Sylvan Learning Systems Inc. saw its stock tumble about 10 percent late this week after the author of a newsletter for investors questioned the accounting practices of the Baltimore-based education company.
Herb Greenberg, a San Diego-based columnist for the Web site TheStreet.Com, questioned Sylvan's practices Wednesday in a column in the newsletter Street Fund.
Greenberg said the company's 900 tutoring centers in North America benefit from advertising that Sylvan has begun for a new offshoot that offers tutoring online, but that Sylvan wrongly omits those ad costs from calculations for its core earnings. In effect, Sylvan's bottom line looks better than it is, he said.
The point may seem arcane, but not to investors: Sylvan's stock, which had risen about 20 percent since December, lost about half that gain after Greenberg's Wednesday critique.
Sylvan shares closed yesterday at $23.94 on the Nasdaq stock market, down 83 cents on the day and 9.93 percent below Tuesday's close of $26.58. More than 1.9 million shares traded Wednesday - the most for a single day since November.
Sylvan's top executive and several investment analysts who follow the company dismissed Greenberg's article and a follow-up piece by him yesterday.
Douglas L. Becker, chairman and chief executive officer, told shareholders at a conference Thursday that advertising costs for eSylvan, the online tutoring, were a fraction of the sum spent to market the learning centers that students visit: $700,000 for eSylvan vs. $40 million for the centers.
"We do live in a world where just about anybody can write an article, say anything they want and that doesn't make it true," he told shareholders.
Jeffrey M. Silber, an analyst with Gerard Klauer Mattison in New York, said yesterday that some of his clients did ask him to sell their shares after the article appeared, but he disagreed with its conclusion.
"In this environment, it's easy to pour coals on anybody, and these kind of charges are hard to defend," he said. "Is the company trying to hide something within Sylvan Ventures? I don't think that's the case."
"The person who wrote that got it backward," said another analyst, Dalton L. Chandler of Needham & Co. in New York. Chandler argued that marketing for the learning centers benefits the smaller online start-up, not the other way around.
But Greenberg, in an interview yesterday, said that it's all too common for analysts to interpret financial data the way a company desires for fear of being shut out by executives.
"People are still sometimes playing the old game of doing what the company wants them to do, but the game is slowly changing," he said. "They can't have it both ways."
Greenberg wrote that an associate contacted a Sylvan spokesman who told him that ads for eSylvan boosted enrollment for the tutoring centers by 30 percent.
"Had costs associated with the company's eSylvan start-up been included with the core business, by one calculation, earnings per share for 2001 would've been more like 44 cents rather than the 67 cents reported," he wrote.
Greenberg said he has not followed Sylvan regularly but acted on a "tip" from a reliable source.
He's not the first to take issue with the complexity of the company's balance sheet. Sylvan executives, for example, have often criticized news headlines that focus on losses from the company's venture subsidiary.
Sylvan typically reports its quarterly and yearly financial results two ways - with the venture losses and without. It contends that its $285 million commitment to startup education companies does not reflect the long-term strength of its primary operation.
Greenberg and some others say the venture losses are a sizable risk that investors should assess.
Becker said Sylvan reports both versions, and investors can decide for themselves which is a better yardstick.
"The article implied that we're not being transparent when we're being as transparent as anybody could ask," he said. "If our regular business is having a banner quarter, it has nothing to do with eSylvan."