DreamWorks Animation creates family entertainment, including animated feature films, television specials and series, live entertainment properties, online virtual worlds and related consumer products, meant for audiences around the world. We have released a total of 18 animated feature films of which Shrek the Third, Shrek 2 and Madagascar were the highest-grossing animated films in the domestic box office in their respective years of release, and Shrek 2 remains the highest-grossing animated film, as well as the fifth-highest grossing film, of all time in the domestic box office. The table below lists our animated films produced and released since 2007.
Historically, our business plan has generally been to release two animated feature films per year. During 2009, we released one animated feature film, Monsters vs. Aliens, which was released into the domestic theatrical market on March 27, 2009. In 2009, we announced that, beginning in 2010, we expect to release a total of five movies every two years. We currently plan to release three animated films, How to Train Your Dragon, Shrek Forever After and Megamind, in 2010. We are currently producing five additional feature films, of which we expect to release two in 2011 and three in 2012. In addition, we have a substantial number of projects in creative and story development that are expected to fill the release schedule in 2013 and beyond. In 2007, we announced that all of our films, beginning with the release of Monsters vs. Aliens in 2009, will be released in stereoscopic 3D.
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 ancillary markets such as home entertainment 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. Effective January 31, 2006, our results reflect our distribution, servicing and other arrangements with Paramount Pictures Corporation and its affiliates and related entities, including Old DreamWorks Studios (collectively “Paramount”). Beginning with the fourth quarter of 2004 and continuing through January 31, 2006, our results reflect the effects of our distribution, servicing and other arrangements with Old DreamWorks Studios as also discussed. For a discussion of our distribution arrangements prior to January 31, 2006, see our Annual Report on Form 10-K for the year ended December 31, 2007. For a discussion of the Company’s business segment and of 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.
Prior to the Separation 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 custom built in 1997.
We generally retain the exclusive copyright and other intellectual property rights to all of our projects and characters, other than (i) co-ownership of the copyright and other intellectual property rights (including characters) in and to films co-produced with Aardman Animations, Ltd. (“Aardman”), (ii) Wallace & Gromit: The Curse of the Were-Rabbit, a film owned by Aardman for which we generally have worldwide distribution rights in perpetuity, excluding certain United Kingdom television rights and certain ancillary markets and (iii) the animated television series “The Penguins of Madagascar,” for which the copyright is owned by Nickelodeon.
Films in Production and Development
We are currently producing eight animated feature films for release between 2010 and 2012. In addition, we have a substantial number of projects in development that are expected to fill our release schedule in 2013 and beyond. The table below lists all of our films that are expected to be released through the end of 2012.
Over the last few years, the Company has commenced a number of initiatives aimed at further capitalizing on its franchise film properties, such as Shrek, Madagascar and Kung Fu Panda. These business initiatives seek to broaden and diversify the Company’s revenue streams by exploiting the film properties in other areas of family entertainment, including the following:
Television Specials and Series
In December 2007, our half-hour television Christmas special, Shrek the Halls, premiered on network television. The special was one of the highest-rated television shows in its time slot during 2007. In 2009, two additional half-hour television specials, Monsters vs. Aliens: Mutant Pumpkins from Outer Space and Merry Madagascar, debuted on network television. The Company has several additional television specials in development for initial broadcast in 2010 and beyond. In connection with these specials, the Company has or intends to enter into long-term network television distribution agreements, while retaining all other distribution rights (such as DVD, other home entertainment and consumer product distribution rights).
The animated television series, The Penguins of Madagascar, debuted on the Nickelodeon network in March 2009. Under the Company’s agreement with Paramount, an affiliate of Nickelodeon (which is discussed in greater length in “Distribution and Servicing Arrangements—How We Distribute, Promote and Market Our Films—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 the television series.
In December 2008, the Company’s Shrek The Musical debuted on Broadway. The play is based on the Company’s 2001 theatrical release, Shrek. Although the Broadway production closed in January 2010, the Company currently expects that a national touring production of the play will begin public performances in Chicago in the second half of 2010. The Company is also developing live shows based on its theatrical film properties, Madagascar, How to Train Your Dragon and Kung Fu Panda.
Online Virtual Worlds
The Company currently expects that its online virtual world based on Kung Fu Panda will become available to the public in the first half of 2010. The virtual world, Kung Fu Panda World, will be aimed at children ages seven through 12. The Company currently expects that it will realize revenue from the virtual world through user subscription fees and advertising. The Company has also begun development of an online virtual world based on How to Train Your Dragon.
Distribution and Servicing Arrangements
On January 31, 2006, Viacom Inc. and certain of its affiliates (collectively, “Viacom”) (including Paramount) acquired Old DreamWorks Studios. In connection with this transaction, we terminated our prior distribution agreement with Old DreamWorks Studios (the “Old DreamWorks Studios Distribution Agreement”). Effective January 31, 2006, the worldwide theatrical and television distribution and home video fulfillment services for our films released after January 31, 2006 have been provided by Paramount. A detailed discussion of our distribution and fulfillment services agreements with Paramount is provided immediately below. For the period beginning October 1, 2004 to January 31, 2006, our films were distributed in the domestic theatrical and worldwide television market directly by Old DreamWorks Studios and in international theatrical and worldwide home entertainment markets by Universal Studios, Inc. (“Universal Studios”), as an approved subdistributor and fulfillment services provider of Old DreamWorks Studios, in each case pursuant to the terms of the Old DreamWorks Studios Distribution Agreement. For a detailed discussion of these prior distribution and servicing arrangements, please see our Annual Report on Form 10-K for the year ended December 31, 2007.