NEW YORK -- In an about-face that will cut its annual revenues by nearly $9 million, Education Alternatives Inc. said yesterday it would use a new accounting method for two baltimore schools it is under contract to manage.
The company, which runs nine city schools and won a contract to manage the two additional schools in December, originally said the two schools would add $9.6 million to its annual revenues. But after huddling with its accountants and coming under criticism from accounting experts who said the figures were inflated, the company said it would adopt a more conservative accounting method.
It did not say what the value of the management contract for the two schools would be under the new method, but analysts said the contract for the two schools could now be valued at less than $1 million -- a setback for a company that has searched in vain for new business since signing up nine Baltimore schools in 1992 and two more in the city in the past year.
The company's stock fell $4, or 12 percent, yesterday to $29.375.After a disappointing earnings report on Monday and a $4 fall on Friday, the company's stock is down 22 percent,and it's one-third off its peak of $48 in November.
EAI officials denied that they had changed their accounting practices, although their chief executive officer said last month that the company would book the full $9.6 million as revenue.
"It's not a change in our accounting practices," EAI spokeswoman Lori Sutton said. "We take new contracts and apply them to our policy. That's all we're doing here."
EAI's accounting method for the first nine Baltimore schools had it receiving a fixed amount per pupil -- this year, $5,918 for about 4,800 pupils, or $28.5 million. Although it returns about $17 million to the Baltimore school board to pay for administrative services and teachers' salaries, it books the full $28.5 million as revenue.
EAI says it books the full amount because it is responsible for the schools' success or failure. According to its accounting policy, it assumes the risk and therefore is entitled to book the full amount.
When EAI landed the two new contracts to run Robert W. Coleman Elementary School and City College High School, EAI Chief Executive Officer John Golle said EAI would likewise book the full $5,918 for each of the two schools' 1,629 pupils -- for a total of $9.6 million. He repeated that position in January.
If EAI had followed that policy, its stated revenues for this year would have jumped from about $34 million to $40 million. It would not have received all $9.6 million this year because it signed the contracts in mid-year.
After Mr. Golle's statements in January, accounting experts questioned the decision, especially because EAI would be responsible for fewer programs at the new schools than at the original schools.
Instead of the $9.6 million, EAI will book its profit from running the schools,according to Mike Sabbann, an analyst with Piper Jaffray.