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I actually give DWA management a lot of credit. I just listened to their cc regarding the guidance update and the withdrawal of the offering, and I came away very impressed by the openness and quality of the communication, especially from the CFO (Ms.) Kris Leslie. I get the impression that they were honestly taken by surprise by the poor performance of the releases (specifically Shrek 2) as they moved to catalog. It's important to note that in the initial release window, Shrek 2 and (so far) Shark Tale have met expectations. It's when the titles move to catalog that the performance deteriorates. Now, I'm not sure how that deterioration translates to a $700-$900MM shortfall in estimate -- the talk about lower marginal contributions from sales "ultimates" leads me to think that the downward revision will ultimately involve a write-down of inventory -- but they declined to give firm details. However, they did address the question of how they plan to deal with the new marketplace dynamics, which is that, as I write, action is being taken to characterize this change to the extent possible -- Katzenberg mentioned that he has deployed people "on the ground" to monitor the physical marketplaces -- because whether the effects are temporary or permanent are not yet clear. I don't think it's fair to criticize them for not anticipating a change in marketplace dynamic because I don't expect clairvoyance from them. Instead I see an investment opportunity because I believe management has the ability to sort the problem out; right now they are at the point of realizing the full extent of the setback. The bottom line is that I think the mistake was honest and that they have the data to support their original estimate -- i.e., the phenomenal success of Shrek 2 at the box office and continuing success during the DVD-exclusive window. The cc did not address the SEC inquiry.

The secondary offering is an interesting arrangement. It's not actually an offering by the company, but rather an offering on behalf of the three principal shareholders Katzenberg, Geffen and Vulcan. I'm not entirely sure about this, but I think that individually they are not allowed to sell their shares until the lockup period expires, but in the meantime, they can do a secondary offering through the company. The upshot is explained very well in the "Not So Dreamy" article.

On balance, my plan moving forward is to hold my shares and buy in after a few days, in anticipation of a further drop in share price. On the question of financing that another member posted -- they are in no danger of being unable to finance further films! Their cash balance is $445MM as of 3/31/05, and the estimate is $110-$130 to produce a film (before SG&A expenses).

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