John and all: A short preview of what is coming in my 10K analysis:
(actually it ended up being partial but very detailed. I will follow
up with details on future business prospects. I apologize for the
typos. I have got to run now so I could not spell/logic/grammar
check the post)
A short preview of findings related to revenue recognition. (Please
notice that we have already agreed that BFIT financial statements
Balance sheet, Income Statement, and Cash Flow statement are about as
bad as you are likely to see anywhere. Poor revenue growth, lousy
operating margins, extreme leverage. This despite the significant
leeway they have to massage their numbers! )
1. As we know, they recognize contract revenue usually within a 36/22
month time frame. This is fine. (Actually, the SEC required them to
increase the time frame within which contract revenue is
recognized. The time frame used to be something like 32/20 months.)
Now the interesting part: part of the sales people
compensation is commission on contracts sold which should be expensed
within the period in which the commissions are paid as these are
just salaries paid. Guess what? They capitalize these commissions
and the amortize them within a similar time frame as the contract
revenue.
Deferred membership origination costs (an asset in their BS!)
1997:86,737 1996: 82,140
The net increase in this asset category: about $4.6 million. Should
have been an expense for 1997! they did pay these commissions out!
2. As we know most people signing these contracts (over half of
them) do not go to them gym for more than a few weeks and many get
tired of paying their monthly installments. Therefore, their
allowance for doubtful accounts is huge. However, there is
significant leeway in the calculation of these allowances. It is
interesting to see that despite the significant increase in long-term
financed contracts, the allowance for doubtful accounts has
actually gone down!
INSTALLMENT CONTRACTS RECEIVABLE<TABLE><CAPTION>
1997 1996
-------- --------
<S> <C> <C> Current:
Installment contracts receivable $239,448 $226,173
Unearned finance charges (27,709) (24,467)
Allowance for doubtful receivables and
cancellations (43,728) (48,471)
-------- --------
$168,011 $153,235
======== ========
Long-term:
Installment contracts receivable $226,735 $195,978
Unearned finance charges (14,357) (11,382)
Allowance for doubtful receivables and
cancellations (36,803) (37,624)
-------- --------
$175,575 $146,972
======== ========
Another interesting finding:
Capitalization of the cost of issuing debt:
Instead of considering the cost of issuing debt (you have got to pay
the bankers waaring the expensive Armani suits! They capitalize
these expenses and then amortize them over a period of several
years! Interesting practice:
DEFERRED FINANCE COSTS
Deferred finance costs are amortized over the terms of the related
debt using the bonds outstanding method. Included in "Other assets"
at December 31, 1997 and 1996 were deferred finance costs of $9,828
and $8,252, respectively, net of accumulated amortization of $2,511
and $4,430, respectively.
Interesting, appx. $1.6 million of debt issuing costs were
capitalized instead of taken as a 1997 expense!
nother interesting one: lumping of accrued interest on the
retired debt which should have been a 1997 Q4 expense was buried into
the huge extraordinary charge for retirement of debt. No wonder
they beat street estimates from a handful second tier analysts!
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash payments for interest and income taxes were as follows-
Interest paid 1997: $ 48,427
However if you check the income statement you will see that only that
interest expense for 1997 was only 45 million!
We see that despite this partial list of creative ways of improving
results their Income Statement really sucks. Just as a reminder here
it is:
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues: Membership revenues-- Initial membership fees on financed
memberships originated $ 352,661 $ 290,378 $ 309,974
Initial membership fees on
paid-in-full memberships originated 58,117 85,624 95,695
Dues collected 194,084 182,909 177,783
Change in deferred revenues 961 29,791 16,813
---------- ---------- ----------
605,823 588,702 600,265
Finance charges earned 39,218 36,405 36,889
Fees and other 15,996 14,092 16,220
---------- ---------- ----------
661,037 639,199 653,374
Operating costs and expenses:
Fitness center operations 384,120 366,466 396,564
Member processing and collection centers 38,627 42,257 50,255
Advertising 45,042 47,428 50,037
General and administrative 28,952 23,586 21,603
Provision for doubtful receivables 96,078 80,350 72,145
Depreciation and amortization 52,878 55,940 57,359
Change in deferred membership
origination costs (4,597) 4,113 428
---------- ---------- ----------
641,100 620,140 648,391
---------- ---------- ----------
Operating income 19,937 19,059 4,983
Interest income 1,928 988 179
Interest expense (45,021) (47,644) (43,750)
---------- ---------- ----------
Loss before income taxes and
extraordinary item (23,156) (27,597) (38,588)
Income tax benefit (provision) (300) 2,700 7,188
---------- ---------- ----------
Loss before extraordinary item (23,456) (24,897) (31,400)
Extraordinary gain (loss) on
extinguishment of debt (21,414) 5,655
---------- ---------- ----------
Net loss $ (44,870) $ (19,242) $ (31,400)
========== ========== ==========
Basic and diluted earnings (loss) per common share (pro forma for 1995):
Loss before extraordinary item $ (1.51) $ (2.04) $ (3.25)
Extraordinary gain (loss) on
extinguishment of debt (1.37) .46
---------- ---------- ----------
Net loss $ (2.88) $ (1.58) $ (3.25)
A 44 million loss, despite all the creative expense rediction tricks
discussed!
The cash flow statement is a much better indicator of results. Do
you want to see a bad one?
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING:
Loss before extraordinary item $(23,456) $(24,897) $(31,400)
Adjustments to reconcile to cash used - Depreciation and amortization,
including amortization included in
interest expense 55,287 59,124 60,701
Provision for doubtful receivables 96,078 80,350 72,145
Change in operating assets and
liabilities (163,770) (119,764) (112,922)
Other, net (75) (114) 1,622
-------- -------- --------
Cash used in operating activities (35,936) (5,301) (9,854)
INVESTING: Purchases and construction of property
and equipment (27,065) (20,612) (22,469)
Proceeds from sale of property and
equipment 10,946
Reserve fund deposit refunded (paid)
pursuant to securitization facility 10,000 (20,000)
Other, net 833 353
-------- -------- --------
Cash used in investing activities (16,119) (9,779) (42,116)
FINANCING: Debt transactions -
Proceeds from long-term borrowings 225,052 162,318 150,000
Repayments of long-term debt (208,034) (155,912) (82,917)
Debt issuance costs (8,466) (2,815) (6,654)
-------- -------- --------
Cash provided by debt transactions 8,552 3,591 60,429
Equity transactions - Proceeds from issuance of common stock
through public offering 88,390
Proceeds from issuance of common stock
upon exercise of stock options 258
Capital contribution by Bally
Entertainment Corporation 6,760
-------- -------- --------
Cash provided by financing activities 97,200 10,351 60,429
-------- -------- --------
Increase (decrease) in cash and equivalents 45,145 (4,729) 8,459
Cash and equivalents, beginning of year 16,534 21,263 12,804
-------- -------- --------
Cash and equivalents, end of year $ 61,679 $ 16,534 $ 21,263
======== ======== ========
The negative cash flow from operations in the amount of $36 million
is a much better indicator of operating income. Moreover, some of
the cash flows in other categories: like Debt issuance costs (8,466)
in Financing activities really belong inoperations.
Do you want to take a look at one of the weakest Balance sheets I
have ever seen:
CONSOLIDATED BALANCE SHEET-(CONTINUED)
(In thousands, except share data)<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:
Accounts payable $ 36,908 $ 41,565
Income taxes payable 2,342 2,258
Deferred income taxes 5,660 15,145
Accrued liabilities 50,464 55,063
13% Senior Subordinated Notes due 2003, called
for 1998 redemption 22,555
Other current maturities of long-term debt 4,590 8,401
Deferred revenues 270,853 265,465
-------- --------
Total current liabilities 393,372 387,897
Long-term debt, less current maturities 405,425 376,397
Other liabilities 7,459 6,824
Deferred revenues 90,989 98,032
Stockholders' equity: Preferred stock, $.10 par value; 10,000,000
shares authorized; none issued--
Series A Junior Participating; 300,000 shares
authorized; none issued Common stock, $.01 par value; 60,200,000 shares
authorized; 20,575,092 and 12,495,161 shares
issued and outstanding 206 125
Contributed capital 392,718 303,811
Accumulated deficit (322,603) (277,733)
Unearned compensation (restricted stock) (2,051)
-------- --------
Total stockholders' equity 70,321 24,152
-------- --------
$967,566 $893,302
======== ========
Notice the extreme leverage which does not even include lease
obligations which are a common form of off-balance sheet financing.
Talk about dangerous leverage. hera are the details:
COMMITMENTS AND CONTINGENCIESOPERATING LEASES
The Company leases various fitness center facilities, office facilities, and
equipment under operating leases expiring in periods ranging from one to
twenty-five years excluding optional renewal periods. Certain of the leases
contain contingent rental provisions generally related to cost of living
criteria or revenues of the respective fitness centers. Rent expense under
operating leases was $89,384, $90,060 and $90,318 for 1997, 1996 and 1995,
respectively. 41<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Minimum future rent payments under long-term noncancellable operating leases in
effect as of December 31, 1997, exclusive of taxes, insurance, other expenses
payable directly by the Company and contingent rent, are $84,519, $82,807,
$78,265, $73,782 and $70,353 for 1998 through 2002, respectively, and $405,425
thereafter.
Included in the amounts above are leases with real estate partnerships in which
certain of the Company's then current executive officers had ownership
interests. Rent expense under these leases was $808, $2,002 and $1,991 for 1997,
1996 and 1995, respectively. In addition, these leases require minimum rent
payments of $845 for 1998.
Wow! how do you like that? it looks like liabilities are understated
by more than 20 million!
Leverage means risk due to significant reuqired fixed payments. You
don't pay and chapter 11 may knock at your door!
Mr. Hillman what would happen if a mild recession screws up the rosy
picture for collection of accounts you assume?
Mr. Hillman what would happen if el presidente Clinton raises minimum
wages by close to 20%. I hope you are aware that a significant
fraction of your labor costs are at minimum wage!
Mr Hillman, what will happen when your rent for expired leases go up?
I hope you are aware of the fact rents are going up like hell!
Wonder why REITS are doing so well?
I have to go now, Will continue later with more interestiong stuff.
The bottom line here is that I am still very confident BFIT will
trade at under $5/share within the next 2 years. However, I cannot
warrantee what MMs, momentum investtors, meat head investors will do
to the stock price before this happens!
pancho
Mr. Hillman |
