NEW YORK -- For 18 months, Wall Street was Education Alternatives Inc.'s best friend.
Starting in mid-1992, investors showered the company with millions of dollars, helping to replenish EAI's war chest and to make its high-profile expansion into public education possible. Even when EAI used unorthodox accounting practices and failed to sell its product outside Baltimore, Wall Street stood by and ponied up a small fortune in financial support.
But now that friendship is over.
The failure to win new contracts and growing skepticism about company officers -- who liberally cashed in on EAI's temporary stock market success last year -- have convinced investors to jump ship, helping to slice EAI's stock price in half. This has closed the company's spigot of easy money from the stock market -- money that has helped EAI renovate the 11 schools that it manages in Baltimore.
"The whole thing is coming crashing down on them," said Howard Schilit, a business professor at the American University and author of an independent study commissioned by large investors of EAI. "The stock is heading down and shows no signs of recovering."
This dissatisfaction came to a head 10 days ago when two shareholders filed a class action lawsuit against EAI, charging the company with unethical accounting practices and unfounded predictions of new business to boost its stock. Company officers, the suit charges, used the high stock price to sell stock and make six- to seven-figure profits.
Although most on Wall Street are not so harsh, interviews with analysts and former stockholders describe a company that has lost much of its credibility. The company, they say, has been more concerned with hyping its Baltimore contracts than with buckling down to daily business. Instead of getting in on the ground floor of the next blue chip stock, many investors feel they were caught in one of Wall Street's fad stocks.
One of the main complaints heard on Wall Street is that EAI has so consistently oversold its prospects that investors feel misled. Since signing the contract to manage nine schools in Baltimore two years ago, EAI has added just two more schools in Baltimore, and those have been under terms that give the company only a fraction of the revenues they receive for the first nine.
Most recently, the company disappointed investors by failing to land contracts in Milwaukee and Washington. When the news hit the market Thursday, the company's stock fell 23 percent, or $5 a share. The stock closed Friday at $13.25, down $3.50 a share.
"Had they been able to sign new contracts, I would have had a higher degree of confidence. After a while, it seemed the stock was trading on air," said Jay Tracey, a manager of Oppenheimer's Discovery Fund, which once owned EAI's stock.
Like many on Wall Street, Mr. Tracey said he was attracted to the company that promised to revolutionize public education -- much like Federal Express had changed mail delivery. Besides helping to improve the country's educational level, EAI could become a multibillion-dollar company if it could get just a small slice of the $250 billion spent each year on public education, Mr. Tracey figured.
"It was a very appealing idea. It was a concept stock, but it became a bit too concepty for me," said Mr. Tracey, who sold his fund's 90,000 shares of EAI in December, when the stock was still trading at about $35 a share.
Mr. Tracey said he lost confidence in EAI because the company seemed able to generate headlines better than profits.
Questions have also been raised about EAI's accounting methods. EAI records the full $27 million that Baltimore gives it each year as revenue.
Much of that money, however, is immediately returned to the city to pay for teachers' salaries and administrative costs, leading some critics to say that EAI deliberately uses this accounting method to inflate revenues and mislead investors into thinking it is a much bigger company.
EAI officials have strongly denied that their accounting practices are flawed. Company accountants, Arthur Andersen & Co., have also reaffirmed their approval of the method in use. Besides, company officials say, the accounting issue does not affect EAI's bottom line, which has been in the black after years of heavy losses.
But even the bottom line has not satisfied investors. Last year, the company recorded an operating profit of $735,000 -- representing just 3 percent of the $27 million contract, though investors had been told that the company was sure to earn 10 percent profit margins.
This year has been worse, with EAI making no operating profit. It has been in the black only because it has earned interest on money the company raised from the stock market.
rTC Some of the company's unfulfilled promises go back to its roots: EAI was founded in 1986 to run private schools using an educational method called "Tesseract." But it failed to make money running private schools, so moved into public schools as a consultant and then manager.