Dreamworks warns of economic doom…

October 30, 2008

By now we’re used to reading filings that fret about the state of the economy. Many acknowledge that a prolonged weakened economy may wreak havoc with the bottom line— even if you have Kung Fu Panda’s Tigress (Angelina Jolie) on speed dial.

In the 10-Q that Dreamworks Animation SKG, Inc. (DWA) filed yesterday, we noticed the following:

The global economy is currently experiencing a significant contraction, with an almost unprecedented lack of availability of business and consumer credit. This current decrease and any future decrease in economic activity in the United States 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 may cause us to incur bad debt expense at levels higher than historically experienced.

In other words, if people are scrambling to cobble the mortgage payment together, don—t be surprised if the box office receipts (and subsequent DVD sales) for Madagascar: Escape 2 Africa fall a bit flat.

But after that gloomy start, it then felt incongruous to read about the amended and restated employment agreement with Chief Operating Officer Ann Daly.

Now, before the company’s IPO, Ms. Daly earned a base salary of $1.5 million annually. She took a pay cut when the company went public, and until last week —only earned $1 million. But the compensation committee just extended her employment agreement for another five years and raised her base salary to $1,012,000 annually.

Ms. Daly can still afford full-price movie tickets, though. She may earn another $9 million award in performance-based RSUs, and — starting in 2011 — an —annual equity award of $500K. There’s also an annual cash or equity incentive award that has a target value of $750K, and long-term equity incentive options (also starting in 2011) worth $2.5 million.

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