2005 Annual Report DreamWorks Animation SKG 2005 Annual Report To Our Shareholders As a category, CG animation has been very successful relative to the In our first year as a public rest of the motion picture industry. While this success can be partially company, we experienced first- attributed to the breathtaking images that technology has enabled, hand some of the ups and downs I believe the primary reason the public has embraced CG animated of the movie business. We cele- films is because they so often tell such entertaining stories. Because brated successes and suffered of our talented group of artists and innovative technologists, we’re disappointments. Box office uniquely positioned to tell our stories in a way that sets them apart. returns for the industry were down At the end of the day, people want to see films that are truly great; slightly from the previous year, but as history has shown, the film busi- the top films are still in demand by studios, theaters, retailers, and ness is traditionally cyclical. Only time can definitively reveal if a given other distribution channels. Great films still prompt people to add to trend actually represents a long term market shift. In the meantime, it’s their personal film libraries. Great films create recognizable characters clear that films that create a special theatrical experience still have the and allow for the creation of successful franchises. At DreamWorks potential to be successful. And while the home video market has been Animation, we will continue to pursue success in every one of our challenging, it is still a growing industry. films. In the next few years, we plan to introduce more sequels and Despite the many challenges we faced this past year, I believe we got continue to build our franchises. And as more distribution channels one of the hardest parts of this business right—making great creative become available, we will have even more opportunities to deliver product. Madagascar became our highest grossing original film to the content we work so hard to perfect. Our focus is to stand out date; with over $525 million in worldwide box office, it was one of even more in the CG animation category, and we will keep working the top films of 2005. Computer-generated (“CG”) animation towards that goal. That’s the promise we make to our audiences, our remained the leading seller in the home video market, accounting for shareholders, and ourselves. three of the top four domestic home video releases of 2005, and two Sincerely, of those—Shark Tale and Madagascar—were our films. Our latest release, the stop motion film Wallace & Gromit: The Curse of the Were-Rabbit, was critically acclaimed and won the Academy Award® Jeffrey Katzenberg for Best Animated Film of the Year; however, as we learned, creative Chief Executive Offi cer and Director success does not always guarantee financial success. As Wallace & Gromit demonstrated, the film business can be unpredictable. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 ‘ 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 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘. Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ‘ No È. 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 È 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. È. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes È No ‘. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È. The aggregate market value of Class A common stock held by non-affiliates as of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $920,816,135, using the closing price of $26.20 as reported by the New York Stock Exchange as of such date. As of such date, non-affiliates held no shares of Class B common stock or Class C common stock. There is no active market for the Class B common stock or the Class C common stock. Shares of Class A common stock held by all executive officers and directors of the registrant and all persons filing Schedules 13G in respect to registrant’s 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, 2005. In addition, 525,929 shares of common stock held by DreamWorks L.L.C. as of June 30, 2005 have been deemed, solely for the foregoing calculation, as held by an affiliate. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 1, 2006, there were 52,620,573 shares of Class A common stock, 50,842,414 shares of Class B common stock and one share of Class C 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 2006 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, 2005 Page PART I Item 1. Business ..................................................................... 2 Item 1A. Risk Factors .................................................................. 23 Item 1B. Unresolved Staff Comments ..................................................... 39 Item 2. Properties .................................................................... 39 Item 3. Legal Proceedings ............................................................. 39 Item 4. Submission of Matters to a Vote of Security Holders .................................. 40 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ............................................................... 43 Item 6. Selected Financial Data ......................................................... 44 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .... 47 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................ 68 Item 8. Financial Statements ............................................................ 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 110 Item 9A. Controls and Procedures ......................................................... 110 Item 9B. Other Information .............................................................. 111 PART III Item 10. Directors and Executive Officers of the Registrant .................................... 112 Item 11. Executive Compensation ........................................................ 112 Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 112 Item 13. Certain Relationships and Related Transactions ...................................... 112 Item 14. Principal Accounting Fees and Services ............................................ 112 PART IV Item 15. Exhibits and Financial Statement Schedules ......................................... 113 FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K (the “Form 10-K”) are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate, and management’s beliefs and assumptions made by management. Such statements include, in particular, statements about our