EA Hopes To Soon Resolve Investor and Shareholder Suits

EA Senior Vp-Business & Legal Affairs Joel Linzner said class action counsel was recently chosen by a federal judge in Cal. and an amended complaint is expected to be filed in about 3 weeks. He didn’t identify the law firm. Linzner said “we expect to make a motion to dismiss it [and] we're optimistic that our motion will be granted.” He said “we're not aware of any facts that give us pause” about the case. Suits were originally filed by Schiffrin & Barroway and other law firms on behalf of investors who bought EA stock Jan. 25-March 21, just before the company slashed its fiscal year earnings estimate because of hardware shortages and slower-than-expected game sales (CED March 23 p2). EA, CEO Larry Probst and CFO Warren Jenson were accused of violating the Securities Exchange Act of 1934 because they “materially misled the investing public, thereby inflating the price of EA’s securities, by publicly issuing false and misleading statements and omitting to disclose material facts” about the company’s business.

Linzner also said “hopefully we can have some resolution fairly soon” in EA’s legal battle with workers who had complained of working conditions including long hours and no overtime pay. He said “we don’t like being put in a position of being adverse to our employees… It is in our interest and in our employees’ interest to try and get that resolved as quickly as possible and we aim to do that.” He added that EA had “made some changes to address some of the issues raised by the litigation” but didn’t say what changes.

EA Worldwide Studios Pres. Don Mattrick told shareholders earlier that it was “very challenging” to stop independent programmers from making modifications to games. Rival Take-Two Interactive recently earned the wrath of politicians and parental watchdog groups after leaving the code for sexual content on the final discs for the game Grand Theft Auto: San Andreas and that title’s rating wound up being changed from M to AO by the Entertainment Software Rating Board (CED July 22 p7). But Fla. attorney Jack Thompson, one of the most vocal critics of videogame violence, recently asked politicians to also investigate EA’s popular T-rated game The Sims, claiming users can view nudity in it by entering special codes. EA maintains that the nudity is only available using modifications made by independent programmers that it had no control over. Mattrick compared what “modders” had done to a consumer who might buy a newspaper and then drawn a mustache on Snoopy in the comics. He also said EA had a policy under which developers are restricted from adding hidden content to games without authorization. EA games, he said, go through approvals to make sure they aren’t released with content like that found in San Andreas.

Probst also told shareholders that the 19.9% stake EA recently took in rival Ubisoft (CED Dec 21 p4) “already paid great dividends for us,” but he didn’t elaborate. Long-term growth drivers for EA, he said, include enhanced quality on its games, expanded distribution and additional globalization. He said the company expects its Asian business to reach $1 billion in sales by 2010.

The publisher’s goals for fiscal 2006 include delivering on its game SKU plan, successfully launching new intellectual property through games including the delayed Godfather title, achieving industry leadership on the next-generation consoles from Microsoft and Sony, being a winner on game creation for Sony’s PlayStation Portable (PSP), building the company’s mobile game business and taking advantage of acquisition opportunities, Probst said. He said EA was “convinced we will win” on the PS3 and Xbox 360 platforms, becoming the top U.S. 3rd-party publisher for those consoles as it is with PS2 and Xbox. Probst said EA had “done very well so far” on PSP and was averaging a 26% market share on games for it.

Probst also said EA had a #1 -- 26% -- market share on PS2 games in the U.S. the past 12 months and was #2 on Xbox with a 23% share, behind only Microsoft. For GameCube, he said EA was #2 with an 18% share, behind only Nintendo. For PC games, he said EA was #1 with a 22% share. In Europe, Probst said EA was #1 on PS2 (24% share), Xbox (25%) and PC 27%), and was #2 on GameCube (21%).

EA earlier in the week had revised some videogame hardware system sellthrough estimates for this calendar year. The company said it still expected Sony to sell through 5.5-6.5 million PS2 consoles in N. America and 6.5-7.5 million PS2s in Europe. But EA said it now expects Microsoft to sell only 3.2-4 million Xbox and Xbox 360 consoles combined in N. America instead of the 3.7-4.5 million earlier forecast and 1.3-2 million in Europe instead of the 2-2.7 million forecast. For GameCube, EA said it now expects 1.2-1.5 million to be sold in N. America, vs. only 800,000-one million predicted earlier, but only 300,000-500,000 units in Europe vs. the 500,000- 800,000 predicted. The company kept its estimates for handheld systems in Europe intact at 1.8-2.2 million Game Boy Advance (GBA) systems, 2.2-2.8 million Nintendo DS systems and 2-3 million PSPs. But EA raised its N. American GBA and PSP estimates to 4.5-5 million and 4.5- 5.5 million units, respectively, from 3.5-4.2 million and 4.3-5 million units. But despite the upcoming U.S. launch of the game Nintendogs that many game industry observers expect to boost DS sales as it did in Japan, EA lowered its N. American DS sellthrough estimate to 2-2.5 million from 3.8-4.3 million. Although Sony later upgraded its fiscal year projection for production shipments of PS2 and PSP hardware to 13 million units of each from 12 million (CED July 29 p3), an EA spokesman said his company was sticking with its estimates for those systems.

EA shareholders voted to reelect 8 board members including Probst, and to elect Vivek Paul. They also approved amendments to the company’s 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan, and ratified the appointment of KPMG as the company’s independent public accounting firm for fiscal 2006. While 74.4% of voting shareholders approved the amendment to the Equity Incentive Plan, the company said 88.6% approved the amendment to the Stock Purchase Plan and more than 98% voted to ratify KPMG’s appointment. EA had asked stockholders to increase by one million shares the limit on the total number of shares underlying awards of restricted stock and restricted stock units that may be granted under its equity plan and asked to increase by 1.5 million the common shares reserved for issuance under its purchase plan (CED June 27 p10).