DreamWorks, LLC, also known as DreamWorks Pictures, DreamWorks SKG, or DreamWorks Studios, is a major American film studio which develops, produces, and distributes films, video games, and television programming. It has produced or distributed more than ten films with box-office grosses totalling more than $100 million each. Its most successful title to date is Shrek 2.

DreamWorks began in 1994 as an ambitious attempt by media moguls Steven Spielberg, Jeffrey Katzenberg, and David Geffen (forming the SKG present on the bottom of the DreamWorks logo) to create a new Hollywood studio. Then, in December 2005, the founders agreed to sell the studio to Viacom, the parent company of Paramount Pictures. The sale was completed in February 2006.

DreamWorks' animation arm was spun-off in 2004, into DreamWorks Animation SKG. Its films are distributed worldwide by Paramount, but the animation studio remains independent of Paramount/Viacom. (wikipedia.org)

Dear Fellow Shareholders,

I am pleased to report that 2007 was our most successful year since we took DreamWorks Animation public in 2004, thanks in large part to the blockbuster success of Shrek the Third and the Shrek franchise as a whole. In addition to boasting the best domestic opening in the history of animated film, Shrek the Third became the second highest grossing film of 2007 in the U.S. and the fourth best performing animated movie of all time. Even in a challenging home video market, Shrek the Third has risen above the competition and performed well.

In 2007, we advanced our mission to successfully expand the Shrek brand with Shrek the Halls, our first made-for-television special. Over 21 million people throughout the U.S. watched the program this past holiday season on ABC. Additionally, Shrek made his first appearance at the annual Macy’s Thanksgiving Day Parade as the official 2007 Ambassador for the event. In December, we will take our brand expansion one step further by bringing Shrek the Musical to the Broadway Theatre in New York City. We are very excited about this tremendous opportunity to further extend one of the most successful franchises in Hollywood history.

Our second theatrical release of 2007, Bee Movie, told a unique story in the voice of one of the world’s legendary comedic talents. Working alongside Jerry Seinfeld—with all of his passion and energy—was one of the most thrilling things to happen at DreamWorks Animation since its inception. Visually, the film was stunning and we are all very proud of its many creative accomplishments.

Achieving an improved level of consistency in our films’ performances is key to realizing the full potential of our business model. Every one of our movies must tell a great story in a compelling way to successfully stand out among the clutter and competition. We have dedicated a considerable amount of resources and energy in 2007 toward differentiating our films and, as a result, DreamWorks Animation now has one of the strongest upcoming slates with which I have ever been associated.

This year, on June 6, we will release Kung Fu Panda, a film that I believe captures the elements our audience has come to expect of a DreamWorks Animation film: great storytelling, exciting characters, emotion and humor.

On November 7, the second chapter of our popular Madagascar franchise will come to a theater near you and early in 2009 our Madagascar penguins will make their television debut in a new series on Nickelodeon.

While each film must begin with a good story, we have also focused on building and utilizing leading visual technology to help distinguish our product. Digital technology can now deliver a heightened viewing experience at the movie theater and I believe that 3D is poised to take movie-going to a whole new level. We worked very hard throughout 2007 to position DreamWorks Animation at the forefront of this movement. “Ultimate 3-D” is the innovative development process that draws audiences into our stories in dazzling and engrossing ways.

Next year, we will become the first studio to produce all of our movies in “Ultimate 3-D,” beginning with Monsters vs. Aliens in March of 2009. In this way, we hope to make DreamWorks Animation films premium events that both attract larger audiences and command higher ticket prices at the box office.

I am very enthusiastic about our strong film slate and the many prospects that lie ahead for the Company in 2008 and beyond. I am grateful to our artists and employees for their hard work, creativity and enthusiasm and I’d like to thank them for their many contributions to the Company every day. It’s an exciting time for them, our management team and, I believe, our shareholders. On behalf of all of us at DreamWorks Animation, thank you for your continued support.

Sincerely,
Jeffrey Katzenberg,
CEO, DreamWorks Animation

Download DreamWorks Animation, 2007 Annual Report

PDF format, 3.3MB, 138Pages.

As a celebration of the creative spirit that drives everything we do at DreamWorks Animation, we held an artwork contest in 2007 in which we invited all employees to submit a design to be featured in the Annual Report. Every submission celebrated the unique and fulfilling process of working on an animated film at the Company. Rhion Magee, Consumer Products, created the winning submission.

View DreamWorks Animation, 2007 Annual Report

Risk Factors:

Our success is primarily dependent on audience acceptance of our films, which is extremely difficult to predict and, therefore, inherently risky.

We cannot predict the economic success of any of our motion pictures because the revenue derived from the distribution of a motion picture (which does not necessarily bear any correlation to the production or distribution costs incurred) depends primarily upon its acceptance by the public, which cannot be accurately predicted. The economic success of a motion picture also depends upon the public’s acceptance of competing films, the availability of alternative forms of entertainment and leisure-time activities, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. Furthermore, part of the appeal of CG animated films may be due to their relatively recent introduction to the market. We cannot assure you that the introduction of new animated filmmaking techniques, an increase in the number of CG animated films or the resurgence in popularity of older animated filmmaking techniques will not adversely affect the popularity of CG animated films.

In general, the economic success of a motion picture is dependent on its domestic theatrical performance, which is a key factor in predicting revenue from other distribution channels and is largely determined by our ability to produce content and develop stories and characters that appeal to a broad audience and by the effective marketing of the motion picture. If we are unable to judge accurately audience acceptance of our film content or to have the film effectively marketed, the commercial success of the film will be in doubt, which could result in costs not being recouped or anticipated profits not being realized. Moreover, we cannot assure you that any particular feature film will generate enough revenue to offset its distribution, fulfillment services and marketing costs, in which case we would not receive any net revenues for such film from Paramount. In the past (including in the past three years), some of our films have not recovered, after recoupment of marketing, fulfillment services and distribution costs, their production costs in an acceptable timeframe or at all.

Our business is dependent upon the success of a limited number of releases each year and the unexpected delay or commercial failure of any one of them could have a material adverse effect on our financial results.

Our current business plan is generally to release two CG animation feature films per year. The unexpected delay in release or commercial failure of just one of these films can have a significant adverse impact on our results of operations in both the year of release and in the future. Historically, feature films that are successful in the domestic theatrical market are generally also successful in the international theatrical, home entertainment and television markets, although each film is different and there is no way to guarantee such results. If our films fail to achieve domestic box office success, their international box office and home entertainment success and our business, results of operations and financial condition could be adversely affected. Further, we can make no assurances that the historical correlation between domestic box office results and international box office and home entertainment results will continue in the future. The limited number of films that we release each year magnifies fluctuations in our earnings. Therefore, our reported results for quarterly and annual periods may be skewed based on the release dates of our films, which could result in volatility in the price of our Class A common stock. In addition, we can make no assurances that home entertainment wholesale prices can be maintained at current levels due to marketplace or other factors. In 2005, the home entertainment performance of our films was adversely affected by changes in the home entertainment market.

Our operating results fluctuate significantly.

We continue to expect significant fluctuations in our future quarterly and annual operating results because of a variety of factors, including the following:

• the potential varying levels of success of our feature films;
• the timing of the domestic and international theatrical releases and home entertainment release of our feature films; and
• our distribution arrangements with Paramount, which cause us to recognize significantly less revenue from a film in the period of a film’s initial theatrical release than we would absent these agreements.

Furthermore, in the event that the Paramount Agreements were terminated, depending on the arrangement that we negotiated with a replacement distributor or fulfillment services provider, we could be required to directly incur distribution, servicing and marketing expenses related to our films, which under the Paramount Agreements are incurred by Paramount. Because we would expense those costs as incurred, further significant fluctuations in our operating results could result.

We principally operate in one business, the production of CG animated feature films, and our lack of a diversified business could adversely affect us.

Unlike most of the major studios, which are part of large diversified corporate groups with a variety of other operations, we depend primarily on the success of our feature films. For example, unlike us, many of the major studios are part of corporate groups that include television networks and cable channels that can provide stable sources of earnings and cash flows that offset fluctuations in the financial performance of their feature films. In this regard, the acquisition of Pixar by Disney gives Pixar the benefits of being part of a large, diversified corporate group. We, on the other hand, derive substantially all of our revenue from a single source—our CG animated feature films—and our lack of a diversified business model could adversely affect us if our films fail to perform to our expectations.

We cannot predict the effect that rapid technological change, emerging distribution channels or alternative forms of entertainment may have on us or the motion picture industry.

The entertainment industry in general, and the motion picture industry in particular, continue to undergo significant changes, due, in part, to technological developments. Due to rapid growth of technology and shifting consumer tastes, we cannot accurately predict the overall effect that technological growth or the availability of alternative forms of entertainment may have on the potential revenue from and profitability of our animated feature films. In addition, certain outlets for the distribution of motion pictures may not continue to have the public acceptance that they currently have. For example, the availability of high-quality home entertainment systems may reduce the public’s desire to see motion pictures in the theaters. In addition, we cannot assure you that consumers will continue to use the DVD format for their home entertainment or whether other developing distribution channels, such as video-on-demand or Internet distribution, will be accepted by the public. Currently, a significant portion of our results of operations are due to DVD sales.

During 2007, three retailers, Wal-Mart, Target and Best Buy, accounted for approximately 60% of the Company’s domestic DVD sales. If these and other retailers’ support of the DVD format decreases, the Company’s results of operations could be materially adversely affected. In addition, if other distribution channels (such as the Internet delivery of films) are accepted by the public, we cannot assure you that we will be successful in exploiting such channels. Moreover, to the extent that other distribution channels gain popular acceptance, it is possible that demand for existing distribution channels, such as DVDs, will decrease. If we are unable to successfully exploit new distribution channels or if they prove to be less profitable than existing channels, our business, results of operations or financial condition could be materially adversely affected.

Animated films are expensive to produce and the uncertainties inherent in their production could result in the expenditure of significant amounts on films that are abandoned or significantly delayed.

Animated films are expensive to produce. The production, completion and distribution of animated feature films is subject to a number of uncertainties, including delays and increased expenditures due to creative problems, technical difficulties, talent availability, accidents, natural disasters or other events beyond our control. Because of these uncertainties, the projected costs of an animated feature film at the time it is set for production may increase, the date of completion may be substantially delayed or the film may be abandoned due to the exigencies of production. Delays in production may also result in a film not being ready for release at the intended time and postponement to a potentially less favorable time, which could result in lower gross receipts for that film. In extreme cases, a film in production may be abandoned or significantly modified (including as a result of creative changes) after substantial amounts have been spent, causing the write-off of expenses incurred with respect to the film.

Animated films typically take longer to produce than live-action films, which increases the uncertainties inherent in their production and distribution.

Animated feature films typically take three to four years to produce after the initial development stage, as opposed to an average of 12 to 18 months for live-action films. The additional time that it takes to produce and release an animated feature film increases the risk that our films in production will fall out of favor with target audiences and that competing films will be released in advance of or concurrently with ours, either of which risks could reduce the demand for or popular appeal of our films. ...

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