PIXAR PERFECT; FLEDGLING ANIMATION FIRM IS ANYTHING BUT A 1-JOKE ACT AS IT GOES FOR 3 HITS IN 3 TRIES.

Byline: Dave McNary Staff Writer

The hottest companies in Hollywood sit 400 miles to the north of Los Angeles in a pair of small towns connected by the San Rafael Bridge over the San Francisco Bay.

The city of San Rafael has received worldwide notoriety as headquarters for the ``Star Wars'' empire operated by George Lucas. But the other town, Port Richmond, has remained largely under the Hollywood radar.

That will change soon. All indications point toward computer industry legend Steve Jobs and Pixar Animation letting loose their third blockbuster movie in three tries with ``Toy Story 2,'' due out Nov. 24.

If the sequel performs as expected, it will be truly an astounding achievement in an industry where perhaps one in 10 movies ever becomes a hit. In short, Pixar has become a nearly sure thing in one of the world's most volatile businesses, where tastes and trends can be impossible to predict from one season to the next.

Like Lucas and ``Star Wars,'' Pixar has also re-energized and revolutionized the movie business by showing that the public has a massive appetite for three-dimensional, computer-generated animation. 1995's ``Toy Story'' and 1998's ``A Bug's Life'' generated combined domestic ticket sales of over $350 million and rank as the 29th- and 54th-highest grossers of all time, respectively.

Wall Street's conclusion: Pixar is no longer a fluke. It actually has lived up to the hype of being able to mix staggeringly powerful computer technology with commercially viable stories.

``What Pixar has done is break new ground in the convergence of entertainment and technology,'' said Kevin B. Skislock of Laguna Research Partners. ``To find a company that merges both is extremely rare.''

The power of Pixar has become evident a full four months before the opening of ``Toy Story 2,'' co-produced by Pixar and The Walt Disney Co. Much like the situation with ``Star Wars: Episode 1 - The Phantom Menace'' in May, other studios have moved out of the way.

``There are no other animated films scheduled to be released during the holiday 1999 season, something we think could bode extremely well for `Toy Story 2' box office revenues,'' said Katherine Styponias, an analyst with Prudential Securities, noting the ``A Bug's Life'' generated outstanding numbers despite going up against three strong animated movies - ``Antz,'' ``Prince of Egypt'' and ``Rugrats.''

``Pixar has become the best way to play what is the single-most attractive segment of the film industry,'' said analyst Andrew Slaban of Merrill Lynch, who has a ``buy'' rating on Pixar stock.

``Pixar and `Toy Story' was such a winning combination that we believe `Toy Story 2' will be the year's top family film with a domestic gross in the $175 million range,'' said Robert Bucksbaum, president of the Reel Source forecasting service. ``Everything Pixar has done so far is golden.''

Pixar was originally created by George Lucas as part of his special-effects operations. Jobs bought Pixar in 1986 from Lucas for $10 million and still owns more than two-thirds of the company. His full-time job remains the turnaround of Apple Computer, a company he founded and that he leads as its interim chief executive officer.

As with the revival of Apple, Jobs' touch with Pixar and its 450 employees has been magical.

``I think Steve has been the critical factor by giving Pixar them foresight and leadership,'' Skislock said. ``One of the things that impresses me is the discipline Steve has used in growing this company. Wall Street used to feel that Pixar was not growing fast enough.''

Slaban said Jobs is adept at retaining gifted artists such as John Lasseter, a Pixar vice president who directed both ``Toy Story'' movies and co-directed ``A Bug's Life.''

``Jobs is known as someone who can get things done,'' Slaban said. ``I also think it's the culture of backing creative talent like John Lasseter. When you're on the company campus, it really is a completely different feeling from what I'm used to in New York.''

``Toy Story 2'' is a landmark for Burbank-based Disney, too. It had originally been planned as a direct-to-video release, but Disney decided early last year to break its long-standing policy that prevented animated sequels from being released theatrically.

Disney's shift in strategy looks like it will pay off big at a time when the company has been losing favor on Wall Street. Initial reaction to the ``Toy Story 2'' trailer, which began playing a month ago, has been strong and Internet buzz on the movie is positive.

In the movie, Woody will be stolen by a collector while his owner Andy is off at camp, then rescued by the other toys. At one point, the toys cause chaos when they hide under orange traffic cones as they move across a road.

``We are madly working hard, getting the last pieces done,'' said Ed Catmull, chief technology officer at Pixar, who admits there are definite differences between ``Toy Story'' and ``Toy Story 2.''

``You might say the characters are richer but you probably won't think about it and that's the way we want it to be,'' Catmull said. ``We really don't want people to be aware of the technology; we just want them to believe that the characters are alive. And even though we're technical people, we all believe story is the most important thing.''

For Disney, the 1997 partnership deal with Pixar appears to be a massive success. The agreement calls for four more films with split costs and profits and will help keep the entertainment giant at the forefront of its most prized and basic business - creating animated films with memorable characters.

The flow of new product, expected to be one film per year starting in 2001, will keep Disney as the dominant player even though rivals have managed to broaden the audience for animation through the successes of ``Beavis and Butthead,'' ``South Park,'' ``Rugrats,'' ``Antz'' and ``Prince of Egypt.''

Disney and Pixar announced this spring that their next film will be ``Monsters Inc.,'' with a tentative release date of mid-2001. ``A comedy set in the realm if things that go bump in the night, where chaos breaks loose after a hapless monster accidentally lets a human child into the secret world,'' is all that's been disclosed so far.

Wall Street already believes Disney and Pixar will continue to generate hits, citing the combination of Pixar's creative talent and Disney's marketing muscle. ``Our scenarios are based on achieving box office receipts similar to that of Disney's more successful films and/or `Toy Story,' '' Styponias said.

It's not just that Pixar-Disney films do well at the box office. ``They also have a big afterlife with merchandise and home video,'' Slaban said. ``It's what makes animated films the best segment of the movie business, which is pretty lousy these days with margins in the single digits. The merchandise profits are an aspect you don't have from live action.''

Pixar's success has inspired Hollywood; there are nine major animated projects set to be released in the Year 2000 - ``Fantasia 2000,'' ``Dinosaurs,'' ``Kingdom of the Sun'' from Disney; ``The Road to El Dorado,'' ``Chicken Run'' and ``Shrek'' from DreamWorks; ``Titan A.E.'' from 20th Century Fox; and ``Osmosis Jones'' from Warner Bros.

Will Pixar be able to stay at the front of the pack? Absolutely, Skislock predicted.

``Here's what I think Steve Jobs understands - when Wall Street wanted instant gratification, he stuck to his guns and did it right,'' he said. ``I'm convinced he'll never rush anything out so Pixar will release a film only when it's ready from a story and technology standpoint. They're well-positioned to be where the technology is headed because this is not a speed game; it's a quality game.''

Investors have never been united about Pixar. It went public in late 1995 amid a frenzy over ``Toy Story'' with shares jumping from $17 to $39 on the first day, then fell as low as $12 during 1996. The stock got a bump in 1997 after Jobs negotiated the five-picture deal with Disney and during the past year, Pixar has traded between $27.50 and $66. It has been just under $50 in recent weeks; and several analysts have price targets of $60.

Still, Pixar is hardly a juggernaut. First-quarter earnings amounted to only $900,000, or 2 cents a share, enough to beat Wall Street's consensus estimate. Revenue fell to $3.4 million from $5 million. Second-quarter earnings are due out Monday.

For now, Pixar keeps its image low-key and won't discuss what films it will do after ``Monsters Inc.''

``We're now in a new area of using technology to make films, trying to invent better ways of doing that,'' Catmull said. ``What matters most is how our people feel about a project. That's not a side issue - it's fundamental. It needs to feel good to us.''

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4 Photos

Photo: (1--2--Color) Toy Story 2

(3--4--Color) A Bug's Life