Lifetime Fitness 2007 Annual Report Download - page 52

LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
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Impairment of Long-lived Assets — The carrying value of long-lived assets is reviewed annually and whenever
events or changes in circumstances indicate that such carrying values may not be recoverable. We consider a history
of consistent and significant operating losses to be our primary indicator of potential impairment. Assets are grouped
and evaluated for impairment at the lowest level for which there are identifiable cash flows, which is generally at an
individual center level or corporate business. The determination of whether impairment has occurred is based on an
estimate of undiscounted future cash flows directly related to that center or corporate business, compared to the
carrying value of these assets. If an impairment has occurred, the amount of impairment recognized is determined by
estimating the fair value of these assets and recording a loss if the carrying value is greater than the fair value. Based
upon our review and analysis, no impairments were deemed to have occurred during 2007, 2006 or 2005.
Derivative Instruments and Hedging Activities. As part of our risk management program, we may periodically use
interest rate swaps to manage known market exposures. Terms of derivative instruments are structured to match the
terms of the risk being managed and are generally held to maturity. We do not hold or issue derivative financial
instruments for trading purposes. All other contracts that contain provisions meeting the definition of a derivative
also meet the requirements of, and have been designated as normal purchases or sales. Our policy is to not enter into
contracts with terms that cannot be designated as normal purchases or sales.
In 2007, we entered into an interest rate swap contract that effectively fixed the rates paid on a total of $125.0
million of variable rate borrowings. The contract fixed the rate on $125.0 million of borrowings at 4.825% plus the
applicable spread (depending on cash flow leverage ratio) until October 2010. The contract has been designated a
hedge against interest rate volatility. In accordance with Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” changes in the fair market value of the swap
contract are recorded in accumulated other comprehensive income (loss). As of December 31, 2007, the $2.0
million, net of tax, fair market value of the swap contract was recorded as accumulated other comprehensive loss in
the shareholder equity section and the $3.3 million gross fair market value of the swap contract was included in
long-term debt.
Other Assets — We record other assets at cost. Amortization of financing costs is computed over the periods of the
related debt financing. Other assets consist of the following:
December 31,
2007 2006
Financing costs, net...................................................................... $ 5,399 $ 4,093
Investment in unconsolidated affiliate (see Note 3)..................... 2,636 2,400
Site development costs................................................................. 2,669 2,371
Lease deposits.............................................................................. 3,867 2,340
Earnest money deposits................................................................ 9,632 8,984
Intangible assets........................................................................... 5,505 4,252
Land held for sale ........................................................................ 10,592 5,655
Other ............................................................................................ 2,505 —
$ 42,805 $30,095
Site development costs consist of legal, engineering, architectural, environmental, feasibility and other direct
expenditures incurred for certain new center projects. Capitalization commences when acquisition of a particular
property is deemed probable by management. Should a specific project be deemed not viable for construction, any
capitalized costs related to that project are charged to operations at the time of that determination. Costs incurred
prior to the point at which the acquisition is deemed probable are expensed as incurred. Site development costs
capitalized in the years ended December 31, 2007 and 2006 were approximately $10.3 million and $6.1 million,
respectively. Upon completion of a project, the site development costs are classified as property and equipment and
depreciated over the useful life of the asset.