Lifetime Fitness 2006 Annual Report Download - page 32

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future periods than in the past. Of the eight new centers we plan to open in 2007, we expect that four will be in
existing markets. We do not expect that operating costs of our planned new centers will be significantly higher than
centers opened in the past, and we also do not expect that the planned increase in the number of centers will have a
material adverse effect on the overall financial condition or results of operations of existing centers. Another result
of opening new centers, as well as the assumption of operations of seven leased facilities in 2006, is that our center
operating margins may be lower than they have been historically while the centers build membership base. We
expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly-opened
centers, as well as the facility costs for the seven leased centers, to affect our center operating margins at these new
centers and on a consolidated basis. Our categories of new centers and existing centers do not include the center
owned by Bloomingdale LLC because it is accounted for as an investment in an unconsolidated affiliate and is not
consolidated in our financial statements.
We measure performance using such key operating statistics as average revenue per membership, including
membership dues and enrollment fees, average in-center revenue per membership and center operating expenses,
with an emphasis on payroll and occupancy costs, as a percentage of sales and comparable center revenue growth.
We use center revenue and EBITDA margins to evaluate overall performance and profitability on an individual
center basis. In addition, we focus on several membership statistics on a center-level and system-wide basis. These
metrics include growth of center membership levels and growth of system-wide memberships, percentage center
membership to target capacity, center membership usage, center membership mix among individual, couple and
family memberships and center attrition rates.
We have three primary sources of revenue. First, our largest source of revenue is membership dues and enrollment
fees paid by our members. We recognize revenue from monthly membership dues in the month to which they
pertain. We recognize revenue from enrollment fees over the expected average life of the membership, which we
estimate to be 36 months. Second, we generate revenue, which we refer to as in-center revenue, at our centers from
fees for personal training, dieticians, group fitness training and other member activities, sales of products at our
LifeCafe, sales of products and services offered at our LifeSpa and renting space in certain of our centers. And third,
we have expanded the LIFE TIME FITNESS brand into other wellness-related offerings that generate revenue,
which we refer to as other revenue, including our media, athletic events and nutritional product businesses. Our
primary media offering is our magazine, Experience Life. Other revenue also includes our restaurant located in the
building where we operate a center designed as an executive facility in downtown Minneapolis, Minnesota and
rental income on our Highland Park, Minnesota office building.
Center operations expenses consist primarily of salary, commissions, payroll taxes, benefits, real estate taxes and
other occupancy costs, utilities, repairs and maintenance, supplies, administrative support and communications to
operate our centers. Advertising and marketing expenses consist of our marketing department costs and media and
advertising costs to support center membership growth and our media, athletic event and nutritional product
businesses. General and administrative expenses include costs relating to our centralized support functions, such as
accounting, information systems, procurement, real estate and development and member relations. Our other
operating expenses include the costs associated 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 the number of centers engaged in presale activities.
Our primary capital expenditures relate to the construction of new centers and updating and maintaining our existing
centers. The land acquisition, construction and equipment costs for a current model center since inception in 2000,
has ranged from approximately $18 to $34 million, and can vary considerably based on variability in land cost and
the cost of construction labor, as well as whether or not a tennis area is included or whether or not we expand the
gymnasium. The average cost for the current model centers opened in 2006 increased to $29.5 million as a result of
higher land costs and higher construction costs in states where we are opening centers. We perform maintenance and
make improvements on our centers and equipment throughout each year. We conduct a more thorough remodeling
project at each center approximately every four to six years.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or
GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and