Friday, October 12, 2007

Mean Muggles

Even if you didn’t love the Harry Potter series, it was sad to see it end. I’m sure they got really weepy at Scholastic Corporation (SCHL), publisher of the magical epic. In its first-quarter earnings release a couple of weeks ago, the company - in language worthy of Harry and his adolescent friends - termed sales of Harry Potter and the Deathly Hallows “phenomenal.”

And indeed, proceeds from the book were totally awesome, bumping Scholastic’s quarterly revenues up 75% over the prior year. Unfortunately, the company didn’t know the spell for converting all that cash into profits and reported a loss of 7 cents per share. (Their excuse was that they normally lose money in the first quarter because schools are out and they can’t sell books to unsuspecting third-graders through those fake school "book clubs." Personally I think this is kind of a dorky business model, though as a blogger I probably should not be using the term “business model.”)

Late in the summer, while everyone was plowing through Deathly Hallows, Scholastic was hit with a class action suit alleging securities fraud. The plaintiffs’ lawyers (a group less popular than Dementors in many quarters) sent out a press release to brag about it, but Scholastic just disclosed the lawsuit this week in its first-quarter 10-Q.

The 10-Q says Scholastic hasn’t yet responded to the complaint. It remains to be seen whether this is just another ho-hum strike suit. The gripe is that between March 2005 and March 2006, Scholastic gave an overly rosy impression of its prospects while failing to write down certain assets and reserve enough for bad debts, among other alleged screw-ups, and that Scholastic insiders traded on info they kept from the public. The lead plaintiff is an institutional investor, though hardly a household name: the Alaska Laborers Employees Retirement System. The complaint adds as defendants Scholastic's eternal Chairman/CEO/President Richard Robinson (son of the company’s founder) and former CFO Mary Winston, who left in July of this year with $1.2M in severance payments.

I hope Scholastic is busy hiring defense lawyers, or practicing Defense Against the Dark Arts. Or maybe there's no difference.

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