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Strategies & Market Trends : Mr. Pink's Picks: selected event-driven value investments -- Ignore unavailable to you. Want to Upgrade?

To: TRIIBoy who wrote (12252)	12/15/1999 11:41:00 AM
From: torquatus	Read Replies (1) \| Respond to of 18998

The company is burning through cash from operations at a rate of more than $2 million per month, having racked up more than $62 million in negative cash flow from operations since 1996. Not only has the company been to the well twice for equity financing since going public ($88.3 million in August of last year, and another $82.7 million just this last May), but as of June 30 the balance sheet showed cash of only $66 million -- an increase of a mere $43 million since March 30. And don't forget, it was only in May when the company raised that $82.7 million in its second sale of stock in less than a year. Now simple arithmetic will tell you that if a company already has $22.6 million on hand on March 30, then raises another $82.7 million in May, the balance sheet as of June 30 ought to show somewhere around $105 million in cash. But it doesn't. It shows only about $66 million. So what happened to the missing $40 million? What happened is, the company spent $17 million of it on new gym stuff and whatnot, then burned through the rest ($23 million) simply running the business. But wait, wasn't this a company that showed a $2 million net profit (revenues minus expenses) during the period in question? In fact, Bally is bleeding cash. It's just that the losses don't turn up on the income statement because the one discretionary item on that statement -- the provision for doubtful receivables -- is being set way too low. The company says, "all-in," it is reserving 41% of accounts receivable against doubtful receivables, which includes $32.7 million for contract cancellations. But in the quarter ended June 30, the provision-for-doubtfuls item on the income statement stood at $29.3 million, or roughly only 28% of the $103.6 million worth of installment contract membership fees sold during the quarter. Perhaps that income statement provision should have been higher. Why? Because if you take the revenue reported during the quarter ($180.8 million) and isolate out of it the cash that Bally actually wound up receiving (account receivables at the start of the quarter, minus account receivables at the end of the quarter, minus the provision for doubtful receivables, minus the deferred revenues at the start of the quarter, plus the deferred revenues at the end of the quarter -- got all that?) you end up with actual cash money during the quarter of only $128.7 million -- which sure ain't the $151.5 million (gross revenues minus the provision for doubtfuls) that the company had provided for. The gap -- $22.8 million -- happens to be almost exactly equal to (a) the company's negative cash flow for the quarter and (b) the $23 million that one would expect to be on the company's balance sheet from the May stock sale, but isn't -- the money that seems to have been spent simply running the company. And what if that $23 million had been accounted for as an equivalent increase in the provision for doubtfuls? In that case, Bally wouldn't have reported that $2 million, or 9 cents per share, in earnings. It would have reported a loss of close to 80 cents per share.