10-K 1 dwa-12312014x10xk.htm FORM 10-K DWA-12.31.2014-10-K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________ 
FORM 10-K
_________________________________________________ 

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014
¨
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 001-32337
DREAMWORKS ANIMATION SKG, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
68-0589190
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
Campanile Building
1000 Flower Street
Glendale, California
 
91201
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (818) 695-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class    
 
Name of Exchange on Which Registered    
Class A Common Stock, par value $0.01 per share
 
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  ý.
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 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  ý    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10‑K.  ý.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý 
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý.
The aggregate market value of Class A common stock held by non-affiliates as of June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,042,542,577 using the closing price of $23.26 as reported by the Nasdaq Global Select Market as of such date. As of such date, non-affiliates held no shares of Class B common stock. There is no active market for the Class B common stock. Shares of Class A common stock held by all executive officers and directors of the registrant and all persons holding more than 10% of the registrant’s Class A or Class B common stock have been deemed, solely for the purpose of the foregoing calculations, to be held by “affiliates” of the registrant as of June 30, 2014.
As of February 13, 2015, there were 77,847,773 shares of Class A common stock and 7,838,731 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the registrant’s definitive proxy statement (the “Proxy Statement”) to be filed pursuant to Regulation 14A with respect to the registrant’s 2015 annual meeting of stockholders. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
 





DreamWorks Animation SKG, Inc.
Form 10-K
For the Year Ended December 31, 2014
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
PART III
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
PART IV
 
 
 
 
 
Item 15.
 
Unless the context otherwise requires, the terms "DreamWorks Animation," the "Company," "we," "us" and "our" refer to DreamWorks Animation SKG, Inc., its consolidated subsidiaries, predecessors in interest and the subsidiaries and assets and liabilities contributed to it by the entity then known as DreamWorks L.L.C. ("Old DreamWorks Studios") on October 27, 2004 (the "Separation Date") in connection with our separation from Old DreamWorks Studios (the "Separation").





PART I

Item 1.
Business
 
Overview
 
DreamWorks Animation creates and exploits branded family entertainment, including animated feature films, television series and specials, live entertainment properties and related consumer products. We have released a total of 30 animated feature films, including the franchise properties Shrek, Madagascar, Kung Fu Panda and How to Train Your Dragon. We currently have operations in four business segments: Feature Films, Television Series and Specials, Consumer Products and New Media. For a discussion of the Company’s business segments and geographic information about the Company’s revenues, please see the Company’s consolidated financial statements and notes thereto included in this Annual Report on Form 10-K.

Our current business plan generally contemplates releasing two animated feature films per year. We may release one or more additional films in a particular year if we determine that there is an attractive release date and that other relevant factors support such decision. We are currently producing seven feature films, of which we expect to release one in 2015 and two in each of 2016 through 2018, and are using a third-party production company to produce another feature film that is expected to be released in 2017. We have a substantial number of projects in creative and story development and production that are expected to fill the release schedule in 2019 and beyond.

Our feature films are currently the source of a substantial portion of our revenue. We derive revenue from our distributors’ worldwide exploitation of our feature films in theaters and in post-theatrical markets such as home entertainment, digital transactions and pay and free broadcast television. In addition, we earn revenue from the licensing and merchandising of our films and characters in markets around the world. Twentieth Century Fox Film Corporation and Twentieth Century Fox Home Entertainment, LLC (collectively, "Fox"), pursuant to our distribution and fulfillment services agreement (the "Fox Distribution Agreement"), distribute and service our films initially theatrically released after December 31, 2012. As of July 1, 2014, we reacquired from Paramount Pictures Corporation and its affiliates and related entities (collectively "Paramount") the right to distribute and exploit the Company’s feature films theatrically released prior to January 1, 2013 in theatrical, non-theatrical, home entertainment and transactional digital media, which reacquired rights were then licensed to Fox. The rights licensed to, and serviced by, Fox will generally terminate on the date that is one year after the initial home video release date in the United States of the last film theatrically released by Fox during such five-year period, subject to any sublicense agreements approved by the Company that extend beyond such date. In addition, we will continue to receive revenues derived from the exploitation of television and non-transactional digital rights in and to our feature films released prior to January 1, 2013 pursuant to a distribution agreement and a fulfillment services agreement. Paramount will continue to exploit and render fulfillment services in television and related media for feature films released prior to January 1, 2013 until the date that is 16 years after the theatrical release of any such film, and will continue to exploit and service certain other agreements with Paramount’s sublicensees that remain in place after July 1, 2014.

In addition to the creation of feature films, we are engaged in a number of initiatives to more fully exploit our franchise and other properties and diversify our revenue streams. One of these initiatives is the development and production of episodic series for exploitation in television and new digital platforms. We have entered into long-term agreements to deliver these new series, as well as existing series, over the next several years.

In May 2013, we acquired AwesomenessTV (“ATV”). ATV is a multi-media platform company and generates revenues from online advertising sales and distribution of content through media channels such as theatrical, home entertainment, television and consumer products. We acquired all of the outstanding equity interests in ATV for initial cash consideration of $33.5 million. In addition, pursuant to a written amendment to the original merger agreement, we made an additional agreed-upon fixed cash payment of $80.0 million to the former ATV stockholders (substantially all of which was paid in December of 2014) in lieu of any contingent consideration potentially payable by us as specified under the original merger agreement.

In August 2012, we completed the acquisition of Classic Media (which now operates as DreamWorks Classics). Classic Media is primarily engaged in the acquisition and exploitation of character-based family entertainment properties across television, home entertainment, merchandising, music and other media channels worldwide. Classic Media has acquired, licensed or created intellectual property rights in relation to a number of characters including Veggie Tales, Casper, Lassie, Frosty and Rudolph the Red-Nosed Reindeer. Classic Media generates revenues from home entertainment sales, television and video licensing, licensing of intellectual property for sale or use (including consumer products, merchandise and live performances) and music publishing.


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As part of our CG ("computer-generated") filmmaking and other processes, we have developed a variety of software tools and other intellectual property. From time to time, we may seek to exploit this intellectual property in applications other than our traditional filmmaking business. Such projects may be conducted by us directly or with or through technology companies or other business partners.

In January 2015, we announced restructuring initiatives (the “2015 Restructuring Plan”) involving our core feature animation business. In connection with the 2015 Restructuring Plan, we have made changes in our senior leadership team and our feature film slate, and will be closing our Northern California animation studio. We anticipate that the 2015 Restructuring Plan will result in a total reduction of approximately 500 positions. The actions associated with the 2015 Restructuring Plan are expected to be substantially completed by the end of 2015. For more information about the 2015 Restructuring Plan, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management Overview.”

Company History
 
Prior to the Separation from Old DreamWorks Studios on October 27, 2004, we were a business division of Old DreamWorks Studios, the diversified entertainment company formed in October 1994 by Steven Spielberg, Jeffrey Katzenberg and David Geffen. As a division of Old DreamWorks Studios, we conducted our business primarily through Old DreamWorks Studios’ animation division. On October 28, 2004, our Class A common stock began trading on the New York Stock Exchange in connection with our initial public offering.

In connection with the Separation, we entered into a separation agreement (the "Separation Agreement") and a number of other agreements with Old DreamWorks Studios to accomplish the Separation and establish the terms of our various relationships with Old DreamWorks Studios. We completed the Separation in connection with our initial public offering in October 2004 by the direct transfer to us of certain of the assets and liabilities that comprise our business. Old DreamWorks Studios also transferred certain of its subsidiaries to us.

We conduct our business primarily in two studios—in Glendale, California, where we are headquartered, and in Redwood City, California. Our Glendale animation campus, where the majority of our animators and production staff are based, was originally constructed in 1997. We plan to close our Redwood City studio and consolidate its business operations to our Glendale animation campus during 2015.

Subject to any distribution rights we may license to our distributors and other third parties, we generally retain the exclusive copyright and other intellectual property rights in and to all of our films and episodic content and characters therein, other than certain properties which were co-produced or for which the copyright is owned by others.

Feature Films Segment
 
We are currently producing seven animated feature films intended for theatrical release during 2015 through 2018. In addition, we have a substantial number of projects in development and production that are expected to fill our release schedule in 2019 and beyond. The table below lists all of our animated feature films that are expected to be released through the end of 2018.
Title
Expected Release Date*
Home
March 27, 2015
Kung Fu Panda 3
March 18, 2016
Trolls
November 4, 2016
Boss Baby
January 13, 2017
The Croods 2
December 22, 2017
Larrikins
February 16, 2018
How to Train Your Dragon 3
June 29, 2018
____________________
*
Release dates are tentative as of March 2, 2015. Due to the release slate of competitive films and the uncertainties involved in the development and production of animated feature films, the release date can be significantly delayed or otherwise changed.


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We are also using a third-party production company to produce a feature film based on the Captain Underpants book series. This film, which is being produced at a significantly lower budget than our other feature films, is currently expected to be released in 2017.

Television Series and Specials Segment

The Company also capitalizes on its franchise films and other properties, such as Shrek, Madagascar and Kung Fu Panda, by exploiting the film properties through episodic series and specials.

In June 2013, we entered into a long-term agreement with Netflix, in May 2014 with the German television network Super RTL and, in February 2014, with southern European media company Planeta Junior regarding the production and distribution of existing and future series. Each agreement provides for the Company to deliver over 1,000 episodes of newly created series based on the Company's properties, including characters from our Classic Media library. Each agreement provides for the Company to receive a per-episode license fee. The Company will also be entitled to retain all revenues from the exploitation of the series in other countries and derived from all media not expressly licensed to Netflix, Super RTL or Planeta Junior. The Company will also retain all revenues from merchandise based on the various series.
 
The animated television series, The Penguins of Madagascar, based on the Company's film Madagascar, debuted on the Nickelodeon network in March 2009. The animated television series, Kung Fu Panda: Legends of Awesomeness, debuted on Nickelodeon in late 2011. The animated television series Monsters vs. Aliens, based on the Company's animated feature film of the same name, debuted on the Nickelodeon network in 2013. Under the Company's agreement with Nickelodeon, which is an affiliate of Paramount (which is discussed in greater length in "—Distribution and Servicing Arrangements—Paramount Distribution Agreement—Nickelodeon Television Development"), the Company is generally entitled to receive one-half of the revenues, as well as certain service fees, associated with home entertainment and consumer products sales related to these television series, and one-half of the revenues derived by Nickelodeon from its sales of the programs to other networks. The Company's animated television series based on How to Train Your Dragon, debuted on the Cartoon Network in late 2012. The Company received a per-episode fee from Cartoon Network and is entitled to retain all revenues from the exploitation of the series on home video and in countries not served by Cartoon Network. The Company also retains all revenue from merchandise based on the series.
    
We have also produced a number of half-hour television specials based on our films Shrek, Kung Fu Panda, Madagascar and Monsters vs. Aliens. In connection with these specials, the Company has, from time to time, directly entered into various television distribution agreements and in 2011 entered into a long-term distribution agreement with Netflix covering various of these specials (as well as the Company's feature films released after January 1, 2013). The Company retains all other distribution rights (such as DVD, other home entertainment and consumer product distribution rights) with respect to its television specials and series.

Consumer Products Segment

Over the last several years, the Company commenced initiatives to further diversify its revenue streams through exploitation of its properties in consumer products. The Company enters into a variety of licensing arrangements with consumer products companies, manufacturers, publishers and retailers in order to design, develop, manufacture, publish and sell numerous products. The products are based on the Company’s franchise films, episodic series, Classic Media, AwesomenessTV and other properties, and include toys, games, apps, books, apparel and accessories. The Company generally licenses characters from its film properties, episodic series properties and other intellectual properties for use in third-party products and collects royalties from sales of the products.

Pursuant to our typical arrangements, we grant multi-property agreements or multi-category license agreements, pursuant to which the licensee receives merchandising or promotional rights in exchange for royalty payments or guaranteed payments. We may also enter into other arrangements, such as single-property license arrangements to use our characters or film elements in connection with a specified merchandise item or category in exchange for a percentage of net sales of the products and, in certain instances, minimum guaranteed payments. We are also currently exploring a number of strategies to further increase the size and scale of our consumer products business to more fully exploit our franchises and other intellectual property.

Our Classic Media business primarily derives revenue from the large number of licensing arrangements into which it has entered with a variety of consumer products companies and other retailers. In certain instances, Classic Media has also entered into license agreements with other studios and content producers granting them the right to develop and produce theatrical motion pictures and other original content using the iconic characters which are owned by Classic Media.

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Over the last several years, we have also greatly expanded our licensing of our characters and other intellectual property for use in location-based entertainment, such as cruise ships, amusement parks and shopping malls. For example, since 2010 we have had a licensing arrangement with Royal Caribbean International allowing them to incorporate our characters into live shows and other entertainment on certain of their cruise ships. We intend to continue to explore new opportunities for similar location-based entertainment.

New Media Segment

Our New Media business consists primarily of ATV, along with certain related businesses. We acquired all of the outstanding equity interests in ATV in May of 2013. ATV primarily generates revenues from the production and distribution of content across a variety of channels, including theatrical, home entertainment, television and online video-on-demand, and the exploitation of ancillary products and services, including marketing and consumer products.

ATV generally enters into management, network and production agreements with individuals who generate content, distribution agreements with third-party distributors and sponsorship and integration agreements with consumer products and other companies.

In December of 2014, we entered into an agreement with an affiliate of the Hearst Corporation (“Hearst”) whereby Hearst acquired a 25% equity interest in a newly formed joint venture (“ATV Joint Venture”) conducting the ATV business for a purchase price of $81.25 million.

Other

Our other business segment generally consists of our live performances business and other ancillary revenues. From December 2008 until January 2010, the Company's Shrek The Musical ran on Broadway. The play is based on the Company's 2001 theatrical release, Shrek. From July 2010 until July 2011, the Company also operated a national touring production of the play. A separate production of the play opened in London in May 2011 and completed its run in February 2013. During 2011, the Company operated a live show in the United States based on the film Madagascar. From June 2012 until January 2013, we operated a live arena touring show based on our feature film How to Train Your Dragon.

For more information on our segments, see Note 20 to the audited consolidated financial statements contained elsewhere in this Form 10-K.

Joint Ventures and Investments

From time to time, the Company also enters into joint ventures or makes investments in various family entertainment and other entertainment-oriented businesses.

Chinese Joint Venture. On April 3, 2013 ("ODW Closing Date"), the Company formed a Chinese joint venture, Oriental DreamWorks Holding Limited ("ODW" or the "Chinese Joint Venture") through the execution of a Transaction and Contribution Agreement, as amended, with its Chinese partners, China Media Capital (Shanghai) Center L.P. ("CMC"), Shanghai Media Group ("SMG") and Shanghai Alliance Investment Co., Ltd. ("SAIL", and together with CMC and SMG, the "CPE Holders"). In addition, in connection with the closing, the Company entered into a series of agreements governing the operation of the Chinese Joint Venture. On the ODW Closing Date, the Chinese Joint Venture was launched among DreamWorks Animation SKG, Inc., one of its wholly-owned subsidiaries ("Company Subsidiary") and the CPE Holders, and equity was issued by ODW to Company Subsidiary and an entity controlled by the CPE Holders. The purpose of the Chinese Joint Venture is to create a leading China-focused family entertainment company engaged in the acquisition, production and distribution of original content originally produced, released or commercially exploited in the Chinese language.

The Chinese Joint Venture will encompass animated and live action motion pictures and television programming, an internet distribution platform, live shows, theme parks, animation parks, mobile, online, interactive games and related consumer products. The business of the Chinese Joint Venture will be conducted in the People's Republic of China, with the potential for expansion into such other markets in the world as may be approved by the board of directors of the Chinese Joint Venture.  

In exchange for 45.45% of the equity of ODW, Company Subsidiary has committed to making a total cash capital contribution to ODW of $50.0 million (of which $5.7 million was funded at the ODW Closing Date, and an additional $3.7 million has been funded since the ODW Closing Date through December 31, 2014, with the balance to be funded over the next

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three years) and non-cash contributions valued at approximately $100 million. Such non-cash contributions include licenses of technology and certain other intellectual property of ours, rights in certain trademarks of ours and film projects developed by us and consulting and training services, each to be provided to the Chinese Joint Venture.

The Chinese Joint Venture is governed by a board of directors, which initially consists of seven directors, four of which have been appointed by the Chinese partners and three of which have been appointed by the Company. The Chinese Joint Venture is prohibited from taking certain actions without the affirmative vote of at least one director appointed by the Chinese partners and one director appointed by the Company.

Hearst/ATV Joint Venture. As previously mentioned, in December 2014, we entered into an agreement with an affiliate of Hearst, whereby Hearst acquired a 25% equity interest in the ATV Joint Venture conducting the ATV business for a purchase price of $81.25 million. The Company and Hearst expect to work together to support ATV efforts to enter into new content channels, broaden its audience and expand its geographic reach. ATV will also gain access to Hearst’s subscription video-on-demand platform.

Strategic Alliances and Promotions
 
The success of our projects greatly depends not only on their quality, but also on the degree of consumer awareness that we are able to generate for their theatrical and home entertainment releases. In order to increase consumer awareness, we have developed key strategic alliances as well as numerous promotional partnerships worldwide. In general, these arrangements provide that we license our characters and storylines for use in conjunction with our promotional partners’ products or services. In exchange, we may receive promotional fees in addition to substantial marketing benefits from cross-promotional opportunities, such as inclusion of our characters and movie images in television commercials, online, print media and on promotional packaging.

We currently have strategic alliances with Hewlett-Packard, Intel and other companies. We believe these relationships are mutually valuable. We benefit because of the consumer awareness generated for our films, and our partners benefit because these arrangements provide them the opportunity to build their brand awareness and associate with popular culture in unique ways.

Distribution and Servicing Arrangements
 
On August 18, 2012, we entered into a binding term sheet with Fox, pursuant to which we have agreed to license Fox certain exclusive distribution rights and exclusively engage Fox to render fulfillment services with respect to certain of our animated feature films and certain other audiovisual programs released after December 31, 2012, which is filed as an exhibit to this Form 10-K. As of July 1, 2014, we reacquired from Paramount the right to distribute and exploit the Company's feature films theatrically released prior to January 1, 2013 (the "Existing Pictures"), and certain other audio visual programs, in theatrical, non-theatrical, home entertainment and transactional digital media, which reacquired rights were then licensed to Fox. A detailed discussion of the Fox Distribution Agreement is provided below. In addition, we still continue to receive revenues derived from the exploitation of television and non-transactional digital rights in and to the Existing Pictures pursuant to a distribution agreement (the “Paramount Distribution Agreement”) and a fulfillment services agreement (the “Paramount Fulfillment Services Agreement" and, with the Paramount Distribution Agreement, the “Paramount Agreements”) with Paramount and its affiliates. A detailed discussion of the Paramount Agreements is provided below following the discussion of the Fox Distribution Agreement.

Fox Distribution Agreement

Term of Agreement. Under the Fox Distribution Agreement, we licensed Fox the exclusive right to distribute, and have engaged Fox to service, in each case on a worldwide (excluding China and South Korea) basis, the following animated feature films and other audiovisual programs: (i) our animated feature films that we produce and elect to initially theatrically release during the five-year period beginning on January 1, 2013 (such five-year period, the "Output Term") and with respect to which we own substantially all of the relevant distribution rights (each, a "Qualified Picture"), (ii) motion pictures that would be Qualified Pictures but for the fact that we do not own substantially all of the relevant distribution rights, which we must offer Fox the right to distribute and service and Fox has the option to distribute and service (each, an "Optional Picture"), (iii) Existing Pictures, as and to the extent such films cease being subject to third-party distribution rights at any point during the Output Term, (iv) as determined by us in our sole discretion, subject to certain exceptions, audiovisual programs acquired by us as part of our acquisition of Classic Media (each a "Classic Media Picture") and (v) as determined by us in our sole discretion, subject to certain exceptions, other audiovisual programs produced or acquired by us that are not Qualified Pictures, Optional Pictures, Classic Media Pictures, Existing Pictures or live-action or hybrid feature-length theatrical motion pictures (each, an

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"Other Picture"). Live-action or hybrid feature-length theatrical motion pictures (other than Classic Media Pictures) are not subject to the terms of the Fox Distribution Agreement. Each motion picture with respect to which rights are licensed to (and serviced by) Fox under the Fox Distribution Agreement is herein called a "Licensed Picture."

The rights licensed to, and serviced by, Fox for all Licensed Pictures will terminate on the same date, which will be the date that is one year after the initial home video release date in the U.S. of the last Licensed Picture theatrically released by Fox during the Output Term, unless terminated earlier in accordance with the terms of the Fox Distribution Agreement, subject to extension in the case of certain television license agreements entered into by Fox prior to or during the Output Term and approved by us.

Certain Retained Rights. The rights licensed to, and serviced by, Fox do not include the following rights that we retain and may freely exploit: (i) all rights in China and Korea, (ii) all forms of television, all forms of video on demand (excluding transactional video-on-demand) and other digital rights (other than electronic sell-through/download-to-own) in the U.S. and Canada (provided that Fox will have the first opportunity to exploit such rights if we elect to distribute such rights through a third party), (iii) television and subscription video-on-demand rights licensed pursuant to pre-existing deals or deals pending as of the date of the Fox Distribution Agreement in certain international territories, (iv) any other rights necessary for us to sell content directly to consumers through digital "storefronts" owned or controlled by us (which Fox may exploit on a non-exclusive basis under certain conditions) and (v) certain other retained rights, including subsequent production, merchandising, commercial tie-in and promotional rights (which Fox may exploit on a non-exclusive basis under certain conditions) and certain other ancillary rights. We have entered into agreements with Netflix involving the exploitation of our theatrical films released beginning in 2013 through Netflix’s U.S., Canadian and Scandinavian subscription video-on-demand service.

Creative Control.    We retain the exclusive right to make all creative decisions and initiate any action with respect to the development, production and acquisition of each of our films, including the right to abandon the development or production of a film, and the right to exercise final cut.

Fees and Expenses. The Fox Distribution Agreement provides that Fox will be entitled to a distribution fee or services fee of 8.0% on all theatrical gross receipts and home video gross receipts received by or credited to Fox, except in connection with the following rights for which the fee will be 6.0%: (i) pay television in the U.S. and/or Canada that we elect to license to Fox and pay television outside the U.S. and Canada under certain output agreements entered into by Fox (although an 8.0% fee is payable with respect to certain existing Fox output arrangements) and (ii) all forms of video-on-demand (other than attendant subscription video-on-demand included in existing pay television output agreements) and other digital distribution.

The Fox Distribution Agreement provides that we will be solely responsible for all of the costs of developing and producing our animated feature films, including contingent compensation and residual costs. Fox will be responsible for advancing all expenses related to the exhibition, exploitation, use and distribution of each Licensed Picture and all expenses related to home video distribution and fulfillment services. Fox will be entitled to recoup all such distribution expenses and home video fulfillment expenses, and in each case will be financially responsible for such expenses in a manner to preserve our existing net accounting treatment with respect to revenue recognition. Fox will also be granted a contractual television participation right with respect to each of the Qualified Pictures, which will be calculated and paid only if the ultimates statement prepared by us for a given Qualified Picture indicates that Fox will not fully recoup the relevant distribution expenses and home video fulfillment expenses from the projected theatrical gross receipts and home video gross receipts for such Qualified Picture. Fox will pay us in a manner generally consistent with our past practice. Fox has also agreed to provide us with additional services and pay us an annual cost reimbursement amount during the term of the Fox Distribution Agreement.

Distribution Services. Fox has agreed to advertise, promote and distribute the Licensed Pictures and provide the quality, level, priority and quantity of distribution support and services in connection therewith, at least comparable to the support and services provided in connection with our three most recent wide-release pictures released by Fox and, if a higher standard, on a non-discriminatory basis as compared to Fox's own comparable motion pictures, taking into account certain factors. Fox is obligated to release, distribute and service the Licensed Pictures in all media, territories and formats designated by the Company (unless Fox rejects an offered Classic Media Picture or Other Picture because it is not economically viable for it to distribute, in which case we can ourselves distribute or have any third party distribute such Classic Media Picture or Other Picture). Fox is also obligated to expend a minimum amount in connection with the distribution and servicing of the Qualified Pictures generally consistent with past practice. We will have all approvals and controls over the exploitation of the Licensed Pictures as are generally consistent with past practice.

Termination. The Fox Distribution Agreement is subject to termination by either party in the event that we experience a "DWA Change in Control." For purposes of the Fox Distribution Agreement, "DWA Change in Control" is defined as (i) the acquisition of beneficial ownership of more than 35% of the outstanding equity securities of the Company by a media company

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in the audiovisual content distribution business (a "Media Company"), (ii) the sale or other transfer of all or substantially all of the Company's property, business or assets or of its motion picture division to a Media Company and (iii) any merger, consolidation, share exchange or other similar transaction between the Company and a Media Company, the result of which is that the applicable Media Company owns at least 35% of the voting power of the outstanding voting securities of the resulting combined entity. In order to terminate the Fox Distribution Agreement, either party must deliver written notice to the other party within 90 days of such DWA Change in Control, which notice must specify a termination date no earlier than one year following the date of such notice.

Paramount Distribution Agreement
 
The following is a summary of the Paramount Distribution Agreement, which is filed as an exhibit to this Form 10-K. This summary is qualified in all respects by such reference.

Term of Agreement.    Subject to certain exceptions, following our reacquisition of rights in July 2014, the Paramount Distribution Agreement currently grants Paramount the worldwide right to distribute the Existing Pictures by means of international television licensing, including pay television, network, basic cable and syndication, subscription video-on-demand and free video-on-demand. Under the Paramount Distribution Agreement, we retain all other rights to exploit our films (of which certain of such retained rights have been licensed to Fox, as described above), and the right to make prequels and sequels, commercial tie-in and promotional rights with respect to each film, as well as merchandising, theme park, interactive, literary publishing, music publishing and soundtrack rights. Paramount generally has the right to exploit the Existing Pictures in the manner described above for 16 years from such film’s initial general theatrical release. If the rights to the Existing Pictures revert to us thereafter during the Fox Output Term, such rights will be licensed to Fox.

Distribution Services.    Paramount is responsible for the worldwide distribution in the media mentioned above of all of our animated feature films covered by the Paramount Distribution Agreement, but may engage one or more sub-distributors and service providers in those territories and media in which Paramount subdistributes all or substantially all of its motion pictures, subject to our prior written approval.

Expenses and Fees.    The Paramount Distribution Agreement provides that we will be solely responsible for all of the costs of developing and producing our animated feature films, including contingent compensation and residual costs. Paramount will be responsible for all of the out-of-pocket costs, charges and expenses incurred in the distribution, advertising, marketing and publicizing of each film (collectively, the "Distribution Expenses").

The Paramount Distribution Agreement provides that we and Paramount will mutually agree on the amount of Distribution Expenses to be incurred with respect to the initial theatrical release of each film in the domestic territory and in the majority of the international territories, including all print and advertising costs and media purchases (e.g., expenses paid for print advertising). However, in the event of a disagreement, Paramount’s decisions, based on its good-faith business judgment, will prevail.

Under the Paramount Distribution Agreement, Paramount is entitled to (i) retain a fee of 8.0% of revenue (without deduction for, among other things, distribution and marketing costs, third-party distribution fees and sales agent fees), and (ii) recoup all of its distribution and marketing costs with respect to our films on a title-by-title basis prior to our recognizing any revenue. For each film licensed to Paramount, revenues, fees and expenses for such film under the Paramount Distribution Agreement are combined with the revenues, fees and expenses for such film under the Paramount Fulfillment Services Agreement and we are provided with a single monthly accounting statement and, if applicable, payment for each film. For further discussion, see "—Expenses and Fees under the Paramount Distribution Agreement and Paramount Fulfillment Services Agreement" below.

Nickelodeon Television Development.    During the output term of the Paramount Distribution Agreement, we also agreed to license, subject to certain conditions and third party rights and restrictions, to Paramount (on behalf of Nickelodeon) the exclusive rights to develop animated television properties based on our films and the characters and elements contained in those films. We retained the right to co-produce any television programs and maintained all customary creative approvals over any production using our film properties, including the selection of the film elements to be used as the basis for any television productions. The animated television series, The Penguins of Madagascar, which is based on our Madagascar films, debuted on the Nickelodeon network in March 2009. The animated television series Kung Fu Panda: Legends of Awesomeness, which is based on our Kung Fu Panda films, debuted on Nickelodeon in 2011. The animated television series Monsters vs. Aliens, which is based on our film Monsters vs. Aliens, debuted on Nickelodeon in 2013.


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Termination.    Upon the occurrence of certain events of default, the non-breaching party may terminate the agreement. If we terminate the agreement, we generally can require Paramount to stop distributing our films in the various territories and markets in which Paramount directly distributes our films, but require Paramount to continue distributing our films that are currently being distributed pursuant to the Paramount Distribution Agreement, subject, in each case, to the terms of any output agreements or other agreements to which the films are then subject. Unless otherwise agreed, termination of the Paramount Distribution Agreement will not affect the rights that any sub-distributor or service provider has with respect to our films pursuant to sub-distribution, servicing and licensing agreements that we have approved. Upon termination by either party of the Paramount Distribution Agreement or the Paramount Fulfillment Services Agreement, we have the corresponding right to terminate the other agreement at our sole election.

Paramount Fulfillment Services Agreement
 
Although the Paramount Fulfillment Services Agreement, which is filed as an exhibit to this Form 10-K, remains in place between the parties, following our reacquisition of rights in and to the Existing Pictures, which included the home entertainment rights previously subject to the Paramount Fulfillment Services Agreement, we are no longer obligated to engage Paramount to provide, and Paramount is no longer obligated to provide, worldwide home video fulfillment services for the Existing Pictures.

Expenses and Fees under the Paramount Distribution Agreement and Paramount Fulfillment Services Agreement
 
Each of our films is accounted for under the Paramount Distribution Agreement and the Paramount Fulfillment Services Agreement on a combined basis for each film. In such regard, all revenues, expenses and fees under the Paramount Agreements for a given film are fully cross-collateralized. If a theatrical feature film does not generate revenue in all media, net of the 8.0% distribution and servicing fee, sufficient for Paramount to recoup its expenses under the Paramount Agreements, Paramount will not be entitled to recoup those costs from proceeds of our other theatrical feature films, and we will not be required to repay Paramount for such amounts.

Other Distribution Arrangements

In addition to the agreements with Fox and Paramount for distribution of our feature films and the agreements with Netflix, Super RTL and Planeta Junior for distribution of our episodic series and specials, we have other third-party distribution arrangements with television and home entertainment licensees around the world for distribution of our new episodic series and existing Classic Media titles. Unlike our feature film distribution arrangements, these other distribution arrangements generally require us to bear the risk of cash collection and, where applicable, unsold inventory. The Company's activities associated with its Classic Media properties and ATV business are not subject to the Company's distribution agreements with its theatrical distributors. For more information about these distribution arrangements, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Revenues and Costs—Our Revenues—Television Series and Specials.”

The Animation Process
 
The filmmaking process starts with an idea. Inspiration for a film comes from many sources—from our in-house staff, from freelance writers or from existing literary or other works. Successful ideas are generally written up as a treatment (or story description) and then proceed to a screenplay, followed by the storyboarding process and then finally into the production process. Excluding the script and early development phase, the production process, from storyboarding to filming out the final image, for a full-length feature film can take approximately three to four years.

We employ small collaborative teams that are responsible for preparing storylines and ideas for the initial stages of development. These teams, through a system of creative development controls, are responsible for ensuring that ideas follow the best creative path within a desired budget and schedule parameters. The complexity of each project, the background environments, the characters and all of the elements in a project create a very intricate and time-consuming process that differs for each project. The table below depicts, in a very general manner, a timeline for a full-length feature film, and describes the four general and overlapping phases that constitute the process and their components:


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The development phase generally consists of story and visual development. The duration of the development phase can vary project by project—from a matter of months to a number of years. In the pre-production phase, the script and story are further developed and refined prior to the majority of the film crew commencing work on the project. The production phase which follows can last up to two years depending on the length of the project and involves the largest number of staff. The Company’s use of stereoscopic 3D for its films provides the filmmakers with additional variables to review and decide upon during this production phase. Finally, in the post-production phase, the core visuals and dialogue are in place and we add important elements such as sound effects and the music/score.

Although the process for making episodic series and specials involves most of the various phases described above for feature films, the timeline for the process is significantly shorter, usually no longer than one year. As part of our expansion of this business as a result of our agreements with Netflix, Super RTL and Planeta Junior, we have recently added a significant number of staff, primarily to handle the development and pre-production phases. We currently expect that the production phase for our episodic series business will be generally undertaken by third-party production firms as a result of the amount of new content that we are required to produce in the next three to four years.

Our technology plays an important role in the production of our projects. Our focus on user interface and tool development enables our artists to use existing and emerging technologies, allowing us to leverage our artistic talent. In addition, we have strategic relationships with leading technology companies that allow us to benefit from third-party advancements and technology at the early stages of their introduction.

Competition
 
Our films and other projects compete on a broad level with all forms of entertainment and other consumer leisure activities. Our primary competition for film audiences generally comes from other wide-release "event" films released into the theatrical market at or near the same time as our films. At this level, in addition to competing for box-office receipts, we compete with other film studios over optimal release dates and the number of motion picture screens on which our movies are exhibited. In addition, with respect to the home entertainment and television markets, we compete with other films as well as other forms of entertainment. We also face intense competition from other animation studios for the services of talented writers, directors, producers, animators and other employees and for the acquisition of rights to pre-existing literary and other works.

Competition for Film Audiences.    Our primary competition for film audiences generally comes from other wide-release "event" films, especially animated and live-action films that are targeted at similar audiences and released into the theatrical market at or near the same time as our films. Our feature films compete with both live-action and animated films for motion picture screens, particularly during national and school holidays when demand is at its peak. Due to the competitive environment, the opening weekend for a film is extremely important in establishing momentum for its box-office performance. Because we currently expect to release only two films per year, our objective is to produce "event" films, attracting the largest and broadest audiences possible. As a result, the scheduling of optimal release dates is critical to our success. One of the most important factors we consider when determining the release date for any particular film is the expected release date of other "event" films. In this regard, we pay particular attention to the expected release dates of other films produced by other animation studios, as well as live-action films targeting family audiences.

Disney/Pixar, Sony Entertainment, Fox Entertainment’s Blue Sky Studios and Illumination Entertainment are currently the animation studios that we believe target similar audiences and have comparable animated filmmaking capabilities. In

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addition, other companies and production studios continue to release animated films, which can affect the market in which our films compete.

Competition in Home Entertainment.    In the home entertainment market, our films and television series/specials compete with not only other theatrical titles, direct-to-video titles and television series titles, but also other forms of home entertainment, such as online games. As competition in the home entertainment market increases, consumers have a greater number of choices for home entertainment products. In addition, once our films are released in the home entertainment market they may also compete with other films that are in their initial theatrical release or in their subsequent theatrical re-release cycles. Historically, a significant portion of our revenues has been derived from consumer purchases of our home entertainment titles. In this regard, we compete with companies that offer Internet-based services that allow consumers to stream home entertainment titles to their televisions, computers or mobile devices for a one-time or monthly subscription fee. Additionally, some existing subscription cable television channels have developed Internet-based services that offer subscribers the ability to view content on computers or mobile devices. We also compete with video-rental or video-on-demand services that offer consumers the ability to view home entertainment titles one or more times for a rental fee that is typically significantly less than the purchase price of the title. Our home entertainment titles also compete with these services. Finally, over the past several years, there has been a significant increase in competition for shelf space given by retailers for any specific title and for DVDs in general.

Competition for Talent.    Currently, we compete with other animated film and visual effect studios for artists, animators, directors and producers. In addition, we compete for the services of computer programmers and other technical production staff with other animation studios, production companies and video game producers. In order to recruit and retain talented creative and technical personnel, we have established relationships with the top animation schools and industry trade groups. We have also established in-house digital training and artistic development training programs.

Potential Competition.    Barriers to entry into the animation field have decreased as technology has advanced. While we have developed proprietary software to create animated films, other film studios may not be required to do so, due to technological advances that have made it possible to purchase third-party software capable of producing high-quality images. Although we have developed proprietary technology, experience and know-how in the animation field that we believe provide us with significant advantages over new entrants in the animated film market, there are no substantial technological barriers to entry that prevent other film studios from entering the field. Furthermore, advances in technology may substantially decrease the time that it takes to produce an animated feature film, which could result in a significant number of new animated films or products. The entrance of additional animation companies into the animated feature film market could adversely affect us by eroding our market share, increasing the competition for animated film audiences and increasing the competition for, and cost of, hiring and retaining talented employees, particularly animators and technical staff.

Employees

As of December 31, 2014, we employed approximately 2,700 people, many of whom were covered by employment agreements, which generally include non-disclosure agreements. In connection with the 2015 Restructuring Plan, we anticipate reducing our workforce by approximately 500 employees. We also hire additional employees on a picture-by-picture basis. The salaries of these additional employees, as well as portions of the salaries of certain full-time employees who provide direct production services, are typically allocated to the capitalized costs of the related feature film. Approximately 920 of our employees (and some of the employees or independent contractors that we hire on a project-by-project basis) were represented under industry-wide collective bargaining agreements to which we are a party, namely agreements with Locals 695, 700 and 839 of the International Alliance of Theatrical Stage Employees (“IATSE”), which generally cover certain members of our production staff, and agreements with the Screen Actors Guild-American Federation of Television and Radio Artists (“SAG-AFTRA”), which generally covers artists such as actors and singers. We entered into new collective bargaining agreements with SAG-AFTRA in July 2014 which run through 2017. Our collective bargaining agreements with IATSE expire in 2015, which we currently expect to renegotiate. We believe that our employee and labor relations are good.

Where You Can Find More Information
 
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). These filings are not deemed to be incorporated by reference into this report. You may read and copy any documents filed by us at the Public Reference Room of the SEC, 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public through the SEC’s website at http://www.sec.gov.


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Our common stock is currently listed on the Nasdaq under the symbol "DWA." We maintain an Internet site at http://www.DreamworksAnimation.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, as well as any amendments to these reports, as soon as reasonably practicable after electronically filing these reports with, or furnishing them to, the SEC. We have adopted a code of ethics applicable to our principal executive, financial and accounting officers. We make available free of charge, on or through our website's investor relations page, our code of ethics. Our website and the information posted on it or connected to it shall not be deemed to be incorporated by reference into this or any other report we file with, or furnish to, the SEC.

Item 1A.
Risk Factors

This report and other documents we file with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business or others acting on our behalf, our beliefs and our management’s assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. You should carefully consider the risks and uncertainties facing our business. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial could have a material adverse effect on our business, financial condition, cash flows and results of operations.

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 directly correlate with 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.

The economic success of a motion picture 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. The theatrical performance of a film is a key factor in predicting revenue from post-theatrical markets. If we are unable to accurately judge 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 revenues for such film from our distributors. Some of our films (including our July 2013 theatrical release Turbo, our March 2014 theatrical release Mr. Peabody and Sherman and our November 2014 theatrical release The Penguins of Madagascar) have not recovered their production costs. See "—We may incur significant write-offs if our feature films and other projects do not perform well enough to recoup production, marketing and distribution costs."
 
We may incur significant write-offs if our feature films and other projects do not perform well enough to recoup production, marketing and distribution costs.
 
We are required to amortize capitalized production costs over the expected revenue streams as we recognize revenue from the associated films or other projects. The amount of production costs that will be amortized each quarter depends on, among other things, how much future revenue we expect to receive from each project. Unamortized production costs are evaluated for impairment each reporting period on a project-by-project basis. If estimated remaining revenue is not sufficient to recover the unamortized production costs, the unamortized production costs will be written down to fair value. In any given quarter, if we lower our previous forecast with respect to total anticipated revenue from any individual feature film or other project, we may be required to accelerate amortization or record impairment charges with respect to the unamortized costs, even if we have previously recorded impairment charges for such film or other project. For instance, in the quarter ended December 31, 2013, we incurred a write-down of $13.5 million for our film Turbo and in the year ended December 31, 2014, we incurred write-downs of $66.5 million for our film Mr. Peabody and Sherman and $30.3 million for our film The Penguins of Madagascar. Such impairment charges adversely impacted our business, operating results and financial condition.


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Our business is currently substantially dependent upon the success of a limited number of film 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 and cash flows.
 
We generally expect to release two animated feature films per year. The unexpected delay in release or commercial failure of just one of these films could have a significant adverse impact on our results of operations and cash flows 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. In fact, over the last several years domestic theatrical results and foreign theatrical results have become less directly correlated than in the past. While we have generally seen growth in our foreign theatrical results, it has come in countries where the home entertainment market is not as robust as in the U.S. or Western Europe.

Our home entertainment and consumer products businesses have experienced and will likely continue to experience significant changes as a result of rapid technological change and shifting consumer preferences and behavior. These changes and shifting preferences have generally resulted in a decrease of the revenue from and profitability of our films.
 
Our businesses create entertainment and products whose ultimate success significantly depends on the current state of our technology, as well as shifting consumer tastes and preferences. A significant amount of our revenues and profitability has historically resulted from sales of DVDs in the home entertainment market. Over the last 10 years, there has been a significant decline in both the number of DVD units sold and the profitability of such units. We believe that this decline is a result of various technological advances and changes in consumer preferences and behavior. Consumers (especially children) are spending an increasing amount of time on the Internet and mobile devices, and technology in these areas continues to evolve rapidly. In addition, consumers are increasingly viewing content on a time-delayed or on-demand basis from the Internet, on their televisions and on handheld or portable devices. As a result, consumer demand for DVDs has declined sharply. We and our distributors must adapt our businesses to changing consumer behavior and preferences and exploit new distribution channels (such as Internet distribution) or find new and enhanced ways to deliver our films in the home entertainment market. There can be no assurances that we will be able to do so or that we will be able to achieve historical revenues or margin levels in such business.

During 2014, two large retailers, Walmart and Target, accounted for approximately 58% of our domestic (U.S. and Canada) DVD sales. If these and other retailers' support of the DVD format decreases, our results of operations could be materially adversely affected.

 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, television series and specials, new media business and other entertainment;
the frequency and timing of the domestic and international theatrical releases and home entertainment release of our feature films;
our distribution arrangements with our principal distributors permit our distributors to collect distribution fees and to recoup distribution costs, including print and advertising costs, and cause us to recognize significantly less revenue and expenses from a film in the period of a film’s initial theatrical release than we otherwise would absent these agreements;
the timing of development expenses and varying levels of success of our new business ventures; and
the seasonality of our consumer products and other businesses.

We currently derive a significant percentage of our revenue from a single source, the production of animated family entertainment, which 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 currently depend primarily on the success of our feature films and other properties. For example, unlike us, many of the

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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. We, on the other hand, currently derive a significant percentage of our revenue from a single source—our animated family entertainment—and our lack of a sufficiently diversified business model could adversely affect us if our feature films or other properties fail to perform to our expectations.

We have recently developed and are currently in the process of developing a number of projects that are not feature films, which will involve upfront and ongoing expenses and may not ultimately be successful.

As part of our strategy of diversifying our revenue sources, over the last several years we have produced and are currently developing a number of projects that are not feature films. These projects include location-based entertainment, episodic series, technology initiatives, our Chinese Joint Venture and our ATV Joint Venture. Some of these new businesses are inherently riskier than our traditional animated feature film business. These projects also require varying amounts of upfront and ongoing expenditures, some of which are or may be significant, and may place a strain on the Company's management and capital resources. While we currently believe that we have adequate sources of capital to fund these development and operating expenditures, there can be no assurances that such resources will be available to us. Further, to the extent that the Company needs to hire additional personnel to develop or oversee these projects, the Company may be unable to hire talented individuals. Finally, we cannot provide any assurances that all or any of these projects will ultimately be completed or, if completed, successful.

In June 2013, we entered into a long-term agreement with Netflix, in May 2014 with the German television network Super RTL and, in February 2014, with southern European media company Planeta Junior regarding the production and distribution of existing and future episodic series. Each agreement provides for the Company to deliver over 1,000 episodes of newly created series based on the Company's properties. The Company may have difficulty in producing the required programming for a variety of reasons, including difficulties in hiring the significant additional personnel required to develop and oversee these projects. We currently expect that we will use third-party production companies to assist in the production of some or all of these projects; however, we may have difficulty in engaging such production companies on profitable terms or at all. These projects will require significant expenditures, many of which will be incurred prior to the receipt of any license fees from Netflix, Super RTL or other licensees. While we believe that we will have adequate sources of capital to fund these expenses, there can be no assurances that sufficient capital will be available. The agreements with Netflix, Super RTL, Planeta Junior and other licensees provide for fixed license fees to the Company; therefore, our financial results associated with the agreements will be dependent on our ability to adequately monitor and control production expenses as well as our ability to enter into additional license agreements in other territories. The Company currently expects that some or all of the new series production will occur in jurisdictions that offer tax incentives; however, there can be no assurances that these tax incentives will continue to be offered or that the Company will be able to benefit from them. Finally, the supervision of this expanded television series production business may place an added burden on the Company's management team.

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 are 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. 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. For example, in January 2015, the Company announced that, in connection with the 2015 Restructuring Plan, the Company was writing off the capitalized expenses associated with multiple film properties.

 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 (or longer) 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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The production and marketing of animated feature films and other properties is capital-intensive and our capacity to generate cash from our films may be insufficient to meet our anticipated cash requirements.
 
The costs to develop, produce and market a film are substantial. In 2014, for example, we spent approximately $345.0 million to fund production costs (excluding overhead expense) and to make contingent compensation and residual payments. Although we generally retain the right to exploit each of the films that we have previously released, the size of our film library is much smaller than the film libraries of the major U.S. movie studios, which typically have the ability to exploit hundreds of library titles. Library titles can provide a stable source of earnings and cash flows that supplement the cash flow generated by newly released films. Many of the major studios use these cash flows, as well as cash flows from their other businesses, to finance the production and marketing of new feature films. We are not able to rely on such cash flows to the same extent and are required to fund our films in development and production and other commitments with cash retained from operations, the proceeds of films that are generating revenue from theatrical, home entertainment and ancillary markets and borrowings under our revolving credit facility. If our films fail to perform, we may be forced to seek sources of outside financing. Such financing may not be available in sufficient amounts for us to continue to make substantial investments in the production of new animated feature films or may be available only on terms that are disadvantageous to us, either of which could have a material adverse effect on our cash flows, growth or business.

We compete for audiences based on a number of factors, many of which are beyond our control.
 
The number of animated and live-action feature films released by competitors, particularly the major U.S. motion picture studios, may create an oversupply of product in the market and may make it more difficult for our films to succeed. In particular, we compete directly against other animated films and family-oriented live-action films. Oversupply of such products (especially of high-profile “event” films such as ours) may become most pronounced during peak release times, such as school holidays, national holidays and the summer release season, when theater attendance has traditionally been highest. Although we seek to release our films during peak release times, we cannot guarantee that we will be able to release all of our films during those times and, therefore, may miss potentially higher gross box-office receipts. In addition, a substantial majority of the motion picture screens in the U.S. typically are committed at any one time to only 10 to 15 films distributed nationally by major studio distributors. If our competitors were to increase the number of films available for distribution and the number of exhibition screens remained unchanged, it could be more difficult for us to release our films during optimal release periods.

Changes in the United States, global or regional economic conditions could adversely affect our results of operations and financial condition.
 
Over the last several years, the global economy has experienced a significant contraction. This decrease and any future decrease in economic activity in the U.S. or in other regions of the world in which we do business could significantly and adversely affect our results of operations and financial condition in a number of ways. Any decline in economic conditions may reduce the performance of our theatrical and home entertainment releases and purchases of our licensed consumer products, thereby reducing our revenues and earnings. We may also experience increased returns by the retailers that purchase our home entertainment releases. Further, bankruptcies or similar events by retailers, theater chains, television networks, other participants in our distribution chain or other sources of revenue may cause us to incur bad debt expense at levels higher than historically experienced or otherwise cause our revenues to decrease. In periods of generally increasing prices, or of increased price levels in a particular sector such as the energy sector, we may experience a shift in consumer demand away from the entertainment and consumer products we offer, which could also adversely affect our revenues and, at the same time, increase our costs.

The seasonality of our businesses could exacerbate negative impacts on our operations.
 
Our business is normally subject to seasonal variations based on the timing of theatrical motion picture and home entertainment releases. Release dates are determined by several factors, including timing of vacation and holiday periods and competition in the market. Also, revenues in our consumer products business are influenced by both seasonal consumer purchasing behavior and the timing of animated theatrical releases and generally peak in the fiscal quarter of a film’s theatrical release. We expect that revenues generated by our Classic Media properties, will tend to be higher during the fourth quarter of each calendar year due to the holiday content offered through television distribution rights as well as home entertainment products geared towards the holiday season. Accordingly, if a short-term negative impact on our business occurs during a time of high seasonal demand (such as natural disaster or a terrorist attack during the time of one of our theatrical or home entertainment releases), the effect could have a disproportionate effect on our results for the year.


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Strong existing film studios competing in the CG animated film market and the entrance of additional competing film producers could adversely affect our business in several ways.
 
CG animation has been successfully exploited by a growing number of film studios. There are no substantial technological barriers to entry that prevent other film producers from entering the field. Furthermore, advances in technology may substantially decrease the time that it takes to produce a CG animated feature film, which could result in a significant number of new CG animated films or products. The entrance of additional companies into the CG animated feature film market could adversely impact us by eroding our market share, increasing the competition for CG animated film audiences and increasing the competition for, and cost of, hiring and retaining talented employees, particularly CG animators and technical staff.

Our success depends on certain key employees.
 
Our success greatly depends on our employees. In particular, we are dependent upon the services of Jeffrey Katzenberg, our other executive officers and certain creative employees such as directors and producers. We do not maintain key person life insurance for any of our employees. We have entered into employment agreements with Mr. Katzenberg and with all of our top executive officers and production executives. However, although it is standard in the motion picture industry to rely on employment agreements as a method of retaining the services of key employees, these agreements cannot assure us of the continued services of such employees. The loss of the services of Mr. Katzenberg or a substantial group of key employees could have a material adverse effect on our business, operating results or financial condition.

Our scheduled releases of animated feature films, episodic series and other projects may place a significant strain on our resources.
 
We have established multiple creative and production teams so that we can simultaneously produce several animated feature films and other projects. In the past, we have been required, and will 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 entertainment projects (including the new content required under our agreement with Netflix). This growth and expansion has placed, and continues to place, a significant strain on our resources. We cannot provide any assurances that any of our projects 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.

We are dependent on our distributors for the distribution and marketing of our feature films and related products.
 
Under the Paramount Agreements, Paramount and certain of its affiliates, and under the Fox Distribution Agreement, Fox and certain of its affiliates, are responsible for the distribution and servicing of all of our films in substantially all audiovisual media throughout most of the world. If our distributors fail to perform under these agreements, our business reputation, operating results and financial condition could be adversely affected. For a description of the terms of the Paramount Distribution Agreement, the Paramount Fulfillment Services Agreement and the Fox Distribution Agreement, see "Item 1—Business—Distribution and Servicing Arrangements."

We depend on our distributors to remit most of our revenue to us.
 
We generate a substantial majority of our revenue through our relationships with our distributors. Most of our revenue is remitted to us by Fox, Paramount and Netflix. Due to our dependence on so few counterparties to remit to us the majority of our revenue, we are subject to credit risk on account of each of these counterparties. If one or more of these counterparties is unable to pay the amounts due to us, our results of operations, cash flows and financial condition may be adversely affected.

The amount of revenue that we recognize from our films is dependent on the information we receive from our distributors.
 
Because third parties are the principal distributors of our films, the amount of revenue that we recognize from our films in any given period is dependent on the timing, accuracy and sufficiency of the information we receive from our distributors. As is typical in the film industry, our distributors may make adjustments in future periods to information previously provided to us that could have a material impact on our operating results in later periods. Furthermore, management may, in its judgment, make material adjustments to the information reported by our distributors in future periods to ensure that revenues are accurately reflected in our financial statements.


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Both Fox and Paramount distribute our feature films and related products, and in some cases, the responsibility for distributing and promoting our film franchises will be split between Fox and Paramount.
 
Under the Fox Distribution Agreement, Fox distributes our films and related products released after December 31, 2012, and as of July 1, 2014, Fox has also been licensed and engaged to render fulfillment services for Existing Pictures in theatrical, non-theatrical, home entertainment and transactional digital media. Under the Paramount Agreements, Paramount will continue to exploit and render fulfillment services in the television media for Existing Pictures until the date that is 16 years after such film's theatrical release, and will continue to exploit and service certain other agreements with Paramount's sublicensees that remain in place after July 1, 2014. As a result, one or both of our distributors may focus their efforts on promoting our franchises for which it is the sole distributor, to the detriment of our franchises which include feature films that were released both before and after December 31, 2012 and are therefore distributed by both of our distributors. If the diverging incentives of our distributors, or other complications arising from using multiple distributors, result in less effective promotion of our films and related products, our operating results, cash flows and financial position could be adversely affected.

We face risks relating to the international distribution of our films and related products and to the foreign production of content.
 
In recent years, we have derived approximately 61% of our feature film revenue from the exploitation of our films in territories outside of the U.S. and Canada. Additionally, some of our newer non-feature film businesses are being or are expected to be conducted, at least partially, outside of the U.S. In April 2013, we launched a joint venture, ODW, that will conduct significant operations in China, including the development and exploitation of original content. See "Item 1—Business—Joint Ventures and Investments." As a result, our business is subject to risks inherent in international trade, many of which are beyond our control. These risks include:
fluctuating foreign exchange rates. For a more detailed discussion of the potential effects of fluctuating foreign exchange rates, please see “Part II—Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Revenue and Costs—Our Revenues—Feature Films”;
the Foreign Corrupt Practices Act and similar laws regulating interactions and dealings with foreign government officials;
other laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes and changes in these laws;
differing cultural tastes and attitudes, including varied censorship laws and the regulation of media businesses;
differing degrees of protection for patent rights and other intellectual property rights;
the instability of foreign economies and governments; and
war and acts of terrorism.

Piracy of motion pictures, including digital and Internet piracy, may decrease revenue received from the exploitation of our films.
 
Unauthorized copying and piracy are prevalent in various parts of the world, including in countries where we may have difficulty enforcing our intellectual property rights. Motion picture piracy has been made easier by technological advances and the conversion of motion pictures into digital formats, which facilitates the creation, transmission and sharing of high-quality unauthorized copies of motion pictures. The increased consumer acceptance of entertainment content delivered electronically and consumer acquisition of the hardware and software for facilitating electronic delivery may also lead to greater public acceptance of unauthorized content. The proliferation of unauthorized copies and piracy of these products has an adverse effect on our business because these products reduce the revenue we receive from our legitimate products. Under the Paramount Agreements and the Fox Distribution Agreement, our distributors are substantially responsible for enforcing our intellectual property rights with respect to all of our films subject to such agreements and are required to maintain security and anti-piracy measures consistent with the highest levels each maintains for its own motion pictures in each territory in the world. Other than the remedies we have in such agreements, we have no way of requiring our distributors to take any anti-piracy actions, and our distributors’ failure to take such actions may result in our having to undertake such measures ourselves, which could result in significant expenses and losses of indeterminate amounts of revenue. Even if applied, there can be no assurance that the highest levels of security and anti-piracy measures will prevent piracy.


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We could be adversely affected by strikes and other union activity.
 
Along with the major U.S. film studios, we employ members of IATSE on many of our productions. We are also currently subject to collective bargaining agreements with IATSE and SAG-AFTRA. We may also become subject to additional collective bargaining agreements. A strike by one or more of the unions that provide personnel essential to the production of our feature films could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time involved, could cause a delay of the release date of our feature films and thereby could adversely affect the revenue that the films generate. In addition, strikes by unions with which we do not have a collective bargaining agreement can have adverse effects on the entertainment industry in general and, thus, indirectly on us.

Business interruptions could adversely affect our operations.
 
Our operations are vulnerable to outages and interruptions due to fire, floods, power loss, telecommunications failures and similar events beyond our control. In addition, we currently have two large production facilities in California—one in Southern California, and one in Northern California (which we plan to close in connection with our 2015 Restructuring Plan and consolidate its operations with our Southern California facility). These areas in California have in the past and may in the future be subject to earthquakes as well as electrical blackouts as a consequence of a shortage of available electrical power. 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. In the event of a short-term power outage, we have installed UPS (uninterrupted power source) equipment designed to protect our CG animation rendering equipment and other sensitive equipment. A long-term power outage, however, 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. Although we currently carry business interruption insurance for potential losses (including earthquake-related losses), there can be no assurance that such insurance will be sufficient to compensate us for losses that may occur or that such insurance may continue to be available on affordable terms. Any losses or damages incurred by us could have a material adverse effect on our business and results of operations.

Potential acquisitions, joint ventures and other transactions could negatively affect our operating results.
 
From time to time, we may enter into discussions regarding potential acquisitions, joint ventures or other similar transactions, in connection with our traditional animation business or new types of businesses. To the extent that we consummate such transactions, there can be no assurance that such acquisitions, joint ventures or other transactions (such as our acquisitions of AwesomenessTV and Classic Media, and our Chinese Joint Venture and ATV Joint Venture) will be successfully integrated by us to the extent required. Additionally, there can be no assurance that such acquisitions, joint ventures or other transactions will not adversely affect our results of operations, cash flows or financial condition. Moreover, there can be no assurance that we will be able to identify acquisition candidates or other potential business partners or that any discussions will result in a consummated transaction. Any such transactions may require significant additional capital resources and there can be no assurance that we will have access to adequate capital resources.

Our Chinese Joint Venture faces restrictions in China and may not succeed.
 
On April 3, 2013, we formed our Chinese Joint Venture. The purpose of the joint venture is to create a leading China-focused family entertainment company engaged in the acquisition, production and distribution of original content originally produced, released or commercially exploited in the Chinese language. Media and entertainment businesses in China are currently subject to a variety of restrictions, including prohibitions on the conduct of certain activities by foreign-owned entities. Additionally, among other things, there are restrictions on the repatriation of funds earned in China. There can be no assurances that the joint venture will be able to obtain the appropriate authorizations to engage in all contemplated aspects of its business or, if such licenses are obtained, that the joint venture will be successful. The formation of the venture and establishment of its business will require significant management and capital resources and there can be no assurances that such resources will be available.

A variety of uncontrollable events may reduce demand for our entertainment and consumer products or otherwise adversely affect our business.
 
Demand for our products and services is highly dependent on the general environment for entertainment and other leisure activities and consumer tastes and preferences. The environment for these activities can be significantly adversely affected in the U.S. or worldwide as a result of a variety of factors beyond our control, including terrorist activities, military actions, adverse weather conditions or natural disasters or health concerns. Such events could have a material adverse effect on our business and results of operations. Similarly, an outbreak of a particular infectious disease could negatively affect the public’s willingness to see our films in theaters. Finally, the ongoing effects of global climate change could adversely affect our

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business. Various proposals have been discussed at the federal and state level to limit the carbon emissions of business enterprises, which if enacted could result in an increase in our costs of operations. The effects of climate change could also have unpredictable effects on consumer movie attendance patterns.

To be successful, we must continue to attract and retain qualified personnel and our inability to do so would adversely affect the quality of our films.
 
Our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified creative, technical and managerial personnel. Competition for the caliber of talent required to make our films, particularly for our film directors, producers, writers, animators, creative and technology personnel, will continue to intensify as other studios, some with substantially larger financial resources than ours, build their in-house animation or special-effects capabilities. The entrance of additional film studios into the animated film industry or the increased production capacity of existing film studios will increase the demand for the limited number of talented CG animators and programmers. There can be no assurance that we will be successful in identifying, attracting, hiring, training and retaining such qualified personnel in the future. If we are unable to hire and retain qualified personnel in the future, particularly film directors, producers, animators, creative personnel and technical directors, there could be a material adverse effect on our business, operating results or financial condition.

We depend on technology and computer systems for the timely and successful development of our animated feature films and related products.
 
Because we are dependent upon a large number of software applications and hardware for the development and production of our animated feature films and other projects, an error or defect in the software, a failure in the hardware, a failure of our backup facilities or a delay in delivery of products and services could result in significantly increased production costs for a project. Moreover, if a software or hardware problem is significant enough, it could result in delays in one or more productions, which in turn could result in potentially significant delays in the release dates of our feature films or affect our ability to complete the production of a feature film or other project.

Significant delays in production and significant delays in release dates, as well as the failure to complete a production, could have a material adverse effect on our results of operations. In addition, we must ensure that our production environment integrates the latest animation tools and techniques developed in the industry so that our projects remain competitive. To accomplish this, we can either develop these capabilities by upgrading our proprietary software, which can result in substantial research and development costs, or we can seek to purchase third-party licenses, which can also result in significant expenditures. In the event we seek to develop these capabilities internally, there is no guarantee that we will be successful in doing so. In the event we seek to obtain third-party licenses, we cannot guarantee that they will be available or, once obtained, will continue to be available on commercially reasonable terms, or at all.

We may be adversely affected if we fail to protect certain of our proprietary technology or enhance or develop new technology.
 
We depend on certain of our proprietary technology to develop and produce our animated feature films and other projects. We rely on a combination of patents, copyright and trade secret protection and non-disclosure agreements to establish and protect our proprietary rights. We typically have several patent applications pending in the U.S. or other countries at any given time. 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 or that they will not be challenged, invalidated or circumvented. From time to time, we make some of our proprietary technology available to our business partners pursuant to agreements containing non-disclosure obligations. In addition, to produce our projects we also rely on third-party software, which is readily available to others. Failure of our patents, copyrights and trade secret protection, non-disclosure agreements and other measures to provide protection of our technology and the availability of third-party software may make it easier for our competitors to obtain technology equivalent or superior to our technology. If our competitors develop or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our feature films and other projects remain competitive. Such costs could have a material adverse effect on our business, financial condition or results of operations.

In addition, we may be required to litigate to enforce our intellectual property rights, to protect our trade secrets, 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, could effectively prevent us from using important technology and could have a material adverse effect on our business, financial condition, results of operations or cash flows.


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Third-party technology licenses may not continue to be available to us in the future.
 
In addition to our proprietary technology, we also rely on certain technology that we license from third parties, including software that we use with our proprietary software. We cannot provide any assurances that these third-party technology licenses will continue to be available to us on commercially reasonable terms or at all or that the technology licenses will not result in intellectual property infringement claims by third parties. The loss of or inability to maintain any of these technology licenses could result in delays in project releases until equivalent technology is identified, licensed and integrated to complete a given project. Any such delays or failures in project releases could materially adversely affect our business, financial condition or results of operations.

Others may assert intellectual property infringement claims against us.
 
One of the risks of the CG animated film production business is the possibility of claims that our projects and production techniques misappropriate or infringe the intellectual property rights of third parties with respect to their technology, software, previously developed films, stories, characters, copyrights, trademarks, other entertainment or intellectual property. We have received, and are likely to receive in the future, claims of infringement of other parties’ proprietary rights. For many of the properties in the Classic Media library, because of the age of such properties the rights to exploit the properties in newer forms of media may be uncertain or may be split with other rightsholders. Additionally, due to the age of many of the Classic Media properties, in certain countries (including the U.S.) the Company's rights to exploit the properties may be subject to termination or reversionary rights. There can be no assurance that infringement or misappropriation claims (or our business partners' claims for indemnification resulting from such 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. Regardless of the validity or the success of such claims, we could 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 of 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.

Our online activities are subject to a variety of laws and regulations relating to privacy and child protection, which, if violated, could subject us to an increased risk of litigation and regulatory actions.

We use social media and other Internet websites to market our projects and connect with consumers. In May 2013, we acquired AwesomenessTV, a multi-media platform company that generates revenues primarily from online advertising sales and distribution of content through media channels such as theatrical, home entertainment, television and consumer products. A variety of laws and regulations have been adopted aimed at protecting children using the Internet. These laws include the federal Children's Online Privacy and Protection Act of 1998 (“COPPA”). COPPA sets forth, among other things, a number of restrictions on what information can be collected from children under the age of 13. There are also a variety of laws and regulations governing privacy in general and the protection and use of information received from consumers or other third parties, regardless of age. Many foreign countries have adopted similar laws affecting interaction with children and governing privacy. If the Company's online activities (including through its AwesomenessTV business) were to violate any applicable current or future laws and regulations, the Company could be subject to litigation and regulatory actions, including fines and other penalties, and our reputation as a family-friendly content provider could be damaged. Additionally, any unauthorized disclosure by us of consumers' credit card or other personally identifiable information could result in claims and lawsuits against us.

We incur significant costs to protect electronically stored data and if our data is compromised despite this protection, we may incur additional costs, business interruption, lost opportunities and damage to our reputation.

We collect and maintain information and data necessary for conducting our business operations, which information includes proprietary and confidential data and personal information of our customers and employees. Such information is often maintained electronically, which includes risks of intrusion, tampering, manipulation and misappropriation. We implement and maintain systems to protect our digital data, but obtaining and maintaining these systems is costly and usually requires continuous monitoring and updating for technological advances and change. Additionally, we sometimes provide confidential, proprietary and personal information to third parties when required in connection with certain business and commercial transactions. For instance, we have relationships with third party vendors to assist in processing employee payroll, and they receive and maintain confidential personal information regarding our employees. We take precautions to try to ensure that such third parties will protect this information, but there remains a risk that the confidentiality of any data held by third parties may be compromised. If our data systems, or those of our third party vendors and partners, are compromised, there may be negative effects on our business including a loss of business opportunities or disclosure of trade secrets. If the personal information we

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maintain is tampered with or misappropriated, our reputation and relationships with our partners and customers may be adversely affected, and we may incur significant costs to remediate the problem and prevent future occurrences.

If our stock price fluctuates, you could lose a significant part of your investment.
 
The market price of our Class A common stock may be influenced by many factors, some of which are beyond our control, including those described above and the following: 
changes in financial estimates by analysts;
announcements by us or our competitors of significant contracts, productions, acquisitions, joint ventures or capital commitments;
variations in quarterly operating results;
general economic conditions;
terrorist acts;
future sales of our common stock; and
investor perception of us, the filmmaking industry and the other businesses that we operate.

Our stock price may also experience fluctuations as a result of the limited number of outstanding shares that are able to be sold in an unrestricted manner (often referred to as the “public float”). As a result of our limited public float, large transactions by institutional investors may result in increased volatility in our stock price. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of movie studios. These broad market and industry factors may materially reduce the market price of our Class A common stock, regardless of our operating performance.

The interests of our controlling and significant stockholders may conflict with the interests of our other stockholders.
 
We cannot assure you that the interests of Jeffrey Katzenberg and entities controlled by him will coincide in all instances with the interests of our other stockholders. For example, Jeffrey Katzenberg or entities controlled by him, could cause us to make acquisitions that increase the amount of our indebtedness or outstanding shares of common stock or sell revenue-generating assets. Jeffrey Katzenberg may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Our restated certificate of incorporation provides for the allocation of corporate opportunities between us, on the one hand, and certain of our founding stockholders, on the other hand, which could prevent us from taking advantage of certain corporate opportunities. So long as Jeffrey Katzenberg or entities controlled by him continue to collectively own shares of our Class B common stock with significant voting power, Jeffrey Katzenberg or entities controlled by him, will continue collectively to be able to strongly influence or effectively control our decisions.

Additionally, at the time of our initial public offering in 2004, we entered into a tax receivable agreement with an affiliate of Paul Allen, who was previously a director and significant stockholder. As a result of certain transactions in which entities controlled by Paul Allen engaged, the tax basis of our assets was partially increased (the “Tax Basis Increase”) and the amount of tax we may pay in the future is expected to be reduced during the approximately 15-year amortization period for such increased tax basis. Under the tax receivable agreement, we are required to pay to such affiliate 85% of the amount of any cash savings in certain taxes resulting from the Tax Basis Increase and certain other related tax benefits, subject to repayment if it is determined that these savings should not have been available to us. During the year ended December 31, 2013, we made payments (net of refunds) totaling $16.0 million to Mr. Allen’s affiliate. During the year ended December 31, 2014, we were not required to make any payments. As of December 31, 2014, we have recorded a liability of $10.5 million to Mr. Allen’s affiliate. We expect that $8.3 million will become payable during the next 12 months (which is subject to the finalization of our 2014 tax returns and may be reduced by refunds of overpayments related to prior years) and the remainder will become payable over the next several years. This liability may increase in the future to the extent that new deferred tax assets result in realized tax benefits that are subject to the tax receivable agreement or if we release the valuation allowance recorded during 2014.

As a result of the tax receivable agreement, the interests of Paul Allen and entities controlled by him and our stockholders could differ. The actual amount and timing of any payments under the tax receivable agreement will vary depending upon a number of factors. The payments that may be made to Paul Allen’s affiliate pursuant to the tax receivable agreement could be substantial. For a further discussion of the tax receivable agreement, see Note 2 to our audited consolidated

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financial statements contained elsewhere in this Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Provision for Income Taxes.”

Future sales of our shares, including sales that may occur in connection with follow-on offerings that we have agreed to effect for certain of our stockholders, may cause the market price of our Class A common stock to drop significantly, even if our business is doing well.
 
Jeffrey Katzenberg (or entities controlled by him or permitted transferees) is able to sell shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by Rule 144 under the Securities Act. In addition, entities controlled by Jeffrey Katzenberg (and certain of his permitted transferees) have the right to cause us to register the sale of shares of Class A common stock beneficially owned by them. If Jeffrey Katzenberg (or entities controlled by him or permitted transferees) were to sell a large number of their shares, the market price of our Class A common stock could decline significantly. In addition, the perception in the public markets that sales by them might occur could also adversely affect the market price of our Class A common stock.

Also, in the future, we may issue our securities in connection with investments and acquisitions. The amount of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding common stock.
 
The concentrated ownership of our common stock and certain corporate governance arrangements will prevent you and other stockholders from influencing significant corporate decisions. 
 
Jeffrey Katzenberg and entities controlled by him own 100% of our Class B common stock, representing approximately 9% of our common equity and approximately 60% of the total voting power of our common stock. Accordingly, Jeffrey Katzenberg or entities controlled by him generally have the collective ability to control (without the consent of our other stockholders) all matters requiring stockholder approval, including the nomination and election of directors, the determination of our corporate and management policies and the determination of the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. In addition, the disproportionate voting rights of the Class B common stock relative to the Class A common stock may make us a less attractive takeover target.

Anti-takeover provisions of our charter and by-laws, as well as Delaware law, may reduce the likelihood of any potential change of control or unsolicited acquisition proposal that you might consider favorable.
 
The anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Additionally, provisions of our charter and by-laws could deter, delay or prevent a third-party from acquiring us, even if doing so would benefit our stockholders. These provisions include:
the division of our capital stock into Class A common stock, entitled to one vote per share, and Class B common stock, entitled to 15 votes per share, all of which Class B common stock is owned or controlled by Jeffrey Katzenberg;
the authority of the board to issue preferred stock with terms as the board may determine;
the absence of cumulative voting in the election of directors;
following such time as the outstanding shares of Class B common stock cease to represent a majority of the combined voting power of the voting stock, prohibition on stockholder action by written consent;
limitations on who may call special meetings of stockholders;
advance notice requirements for stockholder proposals;
following such time as the outstanding shares of Class B common stock cease to represent a majority of the combined voting power of the voting stock, super-majority voting requirements for stockholders to amend the by-laws; and
stockholder super-majority voting requirements to amend certain provisions of the charter.


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To service our indebtedness and long-term lease obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness, including our outstanding 6.875% Senior Notes due 2020 (“Senior Notes”), revolving credit facility, long-term lease obligations and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. The indebtedness under our revolving credit facility bears interest at variable rates. Thus, if interest rates increase, our debt service obligations on variable rate indebtedness would increase even though the amount borrowed had remained the same, and our net income would accordingly decrease.

We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule (or at all) or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund other liquidity needs. The ability to borrow funds in the future under our revolving credit facility will depend on our meeting the restrictive covenants in the agreements governing that facility. If we breach any of these covenants, or suffer a material adverse change which restricts our borrowing ability under our revolving credit facility, we would be unable to borrow funds thereunder without a waiver, which inability could have an adverse effect on our business, financial condition and results of operations. We may need to refinance all or a portion of our indebtedness, on or before maturity. We cannot assure that we will be able to refinance any of our indebtedness, including indebtedness under our revolving credit facility and the Senior Notes, on commercially reasonable terms or at all.

The indenture of our Senior Notes and the agreements governing our revolving credit facility contain various covenants that limit our management’s discretion in the operation of our businesses.

The indenture governing the Senior Notes and the agreements governing our credit facility contain various provisions that limit our management’s discretion by restricting our ability to:
incur or guarantee debt;
create liens;
pay dividends on or redeem or repurchase stock;
make specified types of investments;
sell stock in certain of our subsidiaries;
restrict the ability of restricted subsidiaries to make dividends or other payments from restricted subsidiaries;
enter into certain sale/leaseback transactions;
enter into transactions with affiliates; and
sell assets or merge with other companies.

These restrictions on our management’s ability to operate our businesses in accordance with its discretion could have a material adverse effect on our business.

If we default under any financing arrangements, our lenders could elect to declare all amounts borrowed to be immediately due and payable, together with accrued and unpaid interest or terminate their commitments, if any, to make further extensions of credit.

Our obligations and those of the guarantors under our revolving credit facility are secured by certain of our and our subsidiaries’ assets. If we are unable to pay our obligations to the lenders under our revolving credit facility or owed to any holders of future secured debt, they could proceed against any or all of the collateral securing our indebtedness to them. The collateral under our revolving credit facility consists of substantially all of our existing assets. In addition, an acceleration of our obligations under the revolving credit facility or other debt could cause a default under the Senior Notes. We may not have, or be able to obtain, sufficient funds to make accelerated payments, including payments on the Senior Notes, or to repay the Senior Notes in full after we pay our secured lenders.


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Volatility in the U.S. credit markets could significantly impact our ability to obtain new financing or to refinance our existing debt at reasonable rates as it matures.

In the future, a significant portion of our debt may need to be refinanced. Access to capital markets for longer-term financing is dependent upon many factors outside of our control. Obtaining new financing arrangements or amending our existing ones may result in significantly higher fees and ongoing interest costs.

We may not be able to realize the expected benefits from our 2015 Restructuring Plan.

In January 2015, we announced our 2015 Restructuring Plan involving the Company’s core feature animation business intended to maximize our creative talent and resources, reduce costs and improve profitability. As a result, we recorded charges totaling approximately $210.1 million for the year ended December 31, 2014, including approximately $43.4 million relating to employee termination costs and approximately $155.5 million of film and other inventory write-downs. Since the plans and actions we take in connection with the 2015 Restructuring Plan are multi-faceted and complex, and involve uncertainty in timing and execution, unforeseen factors could cause expected savings and benefits to be delayed or not realized to the full extent planned.

Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
 
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. The Internal Revenue Service is currently auditing our tax returns for the years ended December 31, 2007 through 2009. Our California state tax returns for years subsequent to 2009 are open to audit. The Company’s India subsidiary's income tax returns are currently under examination for the tax years ended March 31, 2011 through 2013. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. While we believe that we have adequately provided for our tax liabilities, including the outcome of these examinations, it is possible that the amount paid upon resolution of issues raised may differ from the amount provided. There can be no assurance that the outcomes from these examinations will not have an adverse effect on our financial condition or results of operations.

We are the subject of an ongoing SEC investigation, which could divert management's focus, result in substantial investigation expenses, monetary fines and other possible remedies and have an adverse impact on our reputation and financial condition and results of operations.

In May 2014, the Company learned that the Division of Enforcement of the United States Securities and Exchange Commission ("SEC") was conducting an investigation into the writedown of film inventory relating to Turbo and related matters. As a result, we may incur significant legal and accounting expenditures. The Company is unable to estimate with confidence or certainty how long the SEC process will last or its ultimate outcome, including whether the Company will reach a settlement with the SEC and, if so, the amount of any related monetary fine and other possible remedies. Publicity surrounding the foregoing, or any SEC enforcement action or settlement as a result of the SEC's investigation, even if ultimately resolved favorably for us, could have an adverse impact on our reputation, business, financial condition, results of operations or cash flows.

Item 1B.
Unresolved Staff Comments
 
The Company received comment letters from the SEC's Division of Corporation Finance dated December 6, 2013 and January 23, 2014 regarding its Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013. We responded to the SEC on January 2, 2014 and on February 26, 2014, respectively, with supplemental information and analyses to address the comments from the SEC. In general, the unresolved staff comments relate to analysis we perform in connection with the assessment of film inventory impairments and the inclusion of forward-looking disclosures related to potential material impairments of film inventory, as well as goodwill.

As of the date of this Annual Report on Form 10-K, the Company has not received confirmation from the staff of the Division of Corporation Finance of the SEC that their review process relating to the comment letters had been completed. The Company intends to continue to cooperate with the SEC and respond to any remaining comments.


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The Company is currently under investigation by the SEC's Division of Enforcement as disclosed in "Item 3. Legal Proceedings." The investigation being conducted by the SEC's Division of Enforcement is related to the writedown of film inventory relating to Turbo and related matters. The Company is cooperating with the SEC in this matter.

Item 2.
Properties
 
We currently maintain two animation studios—in Glendale, California, where we are headquartered, and in Redwood City, California.

Glendale Animation Campus
 
Our Glendale animation campus, which comprises approximately 500,000 square feet, houses a majority of our employees. Other than our New Media segment (which is mostly operated out of offices in Los Angeles, California), we operate substantially all of our business segments out of the Glendale campus.

Redwood City Facility
 
We have entered into a 10-year lease agreement expiring in 2021 with respect to approximately 193,000 square feet of office space in Redwood City, California. The Company currently plans to close its Redwood City facility during 2015 and relocate certain of its employees and operations to its Glendale campus.

Other Office Locations
 
We have entered into a lease agreement with respect to additional office space in downtown Glendale, California. As a result of our acquisitions of ATV and Classic Media, we also maintain offices in Los Angeles, California, New York, New York, Nashville, Tennessee and London, England.

Item 3.
Legal Proceedings
 
See discussion of Legal Proceedings in Note 15 of the audited consolidated financial statements contained elsewhere in this Form 10-K.

Investigation by the SEC. In May 2014, the Company learned that the Division of Enforcement of the SEC is conducting an investigation into the writedown of film inventory relating to Turbo and related matters. The Company is cooperating with the SEC in this matter.

Item 4.
Mine Safety Disclosures
 
Not applicable.


Executive Officers of the Registrant
 
The following table sets forth information as to our executive officers, together with their positions and ages.

Name
 
Age
 
Position
Jeffrey Katzenberg
 
64
 
Chief Executive Officer and Director
Ann Daly
 
58
 
President
Fazal Merchant
 
41
 
Chief Financial Officer
Andrew Chang
 
49
 
General Counsel and Corporate Secretary
Michael Francis
 
52
 
Chief Global Brand Officer
Daniel Satterthwaite
 
46
 
Head of Human Resources
Edward Aleman
 
48
 
Chief Accounting Officer

Our executive officers are appointed by, and serve at the discretion of, the Board of Directors. Each executive officer is an employee of DreamWorks Animation. There is no family relationship between any executive officer or director of

24


DreamWorks Animation. Set forth below is a brief description of the business experience of the persons serving as our executive officers:

Jeffrey Katzenberg—Chief Executive Officer and Director.    Mr. Katzenberg has served as our Chief Executive Officer and member of our Board of Directors since October 2004. DreamWorks Animation is the largest animation studio in the world and has released a total of 30 animated feature films, which have enjoyed a number of critical and commercial theatrical successes. These include the franchise properties Shrek, Madagascar, Kung Fu Panda and How to Train Your Dragon. Under Mr. Katzenberg’s leadership, DreamWorks Animation became the first studio to produce all of its feature films in 3D and in 2010 became the first Company to release three CG feature films in 3D in a single year. Mr. Katzenberg co-founded and was a principal member of DreamWorks L.L.C. (“Old DreamWorks Studios”) from its founding in October 1994 until its sale to Paramount in January 2006. Prior to founding Old DreamWorks Studios, Mr. Katzenberg served as chairman of The Walt Disney Studios from 1984 to 1994. As chairman, he was responsible for the worldwide production, marketing and distribution of all Disney filmed entertainment, including motion pictures, television, cable, syndication, home entertainment and interactive entertainment. During his tenure, the studio produced a number of live-action and animated box office hits, including Who Framed Roger Rabbit, The Little Mermaid, Beauty and the Beast, Aladdin and The Lion King. Prior to joining Disney, Mr. Katzenberg was president of Paramount Studios. In addition to serving as Chairman of the Motion Picture & Television Fund Foundation, he also serves on the boards or as a trustee of the following organizations: AIDS Project Los Angeles, American Museum of the Moving Image, Cedars-Sinai Medical Center, California Institute of the Arts, Geffen Playhouse, Michael J. Fox Foundation for Parkinson’s Research, University of Southern California School of Cinematic Arts and The Simon Wiesenthal Center. With over 30 years of experience in the entertainment industry, Mr. Katzenberg brings an unparalleled level of expertise and knowledge of the Company’s core business to the Board. Among the many accomplishments of his lengthy career, he has been responsible for the production of many of the most successful animated films of all time.

Ann Daly—President.    Ms. Daly has served as our President since August 2014. Previously, Ms. Daly served as our Chief Operating Officer since October 2004 and head of feature animation at Old DreamWorks Studios since July 1997, where she guided the strategic, operational, administrative and production-oriented concerns of the animation division, as well as overseeing the worldwide video operations of Old DreamWorks Studios. Prior to joining Old DreamWorks Studios, Ms. Daly served as president of Buena Vista Home Video, North America, a division of The Walt Disney Company, where she presided over what was then the single largest home entertainment company in the world. Ms. Daly received her B.A. in Economics from the University of California, Los Angeles.

Fazal Merchant—Chief Financial Officer.    Mr. Merchant has served as our Chief Financial Officer since joining the Company in September 2014. Prior to joining the Company, Mr. Merchant was Senior Vice President and Chief Financial Officer for DIRECTV Latin America since November 2013. Until April 2014, Mr. Merchant also served as Senior Vice President, Treasurer and Corporate Development for DIRECTV. From 2011 until July 2012, he was a managing director and group head at Royal Bank of Scotland. Prior to that, he was managing director in the Investment Banking Division at Barclays Capital where he spent seven years advising clients on strategy, financing and risk solutions. He also spent nine years at Ford Motor Company in various treasury and finance management positions across functions in the U.S. and Europe.

Andrew Chang—General Counsel and Corporate Secretary.    Mr. Chang has served as our General Counsel and Corporate Secretary since January 2010. Mr. Chang joined Old DreamWorks Studios in 2002 as Head of Litigation and Head of Legal and Business Affairs for DreamWorks Distribution. He served as our Head of Litigation and Technology Law from 2004 until 2010. Prior to joining Old DreamWorks Studios, Mr. Chang was Vice President of Legal with Metro-Goldwyn-Mayer Studios Inc. ("MGM"). Prior to joining MGM, Mr. Chang was an associate with Gibson, Dunn & Crutcher LLP. Mr. Chang received a J.D. from Georgetown University Law Center and an A.B. in Politics from Princeton University.
 
Michael Francis—Chief Global Brand Officer. Mr. Francis has served as our Chief Global Brand Officer since joining the Company in December 2012. From August 2012 until joining the Company, he was Chief Executive Officer and Founder of Farview Associates, LLC, a global brand agency representing a diverse slate of retail, design and celebrity partners. From October 2011 until June 2012, Mr. Francis served as the President of J.C. Penney Company, Inc. Prior to joining J.C. Penney, he was Executive Vice President and Chief Marketing Officer for Target Corporation. Mr. Francis began his 26-year merchandising and marketing career in 1985 as an executive trainee with Marshall Field's in Chicago, which was acquired by Target in 1990. He held a series of positions of increasing responsibility at Target including Media Manager, Advertising Director, Marketing Vice President and Executive Vice President, Marketing before being named Chief Marketing Officer in 2008.

Daniel Satterthwaite—Head of Human Resources.    Mr. Satterthwaite has served as our Head of Human Resources since joining the Company in September 2007. Prior to joining the Company, Mr. Satterthwaite was with Blockbuster Inc. from

25


1993. At Blockbuster, Mr. Satterthwaite served in a variety of positions of increasing responsibility, most recently as Senior Vice President of Worldwide Human Resources.
 
Edward Aleman—Chief Accounting Officer.    Mr. Aleman has served as our Chief Accounting Officer since joining the Company in September 2014. Prior to joining the Company, Mr. Aleman was Vice President, Assistant Controller for DIRECTV U.S., a position he had held since 2004. Mr. Aleman began his employment with DIRECTV in 1999. From 1994 until 1999, he was with Beckman Coulter, where he served in a variety of accounting and treasury positions. From 1990 to 1994, he was with KPMG Peat Marwick, most recently serving as an audit supervisor. Mr. Aleman is a certified public accountant in California.



PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Price of Our Class A Common Stock
 
Our Class A common stock is currently listed on the Nasdaq Global Select Market (“NASDAQ”) under the symbol “DWA.” The following table sets forth for the periods indicated the high and low sale prices of our Class A common stock:

Year Ended December 31, 2013
High
 
Low
First Quarter
$
19.17

 
$
16.16

Second Quarter
$
25.72

 
$
18.24

Third Quarter
$
30.03

 
$
23.71

Fourth Quarter
$
35.74

 
$
27.05

 
 
 
 
Year Ended December 31, 2014
High
 
Low
First Quarter
$
35.34

 
$
26.02

Second Quarter
$
28.61

 
$
22.57

Third Quarter
$
28.18

 
$
19.98

Fourth Quarter
$
26.75

 
$
20.28

 
On February 13, 2015, the last quoted price per share of our Class A common stock on the NASDAQ was $20.72. As of February 13, 2015, there were approximately 17,459 stockholders of record of our Class A common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. As of February 13, 2015, there were two stockholders of record of our Class B common stock.

Dividend Policy
 
We continuously evaluate ways in which we can provide a meaningful return to our stockholders. We have never declared or paid cash dividends on shares of our common stock. Any future change in our dividend policy will be made at the discretion of our board of directors and will depend on contractual restrictions contained in our credit facility or other agreements, our results of operations, earnings, capital requirements and other factors considered relevant by our board of directors. See Note 12 to the audited consolidated financial statements contained elsewhere in this Form 10-K for a discussion of restrictions on our ability to pay dividends contained in our credit facility agreement.


26


Issuer Purchases of Equity Securities
 
The following table shows Company repurchases of its common stock for each calendar month for the three months ended December 31, 2014.
 
Total Number of
Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced  Plan
or Program(1)
 
Maximum Number (or Approximate Dollar Value)
of Shares That May Yet Be Purchased Under the Plan or
Program(1)
October 1-October 31, 2014

 
$

 

 
$
100,000,000

November 1-November 30, 2014

 
$

 

 
$
100,000,000

December 1-December 31, 2014

 
$

 

 
$
100,000,000

Total

 
$

 

 
 
____________________
(1) 
In July 2010, the Company’s Board of Directors authorized a stock repurchase program pursuant to which the Company may repurchase up to an aggregate of $150.0 million of its outstanding stock.

Stock Performance Graph
 
The stock price performance graph below, which assumes a $100 investment on December 31, 2009 and reinvestment of any dividends, compares DreamWorks Animation’s total stockholder return against the NASDAQ Composite Index and the Standard & Poor’s Movies and Entertainment Index for the period beginning December 31, 2009 through December 31, 2014. No cash dividends have been declared on DreamWorks Animation’s Class A common stock since the IPO.

The comparisons shown in the graph below are based on historical data and the Company cautions that the stock price performance shown in the graph below is not indicative of, and is not intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

The following graph and related information is being furnished solely to accompany this Form 10-K pursuant to Item 201(e) of Regulation S-K. It shall not be deemed “soliciting materials” or to be “filed” with the Securities and Exchange Commission (other than as provided in Item 201), nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing.


27


 
December 31,
2009
 
December 31,
2010
 
December 31,
2011
 
December 31,
2012
 
December 31,
2013
 
December 31,
2014
DreamWorks Animation SKG, Inc.
100.00

 
73.77

 
41.54

 
41.48

 
88.86

 
55.89

NASDAQ Composite Index
100.00

 
117.43

 
118.27

 
138.47

 
196.27

 
223.17

S&P Movies & Entertainment Index
100.00

 
116.74

 
129.98

 
175.01

 
272.25

 
320.76


Equity Compensation Plan Information
 
This information will be contained in our Proxy Statement for the 2015 Annual Meeting of Stockholders, which information is incorporated herein by this reference.

Item 6.
Selected Financial Data

The following table sets forth our selected financial information derived from the audited consolidated financial statements as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010.

The historical selected financial information presented below may not be indicative of our future performance. The historical selected financial information should be read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited consolidated financial statements and the notes to our audited consolidated financial statements included elsewhere in this Form 10-K. The historical selected financial information below includes the results of AwesomenessTV and Classic Media beginning on their respective acquisition dates of May 3, 2013 and August 29, 2012.
 
(In thousands, except per share data)
Year Ended December 31,
 
2014(1)(2)
 
2013(1)
 
2012(1)
 
2011
 
2010
Statements of Operations
 
 
 
 
 
 
 
 
 
Revenues
$
684,623

 
$
706,916

 
$
749,842

 
$
706,023

 
$
784,791

Operating (loss) income
(300,043
)
 
76,340

 
(64,963
)
 
109,858

 
166,844

Net (loss) income
(308,321
)
 
55,723

 
(36,422
)
 
86,801

 
170,639

Net (loss) income attributable to DreamWorks Animation SKG, Inc.
(309,614
)
 
55,084

 
(36,422
)
 
86,801

 
170,639

Basic net (loss) income per share(3)
$
(3.65
)
 
$
0.66

 
$
(0.43
)
 
$
1.04

 
$
2.00

Diluted net (loss) income per share(4)(5)
$
(3.65
)
 
$
0.65

 
$
(0.43
)
 
$
1.02

 
$
1.96

 
 
 
 
 
 
 
 
 
 
Balance Sheets
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
$
34,227

 
$
95,467

 
$
59,246

 
$
116,093

 
$
163,819

Total assets(1)(6)
1,968,710

 
2,274,228

 
1,944,892

 
1,788,913

 
1,755,878

Total borrowings(7)
515,000

 
300,000

 
165,000

 

 

Total equity
1,194,398

 
1,406,019

 
1,346,246

 
1,356,696

 
1,258,882

____________________
(1) 
Our results for the years ended December 31, 2014, 2013 and 2012 included write-downs of film and other inventory costs totaling $271.9 million, or $2.91 per share (on an after-tax basis), $20.2 million, or $0.17 per diluted share (on an after-tax basis), and $154.8 million, or $1.19 per share (on an after-tax basis), respectively.
(2) 
Our results for the year ended December 31, 2014 included restructuring-related charges (exclusive of write-downs of film and other inventory costs) totaling $54.6 million. Refer to "Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management Overview" for further details.
(3) 
The basic per share amounts for each year are calculated using the weighted average number of shares of common stock outstanding for each year.
(4) 
The diluted per share amounts include dilutive common stock equivalents, using the treasury stock method.
(5) 
The following table sets forth (in thousands) the weighted average number of options to purchase shares of common stock, stock appreciation rights, restricted stock awards and equity awards subject to performance or market conditions which were not included in the calculation of diluted per share amounts because the effects would be anti-dilutive. Due to the Company's loss during the years ended December 31, 2014 and 2012, all potential common stock equivalents were anti-dilutive and, accordingly, were not included in the calculation of the diluted per share amount.

28


 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Options to purchase shares of common stock and restricted stock awards
1,378

 
1,744

 
3,084

 
2,531

 
250

Stock appreciation rights

 
4,030

 
5,199

 
5,496

 
1,499

Total
1,378

 
5,774

 
8,283

 
8,027

 
1,749


In addition, the following table sets forth (in thousands) the number of shares of contingently issuable equity awards that were not included in the calculation of diluted shares (for years where we had net income) as the required market and/or performance conditions had not been met as of the end of the respective fiscal year. 
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Options to purchase shares of common stock and restricted stock awards
1,366

 
763

 
701

 
816

 
708

Stock appreciation rights

 

 

 
800

 
800

Total
1,366

 
763

 
701

 
1,616

 
1,508

(6) 
During the quarter ended December 31, 2010, the Company released substantially all of the valuation allowance previously taken against its deferred tax assets. Based on the Company's assessment as of December 31, 2014, the Company recorded a valuation allowance against the majority of its U.S. deferred tax assets. See “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information, as well as the impact on the income tax benefit payable to former stockholder.
(7) 
Total borrowings include bank borrowings and other debt. As of December 31, 2011 and 2010, all of these items had been repaid in accordance with the respective terms of the various agreements. During the year ended December 31, 2013, we issued senior unsecured notes and used the proceeds to repay all of the then-existing outstanding borrowings under our revolving credit facility. Refer to “Part II—Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financing Arrangements” for further information.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This section and other parts of this Form 10-K contain forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. You should read the following discussion and analysis in conjunction with our audited consolidated financial statements and related notes thereto and the “Risk Factors” section of this Form 10-K in Part I, Item 1A, as well as other cautionary statements and risks described elsewhere in this Form 10-K, before deciding to purchase, hold or sell our common stock.

Management Overview
 
The following is a summary of the significant items that affected our financial results for the year ended December 31, 2014:

During the year ended December 31, 2014, we incurred a net loss (excluding net income attributable to non-controlling interests) of $309.6 million and net loss per share of $3.65. A detailed discussion of our financial results is provided in the section entitled "—Overview of Financial Results."

During the year ended December 31, 2014, we released three feature films into the theatrical market, The Penguins of Madagascar (November 2014 release), How To Train Your Dragon 2 (June 2014 release) and Mr. Peabody and Sherman (March 2014 release). A discussion of the revenues generated from these films is provided in the section entitled "—Overview of Financial Results—Revenues and Segment Costs of Revenues—Feature Films Segment—Current year theatrical releases."

During the year ended December 31, 2014, we recorded impairment charges totaling $99.1 million (of which $96.7 million and $2.4 million was allocated to the Feature Film and Consumer Products segments, respectively), which were primarily due to the lower-than-expected worldwide theatrical performance of The Penguins of Madagascar and Mr. Peabody and Sherman. During the year ended December 31, 2013, we recorded an impairment charge totaling $13.5 million due to Turbo's performance in the international theatrical market. Further discussion is

29


provided in the section entitled "—Overview of Financial Results—Revenues and Segment Costs of Revenues—Segment Costs of Revenues."

As a result of our 2015 Restructuring Plan (as described below, as well as described in Notes 24 and 25 to the audited consolidated financial statements contained elsewhere in this Form 10-K), we recorded write-offs of film and other inventory costs totaling $155.5 million that resulted from changes in our feature film slate. In addition, we incurred restructuring-related charges totaling $43.4 million related to employee termination costs. Further discussion is provided in the section entitled "—Overview of Financial Results—Revenues and Segment Costs of Revenues—Segment Costs of Revenues," "—Overview of Financial Results—Selling and Marketing" and "—Overview of Financial Results—General and Administrative."

During the three months ended December 31, 2014, we entered into an agreement with the former stockholders of ATV under which we agreed to pay $80.0 million in lieu of any amounts of earn-out consideration that would have become payable under the Merger Agreement (as described in Note 5 to the audited consolidated financial statements contained elsewhere in this Form 10-K). As a result, during the three and 12 months ended December 31, 2014, we recorded a gain of $6.8 million and $16.5 million, respectively, to reflect the change in fair value of the contingent consideration liability. Further discussion is provided in the section entitled "—Overview of Financial Results—Change in Fair Value of Contingent Consideration."

During the three months ended December 31, 2014, we entered into an agreement with an affiliate of the Hearst Corporation ("Hearst") under which Hearst purchased a 25% ownership interest in a newly formed joint venture ("ATV Joint Venture") conducting the ATV business for $81.25 million of cash consideration. Further discussion is provided in the section entitled "—Overview of Financial Results—Net Income Attributable to Non-Controlling Interests" and in Note 5 to the audited consolidated financial statements contained elsewhere in this Form 10-K.

As a result of our recent cumulative losses, we concluded that, as of December 31, 2014, it was not more likely than not that we will be able to realize substantially all of our U.S. deferred tax assets. As a result, we recorded a valuation allowance in the amount of $338.9 million and a corresponding decrease in income tax benefit payable to former stockholder of $252.6 million, resulting in a net increase in expense in the amount of $86.3 million for the year ended December 31, 2014. Further discussion is provided in the sections entitled "—Overview of Financial Results—Provision for Income Taxes" and "—Overview of Financial Results—Decrease/Increase in Income Tax Benefit Payable to Former Stockholder."


We have historically presented exploitation costs (e.g., advertising and marketing) that are directly attributable to our feature films, television series/specials or live performances as a component of costs of revenues. Due to our continued focus on business diversification and the growth in the variety of business lines in which we now operate, our advertising and marketing efforts have become less correlated with our various revenue streams. We have determined that it is more meaningful to present all marketing and other distribution expenses as a single line item in our statements of operations. For a description of these expenses, see "—Our Revenues and Costs—Our Costs—Selling and Marketing Expenses." 

As disclosed in Note 2 to the consolidated financial statements contained elsewhere in this Form 10-K, our statements of operations presentation historically reflected exploitation costs in costs of revenues to arrive at "gross profit." We have revised our statements of operations presentation to remove advertising and marketing expenses from costs of revenues. However, we continue to believe that advertising and marketing expenses directly attributable to our feature films, television series/specials or live performances are an important component in our evaluation of segment profitability. Accordingly, our segment gross profit continues to include the advertising and marketing expenses, as well as other selling and distribution expenses, previously included within costs of revenues. This does not change the amounts of the previously reported segment profitability metric used by the Company's chief operating decision maker to review segment profitability. See Note 2 of our audited consolidated financial statements contained elsewhere in this Form 10-K for further details of these presentation changes.

2015 Restructuring Plan

On January 22, 2015, the Company announced its restructuring initiatives (the “2015 Restructuring Plan”) that are intended to refocus the Company’s core feature animation business. In connection with the 2015 Restructuring Plan, the Company has made changes in its senior leadership team and has also made changes based on its reevaluation of its feature film slate. The Company expects that the 2015 Restructuring Plan activities will result in charges related to employee-related costs resulting from headcount reductions of approximately 500 employees, lease obligations and other costs associated with the closure of the Company's Northern California facility, accelerated depreciation and amortization charges, write-offs related

30


to the recoverability of capitalized costs for certain unreleased productions and other contractual obligations. Certain of these costs were incurred during the three months ended December 31, 2014 (see Note 24 to our audited consolidated financial statements contained elsewhere in this Form 10-K). The Company expects that the remaining costs will be primarily incurred during the year ending December 31, 2015 and will result in total cash payments of approximately $76.0 million, primarily related to severance, benefits and contractual obligations. This excludes cash payments associated with anticipated excess labor costs as further described below. The actions associated with the restructuring plan are expected to be substantially completed during 2015.

The following tables summarizes the costs that we incurred during the year ended December 31, 2014, as well as the remaining costs we expect to incur in order to execute upon our 2015 Restructuring Plan:
 
Year Ended
 
Future
 
December 31, 2014
 
Periods
Employee termination costs
$
43.4

 
$
12.3

Relocation and other employee-related costs

 
7.1

Lease obligations and related charges

 
6.7

Accelerated depreciation charges

 
19.3

Film and other inventory write-offs
155.5

 

Other contractual obligations
11.2

 

Additional labor and other excess costs

 
38.3

Total restructuring and related charges
$
210.1

 
$
83.7


Employee Termination Costs. Employee termination costs consist of severance and benefits (including stock-based compensation) which are accounted for based on the type of employment arrangement between the Company and the employee. Certain of these arrangements include obligations that are accounted for as non-retirement postemployment benefits. We also employ individuals under employment contracts. Charges related to non-retirement postemployment benefits and amounts due under employment contracts for employees who will no longer provide services are accrued when probable and estimable. Severance and benefits related to all other employees are accounted for in accordance with accounting guidance on costs associated with exit or disposal activities. Thus, such costs are recorded in the period in which the terms of the restructuring plan have been established, management with the appropriate authority commits to the plan and communication to employees has occurred. Such costs will be classified within general and administrative expenses.

Relocation and Other Employee-Related Costs. Relocation and other employee-related costs primarily consist of expected costs to relocate employees from our Northern California facility to our Southern California facility. Such costs are expensed as incurred and will be primarily incurred during the year ending December 31, 2015. Such costs will be classified within general and administrative expenses.

Lease Obligations and Related Charges. Lease obligations and related charges largely consist of remaining rent payments that we expect to incur prior to exiting our Northern California facility. We expect that these charges will be incurred during the years ending December 31, 2015 and 2016. Such costs will be classified within general and administrative expenses.

Accelerated Depreciation Charges. Accelerated depreciation charges consist of our estimate of the incremental charges we expect to incur as a result of shortened estimated useful lives of certain property, plant and equipment which changed as a result of the decision to exit our Northern California facility. We expect that these charges will primarily be incurred during the year ending December 31, 2015. Such costs will be classified within general and administrative expenses.

Film and Other Inventory Write-Offs. Film and other inventory write-offs (as presented in the table above) consist of capitalized production costs for unreleased titles that were written-off due to our decision to change our future film slate, change our creative leadership, abandon certain projects and change creative direction on certain titles. Such costs are classified within costs of revenues.

Other Contractual Obligations. Other contractual obligations consist of amounts due to third parties as a result of the changes made to the Company's film slate. Such costs are classified within selling and marketing or general and administrative expenses.

Additional Labor and Other Excess Costs. We anticipate that we will incur additional costs primarily related to excess staffing in order to execute the restructuring plans specifically related to changes in the feature film slate. We currently estimate

31


that such charges will total approximately $26.1 million. These additional labor costs are incremental to our normal operating charges and are expensed as incurred. In addition, we expect to incur approximately $12.2 million of excess costs due to the closure of our Northern California facility and primarily relate to costs that we expect to incur to continue to operate the facility until we exit the facility. These costs have historically been included in capitalized overhead but will now be expensed as incurred. We expect that additional labor and other excess costs will primarily be incurred during the year ending December 31, 2015. Such costs will be classified within general and administrative expenses.

Our Business
 
Our business is primarily devoted to the development, production and exploitation of animated feature films (and other audiovisual programs) and their associated characters in the worldwide theatrical, home entertainment, digital, television, merchandising, licensing and other markets. We continue to expand our library and increase the value of our intellectual property assets by developing and producing new episodic series and other non-theatrical content based on characters from our feature films. In addition, we have an extensive library of other intellectual property rights through our acquisition of Classic Media, which can be exploited in various markets. Our activities also include technology initiatives as we explore opportunities to exploit our internally developed software.

Distribution and Servicing Arrangements
 
We derive revenue from Twentieth Century Fox Film Corporation's worldwide (excluding China and South Korea) exploitation of our films in the theatrical and post-theatrical markets. Pursuant to a binding term sheet (the "Fox Distribution Agreement") entered into with Twentieth Century Fox and Twentieth Century Fox Home Entertainment, LLC (collectively, "Fox"), we have agreed to license Fox certain exclusive distribution rights and exclusively engage Fox to render fulfillment services with respect to certain of our animated feature films and other audiovisual programs theatrically released during the five-year period beginning on January 1, 2013. As of July 1, 2014, Fox has also been licensed and engaged to render fulfillment services for our feature films theatrically released prior to January 1, 2013 in theatrical, non-theatrical, home entertainment and transactional digital media. The rights licensed to, and serviced by, Fox will terminate on the date that is one year after the initial home video release date in the United States ("U.S.") of the last film theatrically released by Fox during such five-year period, subject to any sublicense agreements approved by the Company that extend beyond such date. Under the Fox Distribution Agreement, we retain the rights to exploit: (i) all rights in China and South Korea, (ii) all forms of television, all forms of video-on-demand (excluding transactional video-on-demand) and other digital rights (other than electronic sell-through/download-to-own) in the U.S. and Canada (provided that Fox will have the first opportunity to exploit such rights if we elect to distribute such rights through a third party), (iii) television and subscription video-on-demand rights licensed pursuant to pre-existing deals or deals pending as of the date of the Fox Distribution Agreement in certain international territories, (iv) any other rights necessary for us to sell content directly to consumers through digital “storefronts” owned or controlled by us, subject to payment by us to Fox of certain amounts with respect to such sales and (v) certain other retained rights, including subsequent production, commercial tie-in and promotional rights (which Fox may exploit on a non-exclusive basis under certain conditions) and certain other ancillary rights. The Fox Distribution Agreement sets forth binding terms and conditions for such distribution rights and fulfillment services.

Through July 1, 2014, our films that were released on or before December 31, 2012 were distributed in the worldwide theatrical, home entertainment, digital and television markets by Paramount Pictures Corporation, a subsidiary of Viacom Inc., and its affiliates (collectively, "Paramount") pursuant to a distribution agreement and a fulfillment services agreement (collectively, the "Paramount Agreements"). We still continue to receive revenues derived from the exploitation of television and non-transactional digital rights in and to our feature films released prior to January 1, 2013 pursuant to the Paramount Agreements. Paramount will continue to exploit and render fulfillment services in television and related media for feature films released prior to January 1, 2013 until the date that is 16 years after the theatrical release of any such film, and will continue to exploit and service certain other agreements with Paramount’s sublicensees that remain in place after July 1, 2014.

For a summary of certain of the significant differences between the Paramount Agreements and Fox Distribution Agreement, refer to Note 4 of the audited consolidated financial statements contained elsewhere in this Form 10-K. In addition, for further details of the Paramount Distribution Agreement and the Fox Distribution Agreement, see "Part I—Item 1—Business—Distribution and Servicing Arrangements."

Beginning in 2013, our films are distributed in China and South Korea territories by separate distributors in each of the territories. The key terms of our distribution arrangements with our Chinese and South Korean distributors are largely similar to those with Fox and Paramount such that we also recognize revenues earned under these arrangements on a net basis. Our distribution partner in China is a subsidiary of Oriental DreamWorks Holding Limited ("ODW"), which is a related party.


32


We generally retain all other rights to exploit our films, including commercial tie-in and promotional rights with respect to each film, as well as merchandising, interactive, literary publishing, music publishing and soundtrack rights. Our activities associated with our Classic Media properties and ATV business are not subject to our distribution agreements with our theatrical distributors. Refer to "Part I—Item 1—Business—Distribution and Servicing Arrangements" of this Form 10-K for a discussion of our primary distribution and servicing arrangements.

Our Revenues and Costs
 
The following is a description of each of our segments:

Feature Films—consists of the development, production and exploitation of feature films in the theatrical, television, home entertainment and digital markets;

Television Series and Specials—consists of the development, production and exploitation of episodic series, direct-to-video and other non-theatrical content in the television, home entertainment and digital markets;

Consumer Products—consists of merchandising and licensing activities related to the exploitation of our intellectual property rights;

New Media—consists of ATV and related businesses; and

All Other—consists of all other segments.

Our Revenues
 
Feature Films
 
Our feature films are currently the source of a significant portion of our revenues. We derive revenue from our distributors' worldwide exploitation of our feature films in theaters and in post-theatrical markets such as home entertainment, digital, pay and free broadcast television, as well as other ancillary markets. Pursuant to the distribution arrangements with each of our theatrical distributors, prior to reporting any revenue for one of our feature films to us, each of our distributors is entitled to (i) retain a distribution fee, which is based on a percentage of gross revenues (without deduction for distribution and marketing costs and third-party distribution fees and sales agent fees) and (ii) recoup all of its permissible distribution and marketing costs with respect to the exploitation of our films on a film-by-film basis. For a summary of the main provisions of our agreements with our primary distributors, Fox and Paramount, refer to "—Distribution and Servicing Arrangements."

As such, under the various distributor agreements, each film’s total exploitation expenses and distribution fees are offset against that film’s revenues on a worldwide basis across all markets, and our distributors report no revenue to the Company until the first period in which an individual film’s cumulative worldwide gross revenues exceed its cumulative worldwide gross distribution fee and exploitation costs, which may be several quarters after a film’s initial theatrical release. Additionally, as the cumulative revenues and cumulative costs for each individual film are commingled among all markets and geographical territories and our distributors only report additional revenue to us for a film in those reporting periods in which that film’s cumulative worldwide gross revenues continue to exceed its cumulative worldwide gross costs, our reported revenues in any period are often a result of gross revenues with respect to an individual film generated in one or several territories being offset by the gross costs of both related and unrelated territories, as well as markets, for such film.

A significant amount of our transactions in foreign countries is conducted in the local currencies and, as a result, fluctuations in foreign currency exchange rates can affect our business, results of operations and cash flow. For a detailed discussion of our foreign currency risk, see "Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Market and Exchange Rate Risk—Foreign Currency Risk" of this Form 10-K.

Theatrical Distribution
 
The percentage of worldwide box office receipts (the total amount collected by theatrical exhibitors for exhibition of films) remitted to our distributor (also referred to as the "settlement rate"), which varies by territory of release, is dependent on the financial success of a given motion picture and the number of weeks that it plays at the box office. In general, our distributors' percentage of box office receipts ranges from 48% to 56% domestically and from 37% to 44% internationally (in China, this percentage is typically 25%). Historically, there was a close correlation between the success of a film in the domestic box office market and the film’s success in the international theatrical and worldwide home entertainment markets.

33


Films that had achieved domestic box office success tended to experience success in the home entertainment and international theatrical markets. However in recent years, we have observed that this correlation has changed and that performance in the domestic box office market may not correlate as closely to performance in other markets. Additionally, as the traditional home entertainment market (i.e., DVD and Blu-Ray sales) continues to decline, the correlation between performance in the domestic box office market and domestic home entertainment market continues to weaken. While we believe that domestic box office performance remains a key indicator of a film’s potential performance in subsequent markets, we do not believe that it is the only factor influencing the film’s success in these post-theatrical markets and recognize that a range of other market and film-specific factors, such as whether the film is an original or sequel, can have a significant impact on a film’s performance in the international theatrical market as well as in the worldwide home entertainment and television markets.

Additionally, our films have experienced meaningful growth in their international box office receipts over the past few years, generally due to the growth in developing theatrical markets. In recent years, we have derived on average 70% of our worldwide box office receipts and 61% of our feature film revenue from foreign countries. The conversion rate of box office receipts to feature film revenues recognized by us is dependent upon theatrical exhibitor settlement rates (as described above), as well as the post-theatrical markets in each foreign territory. Post-theatrical markets in foreign countries are generally not as well-established as in the U.S. and box office success may not equate to success in the international post-theatrical and ancillary markets.

Home Entertainment Distribution
 
Home entertainment market revenues consist of those derived from the distribution of content through physical (e.g. DVD and Blu-ray discs) or digital media formats. As it relates to physical home entertainment product (including electronic sell-through transactions), the initial release in the domestic and international home entertainment markets typically occurs three to six months following the film’s theatrical release. Accordingly, a film theatrically released during the spring or summer is typically released into the domestic home entertainment market during the holiday season of that same year, and a film theatrically released in the fall or winter is typically released into the domestic home entertainment market in the winter or early spring of the following year. The timing of international home entertainment releases is handled on a market-by-market basis, depending upon the timing of the theatrical release in that country and other market-specific factors. In recent years, the distribution of content through physical formats has contributed less to the overall revenue for our films than in the past due to changes in consumer behavior, increased competition and lower pricing by retailers.

Consumer preferences with respect to home entertainment formats have been shifting as a result of new technological developments. The rapid evolution of technology related to methods in which content can be delivered is leading to an increasing number of consumers viewing content on an on-demand basis from the Internet, on their televisions and on handheld or portable devices. Over the last several years, we have experienced a significant decrease in the traditional home entertainment market (e.g., physical DVDs). Although we have been able to increase the amount of our content delivered through digital distribution methods, this has not fully offset the decline in physical home entertainment revenues. Electronic versions of our content may be digitally distributed in the home entertainment market through the following methods: transactional video-on-demand ("TVOD"), electronic sell-through ("EST"), or other means pursuant to which a consumer acquires the right to stream, download and/or store a film digitally in exchange for payment of a discrete fee. Additionally, we classify revenues earned through cable/satellite video-on-demand ("VOD") and pay-per-view ("PPV") delivery methods similarly to our other transactional-based digital revenue streams. Transaction-based electronic deliveries and VOD/PPV are viewed similarly to the distribution of physical home entertainment products. As such, our rights, as well as the method of revenue recognition, related to these distribution methods are generally similar to those applicable to the distribution of physical formats.

Our films are distributed in the digital market primarily through our theatrical distributors. However, on occasion, we may enter into these arrangements directly with the licensee. Our films are distributed in the VOD and PPV markets through our theatrical distributors.

Television Distribution
 
Television market revenues consist of traditional television distribution methods (such as free and pay television), as well as certain digital delivery methods (subscription video-on-demand ("SVOD") and free or ad-supported video-on-demand ("FVOD")). Our films, depending on the theatrical release date, are currently distributed in the worldwide free and pay television markets by Paramount and in the international television markets (other than Canada, China and South Korea) by Fox. Under our Fox Distribution Agreement, we retain the right to distribute our films in the domestic pay television and SVOD markets.


34


Our traditional television distribution includes free television and traditional subscription-based television services (e.g. pay television). Our distributors license our films pursuant to output agreements and individual and package film agreements. These generally provide that the licensee pay a fee for each film exhibited during the specified license period for that film, which may vary according to the theatrical success of the film. Our distributors generally enter into license and/or output agreements for both pay and free television exhibition on a country-by-country basis with respect to our films. The majority of our revenue from traditional television licensing is based on predetermined rates and schedules that have been established as part of output agreements between our distributors and various television licensees. Internationally, the majority of television rights are governed by output agreements on a country-by-country or region-by-region basis. While every film is different, we expect that under our distributors' current international television agreements, the license fees generated in the international pay television market will typically begin to be recognized by our distributors approximately nine to 18 months after the domestic theatrical release and in the international free television markets approximately two and a half years after the domestic theatrical release of our films. Typically the majority of the license fee for domestic pay television and SVOD is recognized as revenues 10 to 12 months after the film has been released in the domestic theatrical market and for free television, two and a half years after the domestic theatrical release of the film. In both the international pay and free television markets, revenue is typically recognized by our distributors over several quarters as our films become available for airing in each country around the world and the films are exploited during the international license terms.

We expect that television market revenues from licensing arrangements with digital subscription-based services will generally replace the traditional pay television arrangements. For example, beginning with our feature films initially theatrically released in 2013, we have entered into arrangements directly with Netflix to exploit such titles through its SVOD services in the U.S., Canada and Scandinavian territories. Our distributors have licensed certain rights to Netflix in other territories. We expect that these revenues will be recognized eight to 12 months after the film has been released in the domestic theatrical market. The SVOD rights in the international market will be handled in most instances by our new distributor, Fox, and we expect that these revenues will be recognized 12 to 18 months after the domestic theatrical release of the film. Our revenues generated through licenses to subscription-based service providers are generally based on a fixed fee depending on the term of the license and may depend on the theatrical performance of the film. Assuming all other criteria for revenue recognition have been met, the fee is generally recognized as revenue upon commencement of the license period.

Television Series and Specials
 
Our business activities also include the development, production and exploitation of episodic series, direct-to-video and other non-theatrical content. We have certain rights in our distribution and servicing arrangements (described above) to engage our distributors to distribute non-feature film product for us. However, our revenue and cost activities related to our television series/specials and direct-to-video product are generally not subject to our distribution agreements and, accordingly, we receive payment and record revenues directly from third parties. We entered into long-term agreements with Netflix in June 2013, in May 2014 with the German television network Super RTL and, in February 2014, with southern European media company Planeta Junior regarding the production and distribution of existing and future episodic series. Each agreement provides for us to deliver over 1,000 episodes of newly created series based on our properties, including characters from the Classic Media library. Under both agreements, we will receive a per-episode license fee. We will also be entitled to retain all revenues from the exploitation of the series in other countries and derived from all media not expressly licensed to Netflix or Super RTL.

As a result of our agreement with Netflix (as described above), we are currently developing and producing original episodic content in order to fulfill our obligations under the agreement. In cases where a series is based on characters from one of our feature films, a portion of the third-party revenues generated by the new series is allocated to the feature film title from which the series originated. This revenue allocation represents a license fee charged to the series for use of intellectual property derived from the related feature film.

Direct-to-video sales are conducted through distribution agreements with various third parties. Revenues from direct-to-video sales are primarily generated in the U.S., Canada and the United Kingdom. Although the majority of direct-to-video sales are conducted through third parties, we bear the inventory risk and cash collection risk, have discretion in supplier selection and are significantly involved in the marketing of the products. Consequently, we are considered the principal in the transactions and recognize direct-to-video revenue and the related distribution, marketing and placement fees on a gross basis. Direct-to-video revenue is recognized when risk of inventory loss has transferred. Direct-to-video revenue is recorded net of estimated returns and rebates.


35


Consumer Products
 
Our Consumer Products segment includes all merchandising and licensing activities related to our intellectual properties. We generate royalty-based revenues from the licensing of our characters, film elements and other intellectual property rights to consumer product companies, retailers, live entertainment companies, music publishers, theme parks, cruise ships and hotels worldwide.

Due to the significant expansion of our merchandising and licensing activities, we have made a strategic shift in our business such that some of our consumer product programs are becoming perennial rather than focused on specific events, such as film or DVD releases. Consumer product revenues derived from our franchise properties (e.g., Shrek and Madagascar) are allocated to individual titles based on the time period surrounding a title's initial release. Consumer product revenues earned in periods significantly after initial release are attributed to the franchise's brand and not an individual title.

New Media

Our New Media segment consists of our ATV and related businesses (which historically had been included within our All Other segment). We acquired ATV in May 2013. ATV generates revenues primarily from the production and distribution of content across a variety of channels, including theatrical, home entertainment, television and online video-on-demand, and the exploitation of ancillary products and services, including marketing and consumer products.

In December 2014, we entered into an agreement with an affiliate of Hearst, whereby Hearst acquired a 25% equity interest in the ATV Joint Venture (as previously described). We consolidate the results of the ATV Joint Venture as we are the controlling party. The Company and Hearst expect to work together to support ATV efforts to enter into new content channels, broaden its audience and expand its geographic reach. ATV will also gain access to Hearst’s subscription video-on-demand platform.

All Other
 
Revenue streams generated by all other segments are related to our live performances and other ancillary revenues. Historically, the revenue activities related to our live performances have been minor relative to the size of our animated feature film business. We receive payment and record revenues directly from third parties. On June 27, 2012, we launched a live arena touring show based on our feature film How to Train Your Dragon, following a limited international launch in March 2012. The final performance of this arena touring show was in January 2013. The live arena touring show was operated through a third-party entity that we consolidate because we have determined that the entity qualifies as a variable interest entity due to our commitment to fund all losses. Subsequent to final performances of our live shows during the initial engagement, we generally continue to earn revenues through license arrangements of these productions that we enter into directly with third parties.

For a detailed discussion of our critical accounting policies related to revenue recognition, please see "—Critical Accounting Policies and Estimates—Revenue Recognition."

Our Costs
 
Costs of Revenues
 
Our costs of revenues primarily include the amortization of capitalized costs related to feature films and television series/specials (which consist of production, overhead and interest costs), participation and residual costs for our feature films and television series/specials and write-offs of amounts previously capitalized for titles not expected to be released or released titles not expected to recoup their capitalized costs. Below is a description of our costs of revenues by segment.

Feature Films. Costs of revenues related to our Feature Films segment primarily include the amortization of capitalized costs, participation and residual costs and write-offs of amounts previously capitalized for titles not expected to be released or released titles not expected to recoup their capitalized costs. While the amortization of capitalized costs is based on the amount of revenues earned from all markets (including consumer products revenue), the amount of amortization reflected in the Feature Films segment is only that attributable to revenues reported in this segment.

Television Series and Specials. Similar to our Feature Films segment, costs of revenues related to our Television Series and Specials segment primarily include the amortization of capitalized costs, participation and residual costs and write-offs of amounts previously capitalized. In addition, costs of revenues include amortization of intangible assets (which consists of

36


certain character rights). We also use a third-party, ANConnect (formerly, Anderson Merchandisors) ("Anderson"), to distribute certain home entertainment product in the U.S. and Canada, and as a result of our arrangement with Anderson, costs of revenues also include costs related to physical inventory sales.

Consumer Products. Costs of revenues associated with our Consumer Products segment are primarily related to the portion of amortization of capitalized costs of our film, television series/specials and live performances, as well as amortization of certain intangible assets, associated with consumer product and licensing revenues. Costs of revenues also include participation costs.

New Media. Costs of revenues associated with our New Media segment are those attributable to ATV and related businesses. Such costs are primarily related to the amortization of content production costs.

All Other. All Other costs of revenues primarily include those attributable to our live performance business (excluding consumer product revenues which are included in the Consumer Products segment). Costs of revenues associated with our live performance business, include the amortization of capitalized costs (excluding the portion attributable to consumer products revenue), and other operating costs.

Expenses related to our live performances are not subject to our distribution agreements and, accordingly, we directly incur costs of revenues such as operating costs associated with our live performances and amortization of any capitalized costs associated with these activities. The amortization periods for these activities vary depending on performance and activity and are typically significantly shorter than those of our feature films. As previously discussed under "Our Revenues—All Other," we operated our How to Train Your Dragon live show through a third party entity that we consolidate. Thus, the operating costs incurred through this entity are consolidated in our results of operations.
 
Segment Costs of Revenues

Costs of revenues (as previously described) and selling, marketing and other distribution expenses directly attributable to our segments are the components that comprise our "segment costs of revenues" to arrive at segment profitability ("segment gross profit"). See Note 20 of our audited consolidated financial statements contained elsewhere in this Form 10-K for a reconciliation of segment gross profit to income before income taxes.

Capitalized Production Costs
 
Capitalized production costs represent the costs incurred to develop and produce our animated films and television series/specials, which primarily consist of compensation (including salaries, bonuses, stock-based compensation and fringe benefits) for animators, creative talent and voice talent (which, in the case of sequels, can be significant), equipment and other direct operating costs relating to the production (including production overhead). In addition, capitalized production costs may include interest expense to the extent that amounts were qualified to be capitalized. Unamortized capitalized production costs are evaluated for impairment each reporting period on a title-by-title basis. If estimated remaining revenue is not sufficient to recover the unamortized capitalized production costs for that title, the unamortized capitalized production costs will be written down to fair value determined using a net present value calculation. In addition, in the event a film or television series/special is not set for production within three years from the first time costs are capitalized or the film or television series/special is abandoned, all such capitalized production costs are generally expensed. On occasion, we may change the creative direction of, or abandon, one or more of our films after being placed into production. As a result, amounts previously capitalized as production costs may be expensed.

We are responsible for certain contingent compensation, known as participations, paid to certain creative participants, such as writers, producers, directors, voice talent, animators and other persons or companies associated with the production of a film or television series/special. Generally, these payments are dependent on the performance of the film and are based on factors such as domestic box office and/or total revenue related to the film. In some cases, particularly with respect to sequels, participation costs can be significant. We are also responsible for residuals, which are payments based on revenue generated by the home entertainment and television markets, and generally made to third parties pursuant to collective bargaining, union or guild agreements or for providing certain services such as recording or synchronization services.

Capitalized production costs and participations and residual costs are amortized and included in costs of revenues in the proportion that the revenue for each film or television series/special ("Current Revenue") during the period bears to its respective estimated remaining total revenue to be received from all sources ("Ultimate Revenue"). The amount of capitalized production costs that are amortized each period will therefore depend on the ratio of Current Revenue to Ultimate Revenue for each film or television series/special for such period. Because the profitability for each title varies depending upon its

37


individual projection of Ultimate Revenues and its amount of capitalized costs incurred, total amortization may vary from period to period due to several factors, including: (i) changes in the mix of titles earning revenue, (ii) changes in any title’s Ultimate Revenue and capitalized costs and (iii) write-downs of capitalized production costs due to changes in the estimated fair value of unamortized capitalized production costs. For a discussion of write-downs of capitalized production costs recorded during the years ended December 31, 2014, 2013 and 2012, see "—Overview of Financial Results—Revenues and Segment Costs of Revenues—Segment Costs of Revenues." Additionally, over the last several years the mix of our various film revenue sources (which generally have differing levels of profitability) discussed above in "Our Revenues—Feature Films" has resulted in lower overall ultimate profitability for our future films than we have historically achieved.

For a detailed discussion of our critical accounting policies relating to film and television series/specials amortization, please see "—Critical Accounting Policies and Estimates—Film and Other Inventory Costs Amortization."

Selling and Marketing Expenses

Beginning with the quarter ended September 30, 2014, our statements of operations now include a financial statement line item titled "Selling and Marketing" (see "—Management Overview" and Note 2 of the audited consolidated financial statements contained elsewhere in this Form 10-K for further information).

Selling and marketing expenses primarily consist of advertising and marketing costs, promotion costs, distribution fees and sales commissions to outside third parties. Generally, given the structure of our feature film distribution arrangements, we do not incur distribution and marketing costs or third-party distribution and fulfillment services fees associated with our feature films. Distribution and marketing costs associated with the exploitation of our feature films would be included in selling and marketing expenses to the extent that we caused our distributors to make additional expenditures in excess of mutually agreed amounts. Our television series and specials are typically not subject to the same distribution agreements as our feature films, and accordingly, selling and marketing expenses include distribution and marketing costs directly incurred by us.

General and Administrative Expenses
 
Our general and administrative expenses consist primarily of employee compensation (including salaries, bonuses, stock-based compensation and employee benefits), rent, insurance and fees for professional services. In addition, as a result of our restructuring plans (as described in Note 24 of the audited consolidated financial statements contained elsewhere in this Form 10-K), our general and administrative expenses also include restructuring and restructuring-related charges.

Product Development Expenses
 
Product development costs primarily consist of research and development costs related to our technology initiatives.

Other Operating Income
 
Operating-related income or gains that are not considered revenues are classified as other operating income in our consolidated statements of operations. Other operating income largely consists of income recognized in connection with our contributions to ODW in the form of consulting and training services and the license of technology. Refer to the section entitled "—Overview of Financial Results—Other Operating Income" for further details of amounts recognized as other operating income during the years ended December 31, 2014 and 2013.

Seasonality
 
The timing of revenue reporting and receipt of cash remittances to us, related to our feature films, from our distributors fluctuates based upon the timing of our films’ theatrical and home entertainment releases and, with respect to certain of our distributors, the recoupment position of our distributors on a film-by-film basis, which varies depending upon a film’s overall performance. From time-to-time, we may enter into license arrangements directly with third-parties to distribute our titles through digital media formats. The timing of revenues earned under these license arrangements fluctuates depending on when each title is made available. Furthermore, the timing of revenues related to our television specials may fluctuate if the title is holiday-themed. The licensing of our character and film elements are influenced by seasonal consumer purchasing behavior and the timing of our animated feature film theatrical releases and television series/specials broadcasts. We expect that revenues generated from our Classic Media properties will tend to be higher during the fourth quarter of each calendar year due to the holiday-themed content offered through television distribution rights as well as home entertainment products geared towards the holiday season. As a result, our annual or quarterly operating results, as well as our cash on hand, for any period are not necessarily indicative of results to be expected for future periods.

38


Overview of Financial Results
 
The following table sets forth, for the years presented, certain data from our audited consolidated statements of operations. This information should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Form 10-K.
 
 
 
 
 
 
 
Increase (Decrease)
 
 
 
 
 
 
 
% Change
 
$ Change
 
2014(1)
 
2013(1)
 
2012(1)
 
2014 vs. 2013
 
2013 vs. 2012
 
2014 vs. 2013
 
2013 vs. 2012
 
(in millions, except percentages and per share data)
Revenues
$
684.6

 
$
706.9

 
$
749.8

 
(3.2
)%
 
(5.7
)%
 
$
(22.3
)
 
$
(42.9
)
Operating expenses (income):
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of revenues
681.1

 
416.4

 
644.6

 
63.6
 %
 
(35.4
)%
 
264.7

 
(228.2
)
Selling and marketing
61.2

 
39.4

 
35.2

 
55.3
 %
 
11.9
 %
 
21.8

 
4.2

General and administrative
262.0

 
184.6

 
130.1

 
41.9
 %
 
41.9
 %
 
77.4

 
54.5

Product development
5.2

 
3.3

 
4.9

 
57.6
 %
 
(32.7
)%
 
1.9

 
(1.6
)
Change in fair value of contingent consideration
(16.5
)
 
1.5

 

 
NM

 
100.0
 %
 
(18.0
)
 
1.5

Other operating income
(8.4
)
 
(14.7
)
 

 
(42.9
)%
 
100.0
 %
 
(6.3
)
 
14.7

Operating (loss) income
(300.0
)
 
76.4

 
(65.0
)
 
NM

 
NM

 
(376.4
)
 
141.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest (expense) income, net
(11.9
)
 
(0.1
)
 
0.5

 
NM

 
NM

 
(11.8
)
 
(0.6
)
Other (expense) income, net
(14.4
)
 
6.2

 
8.3

 
NM

 
(25.3
)%
 
(20.6
)
 
(2.1
)
Decrease (increase) in income tax benefit payable to former stockholder
253.9

 
(0.7
)
 
2.6

 
NM

 
NM

 
254.6

 
(3.3
)
(Loss) income before loss from equity method investees and income taxes
(72.4
)
 
81.8

 
(53.6
)
 
NM

 
NM

 
(154.2
)
 
135.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from equity method investees
13.8

 
6.9

 

 
100.0
 %
 
100.0
 %
 
6.9

 
6.9

(Loss) income before income taxes
(86.2
)
 
74.9

 
(53.6
)
 
NM

 
NM

 
(161.1
)
 
128.5

Provision (benefit) for income taxes
222.1

 
19.2

 
(17.2
)
 
NM

 
NM

 
202.9

 
36.4

Net (loss) income
(308.3
)
 
55.7

 
(36.4
)
 
NM

 
NM

 
(364.0
)
 
92.1

Less: Net income attributable to non-controlling interests
1.3

 
0.6

 

 
116.7
 %
 
100.0
 %
 
0.7

 
0.6

Net (loss) income attributable to DreamWorks Animation SKG, Inc.
$
(309.6
)
 
$
55.1

 
$
(36.4
)
 
NM

 
NM

 
$
(364.7
)
 
$
91.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net (loss) income per share attributable to DreamWorks Animation SKG, Inc.
$
(3.65
)
 
$
0.65

 
$
(0.43
)
 
NM

 
NM

 
$
(4.30
)
 
$
1.08

Shares used in computing diluted net (loss) income per share(2)
84.8

 
85.3
 
84.2
 
(0.6
)%
 
1.3
 %
 
 
 
 
____________________
NM: Not Meaningful.
(1) 
Our results for the years ended December 31, 2014, 2013 and 2012 included write-downs of film and other inventory costs totaling $271.9 million, or $2.91 per share (on an after-tax basis), $20.2 million, or $0.17 per diluted share (on an after-tax basis), and $154.8 million, or $1.19 per share (on an after-tax basis), respectively. See "—Year Ended December 31, 2014 Compared to Year Ended December 31, 2013—Segment Costs of Revenues" and "—Year Ended December 31, 2013 Compared to Year Ended December 31, 2012—Segment Costs of Revenues" for further details.
(2) 
During the year ended December 31, 2013, we repurchased a total of 1.3 million shares of our Class A common stock. No repurchases were made during the years ended December 31, 2014 and 2012.

39


The following chart sets forth (in millions), for the years presented, our revenues by segment. Certain amounts in the prior periods presented have been reclassified to conform to the Company's 2014 presentation. This information should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Form 10-K.
 
____________________
(1) 
For each period shown, "Feature Films" consists of revenues attributable to the development, production and exploitation of feature films in the theatrical, television, home entertainment and digital markets. "Television Series and Specials" consists of revenues attributable to the development, production and exploitation of television, direct-to-video and other non-theatrical content. "Consumer Products" consists of revenues attributable to our merchandising and licensing activities related to the exploitation of our intellectual property rights. "New Media" consists of revenues attributable to ATV and related businesses. "All Other" consists of revenues not attributable to the reportable segments.
 


40


Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Revenues and Segment Costs of Revenues.
 
Feature Films Segment
 
Operating results for the Feature Films segment were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2014
 
2013
 
$
 
%
Segment revenues
$
453.5

 
$
500.1

 
$
(46.6
)
 
(9.3
)%
Segment costs of revenues
542.9

 
296.8

 
246.1

 
82.9
 %
Segment gross (loss) profit
$
(89.4
)
 
$
203.3

 
$
(292.7
)
 
(144.0
)%

Segment Revenues

The following chart sets forth the revenues generated by our Feature Films segment, by category, for the year ended December 31, 2014 as compared to the year ended December 31, 2013 (in millions). Certain amounts in the prior periods presented have been reclassified to conform to the Company's 2014 presentation.

____________________
(1) 
For each period shown, "Current year theatrical releases" consists of revenues attributable to films released during the current year, "Prior year theatrical releases" consists of revenues attributable to films released during the immediately prior year, and "Preceding year theatrical releases" consists of revenues attributable to films released during all previous

41


periods that are not yet part of our library. Titles are added to the "Library" category starting with the quarter of a title's second anniversary of the initial domestic theatrical release.

Current year theatrical releases. Revenues generated by our "Current year theatrical releases" category increased $8.5 million, or 5.8%, during the year ended December 31, 2014 when compared to the year ended December 31, 2013. This increase was primarily due to our summer 2014 sequel film, How to Train Your Dragon 2 (June 2014 release), performing stronger in the worldwide theatrical and home entertainment markets than our summer 2013 original film, Turbo (July 2013 release). In addition, although we released three films in 2014 compared to two films in 2013, our 2014 spring film Mr. Peabody and Sherman (March 2014 release) contributed minimal revenues during the year ended December 31, 2014 due to its weak performance compared to revenues contributed by The Croods (March 2013 release) during the year ended December 31, 2013. As it relates to Mr. Peabody and Sherman, although Fox has not yet recouped their marketing and distribution costs, we currently anticipate that they will recoup their costs from their future on-going distribution of this title in the post-theatrical (e.g., home entertainment and television) markets. Refer to "Segment Costs of Revenues" below for further discussion.

Current year theatrical release revenues for the year ended December 31, 2014 consisted of:

The Penguins of Madagascar: The Penguins of Madagascar contributed $6.9 million, or 1.0%, of consolidated revenues, primarily earned in the Chinese theatrical market, where our films are distributed outside of our arrangement with Fox. During the year ended December 31, 2014, Fox did not report any revenue to us for The Penguins of Madagascar as they had not yet recouped their marketing and distribution costs, largely due to The Penguins of Madagascar's low box office results. Our distributor in the Chinese theatrical market recouped their distribution and marketing costs during the year ended December 31, 2014, as their costs relative to The Penguins of Madagascar's theatrical performance in their distribution territory was lower relative to the costs incurred by Fox in other territories;
How to Train Your Dragon 2: How to Train Your Dragon 2 contributed $142.8 million, or 20.9%, of revenues, primarily earned in the worldwide theatrical and home entertainment markets; and
Mr. Peabody and Sherman: Mr. Peabody and Sherman contributed $4.5 million, or 0.7%, of revenues, primarily earned in the Chinese theatrical and ancillary markets.

Current year theatrical release revenues for the year ended December 31, 2013 consisted of:

Turbo: Turbo contributed $8.0 million, or 1.1%, of consolidated revenues, primarily earned in the Chinese and South Korean theatrical markets, where our films are distributed outside of our arrangement with Fox. During the year ended December 31, 2013, Fox did not report any revenue to us for Turbo as they had not yet recouped their marketing and distribution costs, largely due to Turbo's low box office results. Our distributors in the Chinese and South Korean theatrical markets recouped their distribution and marketing costs during the year ended December 31, 2013, as their respective costs relative to Turbo's theatrical performance in their distribution territories were lower relative to the costs incurred by Fox in other territories; and
The Croods: The Croods contributed $137.7 million, or 19.5%, of revenues, primarily earned in the worldwide theatrical and home entertainment markets.

Prior year theatrical releases. Revenues generated by our "Prior year theatrical releases" category decreased $40.4 million, or 24.1%, to $127.3 million during the year ended December 31, 2014 when compared to $167.7 million during the year ended December 31, 2013. The primary drivers of our prior year theatrical release revenues were the following:

For the year ended December 31, 2014, "Prior year theatrical release" revenues consisted of those generated by Turbo (July 2013 release) and The Croods (March 2013 release) which contributed $51.8 million (or 7.6%) and $75.5 million (or 11.0%) of consolidated revenues, respectively, primarily related to each title's SVOD distribution, as well as revenues earned in the worldwide television and home entertainment markets;
For the year ended December 31, 2013, "Prior year theatrical release" revenues consisted of those generated by Rise of the Guardians (our November 2012 release) and Madagascar 3 (June 2012 release) which contributed $76.9 million (or 10.9%) and $90.8 million (or 12.8%) of consolidated revenues, respectively, primarily earned in the worldwide home entertainment and television markets;
The decrease in revenues was partially attributable to Rise of the Guardians, which was an overall better-performing title when compared to Turbo and, as a result, contributed higher revenues to the year ended December 31, 2013, compared to the revenues contributed by Turbo during the year ended December 31, 2014; and

42


2013's "Prior year theatrical releases" category benefited from Madagascar 3, which was a stronger performing title than each of 2014's "Prior year theatrical release" titles.

Preceding year theatrical releases. Revenues generated by our "Preceding year theatrical releases" category consist of revenues attributable to films released during all previous periods that are not yet part of our library. Revenues generated by our "Preceding year theatrical releases" category decreased $3.0 million, or 21.9%, to $10.7 million during the year ended December 31, 2014 when compared to $13.7 million of revenues during the year ended December 31, 2013, as 2013's "Preceding year theatrical releases" category included Puss in Boots (a sequel title), which is a stronger title as compared to Rise of the Guardians (an original title).

Preceding year theatrical release revenues during the year ended December 31, 2014 were comprised of Rise of the Guardians and Madagascar 3, which contributed an aggregate of $10.7 million, or 1.6%, of consolidated revenues, primarily earned in the worldwide home entertainment and international television markets.

Preceding year theatrical release revenues during the year ended December 31, 2013 were comprised of Puss in Boots and Kung Fu Panda 2, which contributed an aggregate of $13.7 million, or 1.9%, of consolidated revenues, primarily earned in the worldwide home entertainment and international television markets.

Library. Titles are added to the "Library" category starting with the quarter of a title's second anniversary of the initial domestic theatrical release. Revenue from our "Library" category decreased $11.7 million, or 6.8%, to $161.3 million during the year ended December 31, 2014 when compared to $173.0 million during the year ended December 31, 2013. During the year ended December 31, 2013, our "Library" category benefited from the timing of a larger number of titles becoming available for release in the international free television market which resulted in higher revenues for this period when compared to the year ended December, 2014. Our feature film titles are generally released into the international free television market two to three years after the title's initial domestic theatrical release. Thus, revenues earned from the international free television market are impacted by the timing and quantity of feature films released during each of the recent years.

During the year ended December 31, 2014, our "Library" category benefited from revenues earned in the international free television market by Madagascar 3 and Puss in Boots. During the year ended December 31, 2013, our "Library" category benefited from revenues earned in the international free television market by Kung Fu Panda 2, Megamind, Shrek Forever After and How to Train Your Dragon.

Segment Costs of Revenues

The primary component of costs of revenues for our Feature Film segment is film amortization and impairment costs. Segment costs of revenues as a percentage of revenues for our Feature Films segment were 119.7% during the year ended December 31, 2014 compared to 59.3% for the year ended December 31, 2013. The following were the primary drivers of our segment costs of revenues during the year ended December 31, 2014 when compared to the year ended December 31, 2013:

During the year ended December 31, 2014, we recorded impairment charges totaling $96.7 million (exclusive of the impairment allocated to the Consumer Products segment of $2.4 million), which were primarily due to the lower-than-expected worldwide theatrical performance of The Penguins of Madagascar and Mr. Peabody and Sherman;
During the year ended December 31, 2013, we recorded an impairment charge of $11.9 million (exclusive of the impairment allocated to the Consumer Products segment of $1.6 million) on Turbo due to the title's performance in the international theatrical market during the last two months of the quarter ended December 31, 2013;
In connection with our 2015 Restructuring Plan (see Notes 24 and 25 of our audited consolidated financial statements contained elsewhere in this Form 10-K), we reviewed our future feature film slate and reassessed the creative direction of our unreleased titles. As a result, we recorded write-offs of film costs totaling $153.6 million and other contractual obligations totaling $9.4 million; and
Excluding the charges described above, segment costs of revenues as a percentage of revenues was higher during the year ended December 31, 2014 when compared to the year ended December 31, 2013. This increase was primarily due to the high amortization rates of our recent weaker-performing titles (The Penguins of Madagascar, Mr. Peabody and Sherman and Turbo), which was partially offset by the low amortization rate of How to Train Your Dragon 2, which was a stronger-performing title.


43


See "—Critical Accounting Policies and Estimates—Film and Other Inventory Costs Amortization" for further discussion regarding the Company's process for assessing its film and other inventory costs. See also Note 6 to the consolidated financial statements contained elsewhere in this Form 10-K.

Television Series and Specials Segment
 
Operating results for the Television Series and Specials segment were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2014
 
2013
 
$
 
%
Segment revenues
$
103.0

 
$
105.9

 
$
(2.9
)
 
(2.7
)%
Segment costs of revenues
96.3

 
82.8

 
13.5

 
16.3
 %
Segment gross profit
$
6.7

 
$
23.1

 
$
(16.4
)
 
(71.0
)%

Segment Revenues

As illustrated in the table above, revenues generated from our Television Series and Specials segment decreased $2.9 million to $103.0 million during the year ended December 31, 2014 when compared to $105.9 million during the year ended December 31, 2013. The main drivers of the changes in revenues were the following:

A decline in revenues generated by our Classic Media properties due to higher than expected returns of seasonal and newly-released home entertainment product and certain sales incentives offered during the year ended December 31, 2014 when compared to the year ended December 31, 2013; and
An increase in revenues generated by our television series as we licensed three additional series to Netflix during the year ended December 31, 2014.

Segment Costs of Revenues

Segment costs of revenues, the primary component of which is inventory amortization costs, as a percentage of revenues for our Television Series and Specials segment were 93.5% for the year ended December 31, 2014 compared to 78.2% for the year ended December 31, 2013. The following were the primary drivers of our segment costs of revenues during the year ended December 31, 2014 when compared to the year ended December 31, 2013:

We recorded write-downs of capitalized film costs totaling $13.3 million during the year ended December 31, 2014, which were primarily due to revisions in estimated future revenues for certain of our television specials;
During the year ended December 31, 2013, we recorded a $6.7 million write-down of capitalized film costs as a result of a change that occurred during the fourth quarter of 2013 in the planned exploitation of one of our short-form content titles; and
Marketing costs incurred in 2014 increased when compared to 2013 as a result of the quantity of new episodic content we made available to Netflix during the year ended December 31, 2014.

Consumer Products Segment

Operating results for the Consumer Products segment were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2014
 
2013
 
$
 
%
Segment revenues
$
64.8

 
$
67.4

 
$
(2.6
)
 
(3.9
)%
Segment costs of revenues
41.1

 
39.0

 
2.1

 
5.4
 %
Segment gross profit
$
23.7

 
$
28.4

 
$
(4.7
)
 
(16.5
)%


44


Segment Revenues

As illustrated in the table above, revenues generated from our Consumer Products segment decreased $2.6 million, or 3.9%, to $64.8 million during the year ended December 31, 2014 when compared to $67.4 million during the year ended December 31, 2013. The main drivers of the changes in revenues were the following:

An increase in merchandising and licensing revenues related to 2014's "Current year theatrical releases" compared to 2013's "Current year theatrical releases" primarily attributable to revenues generated by How to Train Your Dragon 2;
An increase in revenues of $5.7 million generated by two of our new business initiatives;
The year ended December 31, 2013 benefited from revenues generated from the sale of our share of rights in the 1960s live-action Batman television series; and
During the year ended December 31, 2013, in exchange for our equity interest in ODW during 2013, we granted an intellectual property license to certain of our trademarks, trade names and other intellectual property, and, as a result, we recognized revenues in the amount of $7.8 million, which represents the portion of the license's value attributable to the equity interests of ODW held by our Chinese Joint Venture partners.

Segment Costs of Revenues

Segment costs of revenues as a percentage of revenues for our Consumer Products segment increased to 63.4% during the year ended December 31, 2014 compared to 57.9% during the year ended December 31, 2013. This increase was partially attributable to impairment charges totaling $2.4 million, which were primarily related to The Penguins of Madagascar (as previously described). In addition, segment costs of revenues during the year ended December 31, 2013 benefited from intellectual property licenses granted to ODW with no associated costs, as well as the sale of our share of rights in the 1960s live-action Batman television series, which had minimal associated costs. During the year ended December 31, 2014, there were no similar revenue streams.

New Media Segment

Operating results for our New Media segment were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2014
 
2013
 
$
 
%
Segment revenues
$
49.0

 
$
11.4

 
$
37.6

 
NM
Segment costs of revenues
31.1

 
9.1

 
22.0

 
NM
Segment gross profit
$
17.9

 
$
2.3

 
$
15.6

 
NM
____________________
NM: Not Meaningful.

Segment Revenues

Revenues generated by our New Media segment increased $37.6 million to $49.0 million during the year ended December 31, 2014 when compared to $11.4 million during the year ended December 31, 2013. Revenues generated by our New Media segment increased primarily because the year ended December 31, 2014 included a full 12-month period compared to only eight months in the same period of the prior year due to the timing of our acquisition of ATV. In addition, when comparing the year ended December 31, 2014 to the prior year, this segment generated higher revenues from sponsorship arrangements and content licensing fees.

Segment Costs of Revenues

During the years ended December 31, 2014 and 2013, costs of revenues related to our New Media segment were $31.1 million (or 63.5% of segment revenues) and $9.1 million (or 79.8% of segment revenues). Segment costs of revenues as a percentage of segment revenues decreased as a result of higher revenues generated from sponsorship deals, which is a revenue stream that typically has lower associated costs.


45


All Other Segments

Operating results for all other segments in the aggregate were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2014
 
2013
 
$
 
%
Segment revenues
$
14.3

 
$
22.1

 
$
(7.8
)
 
(35.3
)%
Segment costs of revenues
19.3

 
22.1

 
(2.8
)
 
(12.7
)%
Segment gross loss
$
(5.0
)
 
$

 
$
(5.0
)
 
NM

____________________
NM: Not Meaningful.

Segment Revenues

Revenues generated by our All Other segment decreased $7.8 million to $14.3 million during the year ended December 31, 2014 when compared to $22.1 million during the year ended December 31, 2013. Revenues generated by our All Other segment decreased as we are no longer operating any live performance productions. Revenues earned during the year ended December 31, 2013 included $11.0 million attributable to Shrek The Musical related to the title's SVOD distribution. The decrease in revenues attributable to our live performances was partially offset by an increase in ancillary revenues.

Segment Costs of Revenues

During the years ended December 31, 2014 and 2013, costs of revenues related to our All Other segment were $19.3 million and $22.1 million, respectively, which primarily consisted of those related to our live performance business and other ancillary revenues. In addition, during the year ended December 31, 2014, segment costs of revenues also included a write-off of capitalized costs in the amount of $5.4 million as a result of a change in the creative direction for one of our live productions.

Selling and Marketing. Selling and marketing expenses directly attributable to our feature films, television series/specials or live performances are included as a component of segment profitability, and, thus, are included in each respective segment's revenues and costs of revenues discussion. As illustrated in the table below (in millions, except percentages), for the years ended December 31, 2014 and 2013, the amount of selling and marketing expenses not allocated to our segments was $11.6 million and $6.0 million, respectively.
 
Year Ended December 31,
 
Increase (Decrease)
 
2014
 
2013
 
$
 
%
Selling and marketing
$
61.2

 
$
39.4

 

 

Less: allocation to segments
49.6

 
33.4

 

 

Unallocated selling and marketing
$
11.6

 
$
6.0

 
$
5.6

 
93.3
%

The increase of $5.6 million, or 93.3%, when comparing the year ended December 31, 2014 to the year ended December 31, 2013, was primarily attributable to costs incurred by our recently acquired entities, new business initiatives and increased spending on brand marketing.

General and Administrative. Total general and administrative expenses increased $77.4 million to $262.0 million (including $18.4 million of stock-based compensation expense) for the year ended December 31, 2014 from $184.6 million (including $17.7 million of stock-based compensation expense) for the year ended December 31, 2013. This 41.9% aggregate increase was primarily attributable to the following:

Charges, which primarily consist of employee termination costs and other contractual obligations, related to our 2015 Restructuring Plan totaling $45.2 million (see Notes 24 and 25 of our audited consolidated financial statements contained elsewhere in this Form 10-K);
An increase of $14.9 million as a result of our recent acquisitions;
Higher salaries and benefits of $21.6 million (excluding the effect of our recent acquisitions) due to new employment agreements related to certain executives and increased headcount to support our brand and business diversification efforts;

46


$18.6 million of increased professional fees and facility expenses to support such expansion of business lines not related to our feature animation business; and
These increases were partially offset by a decrease of $22.5 million attributable to lower incentive compensation expense (excluding stock-based compensation) related to performance-based compensation, which varies with changes in forecasts of the related performance metrics that will be achieved.

Product Development. Product development costs increased $1.9 million to $5.2 million for the year ended December 31, 2014 from $3.3 million for the year ended December 31, 2013. Product development costs primarily represent research and development costs related to our technology initiatives. The increase was primarily due to write-offs of capitalized software costs related to projects that we are no longer pursuing.

Change in Fair Value of Contingent Consideration. During the year ended December 31, 2014, we recorded a gain of $16.5 million related to the change in fair value of contingent consideration compared to a loss of $1.5 million during the year ended December 31, 2013. The primary drivers of the change in fair value of contingent consideration during the year ended December 31, 2014 were decreases in the estimate of the contingent consideration liability due to declines in forecasted earnings for each of 2014 and 2015, as well as the inclusion of a probability-weighted factor in our determination of fair value during the three months ended September 30, 2014, and the settlement of the contingent consideration liability related to the acquisition of ATV during the quarter ended December 31, 2014. Refer to Note 5 of the audited financial statements contained elsewhere in this Form 10-K for further information.

Other Operating Income. As a result of executing the Chinese Joint Venture transaction during the quarter ended June 30, 2013, we made certain non-cash contributions to ODW which resulted in the recognition of income associated with these contributions. During the years ended December 31, 2014 and 2013, other operating income attributable to our ODW contributions totaled $8.4 million and $8.1 million, respectively, due to consulting and training services provided, as well as a portion of the value of the technology license granted. Additionally, during the year ended December 31, 2013, other operating income included a gain of $6.4 million, which resulted from the sale of one of our technology projects.

Operating Loss/Income. Operating loss for the year ended December 31, 2014 was $300.0 million compared to operating income of $76.4 million for the year ended December 31, 2013. The decrease of $376.4 million in operating income for the year ended December 31, 2014 was largely due to the impairment and write-downs of capitalized film costs, as well as increased general and administrative expenses due to our restructuring-related charges (as previously described).

Interest Expense, Net. For each of the years ended December 31, 2014 and 2013, the amounts recorded as interest expense (net of interest income and amounts capitalized) were $11.9 million and $0.1 million, respectively. This increase of $11.8 million was primarily due to an increase in interest expense as a result of higher outstanding debt balances.

Other Expense/Income, Net.  For the years ended December 31, 2014 and 2013, total other expense/income (net) was a net expense of $14.4 million compared to net other income of $6.2 million, respectively. Other expense increased $20.6 million, of which $16.5 million was due to write-offs of strategic investments made by us that were determined to not be recoverable as of December 31, 2014. During the year ended December 31, 2014, such write-offs included two of our cost method investments. During the year ended December 31, 2013, other income consisted mainly of income recognized in connection with preferred vendor arrangements with certain of our strategic alliance partners.

Decrease/Increase in Income Tax Benefit Payable to Former Stockholder.  As a result of the Tax Basis Increase (as described in "—Critical Accounting Policies and Estimates—Provision for Income Taxes"), we are obligated to remit to the former stockholder's affiliate 85% of any cash savings in U.S. Federal income tax and California franchise tax and certain other related tax benefits, subject to repayment if it is determined that these savings should not have been available to us. For the year ended December 31, 2014, our payable to the former stockholder significantly decreased because of a valuation allowance that we established against certain deferred tax assets (see "Provision for Income Taxes" for further discussion). As a result, for the year ended December 31, 2014, we recorded $253.9 million as a decrease in payable to former stockholder.

For the year ended December 31, 2013, our payable to the former stockholder was impacted by our ability to retroactively apply research and development credits and other federal tax incentives as a result of extensions granted under the American Taxpayer Relief Act of 2012 (the "Act"). As the Act was not enacted until January 2, 2013, we were not able to apply certain federal tax incentives until the quarter ended March 31, 2013. For the year ended December 31, 2013, we recorded $0.7 million as an increase in income tax benefit payable to the former stockholder primarily as a result of the Act and imputed interest on our payable to former stockholder, which were partially offset by a revaluation of our deferred tax assets.


47


Loss from Equity Method Investees.  During the years ended December 31, 2014 and 2013, our portion of the losses incurred by equity method investees was $13.8 million and $6.9 million, respectively, which were primarily attributable to our share of losses incurred by ODW. The increase between years was primarily due to a full 12-month period being included in our results for the year ended December 31, 2014, as ODW did not commence operations until May 2013.

Provision for Income Taxes.  For the year ended December 31, 2014, we recorded a provision for income taxes of $222.1 million, or an effective tax rate of (65.3)%. For the year ended December 31, 2013, we recorded a provision for income taxes of $19.2 million, or an effective tax rate of 25.4%. When our provision for income taxes is combined with the amounts associated with the Decrease/Increase in Income Tax Benefit Payable to Former Stockholder (see above), the combined effective tax rates for the years ended December 31, 2014 and 2013 were 9.3% and 26.3%, respectively. As of December 31, 2014, we determined that it was necessary to establish a valuation allowance against certain U.S. deferred tax assets due to our recent cumulative losses, which were primarily caused by the impairments and restructuring-related charges recorded during the quarter ended December 31, 2014. The impact of recording the valuation allowance was partially mitigated by a corresponding decrease in the income tax benefit payable to former stockholder (which is recorded in its own financial statement line item). To the extent that we have cumulative income and expect to recognize taxable income in future periods, we would release the valuation allowance. This would result in a corresponding increase in the income tax benefit payable to former stockholder, which would partially offset the effect of releasing the valuation allowance.

Our effective tax rate and our combined effective tax rate for the year ended December 31, 2014 were different than the 35% statutory federal rate primarily due to the valuation allowance established against certain deferred tax assets. Our effective tax rate and our combined effective tax rate for the year ended December 31, 2013 were lower than the 35% statutory federal rate primarily due to research and development credits (including the retroactive impact of the Act discussed above), release of reserves for uncertain tax positions as a result of the conclusion of a California examination for tax years 2005 through 2007, a revaluation of our deferred tax assets, and other federal tax incentives.

Net Income Attributable to Non-controlling Interests.  As a result of our acquisition of Classic Media, we hold a 50% equity interest in a joint venture operated through Bullwinkle Studios, LLC ("Bullwinkle Studios"). In addition, in December 2014, we sold an interest in our ATV business to a third-party. We consolidate the results of both of these entities because we retain control over the operations. Net income attributable to non-controlling interests represents the joint venture partner's share of the income that is consolidated in our operating results. For the years ended December 31, 2014 and 2013, net income attributable to non-controlling interests was $1.3 million and $0.6 million, respectively. The increase of $0.7 million was primarily attributable to the newly established ATV Joint Venture.

Net Loss/Income Attributable to DreamWorks Animation SKG, Inc.  Net loss (excluding net income attributable to non-controlling interests) for the year ended December 31, 2014 was $309.6 million, or $3.65 per share, as compared to net income of $55.1 million, or $0.65 per diluted share, in the corresponding period in 2013.


48


Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
 
Revenues and Segment Costs of Revenues.
 
Feature Films Segment
 
Operating results for the Feature Films segment were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Segment revenues
$
500.1

 
$
582.7

 
$
(82.6
)
 
(14.2
)%
Segment costs of revenues
296.8

 
514.0

 
(217.2
)
 
(42.3
)%
Segment gross profit
$
203.3

 
$
68.7

 
$
134.6

 
195.9
 %

Segment Revenues

The following chart sets forth the revenues generated by our Feature Films segment, by category, for the year ended December 31, 2013 as compared to the year ended December 31, 2012 (in millions):

____________________
(1) 
For each period shown, "Current year theatrical releases" consists of revenues attributable to films released during the current year, "Prior year theatrical releases" consists of revenues attributable to films released during the immediately prior year, and "Preceding year theatrical releases" consists of revenues attributable to films released during all previous periods that are not yet part of our library. Titles are added to the "Library" category starting with the quarter of a title's second anniversary of the initial domestic theatrical release.

49



Current year theatrical releases. Revenues generated by our "Current year theatrical releases" category decreased $46.8 million, or 24.3%, during the year ended December 31, 2013 when compared to the year ended December 31, 2012. This decrease was primarily due to our summer 2012 sequel film, Madagascar 3 (June 2012 release), performing stronger in the theatrical and home entertainment markets than our summer 2013 original film, Turbo (July 2013 release). This performance-related decrease was largely offset by revenues generated by our spring 2013 film, The Croods (March 2013 release). We did not release a film during a similar time frame during the year ended December 31, 2012. However, during 2012, we had a fall theatrical release, Rise of the Guardians (November 2012 release), which only contributed ancillary revenues as the film had not yet recouped its distribution and marketing costs due to its weak theatrical performance.

Current year theatrical release revenues for the year ended December 31, 2013 consisted of:

Turbo: Turbo contributed $8.0 million, or 1.1%, of consolidated revenues, primarily earned in the Chinese and South Korean theatrical markets, where our films are distributed outside of our arrangement with Fox. During the year ended December 31, 2013, Fox did not report any revenue to us for Turbo as they had not yet recouped their marketing and distribution costs, largely due to Turbo's low box office results. Our distributors in the Chinese and South Korean theatrical markets recouped their distribution and marketing costs during the year ended December 31, 2013, as their respective costs relative to Turbo's theatrical performance in their distribution territories were lower relative to the costs incurred by Fox in other territories; and
The Croods: The Croods contributed $137.7 million, or 19.5%, of revenues, primarily earned in the worldwide theatrical and home entertainment markets.

Current year theatrical release revenues for the year ended December 31, 2012 consisted of:

Rise of the Guardians: Rise of the Guardians contributed $4.8 million, or 0.6%, of ancillary revenues. We did not report any theatrical revenues in 2012 as our distributor did not recoup its distribution and marketing costs until the quarter ended March 31, 2013 when the title was released into the worldwide home entertainment market; and
Madagascar 3: Madagascar 3 contributed $187.7 million, or 25.0%, of revenues, earned in the worldwide theatrical and home entertainment markets.

Prior year theatrical releases. Revenues generated by our "Prior year theatrical releases" category decreased $51.4 million, or 23.5%, to $167.7 million during the year ended December 31, 2013 when compared to $219.1 million during the year ended December 31, 2012. The primary drivers of our prior year theatrical release revenues were the following:

Rise of the Guardians (our November 2012 release) was a weaker theatrical release when compared to Puss in Boots (our October 2011 release) and, accordingly, did not recoup its distribution and marketing costs in a time frame as is historically typical for our films. During the year ended December 31, 2013, Rise of the Guardians contributed $76.9 million, or 10.9%, of consolidated revenues, primarily earned in the worldwide home entertainment and television markets. During the year ended December 31, 2012, Puss in Boots contributed $149.7 million, or 20.0%, of revenues, primarily earned in the international theatrical, worldwide home entertainment and worldwide television markets; and
Madagascar 3 (released in the second quarter of 2012) was a stronger-performing title in the home entertainment market when compared to Kung Fu Panda 2 (released in the second quarter of 2011). During the year ended December 31, 2013, Madagascar 3 contributed $90.8 million, or 12.8%, of revenues, primarily earned in the worldwide television and home entertainment markets. During the year ended December 31, 2012, Kung Fu Panda 2 contributed $69.4 million, or 9.3%, of revenues, primarily earned in the digital (SVOD and transactional-based sales) and worldwide television markets.

Preceding year theatrical releases. Revenues generated by our "Preceding year theatrical releases" category consist of revenues attributable to films released during all previous periods that are not yet part of our library. Revenues generated by our "Preceding year theatrical releases" category increased $5.0 million, or 57.5%, to $13.7 million during the year ended December 31, 2013 when compared to $8.7 million of revenues during the year ended December 31, 2012, primarily attributable to Puss in Boots (a sequel title), which is a stronger title as compared to Megamind (an original title). Preceding year theatrical release revenues during the year ended December 31, 2013 were comprised of Puss in Boots and Kung Fu Panda 2, which contributed an aggregate of $13.7 million, or 1.9%, of consolidated revenues, primarily earned in the worldwide home entertainment and international television markets. Preceding year theatrical

50


release revenues during the year ended December 31, 2012 were comprised of Megamind and Shrek Forever After, which contributed an aggregate of $8.7 million, or 1.2%, of revenues, primarily earned in the worldwide home entertainment and television markets.

Library. Titles are added to the "Library" category starting with the quarter of a title's second anniversary of the initial domestic theatrical release. Revenue from our "Library" category increased $10.6 million, or 6.5%, to $173.0 million during the year ended December 31, 2013 when compared to $162.4 million during the year ended December 31, 2012, primarily due to our growing library of titles. During the year ended December 31, 2013, our "Library" category benefited from revenues earned in the international free television market by Kung Fu Panda 2, Megamind, Shrek Forever After and How to Train Your Dragon. During the year ended December 31, 2012, revenues generated by our "Library" category were mainly attributable to How to Train Your Dragon and Shrek Forever After, primarily earned in the worldwide home entertainment and international free television markets.

Segment Costs of Revenues

The primary component of segment costs of revenues for our Feature Film segment is film amortization costs. Segment costs of revenues as a percentage of revenues for our Feature Films segment were 59.3% during the year ended December 31, 2013 compared to 88.2% for the year ended December 31, 2012. The following were the primary drivers of our segment costs of revenues during the year ended December 31, 2013 when compared to the year ended December 31, 2012:

During the year ended December 31, 2013, we recorded an impairment charge of $11.9 million (exclusive of the impairment allocated to the Consumer Products segment of $1.6 million) on Turbo. Due to Turbo's performance in the international theatrical market during the last two months of the quarter ended December 31, 2013, we re-assessed the film's Ultimate Revenue projections (including our estimates of the film's revenues in other markets, including international home entertainment and television, which had not yet been released), which resulted in the film's estimated fair value (calculated using a net present value model) being less than the film’s unamortized capitalized production costs;
During the year ended December 31, 2012, impairment, write-down and restructuring-related charges totaled $158.0 million, which were comprised of the following: (i) an impairment charge of $85.5 million (exclusive of the impairment charge allocated to the Consumer Products segment of $1.4 million) as a result of the lower-than-expected worldwide theatrical performance of our feature film Rise of the Guardians (released during the quarter ended December 31, 2012). The write-down was due to revisions to the film's Ultimate Revenue projections which resulted in the film's estimated fair value (calculated using a net present value model) being less than the film’s unamortized capitalized production costs, (ii) a write-down of capitalized film costs in the amount of $47.6 million as a result of a change in creative direction related to one of our films previously set for production, (iii) write-offs of capitalized development costs totaling $20.3 million as a result of the decision to change our future film slate and (iv) $4.6 million related to non-retirement postemployment benefit charges, which resulted from a strategic business decision to change the production and release slate for some of our animated feature films;
Excluding the charges described above for each of the years ended December 31, 2013 and 2012, segment costs of revenues as a percentage of segment revenues remained consistent during those years;
Overall lower amortization rate of 2013's "Prior year theatrical releases" compared to 2012's "Prior year theatrical releases." 2013's "Prior year theatrical releases" benefited from Madagascar 3, which was a strong performing title, and Rise of the Guardians, which had a stronger-than-expected performance in the home entertainment market in 2013, thereby lowering its amortization rate; and
Overall higher amortization rate related to our “Library” category in 2013 when compared to 2012, which was driven by revenues generated by Megamind (a title that has a higher rate of amortization compared to the average amortization rate of our other library titles).


51


Television Series and Specials Segment
 
Operating results for the Television Series and Specials segment were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Segment revenues
$
105.9

 
$
75.4

 
$
30.5

 
40.5
%
Segment costs of revenues
82.8

 
63.2

 
19.6

 
31.0
%
Segment gross profit
$
23.1

 
$
12.2

 
$
10.9

 
89.3
%

Segment Revenues

As illustrated in the table above, revenues generated from our Television Series and Specials segment increased $30.5 million to $105.9 million during the year ended December 31, 2013 when compared to $75.4 million during the year ended December 31, 2012. The main drivers of revenues generated from our television series and specials were the following:

In 2013, we released our television special Madly Madagascar and earned revenues from the domestic home entertainment and digital markets;
Revenues generated from our television series Dragons: Riders of Berk increased as, during the year ended December 31, 2013, we earned revenues from the first two seasons of the series compared to only the first season during the prior year;
Revenues of $8.0 million related to remaining guaranteed amounts earned under a minimum guarantee arrangement for the distribution of physical home entertainment product; and
Revenues generated from our Classic Media properties in 2013 represented a full 12-month period compared to the prior year which only included four months (we acquired Classic Media in August 2012). The main revenue contributors during the year ended December 31, 2013 were Veggie Tales and holiday-themed product, primarily earned in the television and home entertainment markets.

Segment Costs of Revenues

Segment costs of revenues, the primary component of which is inventory amortization costs, as a percentage of revenues for our Television Series and Specials segment were 78.2% for the year ended December 31, 2013 compared to 83.8% for the year ended December 31, 2012. The following were the primary drivers of our segment costs of revenues during the year ended December 31, 2013 when compared to the year ended December 31, 2012:

Segment costs of revenues for the year ended December 31, 2013 benefited from a full year of revenues generated by our Classic Media properties (a vast catalog of older library properties). This catalog of properties was recorded in groups of definite and indefinite-lived intangible assets upon acquisition. Intangible asset groups classified as indefinite-lived are not amortized, while those classified as definite-lived are amortized on a straight-line basis. Therefore, costs of revenues do not directly correlate with revenues generated during the period;
Lower revenues generated by holiday-themed television specials based on DreamWorks Animation properties (which historically have high amortization rates) during the year ended December 31, 2013 as compared to the year ended December 31, 2012;
A lower amortization rate attributable to our How to Train Your Dragon television series as a result of an increase in our estimate of Ultimate Revenues;
We recorded a $6.7 million write-down of capitalized film costs during the year ended December 31, 2013 as a result of a change that occurred during the fourth quarter of 2013 in the planned exploitation of one of our short-form content titles; and
Additional marketing costs associated with our television series/specials productions of $5.8 million, primarily due to our new series Turbo F.A.S.T.


52


Consumer Products Segment

Operating results for the Consumer Products segment were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Segment revenues
$
67.4

 
$
48.7

 
$
18.7

 
38.4
%
Segment costs of revenues
39.0

 
31.4

 
7.6

 
24.2
%
Segment gross profit
$
28.4

 
$
17.3

 
$
11.1

 
64.2
%

Segment Revenues

As illustrated in the table above, revenues generated from our Consumer Products segment increased $18.7 million, or 38.4%, to $67.4 million during the year ended December 31, 2013 when compared to $48.7 million during the year ended December 31, 2012. The increase was mainly attributable to the following:

Revenues generated from our Classic Media properties in 2013 represented a full 12-month period compared to the prior year which only included four months. The main revenue contributors during the year ended December 31, 2013 were Veggie Tales, Where's Waldo and Noddy;
Revenue generated from the sale of our share of rights in the 1960s live-action Batman television series; and
We granted intellectual property licenses in exchange for our equity interest in ODW during the year ended December 31, 2013. As a result, we recognized revenues in the amount of $7.8 million, which represents the portion of the licenses' value attributable to the equity interests of ODW held by our Chinese Joint Venture partners.

Segment Costs of Revenues

Segment costs of revenues as a percentage of revenues for our Consumer Products segment decreased to 57.9% during the year ended December 31, 2013 compared to 64.5% during the year ended December 31, 2012. The year 2013 benefited from the inclusion of a full 12-month period of revenues from our Classic Media properties compared to the prior year which only included four months. As segment costs of revenues include the straight-line amortization of definite-lived intangible assets, costs of revenues associated with our Classic Media properties do not directly correlate with revenues generated during the period (as further described above under our discussion of the Television Series and Specials segment).

New Media Segment

During the year ended December 2013, our New Media segment consisted of ATV. During the year ended December 31, 2013, segment revenues and segment costs of revenues were $11.4 million (or 1.6% of consolidated revenues) and $9.1 million, respectively. We acquired ATV on May 3, 2013, thus, segment revenues and segment costs of revenues reflect those generated by ATV during the period from May 3, 2013 to December 31, 2013, and primarily relate to content licensing fees earned and related amortization.

All Other Segments

Operating results for all other segments in the aggregate were as follows (in millions, except percentages):
 
Year Ended December 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Segment revenues
$
22.1

 
$
43.0

 
$
(20.9
)
 
(48.6
)%
Segment costs of revenues
22.1

 
70.1

 
(48.0
)
 
(68.5
)%
Segment gross profit (loss)
$

 
$
(27.1
)
 
$
27.1

 
100.0
 %

Segment Revenues

Revenues generated by our All Other segment decreased $20.9 million to $22.1 million during the year ended December 31, 2013 when compared to $43.0 million during the year ended December 31, 2012. The decrease was

53


primarily a result of the final performances of our How to Train Your Dragon arena show and the London version of our Shrek The Musical show during the quarter ended March 31, 2013. Subsequent to final performances of our live shows during their initial engagements, we generally continue to earn revenues through license arrangements of these productions that we enter into directly with third parties. Additionally, revenues earned during the year ended December 31, 2013 included $11.0 million attributable to Shrek The Musical related to the title's SVOD distribution.

Segment Costs of Revenues

During the years ended December 31, 2013 and 2012, segment costs of revenues related to our All Other segment were $22.1 million and $70.1 million, respectively, which primarily consisted of those related to our live performance business. For the year ended December 31, 2013, segment costs of revenues benefited from the decrease in live performance revenues, which historically have had higher costs of revenues as a percentage of revenues.

Selling and Marketing. Selling and marketing expenses directly attributable to our feature films, television series/specials or live performances are included as a component of segment profitability, and, thus, are included in each respective segment's revenues and costs of revenues discussion. As illustrated in the table below (in millions, except percentages), the amount of selling and marketing expenses not allocated to our segments was $6.0 million and $1.2 million, for the years ended December 31, 2013 and 2012, respectively.
 
Year Ended December 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Selling and marketing
$
39.4

 
$
35.2

 

 

Less: allocation to segments
33.4

 
34.0

 

 

Unallocated selling and marketing
$
6.0

 
$
1.2

 
$
4.8

 
400.0
%

The increase of $4.8 million, or 400.0%, when comparing the year ended December 31, 2013 to the year ended December 31, 2012, was primarily attributable to costs incurred by our recently acquired entities and increased spending on brand marketing.

General and Administrative.    Total general and administrative expenses increased $54.5 million to $184.6 million (including $17.7 million of stock-based compensation expense) for the year ended December 31, 2013 from $130.1 million (including $16.2 million of stock-based compensation expense) for the year ended December 31, 2012. This 41.9% aggregate increase was primarily attributable to the following:

An increase of approximately $24.0 million as a result of our recent acquisitions;
Higher salaries and benefits of $18.0 million (excluding the effect of our recent acquisitions) due to new employment agreements related to certain executives and increased headcount to support our brand and business diversification and expansion efforts;
An increase in company-wide incentive compensation expense of $20.7 million (excluding the effect of our recent acquisitions) based on improved operating results;
Charges, which primarily consist of severance and benefits, related to our 2012 Restructuring Plan (see Note 24 of our audited consolidated financial statements contained elsewhere in this Form 10-K) totaling $4.6 million; and
These increases were partially offset by $14.0 million of lower professional fees as these costs were higher during the year ended December 31, 2012 as a result of new business initiatives, such as the acquisition of Classic Media and the establishment of ODW.

Product Development.    Product development costs decreased $1.6 million to $3.3 million for the year ended December 31, 2013 from $4.9 million for the year ended December 31, 2012. Product development costs primarily represent research and development costs related to our technology initiatives. The decrease is primarily due to a decline in development activity associated with a technology project that we are no longer pursuing.

Change in Fair Value of Contingent Consideration. During the year ended December 31, 2013, we recorded an expense of $1.5 million due to an increase in our estimate of the fair value of the contingent consideration liability related to the purchase of ATV (acquired in May 2013).

Other Operating Income. As a result of the closing of the Chinese Joint Venture transaction during the quarter ended June 30, 2013, we made certain non-cash contributions to ODW which resulted in the recognition of income associated with

54


these contributions. During the year ended December 31, 2013, other operating income attributable to our ODW contributions totaled $8.1 million due to consulting and training services provided, as well as a portion of the value of the technology license granted. Additionally, during the year ended December 31, 2013, other operating income included a gain of $6.4 million, which resulted from the sale of one of our technology projects.

Operating Income/Loss.    Operating income for the year ended December 31, 2013 was $76.4 million compared to an operating loss of $65.0 million for the year ended December 31, 2012. This $141.4 million increase was primarily driven by the decline in costs of revenues as, in 2012, we incurred higher costs associated with various impairment, write-off and restructuring-related charges than were incurred in 2013.

Interest Income, Net.    For each of the years ended December 31, 2013 and 2012, the amounts recorded as interest income/expense (net of amounts capitalized) were immaterial.

 Other Income, Net.    For the years ended December 31, 2013 and 2012, total other income (net of other expenses) was $6.2 million and $8.3 million, respectively. Other income in both years consisted mainly of income recognized in connection with preferred vendor arrangements with certain of our strategic alliance partners.

Increase/Decrease in Income Tax Benefit Payable to Former Stockholder.    As a result of the Tax Basis Increase (as described in "—Critical Accounting Policies and Estimates—Provision for Income Taxes"), we are obligated to remit to a former stockholder's affiliate 85% of any cash savings in U.S. Federal income tax, California franchise tax and certain other related tax benefits, subject to repayment if it is determined that these savings should not have been available to us. For the year ended December 31, 2013, our payable to the former stockholder was impacted by our ability to retroactively apply research and development credits and other federal tax incentives as a result of extensions granted under the Act (as described previously). As the Act was not enacted until January 2, 2013, we were not able to apply certain federal tax incentives until the quarter ended March 31, 2013. For the year ended December 31, 2013, we recorded $0.7 million as an increase in income tax benefit payable to the former stockholder primarily as a result of the Act and imputed interest on our payable to former stockholder, which were partially offset by a revaluation of our deferred tax assets. For the year ended December 31, 2012, we recorded $2.6 million as a decrease in income tax benefit payable to the former stockholder as a result of our ability to claim certain tax deductions.

Loss from Equity Method Investees.  During the year ended December 31, 2013, our portion of the losses incurred by equity method investees was $6.9 million, which were primarily attributable to our share of losses incurred by ODW. We did not have any equity method investments during the year ended December 31, 2012.

Provision/Benefit for Income Taxes.    For the year ended December 31, 2013, we recorded a provision for income taxes of $19.2 million and for the year ended December 31, 2012, we recorded a benefit for income taxes of $17.2 million, or an effective tax rate of 25.4% and 30.6%, respectively. When our provision for income taxes is combined with the amounts associated with the Increase/Decrease in Income Tax Benefit Payable to Former Stockholder (see above), the combined effective tax rates for the years ended December 31, 2013 and 2012 were 26.3% and 35.2%, respectively. Our effective tax rate and our combined effective tax rate for the year ended December 31, 2013 were lower than the 35% statutory federal rate primarily due to research and development credits (including the retroactive impact of the Act discussed above), release of reserves for uncertain tax positions as a result of the conclusion of a California examination for tax years 2005 through 2007, a revaluation of our deferred tax assets and other federal tax incentives. During the year ended December 31, 2012, we recorded a benefit for income taxes as a result of our loss before income taxes as the loss will result in a decrease in our tax liability in future periods. During the year ended December 31, 2012, our effective tax rate was less than the 35% statutory federal tax rate as a result of our loss before income taxes for the year and an increase in our foreign valuation allowance.

Net Income Attributable to Non-controlling Interests.  As a result of our acquisition of Classic Media, we hold a 50% equity interest in Bullwinkle Studios, a joint venture. We consolidate the results of this joint venture because we retain control over the operations. Net income attributable to non-controlling interests represents the joint venture partner's share of the income generated by Bullwinkle Studios. For the year ended December 31, 2013, net income attributable to non-controlling interests was $0.6 million.

Net Income/Loss Attributable to DreamWorks Animation SKG, Inc.    Net income (excluding net income attributable to non-controlling interests) for the year ended December 31, 2013 was $55.1 million, or $0.65 per diluted share, as compared to a net loss of $36.4 million, or $0.43 per diluted share, in the corresponding period in 2012.


55


Financing Arrangements

Senior Unsecured Notes. On August 14, 2013, we issued $300.0 million in aggregate principal amount of 6.875% senior unsecured notes due in August 2020 (the "Notes"). The net proceeds from the offering amounted to $294.0 million and we used a portion of the proceeds to repay all of the outstanding borrowings under our revolving credit facility. The indenture governing the Notes contains certain restrictions and covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or repurchase the Company's common shares, make certain loans or investments, and sell or otherwise dispose of certain assets subject to certain conditions.
 
Revolving Credit Facility.  On August 10, 2012, we terminated our then-existing secured credit agreement dated as of June 24, 2008 and entered into a new Credit Agreement (the "New Credit Agreement"). The New Credit Agreement allows us to have outstanding borrowings of up to $400.0 million at any one time, on a revolving basis. In connection with the offering of the Notes, we entered into an amendment to our revolving credit facility agreement. The purpose of the amendment was to amend the agreement to allow the Company to create or permit to exist certain restrictions on the ability of its subsidiaries to pay dividends, transfer assets and take similar actions pursuant to the indenture governing the Notes. Borrowings under the New Credit Agreement bear interest at per annum rates determined by reference to the base rate plus a margin of 1.50% or to the London Interbank Offered Rate ("LIBOR") plus a margin of 2.50% per annum. During the year ended December 31, 2013, we used proceeds from the Notes to repay the then-outstanding borrowings under our revolving credit facility. As of December 31, 2014, $215.0 million was outstanding under our revolving credit facility.

For a more detailed description of our various financing arrangements, see Note 12, as well as Note 25, to the audited consolidated financial statements contained elsewhere in this Form 10-K.

As of December 31, 2014, we were in compliance with all applicable financial debt covenants.

Liquidity and Capital Resources
 
Current Financial Condition
 
Cash generated from our operating activities, borrowings from our revolving credit facility and cash on hand during the year ended December 31, 2014 were adequate to meet our operating cash needs. For the next 12 months, we expect that cash on hand, cash from operations, funds available under our revolving credit facility and other capital resources will be sufficient to satisfy our anticipated cash needs for working capital (e.g., general and administrative costs, selling and marketing costs, participation and residual payments, production and development costs related to film and non-film initiatives and new business investments), capital expenditures, debt service payments and our restructuring initiatives. For 2015, we expect our commitments to fund production and development costs (excluding capitalized overhead expense), make contingent compensation and residual payments (on films released to date) and fund capital expenditures will be approximately $430.0 million. In addition, during 2015 we expect to make cash payments of approximately $88.0 million to fund our restructuring initiatives, as described under "—Management's Discussion and Analysis of Financial Condition and Results of Operations—Management Overview."

As of December 31, 2014, we had cash and cash equivalents totaling $34.2 million. Our cash and cash equivalents consist of cash on deposit and short-term money market investments, principally U.S. government securities, that are rated AAA and with maturities of three months or less when purchased. Our cash and cash equivalents balance at December 31, 2014 decreased by $61.2 million from $95.5 million at December 31, 2013. Components of this change in cash for the year ended December 31, 2014, as well as for the years ended December 31, 2013 and 2012, are provided below in more detail.

As previously described, our feature films are now being distributed in China by ODW. China imposes cross-border currency regulations that restrict inflows and outflows of cash. As a result, we may experience a delay in receiving cash remittances from ODW for revenues generated in China. Based on the current amounts of revenue generated through our distribution arrangement with ODW, we do not currently believe that a delay in cash remittances from China will affect our liquidity and capital resource needs. As of December 31, 2014, the amount of outstanding receivables from ODW for distribution of our films was $19.0 million.


56


Operating Activities
 
Net cash (used in) provided by operating activities for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands): 
 
2014
 
2013
 
2012
Net cash (used in) provided by operating activities
$
(162,445
)
 
$
26,992

 
$
28,397


During the year ended December 31, 2014, our main source of cash from operating activities was the collection of revenue. The main sources of cash during this period were How To Train Your Dragon 2's worldwide theatrical revenues, The Croods' international television, international theatrical and worldwide home entertainment revenues, Rise of the Guardians' worldwide home entertainment and international television revenues, Madagascar 3's international theatrical and television revenues, Puss in Boots' international television revenues, and to a lesser extent, the collection of worldwide television and home entertainment revenues from our other films. Cash used in operating activities for the year ended December 31, 2014 included $35.9 million paid related to incentive compensation payments, which increased $24.5 million when compared to the amount paid during the year ended December 31, 2013 as these cash payments fluctuate based on our financial results. The cash from operating activities was also partially offset by production spending for our films and television series, as well as participation and residual payments. In recent years, cash used in operating activities has increased due to a greater number of projects in development and in production, as well as our expansion of our episodic series productions. In addition, our cash collections have been lower due to the performance of our feature films, which, in the past two years, has been significantly less than our historical experience.

During the year ended December 31, 2013, our main source of cash from operating activities was the collection of revenue. The main sources of cash during this period were The Croods' worldwide theatrical revenues, Madagascar 3's worldwide television and worldwide home entertainment revenues, Rise of the Guardians' worldwide television and home entertainment revenues, and to a lesser extent, worldwide television and home entertainment revenues from our other films. Cash used in operating activities for the year ended December 31, 2013 included $11.4 million paid related to incentive compensation payments, as well as $16.0 million (net of refunds received) paid to an affiliate of a former stockholder related to tax benefits realized in 2013 from the Tax Basis Increase. The cash from operating activities was also partially offset by production spending for our films and television series, as well as participation and residual payments.

During the year ended December 31, 2012, our main source of cash from operating activities was the collection of revenue from Paramount related to Madagascar 3's worldwide theatrical revenues, Puss in Boots' worldwide theatrical, television and home entertainment revenues, Kung Fu Panda 2's worldwide home entertainment and pay television revenues, Megamind's international television revenues and, and to a lesser extent, the collection of worldwide television and home entertainment revenues from our other films. Cash used in operating activities for the year ended December 31, 2012 included $20.2 million paid related to annual incentive compensation payments, as well as $14.2 million paid to an affiliate of a former stockholder related to tax benefits realized in 2012 from the Tax Basis Increase. The cash from operating activities was also partially offset by production spending for our films, television series/specials and live performances, as well as participation and residual payments.

Investing Activities
 
Net cash used in investing activities for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands):
 
 
2014
 
2013
 
2012
Net cash used in investing activities
$
(118,608
)
 
$
(84,547
)
 
$
(234,184
)
 
Net cash used in investing activities for each of the years ended December 31, 2014, 2013 and 2012 was largely attributable to a variety of acquisitions, including the acquisition of certain character and distribution rights. During the years ended December 31, 2014, 2013 and 2012, such acquisitions included a company that operates a multi-channel network, ATV and Classic Media, respectively (as previously described under "Part I—Item 1—Business").

In addition, during the years ended December 31, 2014, 2013 and 2012, we made cash payments totaling $20.6 million, $19.5 million and $3.0 million, respectively, in connection with investments in various unconsolidated entities. Our cash contributions increased during the years ended December 31, 2014 and 2013, when compared to prior periods, as a result of

57


certain strategic investments made by the Company. For further information of our investments in unconsolidated entities, refer to Note 9 of our audited consolidated financial statements contained elsewhere in this Form 10-K.

Lastly, during the years ended December 31, 2014, 2013 and 2012, cash used in investing activities was partially attributable to investments in property, plant and equipment.

Financing Activities
 
Net cash provided by financing activities for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands):
 
 
2014
 
2013
 
2012
Net cash provided by financing activities
$
218,207

 
$
96,498

 
$
150,531

 
Net cash provided by financing activities for the years ended December 31, 2014, 2013 and 2012 primarily included $250.0 million, $68.0 million and $200.0 million, respectively, in borrowings under our revolving credit facility, which was partially offset by $35.0 million, $233.0 million and $35.0 million, respectively, in repayments of borrowings. The increase in borrowings was due to cash needs, including cash needed to fund our episodic series production costs, as well as the acquisitions described above under "—Investing Activities." In addition, for the year ended December 31, 2013, net cash provided by financing activities was largely comprised of $300.0 million of proceeds from the Notes that were issued in August 2013.

For the year ended December 31, 2014, net cash provided by financing activities also included $81.25 million of proceeds from the sale of a non-controlling equity interest in ATV.

Net cash used in financing activities for the year ended December 31, 2014 included payments totaling $79.7 million paid to the former stockholders of ATV in lieu of amounts that may have been due under the contingent consideration arrangement that resulted from the acquisition of ATV ($0.3 million remained accrued as a liability as of December 31, 2014 due to the timing of cash paid). Refer to Note 5 of our audited consolidated financial statements contained elsewhere in this Form 10-K for further information. Net cash used in financing activities for the years ended December 31, 2014, 2013 and 2012 was also comprised of repurchases of our Class A common stock, including repurchases in order to satisfy tax obligations resulting from the vesting of restricted stock awards. During the years ended December 31, 2014 and 2012, we did not repurchase any of our common stock other than those related to repurchases in order to satisfy tax obligations related to the vesting of restricted stock awards. During the year ended December 31, 2013, we repurchased 1.3 million shares of our Class A common stock for $25.0 million under our stock repurchase program (refer to Note 16 of our audited consolidated financial statements contained elsewhere in this Form 10-K).

Contractual Obligations
 
As of December 31, 2014, we had contractual commitments to make the following payments (in thousands and on an undiscounted basis):
 
Payments Due by Year
Contractual Cash Obligations
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Senior unsecured notes(1)
$

 
$

 
$

 
$

 
$

 
$
300,000

 
$
300,000

Interest on senior unsecured notes(1)
20,625

 
20,625

 
20,625

 
20,625

 
20,625