A Supersleuth Raises A Red Flag Over Pyxis

Howard M. Schilit likes to play detective. And his kind of game is deadly serious: ferreting out corporate trouble. An accounting professor at American University, Schilit has called attention to several cases of shenanigans that resulted in either a bankruptcy filing or a plunge in the stock price. As a result, a number of money managers and analysts have hired Schilit to undertake sleuthing of companies they have invested in--or are contemplating putting money into.

The scorecard for Schilit, president of the Center for Financial Research & Analysis in Rockville, Md., is impressive: He alerted investors in January, 1992, to "misleading" financial statements used by College Bound Inc. Before long, the Securities & Exchange Commission suspended trading in the stock, then at 24. The company later ceased operations and filed for bankruptcy protection. In September, 1993, Schilit questioned the way Kendall Square Research recorded revenues. The stock, then at 24, dropped to 16 after Price Waterhouse told the company it ought to revise its reported revenues. By December, Price "recalled" the prior year's entire revenues. The stock fell to 4 and is now at 5.

FRONT-LOADING. What company has caught Schilit's eye now? "Watch out," he says, for Pyxis, a San Diego maker and leaser of automated point-of-use systems that hospitals use to control and distribute medications and supplies. Its stock had more than quadrupled--from 8 in 1992 to 35 in December, 1993. Schilit says the sharp rises in revenues and earnings in the past three years are "misleading" and "unsustainable." Revenues jumped from $13.4 million in 1991 to $46.3 million in 1992--and to $100.1 million last year. After a loss in 1991, Pyxis posted earnings of 38 in 1992 and 69 last year.

Here's the hitch, says Schilit: Just before going public in 1992, Pyxis started booking revenues from equipment leases as if they were outright sales, rather than spreading them over the life of the lease. By front-loading revenues, says Schilit, the company "distorts" its true financial condition. He explains that although this sales-type reporting revenues is acceptable under normal accounting rules, it still "exaggerates the actual growth in sales and earnings. Pyxis is in the business of leasing," he says. CEO Taylor says Pyxis must report leasing revenues as sales because of the conditions of the lease contracts.

Another factor that has turned off Schilit on Pyxis: Insiders have been selling stock since November, including Chairman and CEO Ronald Taylor and President and COO Gerald Forth. The stock, which has continued to slip since December, has fallen to 27.

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