Operating Stategies
In October 1996, Lee S. Hillman was named
President and Chief Executive Officer of the
Company. This completed the transition of senior
management of the Company from predominantly
marketing oriented managers, including the
original founders of the Company, to managers
with a more financial and operational orientation.
The new management team quickly implemented
a business strategy designed to improve the
operating results of the Company. These efforts
have contributed to recent increases in revenues
and operating income, although the Company
reported a loss before extraordinary item of $23.5
million for the year ended December 31, 1997.
During 1997, management developed and began
implementing five strategies to improve the
underlying operations and the financial
performance of the Company. These strategies
have already favorably impacted the Company's
financial results and management is committed to
furthering their implementation.
Emphasize the Sale of All-Club Membership
Plans -- Prior to a public offering of
8,000,000 shares of common stock, $.01 par
value per share (the "Common Stock") in
August 1997 which provided net proceeds of
$88.4 million to the Company (the "1997 Stock
Offering"), the Company managed its
commission structure to emphasize the sale of
paid-in-full membership plans to generate
immediate cash for short-term liquidity at the
expense of longer-term financial returns. The
1997 Stock Offering provided additional working
capital, allowing the Company to emphasize the
sale of all-club membership plans, which are
typically financed, rather than single-club
membership plans. In 1997, this new emphasis
contributed to an 18% increase in the
weighted-average price of memberships sold to
approximately $970 from approximately $820 in
1996. Management believes that it can continue
to increase new member revenues through an
emphasis on financed membership plans.
Upgrade and Expand Fitness Centers -- Using
a portion of the net proceeds from the 1997
Stock Offering and cash flow from operations,
the Company has begun to expand and
upgrade its existing facilities and equipment in
order to increase its membership base and
more effectively capitalize on its streamlined
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marketing and administrative functions. The
Company has budgeted approximately
$15 million for this initiative (over and above
normal maintenance capital expenditures), most
of which has been spent or committed.
Increase Dues Revenues -- The Company
believes that its dues are substantially less than
those charged by its competitors and that it can
continue to increase dues for its members who
are beyond their initial financing period without
any material loss in membership. In addition,
the Company has reduced promotions which
discounted or waived dues. In 1997, these
initiatives contributed to an increase in dues
collected of approximately $11.2 million, or 6%,
over 1996. Management believes that it can
continue to raise the dues charged to its
members at a rate consistent with past periods.
Improve Collections on Financed Contracts --
The Company is maintaining its focus on
increasing downpayments on financed
membership plans and securing payments by
electronic funds transfer ("EFT"), which the
Company's experience has shown results in
higher quality receivables. This effort yielded an
increase of 11% in the average down payment,
from $73 in 1996 to $81 in 1997. In addition to
seeking higher down payments, the Company
continues to develop improved collection
practices based on information provided by
"credit scoring" and behavioral modeling, which
management believes will also improve the yield
from the receivables portfolio.
Continue to Leverage Fixed Cost Base -- A
significant percentage of the Company's
operating costs are fixed in nature, both in
terms of fitness center operations and member
processing and advertising. Over the past
several years, the Company has significantly
reduced these operating costs through
aggressive cost management. As the Company
pursues its growth strategies described below,
management will seek to leverage the
Company's fixed cost base to improve operating
margins.
Growth Opportunities
In order to build upon the improved core
operations and accelerate the growth of the
Company's business, management has identified
the following external growth opportunities:
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