Accounting alerts shake stock's value

Worrisome numbers

August 25, 2002|By Andrew Ratner | Andrew Ratner,SUN STAFF

The hijackers on Sept. 11 didn't disrupt Sylvan Learning Systems' stock, but Howard M. Block did on July 30.

That's when Block, a Banc of America Securities analyst in San Francisco, claimed in a report that Sylvan "misrepresented" its accounting for the second quarter of 2002 - a withering charge with investors already in a state of high alert over accounting irregularities.

Block also lowered his recommendation for Sylvan's stock to a "market perform" rating from a more positive "buy."

He contended that Sylvan improperly lumped recent operating losses for English-tutoring centers it owns into an overall $11 million write-off it has claimed as it prepares to sell the part of the global chain located in Spain.

With that loss separated from its main earnings, Sylvan's profits ended up 2 cents a share higher at the end of the quarter. That margin might seem minute, but it was meaningful on Wall Street: The company was able to exceed analysts' earlier expectations, and its stock jumped 14 percent.

Sylvan shares closed at $16.19 after the company's announcement July 25, up from $14.17 a day earlier.

But five days later, the stock sharply reversed course on Block's critique. It dropped 27 percent, to $13.67 a share from $18.78, the 14th-largest percentage drop on the Nasdaq stock market that day.

By comparison, the stock fell 9 percent when the market reopened last September a week after terrorists crashed jets into the World Trade Center, the Pentagon and a Pennsylvania field.

Sylvan officials defend their accounting.

Their assessment is supported by an accounting professor who was asked by The Sun to review Block's report.

Susan Lynn of the University of Baltimore's Robert G. Merrick School of Business said Sylvan's handling of the Spanish loss was proper under Financial Accounting Standards Board guidelines.

Under rule changes that took effect this year, the last quarter's operating loss should be part of the write-down for the overall sale of the business, she said.

Block, however, wasn't the first to cast doubt on Sylvan's numbers.

Herb Greenberg, who writes financial advice columns on the Internet, wounded Sylvan's stock in early June when he said that the company was improperly mixing the costs associated with its various businesses.

He contended that Sylvan should include in its main financial calculations the cost of advertising its new online tutoring, because the ads simultaneously attract customers to its learning centers as well. In his view, the company counted revenue but not the full cost of gaining that revenue, making it look better.

Weeks later, another investment research firm, the Rockville-based Center for Financial Research & Analysis Inc., reiterated that view.

Other analysts who follow the company dismissed the criticisms as uninformed. Advertising for online tutoring is too meager yet to help the tutoring centers, several said.

"In this environment, it's easy to pour coals on anybody, and these kind of charges are hard to defend," said Jeffrey M. Silber, an analyst with Gerard Klauer Mattison in New York.

"The article implied that we're not being transparent when we're being as transparent as anybody could ask," said Douglas L. Becker, Sylvan's chairman and chief executive officer.

The stock was at $28 a share on May 17, two weeks before Greenberg's newsletter article ricocheted around investor chat rooms online like a bullet in a sewer.

The 50 percent drop in the stock price over the next two months mirrored a rocky span for the company in 1999 when some analysts also raised accounting concerns. The stock dropped 67 percent in roughly eight months that year, to $11.19 on Nov. 2 from $34 on Feb. 25.

Sylvan's stock rebounded in 2000. The company helped boost the price by buying back 13.2 million of its own shares at $15.17 apiece.

The company's board recently approved a buyback of up to 3.5 million shares.

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