DreamWorks Sued Over 'Shrek 2' DVD Sales

DreamWorks Animation SKG Inc (DWA) on Thursday was hit with its first shareholder lawsuit since going public — a proposed class action accusing company officers of misrepresenting DVD sales for "Shrek 2."

The lawsuit filed in Los Angeles federal court says DreamWorks Chief Executive Jeffrey Katzenberg (search) and board Chairman Roger Enrico (search) failed to disclose in the first quarter that sales of "Shrek 2" DVDs were declining far more than expected.

The suit says DreamWorks (search) continued to ship the title "far in excess of the actual demand" and hid the fact that retailers were returning "massive amounts" of unsold DVDs.

DreamWorks spokesman Bob Feldman (search) said the company had not seen the lawsuit but called the claims "baseless."

"We believe the suit is completely without merit and we intend to defend ourselves vigorously," Feldman said.

DreamWorks Animation stunned investors on May 10 by reporting that first-quarter DVD sales for "Shrek 2" fell far short of the company's earlier projections and that the Glendale, California, studio would realize no revenue from the title in the quarter.

Katzenberg said DreamWorks had overestimated retail sales of "Shrek 2," and had been saddled with returns of unsold discs from retail outlets.

The announcement during the company's first-quarter earnings call, sent DreamWorks shares tumbling by 12 percent, or $4.45, the next trading day, to close at $32.05 on the New York Stock Exchange.

The title, which broke all box office records for an animated feature last year, sold 33.7 million DVD units in the holiday fourth quarter, Feldman said.

Feldman said that despite sluggish first-quarter sales of 1.3 million units, DreamWorks has not revised its projection for worldwide "Shrek 2" DVD sales of 40 million units.

"Shrek 2" has logged sales of 35 million to date.

Shares of DreamWorks Animation dropped another 7 percent on Tuesday and were trading at $29.74 on Thursday, after last weekend's theatrical debut of "Madagascar" failed to meet analysts' expectations.