disney having exclusive distribution and exploitation
rights), co-brand the Pictures, and share equally in the profits of each
Picture and any related merchandise as well as other ancillary products, after
recovery of all marketing and distribution costs (which Disney finances), a
distribution fee paid to Disney and any other predefined fees or costs,
including any participations provided to talent. The Co-Production Agreement
generally provides that we will be responsible for the production of each
Picture, while Disney will be responsible for the marketing, promotion,
publicity, advertising and distribution of each Picture. The Co-Production Agreement also contemplates that with respect to
theatrical sequels, made-for-home video sequels, television productions, 9




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interactive media products and other derivative works related to the
Pictures, we will have the opportunity to co-finance and produce such products
or to earn passive royalties on such products. We will not share in any theme
park revenues generated as a result of the Pictures. Pursuant to the
Co-Production Agreement, in addition to co-financing the production costs of
the Pictures, Disney will reimburse us for our share of certain general and
administrative costs and certain research and development costs that benefit
the productions. Our second feature film, A Bugs Life, was released in November 1998 and
counted as the first original Picture under the Co-Production Agreement. In

November 1999, Toy Story 2, our third animated feature film was released. As a
theatrical sequel, Toy Story 2is a derivative work of the original Toy Story
and therefore it does not count toward the five original Pictures to be
produced under the Co-Production Agreement. As a derivative work, Toy Story 2
is treated as a Picture under the Co-Production Agreement, and all the
provisions applicable to the five original Pictures apply. In November 2001, we released Monsters, Inc., our fourth animated feature
film, which counts as the second original Picture under the Co-Production
Agreement. In May 2003, we released Finding Nemo, our fifth animated feature
film, which counts as the third original Picture under the Co-Production
Agreement. We are currently in various stages of production on the remaining
two films, The Incrediblesand Cars. These films will be produced and
distributed under the Co-Production Agreement and will count as the fourth and
fifth films of the Pictures to be produced under the Co-Production Agreement.
The Incrediblesis scheduled to be released November 5, 2004 and Carsis
currently scheduled for a 2005 holiday release. The term of the Co-Production Agreement continues until delivery to Disney
of Cars.Since the delivery of Finding Nemo,we have had the ability to
negotiate and enter into another distribution agreement with any other third
party. We have produced five highly successful films to date, and we believe
that this success combined with the strength of our financial resources,
position us to negotiate a distribution arrangement beyond the Co-Production
Agreement with more favorable economic terms and full ownership of our films.
In January 2004, we announced that we had ended our discussions with Disney on
extending our existing arrangement with them. We are currently exploring other
alternatives. Although we look forward to a more favorable agreement for films
released after Cars, we also understand that ending our relationship with
Disney may increase some of the risks we face in the motion picture industry.
See Risk Factors  The Co-Production Agreement imposes several risks and
restrictions on us, Risk Factors  We experience intense competition with
respect to our animated feature films, animation products, and software and
Risk Factors  We face various distribution risks with respect to our feature
films. All payments to us from Disney for development and production of Toy Story
under the Feature Film Agreement, and A Bugs Life, Toy Story 2, Monsters,
Inc., Finding Nemo, The Incrediblesand Carsunder the Co-Production Agreement
have been recorded as cost reimbursements. Accordingly, no revenue has been
recognized for such reimbursements; rather, we have netted the reimbursements
against the related costs. The statements regarding the targeted release dates for our future films
are forward-looking, and the actual release dates may differ. Factors that
could cause delays in the release of our films include, but are not limited to:
(1) the uncertainties related to production delays; (2) financing requirements;
(3) personnel availability; (4) external socioeconomic and political events;
and (5) the release dates of competitive films. Please see Risk Factors for a
more detailed discussion of these factors. Target Earnings per Share for the Second Quarter of Fiscal 2004 We expect continuing international home video revenues from Finding Nemo
to drive our results for the second quarter, particularly from its release in
Spain, France, and Japan. Based on the popularity of the film at the
international box office, and considering the growing trends of the DVD format,
our home video sales projections are now expected to trend higher than those of
Monsters, Inc.However, we anticipate that these gains will be somewhat
mitigated by increases in marketing costs. Our net units take into account
certain return reserves for the Finding Nemohome video which differ from those
estimated by Disney. We will evaluate these projections on a quarterly basis
and adjust them in future periods, if necessary. Revenues from the domestic
pay television licensing of Finding Nemoare also expected in the second
quarter, along with some contributions from merchandise and home video for our
films. Accordingly, we are targeting diluted earnings per share of
approximately $0.30 for the second quarter of fiscal 2004. These statements regarding our targeted earnings per share are
forward-looking, and actual results may differ materially. Factors that could
cause actual results for the second quarter of fiscal 2004 to differ include,
but are not limited to: (1) the timing and amount of worldwide revenues and
distribution costs from The Incredibles, Finding Nemo, Monsters, Inc.and other
titles in our film library, (2) the timing, accuracy, and sufficiency of the
information we receive from Disney to determine revenues and associated gross
profits, (3) the timing and amount of non-film related revenues and expenses,
(4) the accuracy of assumptions and judgments used to estimate certain revenues
and associated gross profits, (5) the market price of our common stock and
related volatility, (6) potential delays in the release dates of our films, (7)
final terms of our future distribution deal, and (8) external socioeconomic and
political events that are beyond our control. Please see Risk Factors for a
more detailed discussion of these factors. Recent Developments Changes in Management In March 2004, we announced that Ann Mather, Executive Vice President and
Chief Financial Officer, will retire in May 2004 to devote more time to her
family. We also announced that Simon Bax would become Pixars new Executive
Vice President and Chief Financial Officer in May 2004. Mr. Bax has over 20
years of financial operations experience, including more than 7 years as the
Chief Financial Officer of Fox Filmed Entertainment. Critical Accounting Policies Revenue Recognition We recognize film revenue from the distribution of our animated feature
films and related products when earned and reasonably estimable in 10




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accordance with Statement of Position 00-2  Accounting by Producers or
Distributors of Films (SOP 00-2). The following are the conditions that must
be met in order to recognize revenue in accordance with SOP 00-2:  
    
    persuasive evidence of a sale or licensing arrangement with a
customer exists;
    
    the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate and
unconditional delivery;
    
    the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale;
    
    the arrangement fee is fixed or determinable; and
    
    collection of the arrangement fee is reasonably assured. Under the Co-Production Agreement, we share equally with Disney in the
profits of Finding Nemo, Monsters, Inc., Toy Story 2and A Bugs Lifeafter
Disney recovers its marketing, distribution and other predefined costs and
fees. Our revenues for Toy Storyare governed by the terms of the Feature Film
Agreement. The amount of revenue recognized in any given quarter or quarters
from all of our films depends on the timing, accuracy and sufficiency of the
information we receive from Disney to determine revenues and associated gross
profits. Although Disney provides us with the most current information
available to enable us to recognize our share of revenue and determine our film
gross profit, in the past we have made adjustments, and we are likely to make
adjustments in the future, to that information based on our estimates and
judgments. For example, in the past, our theatrical revenues have been adjusted
for our estimated reserves on potential uncollectible amounts to be received
from theatrical exhibitors. We also make adjustments to our home video
revenues for estimates on return reserves that may differ from those reported
by Disney. Disney may provide us with reserve information that may differ
substantially from our historical experience with our previous titles. Unless
we obtain compelling explanations for such differences, we have and may
continue to record reserves more in line with our historical experience. The
estimates on reserves may be adjusted in future periods as additional
information becomes available, such as actual rates of returns, inventory
levels in the distribution channel, as well as other business and industry
information. We also utilize margin normalization, such as with merchandising or home
video, in accordance with the provisions of SOP 00-2. This may result in the
utilization of budgeted or forecasted information rather than actual costs
incurred if it is deemed to be a more accurate reflection of our participation.
Similar to return reserves, these expense estimates are reviewed and may be
adjusted periodically to ensure the most accurate depiction of our
participation is reflected. We also have the right to audit Disneys books and
records related to the Pictures according to the terms of the Co-Production
Agreement. Additionally, during the fourth quarter of fiscal 2003 and the first
quarter of fiscal 2004, our fiscal reporting periods differed from that of
Disney. Consequently, it was necessary to use a combination of information
from Disney and our own estimates to determine our revenues for the periods
between Disneys fiscal period end and ours. Any revenue received in advance
from Disney is deferred and recorded as revenue when earned. Any adjustments resulting from changes to our estimated reserves, margin
normalization or updated information from Disney, noted above, could have a
material effect on our financial statements in any given quarter or quarters.
For example, during 2002 and 2003, there were a number of adjustments to our
earnings resulting from the aforementioned estimates, as well as our reliance
on Disney. During fiscal 2002, one-time adjustments to A Bugs Lifeand Toy
Story 2home video reserves and margins and merchandising revenues had a
positive net impact of $0.19 to our diluted net income per share. We also
received updated information from Disney in the first quarter of fiscal 2003,
which decreased previously recorded home video expenses by $3.2 million for all
of our film titles on a cumulative basis. This resulted in an increase of $0.03
to our diluted net income per share for our first quarter of fiscal 2003.
During the second quarter of fiscal year 2003, we recognized an adjustment
which reduced our Monsters, Inc. domestic home video revenue after we received
updated information from Disney, which reflected higher returns of domestic
home video than had been originally anticipated. This adjustment reduced our
home video revenues by $4.4 million and had a net impact of $0.04 to our
diluted net income per share in the second quarter of fiscal 2003. We also
received a settlement on Monsters, Inc.merchandise revenue for the third
quarter of fiscal 2003, which resulted in an increase of $3.5 million to our
revenues and $0.03 to our diluted net income per share. In accordance with the provisions of SOP 00-2, a film is classified as a
library title after three years from the films initial release. Currently, Toy
Story, A Bugs Lifeand Toy Story 2are classified as library titles.
Monsters, Inc.will be classified as a library title beginning in the third
quarter of fiscal 2004. The term library titles is used solely for the purpose
of classification and for identifying previously released films in accordance
with the provisions of SOP 00-2. Revenue recognition for such titles is in
accordance with our revenue recognition policy for film revenue. Software Revenue Revenue for software licenses are recognized in compliance with SOP 97-2
Software Revenue Recognition as amended by SOP 98-9 Modification of SOP
97-2, With Respect to Certain Transactions. Under SOP 97-2, as amended, we
recognize revenues when all of the following conditions are met:  
    
    persuasive evidence of an agreement exists;
    
    delivery of the product has occurred;
    
    the fee is fixed or determinable; and
    
    collection of these fees is probable. SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Revenue recognized from
multiple-element arrangements is allocated to undelivered elements of the 11




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arrangement, such as support services, based on the relative fair values of the
elements. Our determination of fair value of each element in multi-element
arrangements is based on vendor-specific objective evidence (VSOE). We limit
our assessment of VSOE for each element to either the price charged when the
same element is sold separately or the price established by management, having
the relevant authority to do so, for an element not yet sold separately. Software maintenance is recorded as deferred revenue and is recognized
ratably over the term of the agreement, which is generally twelve months. Film Production Costs We capitalize our share of direct film production costs in accordance with
SOP 00-2. Film production costs include costs to develop and produce computer
animated motion pictures, which primarily consists of salaries, equipment and
overhead. With regard to the Pictures, we capitalize film production costs in
excess of reimbursable amounts from Disney. With respect to Project 2006, our
first feature film outside of our existing Disney relationship, and beyond, we
capitalize all film production costs. Production overhead, a component of film
costs, includes allocable costs of individuals or departments with exclusive or
significant responsibility for the production of our films. Capitalized
production overhead does not include administrative, general and research and
development expenses. In addition to the films produced, we are also working on
concept development for several new projects. Once a film is released, capitalized film production costs will be
amortized in the proportion that the revenue during the period for each film
bears to the estimated revenue to be received from all sources under the
individual-film-forecast-computation method. The amount of film costs that will
be amortized each quarter will depend on how much future revenue we expect to
receive from each film. We make certain estimates and judgments of our future
gross revenues to be received for each film based on information received from
Disney, and our knowledge of the industry. Estimates of anticipated total gross
revenues are reviewed periodically and may be revised if necessary. A change to
the estimate of gross revenues for an individual film may result in an increase
or decrease to the percentage of amortization of capitalized film costs
relative to a previous period. Unamortized film production costs are compared
with net realizable value each reporting period on a film-by-film basis. If
estimated remaining gross revenues are not sufficient to recover the
unamortized film production costs, the unamortized film production costs will
be written down to fair value. Results of Operations Our results for the quarter ended April 3, 2004 were driven primarily by
worldwide home video revenue, continuing foreign theatrical revenue,
merchandising, and ancillary royalties from Finding Nemoas well as continued
worldwide home video revenue and merchandising from Monsters, Inc.and our
library titles. Revenue Total revenue, which consists of film revenue and software revenue, was
$53.8 million for the quarter ended April 3, 2004 compared to $18.7 million in
the corresponding prior year period. The period-over-period increase was largely
due to the timing and success of Finding Nemosworldwide home video
performance and continued foreign theatrical revenues in the first quarter of
fiscal 2004. Film revenue for the quarter ended April 3, 2004 was $51.1 million
compared with $16.4 million in the corresponding prior year period. The
increase in revenues for the current quarter as compared to the corresponding
prior year quarter is due primarily to Finding Nemo. Film revenue for the
quarter ended April 3, 2004 consisted of $40.2 million from Finding Nemo
related primarily to worldwide home video revenue, worldwide theatrical
revenues, merchandising, and ancillary royalties. Also included in our film
revenues for the first quarter ended April 3, 2004 was $8.3 million from our
library titles, which consisted of merchandise sales, worldwide home video
sales and ancillary royalties and $2.4 million from Monsters, Inc. Film revenue for the quarter ended March 29, 2003 consisted of $8.6
million from Monsters, Inc.,which related primarily to revenues from domestic
pay television licensing, and to a lesser extent, revenues from pay-per-view
and merchandise sales. Also included in our film revenue for the first quarter
ended March 29, 2003 was $7.7 million from our library titles, which consisted
of continued worldwide home video sales, merchandise sales, international
television licensing and ancillary royalties. During the first quarter of
fiscal 2003, we received additional information from Disney that decreased home
video expenses for all of our film titles on a cumulative basis and contributed
approximately $3.2 million to our net revenues and $0.03 to our fully diluted
net income per share. In May 2003, two of our library titles, Toy Storyand Toy Story 2, were
placed on a domestic home video sales moratorium. Software revenue includes software license revenue, principally from
RenderMan®, and royalty revenue from licensing Physical Effects, Inc. (PEI)
technology to a third party. PEI, a company we acquired in 1998, licensed
certain of its technology to a third party, from which we receive associated
royalty revenue on a quarterly basis. Software revenue for the quarter ended
April 3, 2004 was $2.7 million compared to $2.3 million in the corresponding
prior year period, resulting from increases in RenderMan® software licensing
sales during the period. In spite of the increase in software revenue for the
quarter ended April 3, 2004, our primary focus is on content creation for
animated feature films and related products, and as a result, we have not
increased the time and resources necessary to generate consistently higher
RenderMan® license revenues. Therefore, we continue to expect ongoing
variability in revenues derived from software licenses. Software maintenance
contracts are recorded as unearned revenue and recognized ratably over the term
of the agreement, which is generally twelve months. For the quarter ended April 3, 2004, Disney accounted for 92% of our total
revenue compared to 89% for the corresponding prior year period. The revenue
from Disney consisted primarily of film related revenue. Because of our
relationship with Disney under the Co-Production Agreement, Disney is expected
to continue to represent significantly greater than 10% of our revenue in 2004
and for the near future. Cost of Revenue 12




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Cost of revenue includes cost of film revenue and cost of software
revenue. Cost of film revenue for the quarter ended April 3, 2004 was $5.9
million compared to $2.9 million in the corresponding prior year period. Cost
of film revenue represents amortization of capitalized film production costs.
See Capitalized Film Production Costs below. For the quarter ended April 3,
2004, cost of film revenue represented amortization of capitalized film
production costs associated with Finding Nemo, Monsters, Inc., Toy Story 2and
A Bugs Life,and represented 12% of total film revenue as compared to 18% for
the corresponding prior year period. The decrease in cost of film revenue as a
percentage of total film revenue for the quarter ended April 3, 2004 compared
to the prior year period can be attributable to a higher proportion of revenues
resulting from Finding Nemo, which had a lower amortization percentage than
Monsters, Inc.in the prior period, since we expect to receive more revenues
from Finding Nemoover its lifetime. Additionally, the cost amortization
percentages from Monsters, Inc.and our library titles have declined in the
current quarter relative to the corresponding prior year period due to
increases in their ultimate revenues. Cost of software revenue consists of the direct costs and manufacturing
overhead required to reproduce and package our software products. Cost of
software revenue as a percentage of the related revenue was less than 1% for
the quarter ended April 3, 2004 as compared to 1% for the corresponding prior
year period. Operating Expenses Total operating expenses were $6.8 million for the quarter ended April 3,
2004 compared to $5.1 million in the corresponding prior year period. The
increase in operating expenses over the prior year period reflects the growth
experienced by the studio as we ramp up to meet the demands of multiple films
in production and an increased proportion of operating expenses previously
shared with Disney. Under the Co-Production Agreement, Disney reimburses us
for half 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. To the extent that
personnel, facilities and other expenditures are not capitalized by us nor
allocated to and paid for by Disney, and precede or are not subsequently
followed by an increase in revenue, our business, operating results and
financial condition will be materially adversely affected. For example, in
February 2003, we approved Project 2006 for production, and because it is our
first feature film to be produced outside of the existing relationship with
Disney, certain costs that have been reimbursed by Disney in our previous films
will now be expensed as incurred. Research and Development.Research and development expenses consist
primarily of salaries and support for personnel conducting research and
development for our RenderMan® software and for our proprietary Marionette and
Ringmaster animation and production management software and for creative
development for future films. Research and development expenses increased to
$3.4 million for the quarter ended April 3, 2004 from $2.3 million for the
corresponding prior year period due to an increase in employee related costs,
our incurring a larger share of operating expenses previously shared with
Disney, increased legal expenses related to our intellectual properties and an
increase in expenses related to short film projects. We expect research and
development expenses to increase in future periods. To date, all research and
development costs not reimbursed by Disney have been expensed as incurred. Sales and Marketing.Sales and marketing expenses consist primarily of
salaries and related overhead, as well as public relations, advertising,
technical support and trade show costs required to support our software sales.
Sales and marketing expenses of $372,000 and $388,000 remained relatively
consistent for the quarters ended April 3, 2004 and March 29, 2003,
respectively. We believe that sales and marketing expenses may increase in
future periods, particularly in the areas of public relations and corporate
marketing related to our films. General and Administrative.General and administrative expenses consist
primarily of salaries of management and administrative personnel, insurance
costs and professional fees. General and administrative expenses increased to
$3.1 million for the quarter ended April 3, 2004 from $2.4 million in the
corresponding prior year period. The increase was due primarily to increased
professional services fees, employee related costs, and an increased proportion
of operating expenses previously shared with Disney. General and
administrative expenses may continue to increase in future periods. Other Income, Net Other income, net was $2.9 million for the quarters ended April 3, 2004
and March 29, 2003, and consists primarily of interest income on investments.
Even though cash, cash equivalents and investments increased over the
comparable prior year period, lower interest rates for the quarter ended April
3, 2004 caused interest income to remain comparable to the quarter ended March
29, 2003. Income Tax Expense Income tax expense for the quarter ended April 3, 2004 approximates the
federal and state statutory income tax rate of 39.2% versus 39.5% in the same
period of the prior year. Capitalized Film Production Costs We had $116.0 million in capitalized film production costs as of April 3,
2004, consisting primarily of costs relating to Toy Story 2, A Bugs Life,
Monsters, Inc., Finding Nemo, The Incredibles,and Cars,all of which are being
co-financed by Disney under the Co-Production Agreement. Capitalized film
production costs also include costs related to Project 2006, our first
Pixar-only financed film. All Toy Storycapitalized film costs were fully
amortized as of December 31, 1997. Liquidity and Capital Resources Cash, cash equivalents and investments increased to $541.9 million by the
end of the first quarter of fiscal 2004, an increase of $20.0 million since 13




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January 3, 2004. The increase was primarily due to cash received from Disney
for our share of film revenue, particularly relating to Finding Nemoworldwide
theatrical revenue and home video sales, along with proceeds from stock option
exercises, interest income and software revenue, offset by film production
costs. Net cash provided by operating activities for the quarter ended April
3, 2004 of $1.5 million was primarily attributable to net income of $26.7
million resulting primarily from film revenue related to Finding Nemo,
Monsters, Inc.,and our film library, the non-cash impact of the tax benefit
from stock option exercises of $11.0 million, the non-cash impact of
depreciation and amortization expense and amortization of capitalized film
production costs of $7.6 million, a decrease in trade and other receivables of
$1.7 million, offset by a decrease in income taxes payable of $26.0 million,
capitalized film production costs of $14.1 million, a decrease in unearned
revenue of $1.9 million, a decrease in accrued liabilities of $1.3 million and
an increase in prepaid expenses and other assets of $1.3 million. Net cash
used in investing activities of $17.5 million primarily consisted of the
purchase of investments of $329.4 million and property and equipment of $1.9
million, offset by net proceeds from sales of investments of $313.7 million.
Net cash provided by financing activities consisted entirely of proceeds of
$20.1 million from exercised stock options. Net cash provided by operating activities for the quarter ended March 29,
2003 of $108.7 million was primarily attributable to a decrease of $101.4
million in our receivable from Disney as a result of cash received, net income
of $8.2 million and the non-cash impact of the tax benefit from stock option
exercises of $4.2 million, partially offset by capitalized film production
costs of $12.7 million. Net cash used in investing activities of
$88.1 million
primarily consisted of investments in securities of $142.1 million, offset by
proceeds from the sales of investment securities of $55.8 million. Net cash
provided by financing activities consisted entirely of proceeds of $8.2 million
from exercised stock options. As of April 3, 2004, our principal source of liquidity was approximately
$541.9 million in cash, cash equivalents and investments. Our future capital
commitments primarily consist of obligations to fund production costs of films
and derivative products under the Co-Production Agreement and beyond. Pursuant
to the Co-Production Agreement, we will co-finance the next two original
animated feature films we have in production, The Incrediblesand Cars. In the
future, we may co-finance other derivative works such as theatrical sequels,
direct to home video sequels, interactive products and television productions.
Additionally, we have already approved for production our first film beyond the
Co-Production Agreement and will finance those costs entirely. We also have
obligations to pay portions of any revenue derived from each feature film
produced under the Co-Production Agreement to our entertainment law firm in
consideration for services rendered. Film Production Costs.For the remainder of 2004, we expect to spend
approximately $55 million to $60 million, net of Disneys film cost
reimbursements, on direct film costs and other costs to fund our ongoing film
projects under the Co-Production Agreement and beyond, which will directly
impact working capital. Capital Expenditures.For the remainder of 2004, we expect to spend
approximately $15 million to $18 million related to capital expenditures for
our Emeryville headquarters and studio and other facility related projects. We believe that our current available funds and forecasted cash from
operations for the remainder of 2004 will be sufficient to satisfy our
currently anticipated cash needs for working capital and capital expenditures,
including the production costs of The Incrediblesand Cars, the remaining
post-production costs for Finding Nemo, as well as the production and
development costs associated with films not covered under the Co-Production
Agreement. There can be no assurance that current and forecasted cash from
operations will be sufficient to fund operations. To date, we have chosen to
use our existing cash resources to fund both the construction on our Emeryville
facility 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. Contractual Obligations.At April 3, 2004, we had contractual commitments
to make payments under operating leases. Payments due under these long-term
obligations are as follows (in thousands): Payments Due by PeriodLess than
    
    1-3
    
    3-5
    
    More thanTotal
    
    1 Year
    
    Years
    
    Years
    
    5 YearsOperating lease obligations
    
    $
    1,201
    
    
    $
    662
    
    
    $
    481
    
    
    $
    58
    
    
    $
    Total
    
    $
    1,201
    
    
    $
    662
    
    
    $
    481
    
    
    $
    58
    
    
    $
    
 Off-Balance Sheet Arrangements As of April 3, 2004, we did not have any off-balance sheet arrangements. Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB)
determined that stock-based compensation should be recognized as a cost
in the financial statements and that such cost be measured according to the
fair value of the stock options. The FASB has not as yet determined
the methodology for calculating fair value and plans to issue an accounting
standard that would become effective in 2005. We will continue to monitor
communications on this subject from the FASB in order to determine the impact
on our results of operations, financial position or cash flows. In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue 14




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Recognition, which supersedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104s primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the
SECs Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers(the FAQ) issued with SAB 101 that had been codified in SAB Topic
13, Revenue Recognition. Selected portions of the FAQ have been incorporated
into SAB 104. While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of SAB 104 in December 2003
did not materially affect our revenue recognition policies, or our results of
operations, financial position or cash flows. In March 2004, the FASBs Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.Issue No. 03-1 states that companies
carrying debt and equity securities at amounts higher than the securities fair
values will soon have to use more detailed criteria to evaluate whether to
record a loss and will have to disclose additional information about unrealized
losses. Issue No. 03-1 is effective for reporting periods beginning after June
15, 2004 and the disclosure requirements are effective for annual reporting
periods ending after June 15, 2004. We believe the adoption of EITF No. 03-1
will not have a material effect on our results of operations, financial
position or cash flows. 
 Risk Factors The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. You
should carefully consider these factors before making an investment decision
with respect to our Common Stock. Our operating results are primarily dependent on the success of our feature
films, and forecasting is extremely difficult. For the remainder of 2004, our revenue and operating results will be
largely dependent upon (1) the timing and amount of worldwide revenues and
distribution costs for The Incredibles, Finding Nemo, Monsters, Inc., and to a
lesser extent, the titles in our film library, (2) the timing, accuracy and
sufficiency of the information we receive from Disney to determine revenues and
associated gross profits, (3) the timing and amount of non-film related
revenues and expenses, (4) the accuracy of our assumptions and judgments used
to estimate certain revenues and associated gross profits, (5) the market price
of our Common Stock and related volatility, (6) potential delays in the release
date of The Incredibles, (7) the terms of our next distribution arrangement and
(8) external socioeconomic and political events that are beyond our control. Dependence on revenue from our feature films. Under the current Co-Production Agreement, which governs our relationship
with Disney regarding the Pictures, Pixar and Disney share equally in the
profits of our animated feature films after Disney recovers its distribution
fee and its marketing and distribution costs. Distribution costs include
worldwide theatrical release costs, costs related to merchandise, Disneys
costs to market and distribute home videos in the United States and foreign
markets, Disneys distribution fee, and other distribution costs including
talent participation and residuals. We remain dependent on the timing, accuracy
and sufficiency of the information provided by Disney. For our business to be successful, our films must achieve box office
success. While we have been successful in the release of our first five feature
films, this level of success is highly unusual in the motion picture industry,
and our future releases may not achieve similar results. For the remainder of
fiscal 2004, we will be dependent primarily on the foreign home video sales and
worldwide television licensing from Finding Nemoand the worldwide theatrical
and merchandising success of our sixth feature film, The Incredibles. In
addition, for the remainder of 2004, we expect further contributions from
Monsters, Inc.through worldwide television licensing and home video revenues
and on-going revenues from our library titles. If The Incredibles, Finding Nemo
and Monsters, Inc.do not generate sufficient revenues from these sources, our
2004 results would be adversely affected. To date, we have recognized most of
the revenues we expect to recognize over the lifetime of the Toy Story
franchise and A Bugs Life. Forecasting film revenue and associated gross profits from our feature films is
extremely difficult. Although we have experienced a successful track record with the releases
of our feature films, it is difficult to predict the worldwide box office
success of The Incrediblesbefore its theatrical release on November 5, 2004.
Even if The Incrediblesexperiences a very successful worldwide theatrical run,
it is difficult to predict the related home video, television licensing,
merchandising and ancillary revenue streams. While customer acceptance is
initially measured by box office success, customer acceptance within each
follow-on product category, such as home video, merchandise or television,
depends on factors unique to each type of product, such as pricing, competitive
products, and the time of year or state of the economy into which a product is
released, among many other factors. In addition, we have found that the degree
of customer acceptance varies widely among foreign countries. While box office
success is often a good indicator of general customer acceptance, the relative
success of follow-on
products is not always directly correlated, and the degree of correlation is
difficult to predict. It is also difficult to forecast the amount of revenues from Finding Nemo,
Monsters, Inc.and the titles in our film library. The revenues generated from
continued home video and merchandise sales can fluctuate due to various market
factors. Because the revenues from films nearing the end of their life cycle
tend to be relatively small, minor fluctuations can result in notable variances
from our forecast. Both Toy Storyand Toy Story 2domestic home videos are
currently subject to a sales moratorium, which began on May 1, 2003. Although
this strategy is designed to increase potential sales over the lifetime of a
title, to prevent a declining sales price and to support a potentially higher
sales price upon re-release, it is difficult to predict the actual impact of
this strategy, particularly since these are our first titles to be placed on a
sales moratorium, and it may not generate the results we expect in future
years. With respect to the difficulty of forecasting the timing of revenues,
Disney distributes our films and film-related products and therefore determines
the timing of product releases. While we are targeting to release The
Incrediblesand Carstheatrically worldwide during the holiday periods of 2004
and 2005, respectively, the specific dates of the international releases will
depend on territory-specific factors, such as the local competitive environment
and school holidays. In some instances, the holiday period may not be the
optimal release window for the films. Therefore, 15




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the timing of international
revenues could span over several months, and the forecasting of such revenues
is inherently more difficult. In addition, the amount of revenue recognized in any given quarter or
quarters from all of our films depends on the timing, accuracy, and sufficiency
of the information we receive from Disney to determine revenues and associated
gross profits. Although we obtain from Disney the most current information
available to recognize our share of revenue and to determine our film gross
profit, Disney may make subsequent adjustments to the information that it has
provided, which could have a material impact on us in later periods. For
instance, towards the end of the life cycle for a revenue stream, Disney may
inform us, and has in the past informed us, of additional distribution costs to
those previously forecasted. Such adjustments have impacted and may continue to
impact our revenue share and our film gross profit. In addition, through
information we obtain from other sources, we may make certain judgments and/or
assumptions and adjust the information we receive from Disney. For example, we
also make adjustments to our home video revenues for estimates on return
reserves that may differ from those reported by Disney. Disney may provide us
with reserve information that may differ substantially from our historical
experience with our previous titles. Unless we obtain compelling explanations
for such differences, we have and may continue to record reserves more in line
with our historical experience. The estimates on reserves may be adjusted in
future periods as additional information becomes available, such as actual
rates of returns, inventory levels in the distribution channel, as well as
other business and industry information. We also utilize margin normalization, such as with merchandising or home
video, in accordance with the provisions of SOP 00-2. This may result in the
utilization of budgeted or forecasted information rather than actual costs
incurred if it is deemed to be a more accurate reflection of our participation.
Similar to return reserves, these expense estimates are reviewed and may be
adjusted periodically to ensure the most accurate depiction of our
participation is reflected. We also have the right to audit Disneys books and
records related to the Pictures according to the terms of the Co-Production
Agreement. Additionally, during the fourth quarter of fiscal 2003 and the first
quarter of fiscal 2004, our fiscal reporting periods differed from that of
Disney. Consequently, it was necessary to use a combination of information
from Disney and our own estimates to determine our revenues for the periods
between Disneys fiscal period end and ours. Any revenue received in advance
from Disney is deferred and recorded as revenue when earned. Any adjustments resulting from changes to our estimated reserves, margin
normalization or updated information from Disney, noted above, could have a
material effect on our financial statements in any given quarter or quarters.
For example, during fiscal 2002 and 2003, there were a number of adjustments to
our earnings resulting from the aforementioned estimates, as well as our
reliance on Disney. During fiscal 2002, one-time adjustments to A Bugs Life
and Toy Story 2home video reserves and margins and merchandising revenues had
a positive net impact of $0.19 to our diluted net income per share. We also
received updated information from Disney in the first quarter of fiscal 2003
which decreased previously recorded home video expenses by $3.2 million for all
of our film titles on a cumulative basis. This resulted in an increase of $0.03
to our diluted net income per share for our first quarter of fiscal 2003.
During the second quarter of fiscal year 2003, we recognized an adjustment
which reduced our Monsters, Inc. domestic home video revenue after we received
updated information from Disney, which reflected higher returns of domestic
home video than had been originally anticipated. This adjustment reduced our
home video revenues by $4.4 million and had a net impact of $0.04 to our
diluted net income per share in the second quarter of fiscal 2003. We also
received a settlement on Monsters, Inc.merchandise revenue for the third
quarter of fiscal 2003, which resulted in an increase of $3.5 million to our
revenues and $0.03 to our diluted net income per share. With respect to capitalized film production costs, our policy is to
amortize these costs over the expected revenue streams as we recognize revenues
from the associated films. The amount of film costs that will be amortized each
quarter depends on how much future revenue we expect to receive from each film.
Unamortized film production costs are compared with net realizable value each
reporting period on a film-by-film basis. If estimated remaining gross revenues
are not sufficient to recover the unamortized film production costs, the
unamortized film production costs will be written down to net realizable value.
In any given quarter, if we lower our previous forecast with respect to total
anticipated revenue from any individual feature film, we would be required to
accelerate amortization of related film costs, resulting in lower gross
margins. Such lower gross margins would adversely impact our business,
operating results, and financial condition. Forecasting our operating expenses is extremely difficult. Our operating expenses will continue to be extremely difficult to
forecast. We budget the direct costs of the Pictures with Disney, and we share
such costs equally. We capitalize our share of direct costs of film production
in accordance with SOP 00-2. A substantial portion of all of our other costs is
incurred for the benefit of feature films (Overhead), including research and
development expenses and general and administrative expenses. Portions of our
Overhead are included in the budgets for the Pictures under the Co-Production
Agreement, and we share such costs equally with Disney under the Co-Production
Agreement. With respect to the portion of our Overhead that is not reimbursed
by Disney, we either (1) capitalize such portion as film production costs, if
required under SOP 00-2, or (2) charge it to operating expense in the period
incurred. Since a substantial portion of our Overhead is related to the
Pictures, and is therefore reimbursed by Disney, and since we capitalize other
amounts in accordance with SOP 00-2, our reported operating expenses for the
first quarter of fiscal 2004 have not reflected, and future reported operating
expenses will not reflect, our true level of spending on the production of
animated feature films, related products and Overhead. Further, as we continue
production of our films beyond the Co-Production Agreement, we expect our
operating expenses to continue to increase to the extent that they are not
capitalized or shared with Disney. Film production budgets may increase, and film production spending may exceed
such budgets. Our future film budgets may continue to increase due to factors including,
but not limited to, (1) escalation in compensation rates of people required to
work on our current projects, (2) number of personnel required to work on our
current projects, (3) equipment needs, (4) the enhancement of existing or the
development of new proprietary technology and (5) the expansion of our
facilities to accommodate the growth of the studio. The
budget for The Incrediblesand Carsand subsequent films and related
products are expected to be greater than the budgets for our previous films.
Under the Co-Production Agreement, we will continue to finance the budgets of
The Incrediblesand Carsequally with Disney. In addition, we have approved for
production our first Pixar-only financed film, Project 2006. Due to production
exigencies, which are often difficult to predict, it is not uncommon for film
production spending to exceed film production budgets, and our current projects
may not be completed within the budgeted amounts. In addition, when production
of each film is completed, we may incur significant carrying costs associated
with transitioning personnel on 16




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creative and development teams from one project
to another. These carrying costs, which are currently shared with Disney and
treated as film costs, increase overall production budgets and could have a
material adverse effect on our results of operations and financial condition. Software revenue. Our fiscal 2004 earnings are expected to include revenues attributable to
non-film related sources including software revenue; however, there can be no
assurance as to the timing and amount of such revenues. Other non-film revenue and expenses. Our fiscal 2004 earnings are expected to include our forecast of other
non-film related sources such as interest income and our effective tax rate.
Interest income is difficult to predict and can fluctuate depending on our cash
balance as well as external factors beyond our control, such as economic
conditions and interest rates available to us during the year. For example, in
the first quarter of fiscal 2004, our average cash, cash equivalents and
investment balances increased; however, net interest income remained constant
compared to the corresponding prior year period due to declining interest
rates. Income tax expense may also fluctuate. Our income tax rate for fiscal
2003 approximated statutory rates, and we expect that our income tax rate for
fiscal 2004 will also approximate statutory rates; however, our effective tax
rate may fluctuate in future periods. Our operating results have fluctuated in the past, and we expect such
fluctuations to continue. Our revenues fluctuate significantly We continue to expect significant fluctuations in our future quarterly and
annual revenues because of a variety of factors, including the following:  
    
    the timing of the domestic and international theatrical releases of our animated feature films,
    
    the success of our animated feature films,
    
    the timing of the release of related products into their respective markets, such as home videos, television, and merchandising,
    
    the demand for such related products, which is often a function of the success of the related animated feature film,
    
    Disneys costs to distribute and promote our feature films and related products under the Co-Production Agreement,
    
    Disneys success at marketing our feature films and related products under the Co-Production Agreement,
    
    the timing and accuracy of information received from Disney and other
sources on which we base estimates of revenue to be recognized from our
animated feature films and related products,
    
    the timing and amount of non-film related revenues, such as the licensing of our software,
    
    the introduction of new feature films or products by our competitors,
    
    the final terms of our next distribution arrangement, and
    
    external socioeconomic and political events that are beyond our control. In particular, since our revenue under the Co-Production Agreement is
directly related to the success of our animated feature films, our operating
results are likely to fluctuate depending on the level of success of our
animated feature films and related products. The revenues derived from the
production and distribution of an animated feature film depend primarily on the
films acceptance by the public, which cannot be predicted and does not
necessarily bear a direct correlation to the production or distribution costs
incurred. The commercial success of a motion picture also depends upon
promotion and marketing, production costs and other factors. Further, the
theatrical success of a feature film can be a significant factor in determining
the amount of revenues generated from the sale of the related products. Our operating expenses fluctuate Operating expenses for the first quarter of fiscal 2004 increased in
comparison to the same period in fiscal 2003, and we expect to continue to
increase our operating expenses to fund greater levels of research and
development, to ramp up to meet the demands of multiple films in production and
to expand operations. In addition, we expect our spending levels may increase
significantly due to the following:  
    
    continued investment in proprietary software systems,
    
    continued and potentially increasing competition costs for creative, technical and administrative talent,
    
    increased costs associated with the expansion of our facilities,
    
    increased number of personnel required to support studio growth as we have multiple films in parallel production,
    
    increased investment in creative development and our Pixar-only financed films, 17




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
    
    increased proportion of operating expenses previously shared with Disney, and
    
    increased investment in administrative functions to support our
expanding operations. A portion of our operating expenses that are allocable to film productions
is either capitalized by us or reimbursed by Disney under the Co-Production
Agreement. To the extent that we do not capitalize (or Disney does not
reimburse) the increases in expenses, our operating expenses will increase in
fiscal 2004. In addition, as we increase the resources allocated to our
productions beyond our feature film Cars, which is the last film to be
co-financed with Disney under the current Co-Production Agreement, we expect
our operating expenses to increase significantly. Our scheduled successive releases of feature films will continue to place a
significant strain on our resources. We have established parallel creative teams so that we can develop more
than one film at a time. These teams are currently working primarily on The
Incredibles, which is currently scheduled for release on November 5, 2004, and
Cars, as well as future projects, including Project 2006, our first Pixar-only
financed film, as we move towards producing one feature film per year. We have
only produced and released five feature films to date and have limited
experience with respect to producing animated feature films in parallel. Due to
the strain on our personnel from the effort required for the release of an
upcoming film and the time required for creative development of future films,
it is possible that we would be unable to release a new film in successive
years. In the past, we have been required, and may continue to be required, to
expand our employee base, increase capital expenditures and procure additional
resources and facilities in order to accomplish the scheduled releases of our
animated feature films. This growth and expansion has placed, and continues to
place, a significant strain on our resources. We cannot provide any assurances
that The Incredibles, Cars, Project 2006 or any future animated film will be
released as targeted or that this strain on resources will not have a material
adverse effect on our business, financial condition or results of operations.
In addition, John Lasseters availability has been a key ingredient in the
successful completion of our prior films. As we move towards achieving one film
a year, there has been and will continue to be additional demands placed on his
availability. In addition to Mr. Lasseters role as our Executive Vice
President, Creative, he is also directing his next feature film, Cars. A lack
of his availability may adversely impact the success and timing of our future
films. We continuously implement a variety of new and upgraded operational and
financial systems, procedures and controls, including improvement and
maintenance of our accounting system, other internal management systems and
backup systems. Our growth and these diversification activities, along with the
corresponding increase in the number of our employees and our rapidly
increasing costs, have resulted in increased responsibility for our management
team. We will need to continue to improve our operational, financial and
management information systems, to hire, train, motivate and manage our
employees, to integrate them into Pixar and to provide adequate facilities and
other resources for them. We cannot provide any assurance we will be successful
in accomplishing all of these activities on a timely and cost-effective basis.
Any failure to accomplish one or more of these activities on a timely and
cost-effective basis would have a material adverse effect on our business,
financial condition and results of operations. The Co-Production Agreement imposes several risks and restrictions on us. We are dependent on Disney for the distribution and promotion of our feature
films and related products. The decisions regarding the timing of the theatrical release and related
products, the marketing and distribution strategy, and the extent of
promotional support are important factors in determining the success of our
motion pictures and related products. Under the terms of the Co-Production
Agreement, Disney is required to market and distribute our feature films in the
same manner as their premier animated films, and Disney is required to consult
with us with respect to all major marketing and distribution decisions. While
Disney is prohibited from distributing potential competing films within certain
release collars, we ultimately do not control (1) the manner in which Disney
distributes our animated feature films and related products, (2) the number of
theaters to which Disney distributes our feature films, (3) the specific timing
of release of our feature films and related products or (4) the specific amount
or quality of marketing and promotional support of the feature films and
related products as well as the associated promotional and marketing budgets.
Because Disney co-finances the films developed and produced under the
Co-Production Agreement, distributes the films under the Walt Disney Pictures
label and enjoys substantial financial benefits in the event that such films
achieve significant box office revenues, we believe that Disney desires such
films to be successful. Nonetheless, Disney could make certain decisions as to
marketing, distribution or promotion of the animated feature films or related
products or the marketing and promotion of its own animated or other family
films that could have a material adverse effect on our business, operating
results or financial condition. In addition, the costs for marketing,
distribution and promotion of the films and related products are incurred well
in advance of the release of such films and products, and we experience a delay
in the receipt of proceeds from such films and products until after Disney
recovers such costs. We are also dependent on Disney for receiving accurate
information on a timely basis on which we base estimates to recognize revenue
and associated gross profit from the animated feature films and related
products. If we fail to receive accurate information from Disney, or fail to
receive it on a timely basis, it could have a material adverse effect on our
business, operating results or financial condition. Disney has an exclusive arrangement with us. We have agreed not to release or authorize the release of any of our
feature length animated theatrical motion pictures, other than the Pictures,
until twelve months from our delivery of the fifth Picture under the
Co-Production Agreement. We currently anticipate the delivery of the fifth
Picture, Cars, approximately mid-2005. However, now that we have delivered
Finding Nemo, we are free to enter into any agreement with any third party for
the development, production or distribution of any feature length animated
theatrical motion picture (other than the Pictures). In January 2004, we
announced that we had ended our discussions with Disney regarding a new
arrangement with them for films released beyond Cars. We are
currently exploring other alternatives. We also agreed that we will not develop or produce any rides or
attractions for major theme parks not owned or operated by Disney, and to give
Disney a right to negotiate with respect to animated television productions or
animated made-for-home video productions that we propose to produce during the
term of the Co-Production Agreement. Disney, however, is not similarly
restricted by the exclusivity provisions that bind us under the Co- 18




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Production
Agreement and, therefore, may develop, produce or distribute other feature
length animated and computer animated theatrical motion pictures itself or
enter into similar agreements with third parties. However, if Disney produces
any derivative works without Pixar, we are entitled to receive passive
royalties pursuant to the terms of the Co-Production Agreement. See Risk
Factors  We experience intense competition with respect to our animated
feature films, animation products, and software. We have an obligation to co-finance production costs. Under the Co-Production Agreement, we will continue to co-finance The
Incrediblesand Carsand may co-finance other related products to be developed
and produced pursuant to the Co-Production Agreement. We co-financed A Bugs
Life, Toy Story 2, Monsters, Inc.and Finding Nemo. We also have approved for
production and have begun financing Project 2006, our first Pixar-only financed
film. If our feature films and related products do not generate proceeds
sufficient to more than offset our share of their production costs, our
business, operating results and financial condition will be materially
adversely affected. Disney retains the exclusive distribution and exploitation rights. We share equally with Disney in the profits of each Picture and any
related merchandise after Disney recovers certain costs; however, Disney
retains the exclusive distribution and exploitation rights of each Picture, all
characters and story elements of each Picture and all related products we
develop under the Co-Production Agreement. Accordingly, except in certain
specified circumstances, we are not able to exploit or distribute any of our
feature films or characters or elements of any of our feature films or related
products developed under the Co-Production Agreement without a license from
Disney. We cannot provide any assurances that such a license would be available
to us on commercially reasonable terms or at all. Disney can terminate the agreement under various circumstances. Under the terms of the Co-Production Agreement, Disney may terminate the
agreement under certain circumstances. For example, Disney is entitled to
terminate the Co-Production Agreement in the event that certain types of
competitors directly or indirectly acquire or control a 50% or greater
ownership interest in Pixar or Pixar merges or consolidates into such a
competitor. Disney would not lose any of its rights to distribute and exploit
all feature films and all characters and elements of our feature films and
other products we develop under the Co-Production Agreement, except for feature
films or related products then in development or production as to which Disney
does not elect to proceed, as to which we would regain the rights subject to a
lien in favor of Disney for the costs advanced to date. Further, in the event
that Disney terminated the Co-Production Agreement, we would be required to
seek alternative channels for distribution of our animated feature films and
related products. 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:  
    
    talent and crew 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,
    
    piracy and unauthorized recording, transmission and distribution of motion pictures,
    
    general socioeconomic 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
films box office receipts adversely. Under the terms of the Co-Production
Agreement, Pixar is guaranteed theatrical release either during the summer or
holiday period. In addition, 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 CGI
films, 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. In order for our feature films and related products to be successful, we must
develop appealing creative content. The success of each animated film developed and produced by us will depend
in large part upon our creative teams ability to produce content that will
appeal to a broad audience and to develop compelling stories and characters
that will achieve broad market acceptance. Traditionally, this process has been
extremely difficult. While we have enjoyed worldwide box office success with
Toy Story, A Bugs Life, Toy Story 2, Monsters, Inc., 19




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and Finding Nemo, there
can be no assurance that similar levels of success will be achieved by our
subsequent films, including The Incredibles, Carsand Project 2006. We experience intense competition with respect to our animated feature films,
animation products, and software. Animated Feature Films. Our animated feature films compete and will continue to compete with
family-oriented, animated and live action feature films and other
family-oriented entertainment products produced by major movie studios,
including Disney (as somewhat limited by the Co-Production Agreement),
DreamWorks SKG, Warner Bros., Sony Pictures Entertainment (Sony), Fox
Entertainment Group Inc. (Fox), Paramount Pictures (Paramount), Lucasfilm
Ltd. (Lucasfilm), Universal Studios, Inc. and MGM/UA, as well as numerous
other independent motion picture production companies. In 2004, competition is expected to continue to intensify in the
family-oriented, animated and live action feature film market and may affect
the ultimate box office success of The Incredibles, which will be released on
November 5, 2004. Some of the family-oriented animated and live action feature
films that will be released during the 2004 holiday period that could compete
with The Incrediblesinclude the following:  
    
    Shark Taleby Dreamworks,
    
    J.M. Barries Neverlandby Miramax,
    
    Alexanderby Warner Brothers,
    
    The Polar Expressby Warner Brothers,
    
    SpongeBob SquarePants Movieby Paramount,
    
    National Treasureby Disney,
    
    Oceans Twelveby Warner Brothers,
    
    The Brothers Grimmby Dimension Films,
    
    Lemony Snickets: A Series of Unfortunate Eventsby Paramount, and
    
    The Aviatorby Warner Brothers. We believe competition from animated feature films and family-oriented
feature films may continue to intensify over the next several years, possibly
affecting Cars, which is currently targeted for a 2005 holiday release, and
Project 2006. Due to a potentially large number of family-oriented films
scheduled for release over the next few years, it is possible that the market
for these films, whether animated or live action, will become further saturated
before we release The Incredibles, Carsand Project 2006. This could result in
the failure of such films to achieve the commercial success required for us to
profit from such films. Our films will continue to compete with the feature films of other movie
studios for optimal release dates, audience acceptance, and exhibition outlets.
In addition, we compete and will continue to compete with other movie studios
for the services of performing artists, and the services of other creative and
technical personnel, particularly in the fields of animation and technical
direction. Some of the other movie studios with which we compete have
significantly greater financial, marketing and other resources than we do. There appears to be increasing widespread acceptance for CGI animated
films. In 2004, a significant increase is expected in the number of CGI
animated films to be released, a trend that could carry through 2005 and
beyond. Animated feature films currently in production that are primarily CGI
include Shrek 2, Shark Tale, Madagascar, Chicken Little, The Polar Express, A
Day With Wilbur Robinson, Over the Hedge, Jimmy Neutron 2, Robots, Ice Age 2
and Valiant, among others. Disney is also considering developing and producing
feature-length CGI-animated films based on classic fairy tales, such as
Rapunzel Unbraided. In addition to box office and home video competition, other
family-oriented films may continue to compete with Monsters, Inc.and Finding
Nemo, as well as our film library with respect to related television,
merchandise, and other future revenue sources. Furthermore, 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 successfully produced Antzin 1998, Shrekin 2001
and is scheduled to release Shrek 2and Shark Talein 2004. 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
three-dimensional CGI-animated films. Further, we believe that continuing
enhancements to commercially available computer hardware and software
technology have lowered and will continue to lower barriers to entry for
studios or special effects companies which intend to produce computer-animated
feature films or other products. For example, SGIs subsidiary licenses Maya,
which is its next generation three-dimensional software for creating high
quality animation and visual effects. Maya incorporates many new features and
could be used to make a computer-animated feature film. The Co-Production Agreement provides that we will develop and produce five
original computer-animated feature films. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the Walt Disney Pictures label and enjoys financial benefits in the
event that such films achieve significant box office revenues, we believe that
Disney desires such films to be successful. Nonetheless, during its long
history, Disney has been a very successful producer and distributor of its own
animated feature films. While 20




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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, Pirates of the Caribbean: The Curse of the Black Pearl, which was
released July 9, 2003, Spy Kids 3D: Game Over, which was released on July 25,
2003 and Freaky Friday, which was released on August 6, 2003, competed directly
with Finding Nemofor domestic theatrical market share this past summer. The
home video releases of Pirates of the Caribbean: The Curse of the Black Pearl
and Freaky Fridayhave also competed with Finding Nemoin the worldwide home
video market. We expect the theatrical release of J.M. Barries Neverlandby
Miramax on October 22, 2004 and National Treasureon November 24, 2004 to
compete with the worldwide theatrical release of The Incredibles. Beyond Cars,
Disney may begin to release their movies during our release windows. This could
have an adverse impact on the commercial success required for us to profit from
future films. Our contractual arrangement with Disney also presents other
risks. See Risk Factors  The Co-Production Agreement imposes several risks
and restrictions on us. Computer Graphics Special Effects Firms. We also expect to compete with computer graphics special effects firms,
including ILM, Rhythm & Hues/VIFX, Tippett Studios, WETA Digital, Digital
Domain, and Sony Pictures Imageworks. These computer graphics special effects
firms may be capable of creating their own three-dimensional computer animated
feature films or may produce three-dimensional computer-animated feature films
for movie studios that compete with us. For example, ILM has already created
and produced three-dimensional character animation which was used for several
central characters in the live action film Star Wars Episode II: Attack of the
Clones, and ILM has a royalty-free, paid-up license to use our RenderMan®
software and to obtain at no cost all enhancements and upgrades thereto. Other
computer graphics special effects firms have licensed or may license
RenderMan®. Accordingly, our RenderMan® software may not provide us with a
competitive advantage. We also compete, or may in the future compete, with the
above firms with respect to animation products other than feature films. Software Publishers. We also experience competition with respect to our RenderMan® software
product. In particular, we compete with makers of computer graphics imaging and
animation software, principally Alias (owned by SGI), Discreet (a division of
Autodesk), Mental Images GmbH and Avid Technologies. Mental Images, Avid and
Alias are each marketing competing rendering software products, usually at
lower prices than the price at which we offer RenderMan®. SGI has licensed
several of our patents that cover certain rendering techniques and may
therefore be better able to market products that compete with our RenderMan®
software. Under appropriate circumstances, we might elect to license our
rendering technology patents to other companies, some of which may compete with
us. In addition, as PCs become more powerful, software suppliers may also be
able to introduce products for PCs that would be competitive with RenderMan®
in terms of price and performance for professional users. In addition, there
have been advances in graphics processing unit technology that may impinge on
the market for software rendering solutions. Faster and lower cost graphic
cards provide capability for users to produce pictures of higher complexity
than previously available. We expect competition to persist, intensify and increase in each of our
business areas in the future. Some of our current and potential competitors
have longer operating histories, larger installed customer bases and
significantly greater financial, technical, marketing and other resources than
we do. There can be no assurance that we will be able to compete successfully
against current or future competitors. Such competition could materially
adversely affect our business, operating results or financial condition. Our success depends on certain key employees. Our success depends to a significant extent on the performance of a number
of senior management personnel and other key employees, especially our film
directors, producers, animators, creative personnel and technical directors. In
particular, we are dependent upon the services of Steve Jobs, John Lasseter,
Edwin E. Catmull, Simon Bax, Sarah McArthur and Lois Scali. We do not currently
have key person life insurance for any of our employees. We do have an
employment agreement with Mr. Lasseter, who has been fundamental to Pixars
relationship with Disney; however, such employment agreement does not
necessarily assure the services of Mr. Lasseter. Moreover, although it is
standard in the motion picture industry to rely on employment agreements as a
method of retaining the services of key employees, we have not required our
employees, other than Mr. Lasseter, to enter into employment agreements. The
loss of the services of any of Messrs. Jobs, Lasseter, Bax, Dr. Catmull, Ms.
McArthur, Ms. Scali or of other key employees, especially our film directors,
producers, animators, creative personnel and technical directors, could have a
material adverse effect on our business, operating results or financial
condition. Our Chief Executive Officer has divided responsibilities. Pixars Chief Executive Officer and Chairman, Steve Jobs, is also Chief
Executive Officer at Apple Computer, Inc. Although Mr. Jobs spends time at
Pixar and is active in our management, he does not devote his full time and
resources to Pixar. To be successful, we need to attract and retain qualified personnel. Our success continues to depend to a significant extent on our ability to
identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Competition for the caliber of talent
required to make our films, particularly our film directors, producers,
animators, creative personnel and technical directors, will continue to
intensify as more studios build their in-house CGI-animation or special effects
capabilities. There can be no assurance that we will be successful in
identifying, attracting, hiring, training and retaining such personnel in the
future. If we were unable to hire, assimilate and retain qualified personnel in
the future, particularly film directors, producers, animators, creative
personnel
and technical directors, such inability would have a material adverse
effect on our business, operating results and financial condition. 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 21




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consistent
with those of Disneys premier animated films. Currently, distribution of our
films generally includes (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. Although we have enjoyed a tremendously successful track record with our
first five feature films, we cannot provide any assurances that our future
films will enjoy the same level of success. Currently, Disney shares the
financial risks associated with the production of our films under the
Co-Production Agreement 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. However, because we anticipate
to finance 100% of the production costs of our films under any future
distribution agreement, we expect to bear all of the financial risks associated
with a future films production costs. In addition, we cannot provide any
assurances that future distribution agreements will provide us with our current
level of risk minimization related to the financing of marketing and
distribution expenses. 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 five animated
feature films, Toy Story, A Bugs Life, Toy Story 2, Monsters, Inc., and
Finding Nemo. Accordingly, we have 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. We are currently co-financing our remaining two unreleased Pictures, The
Incrediblesand Carspursuant to the Co-Production Agreement. We are also
solely financing Project 2006. In the future, we may co-finance other
derivative works such as sequels and television productions. The future
development and production costs of The Incredibles, Cars, Project 2006 and
films beyond, and any 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 the production costs of films for release
after Cars. As of April 3, 2004, we had approximately $541.9 million in cash,
cash equivalents 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, and the development
and production costs of The Incrediblesand Cars, as well as development and
production costs for Project 2006. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital
Resources. To date, we have chosen to use our existing cash resources to fund
film production costs and construction 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 processes 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. A single shareholder owns a large percentage of our outstanding stock. Our Chief Executive Officer, Steve Jobs, beneficially owns approximately
53.4% of our outstanding Common Stock as of April 3, 2004. 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. Business interruptions could adversely affect our operations. 22




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Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. Although
we have developed certain plans to respond in the event of a disaster, there
can be no assurance that they will be effective in the event of a specific
disaster. Our facilities in the State of California have in the past and may in
the future be subject to electrical blackouts as a consequence of a shortage of
available electrical power. In the event of a short-term power outage, we have
installed UPS (uninterrupted power source) equipment to protect our RenderFarm
and other sensitive equipment, along with two 1.5 Megawatt backup generators;
however, a long-term power outage could disrupt our operations. Prices for
electricity have in the past risen dramatically and may increase in the future.
An increase in prices would increase our operating costs, which could in turn
adversely affect our profitability. We do not carry earthquake insurance for
earthquake related losses and although we carry business interruption insurance
for other potential losses, there can be no assurance that such insurance will
be sufficient to compensate us for losses that may occur and any losses or
damages incurred by us could have a material adverse effect on our business and
results of operations. Terrorist activities and resulting military and other actions could adversely
affect our business. The continued threat of terrorism within the United States and abroad,
military action and heightened security measures in response to such threats,
as well as other socioeconomic and political events, may cause significant
disruption to commerce, including the entertainment industry, throughout the
world. For example, the terrorist attacks in New York and Washington, D.C. on
September 11, 2001 disrupted commerce throughout the United States and Europe.
Such disruption in the future could have a material adverse effect on our
business and results of operations. Work stoppages could adversely impact our operations. Although none of our employees are represented by a labor union, it is
common for film directors, producers, animators and actors at film production
companies to belong to a union. There can be no assurance that our employees
will not join or form a labor union or that we, for certain purposes, will not
be required to become a union signatory. We may be directly or indirectly
dependent upon certain union members, and work stoppages or strikes organized
by such unions could materially adversely impact our business, financial
condition or results of operations. For example, many of the actors who provide
voice talent for the Pictures and Derivative Works are members of the Screen
Actors Guild (SAG) and/or the American Federation of Television and Radio
Artists (AFTRA) and the current SAG and AFTRA contract expires June 30, 2005.
If a work stoppage did occur, it could delay the completion of our films and
have a material adverse effect on our business operating results or financial
condition. To be successful, we will need to continuously enhance our existing proprietary
technology and develop new technology. Substantially all of our revenues have been derived, and substantially all
of our future revenues are expected to be derived, from the use and license of
our proprietary technologies. We expect that we will be required to enhance
these technologies and to develop new technologies in order to be successful in
our industry and in the licensing of our RenderMan® software. We cannot provide
any assurances that we will be successful in enhancing our existing
technologies or in developing and utilizing new technologies, or that
competitors will not develop technology that is equivalent or superior to our
technologies or that makes our technologies obsolete. If we are unable to
develop enhancements to our existing technologies or new technologies as
required, or if the costs associated with developing those technologies
continue to increase, our business, operating results or financial condition
could be materially adversely affected. There are various risks associated with our proprietary rights. Our efforts to protect our proprietary technologies may not succeed. Our success and ability to compete is dependent in part upon our
proprietary technology. While we rely on a combination of patents, copyright
and trade secret protection, nondisclosure agreements and cross-licensing
arrangements to establish and protect our proprietary rights, we believe that
factors such as the technical and creative skills of our personnel are more
essential to our success and ability to compete. We currently have twenty-eight
patents in force in the United States and fourteen patents in force in foreign
countries. In addition, we have a number of patent applications pending in the
United States and in foreign countries. We cannot provide any assurances that
patents will issue from any of these pending applications or that, if patents
do issue, any claims allowed will be sufficiently broad to protect our
technology. In addition, we cannot provide any assurances that any patents that
have been issued to us, or that we may license from third parties, will not be
challenged, invalidated or circumvented, or that any rights granted thereunder
would provide us with any proprietary protection. Failure of the patents to
provide protection of our technology may make it easier for our competitors to
offer technology equivalent to or superior to our technology. We generally
enter into confidentiality or license agreements with our employees,
consultants and vendors, and generally control access to and distribution of
our software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information, products or technology without
authorization, or to develop similar or superior technology independently.
Policing unauthorized use of our products is difficult and expensive. In
addition, effective copyright, patent and trade secret protection may be
unavailable or limited in certain foreign countries. We generally rely on
electronically delivered software licenses that include an electronic
acceptance by the purchaser, which may be unenforceable under the laws of
certain jurisdictions. We cannot provide any assurances that the steps we take
will prevent misappropriation of our technology or that our confidentiality or
license agreements will be enforceable. Enforcing our proprietary rights may require litigation. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to protect our patents, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Any such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results or financial
condition. 23




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Others may assert infringement claims against us. One of the risks of the film production business is the possibility of
claims that our productions infringe on the intellectual property rights of
third parties with respect to previously developed films, stories, characters
or other entertainment. In addition, our technology and software may be subject
to patent, copyright or other intellectual property claims of third parties. We
have received, and are likely to receive in the future, claims of infringement
of other parties proprietary rights. There can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against us, or that any
assertions or prosecutions will not materially adversely affect our business,
financial condition or results of operations. Irrespective of the validity or
the successful assertion of such claims, we would incur significant costs and
diversion of resources with respect to the defense thereof, which could have a
material adverse effect on our business, financial condition or results of
operations. If any claims or actions are asserted against us, we may seek to
obtain a license under a third partys intellectual property rights. We cannot
provide any assurances, however, that under such circumstances a license would
be available on reasonable terms or at all. Third-party technology licenses may not continue to be available to us in the
future. We also rely on certain technology that we license from third parties,
including software that we integrate and use with our internally developed
software. We cannot provide any assurances that these third-party technology
licenses will continue to be available to us on commercially reasonable terms.
The loss of, or inability to maintain any of these technology licenses could
result in delays in feature film releases or product releases until equivalent
technology could be identified, licensed and integrated. Any such delays in
feature film releases or product releases could materially adversely affect our
business, operating results and financial condition. The market price of our Common Stock has been volatile in the past, and we
expect such volatility to continue. The market price of our Common Stock is highly volatile and is subject to
wide fluctuations in response to a wide variety of factors, including the
publication of box office results for our feature films and those of our
competitors, fluctuations in our quarterly or annual results of operations,
changes in financial estimates by securities analysts, announcements made by
us, Disney, or our competitors, budget increases, delays in or cancellation of
feature film or other product release dates, speculation about the negotiation
of terms or conditions of our next distribution arrangement, or socioeconomic,
political or other factors. For example, during fiscal 2003, our Common Stock
closed as low as $50.19 and as high as $74.20 per share. Moreover, in recent
years, the stock market has experienced extreme price and volume fluctuations,
some of which have been unrelated or disproportionate to the operating
performances of the companies affected. These broad market and industry
fluctuations may adversely affect the market price of our Common Stock. In the
past, following periods of volatility in the market price of a companys
securities, securities class action litigation has often been instituted
against such a company. If brought against Pixar, such litigation could result
in substantial costs and a diversion of managements attention and resources,
which could have a material adverse effect on our business, operating results
or financial condition. As described in Risk Factors  Our operating results have fluctuated in
the past, and we expect such fluctuations to continue, we believe that
period-to-period comparisons of our results of operations may not be
necessarily meaningful. Accordingly, you should not rely on our annual and
quarterly results of operations as any indication of future performance. In
addition, it is possible that in some future period our operating results will
be below the expectations of public market analysts and investors or the
guidance we have provided. In such event, the price of our Common Stock may be
materially adversely affected. See Managements Discussion and Analysis of
Financial Condition and Results of Operations. Our reported financial results could be affected if significant changes in
current accounting principles are adopted. Recent actions and public comments from the SEC have focused on the
integrity of financial reporting generally. Similarly, Congress has considered
a variety of bills that could affect certain accounting principles. The FASB
and other regulatory accounting agencies have recently introduced several new
or proposed accounting standards, such as accounting for stock options, some of
which represent a significant change from current practices. Changes in our
accounting for stock options could materially increase our reported expenses. We are subject to risks caused by the availability and cost of insurance. Changing conditions in the insurance industry have affected most areas of
corporate insurance. These changes have equated to higher premium costs, higher
deductibles and lower insurance coverage limits. Due to these factors, we have
elected to self-insure certain risks. For example, we do not carry earthquake
insurance due to its high cost; however, our primary facility in Emeryville,
California was designed to withstand a 7.0 Richter scale magnitude earthquake
with minimal structural damage to the building. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Investment Portfolio.We invest in a variety of investment grade,
interest-bearing securities, including fixed rate obligations of corporations
and national governmental entities and agencies. This diversification of risk
is consistent with our policy to ensure safety of our principal and maintain
liquidity. We only invest in securities with maturities of 24 months or less,
with only government obligations exceeding 12 months. Our investments are
primarily 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 our financial instruments are held for purposes other than trading
and are considered available for sale per SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. The table below provides
information regarding our investment portfolio at April 3, 2004. The table
presents principal cash flows and related weighted-average fixed interest rates
presented by expected maturity date (dollars in thousands): 24




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Less than1 Year
    
    Over1 Year
    TotalAvailable-for-sale securities
    
    $
    242,848
    
    
    $
    246,660
    
    
    $
    489,508Weighted-average interest rate
    
    
    2.29
    %
    
    
    1.97
    %
    
    
    2.13
    %
 Impact of Foreign Currency Rate Changes.Disney and its affiliates
distribute our products in foreign markets; therefore, we are not directly
exposed to foreign currency rate fluctuations. We recognize revenues from
foreign territories based on an average foreign currency exchange rate used by
Disney for revenue reporting. This rate may differ from the actual exchange
rate at the time cash is remitted to Disney and subsequently to us. Therefore,
there may be some indirect foreign currency exchange rate exposure as managed
by Disney. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures.Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Changes in internal control over financial reporting.There was no change
in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 25




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings Pixar is regularly subject to certain legal proceedings and claims that
arise in the ordinary course of business. Many of these have not yet been fully
adjudicated. In the opinion of management, Pixar does not have a potential
liability related to any current legal proceedings and claims that would have a
material adverse effect on its financial condition, liquidity or results of
operations. However, the results of legal proceedings cannot be predicted with
certainty. Should Pixar fail to prevail in any of these legal matters or should
several of these legal matters be resolved against Pixar in the same reporting
period, the operating results of a particular reporting period could be
materially adversely affected. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1
    
    Certification of Chief Executive Officer Pursuant to Exchange
Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of Chief Financial Officer Pursuant to Exchange
Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (b) Reports onForm 8-K The following current report on Form 8-K was
filed by Pixar during Pixars first fiscal quarter ended April 3, 2004: Current
Report on Form 8-K dated February 4, 2004, furnishing pursuant to Item 12
Pixars press release regarding its financial results for the fourth quarter
and year ended January 3, 2004. Items 2, 3, 4 and 5 are not applicable and have been omitted. 26




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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. PIXARBy:
    
    /s/ ANN MATHERAnn MatherExecutive Vice President and Chief Financial Officer(Principal Financial and Accounting Officer and Duly Authorized Officer)
 Date: May 13, 2004 27




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EXHIBIT INDEX ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 28