A Very Bad School Report

You would think that after plunging from 48 to 26 in just three months the stock of Education Alternatives, a company that provides management services to schools, would be able to shake off the bears. Not quite. The shorts believe the stock could fall some more.

Others agree. "The stock will dive to a single-digit figure when things unravel," insists Howard M. Schilit, an accounting professor at American University and author of the recent book, Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports. "I won't be surprised if auditors find the company has been recording revenues inappropriately," he says.

Schilit says the company books as revenues the funds it receives to operate the schools, including teachers' salaries and other expenses it has no control over. Education Alternatives now says it will count only the consultant's fee it gets under its latest contract--to administer two public elementary schools in Baltimore: These are "enterprise schools" to which the company can only make recommendations, thus placing it in a consultant's role. These schools are separate from the nine elementary schools covered under a five-year contract with the Baltimore City Public Schools, which gives Education Alternatives authority to manage most of the schools' operations. A spokesperson told BUSINESS WEEK the company won't change the way it reports revenues from that contract. "Our auditors have given us a clean bill of health," she adds. Schilit, however, says the company should do the same for all contracts.

Stan Trilling of PaineWebber says the company's rich p-e "is a myth, because it had an operating loss in the first six months of this fiscal year."

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