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DreamWorks Hit With Investor Lawsuit Over 'Shrek 2'

3 Jun, 2005 By: Jessica Wolf

DreamWorks shareholders are suing the studio for its over-inflated projections of Shrek 2 DVD sales in the first quarter, which caused the company to announce a $25 million downturn in revenue expectations and a 20-cent share drop during its first-quarter earnings report May 10.

The suit, filed in Los Angeles by Abbey Gardy, claims that DreamWorks executives "knew but failed to disclose that shipments of Shrek 2 DVDs were being returned to the company at an alarming rate."

The suit also accuses DreamWorks of "improperly stuffing the distribution channels and improperly recognizing revenue which artificially inflated the stock price and acted as fraud on the market."DreamWorks spokesman Bob Feldman said the company believes the suit "is wholly without merit." .

"We plan to defend ourselves vigorously," he said. Feldman, however, could not comment on the exact action DreamWorks will pursue in defense of the suit's claims.

During the company's earnings call last month, executives said they attributed the sales slump in part to an overall 10 percent downturn in sales of catalog titles in the first quarter of 2005, citing Nielsen VideoScan research. The studio re-evaluated expectations as soon as it became aware of the large returns on the title, executives said.

DreamWorks stock fell 12 percent to close at $32.05 the day after the studio announced its first quarter results. As news of the shareholder suit struck yesterday, the studio's stock took another dip — nearly 2 percent to $29.19 in midday trading today.

Suits like this aren't uncommon, especially for companies new to public trading, said Dennis McAlpine, president of New York-based McAlpine Associates. “There are law firms that specialize in bringing these suits,” he said.

Though Shrek 2 has sold 35 million units on DVD since its release in fourth-quarter 2004, DreamWorks announced last month the studio would not see revenue on the title until the fourth quarter buying season of this year.

DreamWorks cited higher than expected returns on the title and the company's distributor Universal Studios Home Video, which must recoup its costs on the title before DreamWorks sees any Shrek 2 DVD revenue. Shrek 2 did bring the company $9 million in licensing for the first quarter of the year.

McAlpine pointed out that another factor DreamWorks attributed the Shrek 2 shortfall to was Wal-Mart's decision in the first quarter to cut back on DVD stock of catalog titles.

“They [DreamWorks] had not anticipated that,” he said.

DreamWorks still expects sales of Shrek 2 to hit 38-40 million units by year-end, according to the studio. Previously, the company anticipated selling 55 million units of the title by the end of 2005.

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