BFIT: Analysis of results. Sit back, relax [if you can] and enjoy.
I tried to use this analysis as a case method for those without
training in financial accounting. These analysis is based on the
resent press release and old SEC fillings. The 10K will probably come
out in mid-march. The press relase numbers are tricky, just
disguised garbage.
These guys are playing naive games [assuming investors including
the big funds can read through the Financial statements]. First,
take a look at the 10Q IS for Q3 97. You need to look at it
so that you understand the points I will make. I show the previous
10Q to motivate the discussion as the press release hides quite a bit.
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months
ended September 30
-----------------------
1997 1996
---------- ----------
(as restated)
Net revenues:
Membership revenues - Initial membership fees on paid-in-full
memberships originated...................... $ 15,541 $ 22,215
Initial membership fees on financed
memberships originated...................... 91,032 73,583
Dues collected................................ 47,720 43,640
Change in deferred revenues................... (3,427) 5,357
---------- ----------
150,866 144,795
Finance charges earned........................... 9,983 9,142
Fees and other................................... 4,298 2,702
---------- ----------
165,147 156,639
Operating costs and expenses:
Fitness center operations........................ 99,382 94,140
Member processing and collection centers......... 10,789 10,410
Advertising...................................... 10,735 10,979
General and administrative....................... 8,753 5,021
Provision for doubtful receivables............... 25,052 19,914
Depreciation and amortization.................... 12,631 13,447
Change in deferred membership origination costs.. (3,123) (35)
---------- ----------
164,219 153,876
---------- ----------
Operating income................................... 928 2,763
Interest income.................................... 575 258
Interest expense................................... (11,658) (12,142)
---------- ----------
Loss before income taxes........................... (10,155) (9,121)
Income tax provision .............................. (100) (116)
---------- ----------
Net loss........................................... $ (10,255) $ (9,237)
========== ==========
Net loss per common share.......................... $ (.60) $ (.76)
========== ==========
*****More analysis
First, notice that Operating Income is not the same thing as Income
Before Extraordinary Items; Operating Income is taken before
interest expense AND extraordinary items. There is also
the concept of Results Before Extraordinary Itmes, the number the street loves. The rationale being that extraordinary charges are non-
recurring items [supporters of EVA analysis argue that this charges
actually reduce asset base and are a "trick to sweep under the rug"
the charge as a "one time hit" which is not included in the
calculation of future performance measures such as return on assets.
Not a key point here BFIT is still a dog under any meas. stick]
So we have discussed three concepts:
1. Operating income: this is taken before interests and extraordinary
items.
2. Results before extraordinary items: Consider operating income
and interest expense but exclude extraordinary items.
3. Net Income after taxes: the bottom line! The important number.
[Cash flows are more important . but item 3. is definitely more
important than 1. and 2.]
In the Q3 results above we see that operating income was a bit under
one million while the net interest expense was an amazing
10+million! and we see that the EPS number they report of
(0.60/share) can be considered a loss before extraordinary items. As
we see, interest expense kills them! Sure, the recent refinancing at
lower rates will help but as we will see from the limited info in
the press release, this came at a cost [a huge extraordinary charge!]
Now, let's sink our theeth on the new release: First let's look at
the Q4 "massaged" Income Statement [a lot of details missing vis-a-
vis what we would see in a 10Q/K]. A good idea is to always look at
the numbers before reading the glossy management comments:
Three months
ended December 31,
1997 1996
(unaudited)
Revenues:
Initial membership fees
originated $ 96,621,000 $ 79,013,000
Dues collected 49,507,000 53,627,000
Change in deferred revenues 5,333,000 14,275,000
Finance charges and other 14,206,000 13,269,000
Total revenues $165,667,000 $160,184,000
Operating income before
depreciation and amortization
("EBITDA") $ 21,805,000 $ 27,330,000
Operating income 9,630,000 12,509,000
Income (loss) before
extraordinary item (221,000) 4,234,000
Extraordinary gain (loss) on
extinguishment of debt (21,414,000) 5,655,000
Net income (loss) (21,635,000) 9,889,000
Basic earnings (loss) per common share:
Income (loss) before
extraordinary item $ (.01) $ .35
Extraordinary gain (1oss) on
extinguishment of debt (1.04) .46
Net income (loss) (1.05) .81
Average common shares
outstanding 20,569,964 12,187,824
Diluted earnings (loss) per common share:
Income (loss) before
extraordinary item $ (.01) $ .33
Extraordinary gain (loss) on
extinguishment of debt (1.04) .44
Net income (loss) 1.05 .77
Average common shares outstanding
(includes 658,549 common
equivalent shares in 1996) 20,569,964 12,846,373
NOTES:
A. The financial data presented above for the 1996 periods have been
restated to reflect a change in the Company's method of recognizing
membership revenue. In addition, interest income for the 1996 periods
has been reclassified to conform with the 1997 presentation. The
Company was an indirect wholly owned subsidiary of Bally Entertainment
Corporation ("Entertainment") until Entertainment spun-off the
Company to its stockholders on January 9, 1996.
B. Excluding the non-cash effects of changes in deferred revenues and
related deferred membership origination costs, EBITDA for the year
and quarter ended December 31, 1997 was $67.2 million and
$13.5 million compared to $49.3 million and $15.3 million for the 1996
periods, an increase of $17.9 million (36%) and a decrease of
$1.8 million (12%), respectively. The change in deferred membership
origination costs decreased operating costs and expenses by
$4.6 million and $3.0 million for the year and quarter ended
December 31, 1997, and increased operating costs and expenses by
$4.1 million and $2.3 million for the year and quarter ended
December 31, 1996.
C. The extraordinary loss on extinguishment of debt for the year and
quarter ended December 31, 1997 results from a refinancing of the
Company's public indebtedness and credit facility. The extraordinary
gain on extinguishment of debt for the year and quarter ended
December 31, 1996 consists of (i) a gain of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was
forgiven as part of the December 1996 merger of Entertainment with
and into Hilton Hotels Corporation [NYSE:HLT - news] and (ii) a charge of $4.2 million
($.35 per share) resulting from the refinancing of the Company's
securitization facility.
D. In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share."
SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is computed similarly to fully diluted
earnings per share pursuant to APB Opinion No. 15. Earnings (loss)
per share amounts for all periods have been presented, and where
appropriate restated, to conform to SFAS No. 128.
S
*****MORE ANALYSIS:
Lee S. Hillman, President and CEO stated, ''The Company's fourth
quarter operating income of $9.6 million and loss from operations of
$.2 million, or $.01 per share, were better than all published Wall
Street estimates as well as our own plan.''
As far as I am concerned, the CEO is comparing apples
with oranges, the consensus number from Zacks is -$0.17/share which
can be considered "Expected EPS BEFORE extraordinary items". The
0.01/share operating income was mainly due to the change in accounting rules.
Details:
1. It looks like they did not bother to list net interest
expense as a separate item to arrive at income before extraordinary
items of (221,000). From thi figure we can infer that interest
expense was around 9.8 million. Was this number manipulated to
achieve results close to break even? Is any accrued interest on the
retired dent included in the following extraordinary item?:
Extraordinary gain (loss) on
extinguishment of debt (21,414,000)
My guess is that the 21 million included some accrued interest on the
retired debt and this was lumped toghether with the amount over book value that was paid when retiring the debt. Very stupid/naive trick that an efficient market will catch?
Most importantly IMO this nice (?) number was also the result of an
accounting change in revenue taking analysts by surpirse [they are
now recognizing interest income on memberships as operating revenues!]
recognition taking the street by surprise!
Other quick questions:
1. Dues collected for the quarter actually went down versus year
ago. Why? apparently lot's of people that have been screwed are not
paying their memberships. Are adequate reserves (looses) being
taken to account for this uncollectible accounts?
2. What portion of initial membership fees are taken as accrued
revenue for the quarter, and what is the basis/rationale for revenue
recognition?
3. Why not show an unaudited CF statement?
4. Any comment on membership revenues in January? why only comment
selectively: "Sales of BFIT-branded nutritional supplements are
growing rapidly, with sales of almost $1 million during January 1998"
Have total members gone up, have "same Gym" members gone up?
5. What will happen to new sources of revenues once the January "rush
hour" traffic is gone and the "shallow pocket regulars" remain?
6. Operating income, bottom line etc. were much better in Q4 96.
Since they talk about reestatement of 96 numbers, here is Q4 96
income statement filled with the SEC in Nov/96: Ups! Q4 results are
never filled with the SEC, since their fiscal closes in 12/31 all
Edgar has is the 10K numbers which are for 12 months. let's look at
The annual 96 IS to see how the accounting changes affected the
numbers in 97: Here is the Original doc. from march 97:
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
Years ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Net revenues:
Membership revenues--
New $ 383,362 $ 423,849 $ 444,043
Dues 190,793 183,803 161,656
Finance charges earned 36,405 36,889 34,877
Fees and other 15,080 17,199 20,929
---------- ---------- ----------
625,640 661,740 661,505
Operating costs and expenses:
Fitness center operations 369,991 400,241 411,776
Member processing and collection centers 44,601 52,764 54,688
Advertising 47,428 50,037 47,578
General and administrative 23,586 21,603 21,925
Provision for doubtful receivables 80,350 72,145 103,930
Depreciation and amortization 55,940 57,359 58,856
---------- ---------- ----------
621,896 654,149 698,753
---------- ---------- ----------
Operating income (loss) 3,744 7,591 (37,248)
Interest expense 47,644 43,750 38,556
---------- ---------- ----------
Loss before income taxes and
extraordinary item (43,900) (36,159) (75,804)
Income tax benefit (2,700) (10,999) (25,013)
---------- ---------- ----------
Loss before extraordinary item (41,200) (25,160) (50,791)
Extraordinary gain on extinguishment of debt 5,655
---------- ---------- ----------
Net loss $ (35,545) $ (25,160) $ (50,791)
========== ========== ==========
Pro forma net loss reflecting income
taxes on a separate return basis $ (36,497) $ (76,305)
========== ==========
Per common share (pro forma for 1995 and 1994):
Loss before extraordinary item $ (3.38) $ (3.08) $ (6.44)
Extraordinary gain on extinguishment of debt .46
---------- ---------- ----------
Net loss $ (2.92) $ (3.08) $ (6.44)
========== ========== ==========
Average common shares outstanding
(pro forma for 1995 and 1994) 12,174,601 11,845,161 11,845,161
========== ========== ==========
Let's compare to the numbers from the release:
Year ended December 31,
1997 1996
Revenues: Initial membership fees
originated $410,778,000 $376,002,000
Dues collected 194,084,000 182,909,000
Change in deferred revenues 961,000 29,791,000
Finance charges and other 55,214,000 50,497,000
Total revenues $661,037,000 $639,199,000
Operating income before depreciation and amortization
("EBITDA") $ 72,815,000 $ 74,999,000
Operating income 19,937,000 19,059,000
Loss before extraordinary item (23,456,000) (24,897,000)
Extraordinary gain (loss) on
extinguishment of debt (21,414,000) 5,655,000
Net loss (44,870,000) (19,242,000)
Basic and diluted earnings (loss) per common share:
Loss before extraordinary
item $ (1.51) $ (2.04)
Extraordinary gain (loss)
on extinguishment of debt (1.37) .46
Net loss (2.88) (1.58)
Average common shares
outstanding 15,557,491 12,174,601
The "new accounting" resulted in higher reported revenues for 96:
new (revised number from latest press release): 639 million
old (3/97 10K): 625 million.
This is a
significant 25%+ increase due to tha accounting change! In their
favor of course! The result is that 97 revenues are also inflated
vis-avis the previous rules followed. The key reason for the increase is the recognition of interest income on the financed memberships as part of operating revenues! A highly debatable practice!
The net effect of the accounting changes in the numbers for 96 result
in EPS for 96 of:
new (revised in press release): (1.58/share)
old (filled in 3/97 original 10K): (2.92/share)
[the
Wow! That was a nice change generated by changes in accounting!
Despite the changes which should greatly favor 97 they reported a
loss per share of (2.88/share)! and remember that is is for an
expanded share base! (i.e., when you are losing money earnings
dilution due to higher number of shares outstanding actually helps
you!)
7. The key thing here is to see the CF statement which
unfortunatelly is not ready yet. It is a bit more difficult yo hide
things on this one!
I did not even bother to analyze the business. IMO this is a low
growth louzy business with very low margins. Aside from the
tricks, The numbers reported support my view on this business.
I will continue to short heavily as the share price goes up.
Pancho |
