Lifetime Fitness 2006 Annual Report Download

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2006
ANNUAL
REPORT

Table of contents

  • Page 1
    2006 A N N U A L R E P O R T

  • Page 2
    ... and athletics, family recreation, and resort and spa services 24 hours a day, seven days a week. Programming, services and products uniquely combine exercise, education and nutrition to help our members lead a healthy way of life and achieve their fitness goals. In 2006, Life Time Fitness grew...

  • Page 3
    ... the member experience by making additional investments in our health and fitness center spaces and amenities, expanded employee training and certification initiatives, and the launch of new, healthy-way-of-life services, products and programs. In 2006, we: • Opened seven current model centers as...

  • Page 4
    ®This Page Intentionally Left Blank©

  • Page 5
    ... as of June 30, 2006, the last business day of the registrant's most recently completed second fiscal quarter, was $1,440,861,172, based on the closing sale price for the registrant's common stock on that date. The number of shares outstanding of the Registrant's common stock as of February 15...

  • Page 6

  • Page 7
    ... in Part III. FORWARD-LOOKING STATEMENTS The information presented in this Annual Report on Form 10-K under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning...

  • Page 8
    ..., and Director Independence Principal Accountant Fees and Services 66 67 67 67 67 Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations...

  • Page 9
    ... vary, our business strategy and operating processes remain consistent across all of our centers. Our current model centers generally target 8,500 to 11,500 memberships by offering, on average, 110,000 square feet of health, fitness and family recreation programs and services. Of the centers that we...

  • Page 10
    ...'s children under the age of 12 at a nominal per child monthly cost. We provide the majority of our members with a variety of complimentary services, including lockers, towels, group fitness classes and our magazine, Experience Life. Our membership plans are month-to-month, cancelable at any time by...

  • Page 11
    ... rate than membership dues or enrollment fees. Our centers offer a variety of in-center products and services, including individual and group sessions with certified professional personal trainers and registered dieticians, relaxing LifeSpa services, engaging member activities programs, wellness...

  • Page 12
    ... experience by offering free seminars on health and nutrition to educate members on the benefits of a regular fitness program and a well-rounded lifestyle. Moreover, our centers offer interactive learning opportunities, such as personal training, group fitness sessions and member activities classes...

  • Page 13
    ...to Experience Life Towel Service Use of Lockers LifeCafe LifeSpa Massage Therapy Nutritional Products Personal Training Pool-side Bistro T.E.A.M. Programs O2 Cardio Training Metabolic Testing Nutrition Coaching Other Centers Facilities Cardiovascular Training Child Centers Free Weights Group Fitness...

  • Page 14
    ... centers offer fitness programs, including group fitness classes and health and wellness training seminars on subjects ranging from stress management to personal nutrition. Each current model center has at least two group fitness studios and makes use of the indoor and outdoor pool areas for classes...

  • Page 15
    ... or families for Fitness or Sports memberships. In addition, new members pay a $5 per child monthly fee to include junior members on a membership. Our current model centers average approximately 2.4 people per membership. Usage Our centers are generally open 24 hours a day, seven days a week and...

  • Page 16
    ...and targeted consumer and business-to-business media as well as referral promotions. To further attract new members during this period, we offer discounted pre-opening enrollment fees and distribute free copies of our Experience Life magazine to households in the immediate vicinity of the new center...

  • Page 17
    .... In 2006, Experience Life was honored with a top national prize for excellence in use of editorial illustration and a Minnesota Magazine Publications Association gold medal for Overall Excellence. Athletic Events. Our annual Life Time Fitness Triathlon attracted participants from 40 states and 13...

  • Page 18
    ...and condominium clubs; country clubs; and the home-use fitness equipment industry. • Competition in the health club industry varies from market to market and is based on several factors, including the breadth of product and service offerings, the level of enrollment fees and membership dues, the...

  • Page 19
    ... our business. In particular, we license the mark "LIFE TIME" in connection with our nutritional products so that we can market and distribute them under the LIFE TIME FITNESS brand. Available Information Our Web site is www.lifetimefitness.com. We make available through our Web site all reports and...

  • Page 20
    ... where membership is generally not yet at a targeted capacity, including market maturity or saturation, a decline in our ability to deliver quality service at a competitive price, direct and indirect competition in the areas where our centers are located, a decline in the public's interest in health...

  • Page 21
    ... to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales and operations functions. These processes are time-consuming and expensive, will increase management responsibilities and will divert management attention. The anticipated benefits of...

  • Page 22
    ... when required could have an adverse effect on our business plans and operating results. If our founder and chief executive officer leaves our company for any reason, it could have a material adverse effect on us. Our growth and development to date have been largely dependent upon the services of...

  • Page 23
    ... be subject to claims related to health or safety risks at our centers. Use of our centers poses potential health or safety risks to members or guests through exertion and use of our equipment, swimming pools, rock climbing walls, waterslides and other facilities and services. We cannot assure you...

  • Page 24
    ... that use LIFE TIME FITNESS or a similar mark in connection with goods and services related to health and fitness. The rights of these entities in such marks may predate our rights. Accordingly, if we open any centers in the areas in which these parties operate, we may be required to pay royalties...

  • Page 25
    ... to third parties who operate our cafe, pro shop, salon or climbing wall or to hospitals that use the space to provide physical therapy. The square footage figures include those subleased areas. The square footage figures exclude areas used for tennis courts and outdoor swimming pools. These figures...

  • Page 26
    ...30, 2004, which is the day our common stock began to trade publicly, through December 31, 2006 with the cumulative total return on the NYSE Composite Index and Russell 2000 Index. The comparison assumes $100 was invested on June 30, 2004 in Life Time Fitness common stock and in each of the foregoing...

  • Page 27
    ...2006, our Board of Directors authorized the repurchase of 500,000 shares of our common stock from time to time in the open market or otherwise for the primary purpose of offsetting the dilutive effect of shares issued pursuant to our Employee Stock Purchase Plan. Equity Compensation Plan Information...

  • Page 28
    ... previously filed with the SEC. Historical results are not necessarily indicative of the results of operations to be expected for future periods. See Note 2 to our consolidated financial statements for a description of the method used to compute basic and diluted net earnings (loss) per share. 22

  • Page 29
    ...$ $ $ $ (1) In-center revenue includes revenue generated at our centers from fees for personal training, dieticians, group fitness training and other member activities, sales of products offered at our LifeCafe, sales of products and services offered at our LifeSpa, tennis and renting space in...

  • Page 30
    ... dues, enrollment fees and in-center revenue for a center are included in comparable center revenue growth beginning on the first day of the thirteenth full calendar month of the center's operation. Average revenue per membership is total center revenue for the period divided by an average number...

  • Page 31
    ... 13 states under the LIFE TIME FITNESS brand. We commenced operations in 1992 by opening centers in the Minneapolis and St. Paul, Minnesota area. During this period of initial growth, we refined the format and model of our center while building our membership base, infrastructure and management team...

  • Page 32
    ... with our media, athletic events and nutritional product businesses, our restaurant and other corporate expenses, as well as gains or losses on our dispositions of assets. Our total operating expenses may vary from period to period depending on the number of new centers opened during that period and...

  • Page 33
    ... of sale to the customer. Pre-opening operations. We generally operate a preview center up to nine months prior to the planned opening of a center during which time memberships are sold as construction of the center is completed. The revenue and direct membership acquisition costs, primarily sales...

  • Page 34
    ... junior membership programs and increased sales of Sports and other value-added memberships. 34.0% was from in-center revenue, which increased $40.6 million primarily as a result of our members' increased use of our personal training, member activities, LifeCafe and LifeSpa products and services. As...

  • Page 35
    ... due to increased advertising revenue from our media business and rental revenue from our Highland Park office building. Center operations expenses. Center operations expenses were $292.3 million, or 58.4% of total center revenue (or 57.1% of total revenue), for the year ended December 31, 2006...

  • Page 36
    ... of total revenue, for the year ended December 31, 2004. This $5.8 million increase was primarily due to increased costs to support the growth in membership and the center base in 2005, as well as costs associated with being a public company. Other operating expenses. Other operating expenses were...

  • Page 37
    ...paid to selected members of senior and center-level management. We have provided reconciliations of EBITDA to net income in the section "Quarterly Results (Unaudited)," located immediately following the Report of Independent Registered Public Accounting Firm. Seasonality of Business Seasonal trends...

  • Page 38
    ... to have monthly membership dues paid by electronic draft, we defer enrollment fee revenue and we fund the construction of our new centers under standard arrangements with our vendors that are paid with proceeds from long-term debt. Operating Activities As of December 31, 2006, we had total cash and...

  • Page 39
    ...enter into certain business combinations, dispose of assets, make certain acquisitions, pay dividends, incur certain additional debt and create certain liens. The weighted average interest rate and debt outstanding under the revolving credit facility for the year ended December 31, 2006 was 6.8% and...

  • Page 40
    ... to the terms of the lease, we agreed to lease the center for a period of 20 years. At December 31, 2006, the present value of the future minimum lease payments due under the lease amounted to $6.7 million. We have financed our purchase of some of our equipment through capital lease agreements with...

  • Page 41
    ...December 31, 2006 (3): Payments due by period Less than 1 year 1-3 years 3-5 years (In thousands) Total Long-term debt obligations ...$ Capital lease obligations ...Interest (1)...Operating lease obligations ...Purchase obligations (2) ...Other long-term liabilities ...Total contractual obligations...

  • Page 42
    ... flows and consolidated results of operations. As of December 31, 2006, our floating rate indebtedness was approximately $245.0 million. If long-term floating interest rates were to have increased by 100 basis points during the year ended December 31, 2006, our interest costs would have increased by...

  • Page 43
    ... EQUIPMENT, net ...RESTRICTED CASH...DEFERRED MEMBERSHIP ORIGINATION COSTS...OTHER ASSETS...TOTAL ASSETS...LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...Accounts payable ...Construction accounts payable...Accrued expenses...Deferred revenue...Total...

  • Page 44
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, 2005 2004 2006 (In thousands, except per share data) REVENUE: Membership dues ...Enrollment fees ...In-center revenue...Total center revenue ...Other revenue ...Total revenue...OPERATING ...

  • Page 45
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Shares Amount Additional Paid-In Capital Deferred Compensation Retained Earnings Total (In thousands, except share data) BALANCE - December 31, 2003...Common stock issued upon initial public ...

  • Page 46
    ...income taxes ...Loss on disposal of property and equipment, net ...Amortization of deferred financing costs...Share-based compensation...Excess tax benefit from exercise of stock options...Changes in operating assets and liabilities ...Other ...Net cash provided by operating activities ...CASH FLOWS...

  • Page 47
    ... of sale to the customer. Pre-Opening Operations - We generally operate a preview center up to nine months prior to the planned opening of a center during which time memberships are sold as construction of the center is being completed. The revenue and direct membership acquisition costs, primarily...

  • Page 48
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) The rollforward of these allowances are as follows: December 31, 2005 2004 2006 Allowance for Doubtful Accounts: Balance, beginning of period...Provisions...Write-offs ...

  • Page 49
    ... member enrollment and management. Costs related to these projects have been capitalized in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Other equipment consists primarily of cafe, spa and playground equipment...

  • Page 50
    ...development costs are classified as property and equipment and depreciated over the useful life of the asset. Intangible assets primarily consist of the leases acquired as part of the purchase in 2005 of the Highland Park, Minnesota office building complex, which includes one of our centers, as well...

  • Page 51
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) Accrued Expenses - Accrued expenses consist of the following: December 31, 2005 2006 Payroll related ...Real estate taxes ...Center operating costs ...Insurance ......

  • Page 52
    ...The number of total common shares outstanding at December 31, 2006 was 36,817,199. There were no equivalent shares excluded from the computation of diluted EPS for the years ended December 31, 2006, 2005, and 2004. Share-Based Compensation - We have stock option plans for employees and accounts for...

  • Page 53
    ... expected life assumptions presented are based on an average of the volatility assumptions reported by a peer group of publicly traded companies. For more information on our share-based compensation plans, see Note 8. Dividends - We have not declared or paid any cash dividends on our common stock in...

  • Page 54
    ... period for deferred enrollment fee revenue and associated direct costs (based on the historical average expected life of center memberships). We revise the recorded estimates when better information is available, facts change, or we can determine actual amounts. Those revisions can affect operating...

  • Page 55
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) Our capital expenditures were as follows: For the Year Ended December 31, 2006 2005 2004 Purchases of property and equipment...Non-cash property purchase financed ...

  • Page 56
    ... pursuant to its terms. We do not receive a management fee in connection with our duties under the management agreement, but do receive an overhead cost recovery charge equal to the lesser of (i) the lowest rate charged to any of our other centers, or (ii) 9.0% of the net revenue of the Bloomingdale...

  • Page 57
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 4. Long-Term Debt December 31, 2005 2006 Term notes payable to insurance company, monthly interest and principal payments totaling $1,273 including interest at 8.25% to...

  • Page 58
    ...enter into certain business combinations, dispose of assets, make certain acquisitions, pay dividends, incur certain additional debt and create certain liens. The weighted average interest rate and debt outstanding under the revolving credit facility for the year ended December 31, 2006 was 6.8% and...

  • Page 59
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) We are a party to capital equipment leases with third parties which include monthly rental payments of approximately $639 as of December 31, 2006. Amortization recorded...

  • Page 60
    ... rate ...State taxes, net of federal benefit...Other, net... Deferred income taxes are the result of provisions of the tax laws that either require or permit certain items of income or expense to be reported for tax purposes in different periods than they are reported for financial reporting...

  • Page 61
    ...The LIFE TIME FITNESS, Inc. 1998 Stock Option Plan (the 1998 Plan), reserved up to 1,600,000 shares of our common stock for issuance. Under the 1998 Plan, the Board of Directors had the authority to grant incentive and nonqualified options to purchase shares of our common stock to eligible employees...

  • Page 62
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) the closing price of our stock on the dates of issue which ranged from $42.72 to $50.82 during 2006. The restricted stock generally vests over periods ranging from one ...

  • Page 63
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) A summary of option activity is as follows: WeightedAverage Exercise Price Weighted Average Remaining Contractual Term (in years) Options Outstanding at December 31, ...

  • Page 64
    ... reporting and discussion of results of operations, "Centers" represent the revenue and associated costs (including general and administrative expenses) from membership dues and enrollment fees, all in-center activities including personal training, spa, cafe and other activities offered to members...

  • Page 65
    ..., except share and per share data) Financial data and reconciling information for our reporting segment to the consolidated amounts in the financial statements are as follows: Centers Segment reporting: Year ended December 31, 2006: Revenue...Net income (loss)...Provision (benefit) for income...

  • Page 66
    ... tennis facility and an operating presale health and fitness facility. In a separate transaction, we entered into a lease agreement with the City of Minneapolis on July 26, 2006, under which we will operate a health and fitness facility located in Minneapolis, Minnesota as a Life Time Fitness center...

  • Page 67
    LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) that Bloomingdale LLC is charged the equivalent of the debt service for the use of the equipment. We charged $443, $516 and $423 for the years ended December 31, 2006, ...

  • Page 68
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Life Time Fitness, Inc.: We have audited the accompanying consolidated balance sheets of Life Time Fitness, Inc. (a Minnesota corporation) and subsidiaries (the "Company") as of December 31, 2006 ...

  • Page 69
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Life Time Fitness, Inc.: We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that Life Time Fitness, Inc. (a Minnesota corporation...

  • Page 70
    ..., including the timing of new center openings and related expenses, timing of price increases for enrollment fees and membership dues and general economic conditions. In the past, our pre-opening costs, which primarily consist of compensation and related expenses, as well as marketing, have varied...

  • Page 71
    ... Act). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the...

  • Page 72
    ... Operating Officer Executive Vice President and Chief Financial Officer Executive Vice President, General Counsel and Secretary Executive Vice President Senior Vice President, Operations Senior Vice President, Life Time University Bahram Akradi founded our company in 1992 and has been a director...

  • Page 73
    ... and Executive Vice President in March 2006. Mr. Zaebst has over 20 years of experience in the health and fitness industry. Mr. Zaebst was instrumental in assisting Mr. Akradi in the creation, expansion and day-to-day operations of U.S. Swim & Fitness Corporation until 1991, at which time he started...

  • Page 74
    ...and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm 2. Financial Statement Schedules: The information required by Schedule II - Valuation and Qualifying...

  • Page 75
    ...Statement made for the benefit of Teachers Insurance and Annuity Association of America. Lease Agreement dated as of September 30, 2003, by and between LT Fitness (DE) QRS 15-53, Inc., as landlord, and Life Time Fitness, Inc., as tenant. Series A Stock Purchase Agreement dated May 7, 1996, including...

  • Page 76
    10.15 Operating Agreement of Life Time, BSC Land, DuPage Health Services Fitness Center - Bloomingdale L.L.C. dated December 1, 1999 by and between the Registrant, Bloomingdale Sports Center Land Company and Central DuPage Health. Life Time Fitness, Inc. 2004 Long-Term Incentive Plan. Incorporated...

  • Page 77
    ...dated July 26, 2006. 10.29 Purchase and Sale Agreement with Well-Prop (Multi) LLC dated July 26, 2006. 10.30# Modification to 2006 Key Executive Incentive Compensation Plan dated September 19, 2006. Form of Restricted Stock Agreement (Executive) for 2004 Long-Term Incentive Plan with performance...

  • Page 78
    ... this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 28, 2007. LIFE TIME FITNESS, INC. By: /s/ Bahram Akradi Name: Bahram Akradi Title: Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer and Director) By...

  • Page 79
    ... Akradi Chairman of the Board Life Time Fitness Director since 1992 Management Bahram Akradi Chairman, President and CEO Michael J. Gerend Investor Information Stock Exchange Listing New York Stock Exchange: LTM Annual Meeting The annual meeting of Life Time Fitness shareholders will be Thursday...

  • Page 80
    ...MINNESOTA ... Lake (Fridley) • New Hope • Plymouth • ...City West Parkway Eden Prairie, MN 55344 Phone: 952-947-0000 Fax: 952-947-0099 lifetimefitness.com ©2007 LIFE TIME FITNESS, INC. LIFE TIME FITNESS, EXPERIENCE LIFE and the LIFE TIME FITNESS LOGO are registered trademarks of Life Time Fitness...