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DreamWorks Takes a Loss

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DreamWorks Takes a Loss

Despite having another hit on its hands with Madagascar, DreamWorks Animation has suffered a blow on Wall Street. The toon studio updated its second quarter guidance of “no profit” to report a loss in the range of seven to nine cents per share. As a result, its principal shareholders will not proceed with the secondary offering of $500 million in Class A common stock that was announced back in March.

DreamWorks’ financial woes stem largely from its home video sector, where it is seeing a higher-than-expected rate of returns, meaning unsold DVD and VHS units being sent back from retailers. “After our first quarter earnings announcement in May, the company has been working closely with our distribution partners to conduct an extensive review domestically and in several major international territories to gather more information about the performance of our home video titles, including their sales movement, inventory levels at retail as well as actual and anticipated returns,” says Kris Leslie, DreamWorks Animation’s chief financial officer. “As part of this review, we have observed changes in the marketplace that appear to have impacted our titles."

Sales and retail inventory data received from distributors has led DreamWorks Animation to revise its previous full-year guidance of $1.00-$1.25 per share to approximately $0.80 to $0.90 per share for 2005.

Six class action lawsuits have been filed against DreamWorks Animation and certain officers and directors in recent weeks. The claims allege that DreamWorks misled shareholders in overestimating sales of its Shrek 2 home video release. The company said Monday that it believes these lawsuits are without merit and intends to vigorously defend itself against them. The Securities and Exchange Commission (SEC) is conducting an informal investigation with the company’s full cooperation.

A secondary stock offering on behalf of principal shareholders will eventually be revisited when market conditions are more favorable. Katzenberg and fellow DreamWorks principal David Geffen can trigger such an offering, but cannot participate in the selling of shares until their IPO lock-up expires on Oct. 27.

To date, Madagascar has earned $260 million worldwide and still holds a top-ten box office spot domestically seven weeks into its theatrical run. DreamWorks Animation will next release Aardman’s highly anticipated stop-motion feature, Wallace & Gromit: The Curse of the Were-Rabbit, on Oct. 7.

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