Lifetime Fitness 2008 Annual Report Download - page 34

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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, the assumption of operations of one leased facility in
2007 and the six facilities we entered into sale-leaseback transactions for in 2008, is that our center operating
margins may be lower than they have been historically, particularly as newly opened centers build membership. We
expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly-opened
centers, as well as the occupancy costs for the eight leased centers and the lease costs for facilities which we
financed through sale leaseback transactions, to affect our center operating margins at these centers and on a
consolidated basis. As the economy continues to slow, we also expect increased member attrition, lower average
dues, lower in-center revenue per membership as well as higher membership acquisition costs which may result in
lower total revenue and operating profit in affected centers. 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 member satisfaction ratings, return on investment,
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 change in 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. During 2008, our
attrition rate increased, driven primarily by inactive members leaving earlier than in the past.
We have three primary sources of revenue. First, our largest source of revenue is membership dues (66.1% of total
revenue for the year ended December 31, 2008) and enrollment fees (3.4% of total revenue for the year ended
December 31, 2008) 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 30 months for the fourth quarter of 2008, 33 months for the second and third quarters of
2008 and 36 months for the first quarter of 2008 and prior periods. Second, we generate revenue within a center,
which we refer to as in-center revenue, or in-center businesses (28.4% of total revenue for the year ended December
31, 2008), including fees for personal training, registered dieticians, group fitness training and other member
activities, sales of products at our LifeCafe, sales of products and services offered at our LifeSpa, tennis programs
and renting space in certain of our centers. Third, we have expanded the LIFE TIME FITNESS brand into other
wellness-related offerings that generate revenue, which we refer to as other revenue, or corporate businesses (2.1%
of total revenue for the year ended December 31, 2008), including our media, wellness and athletic events
businesses. Our primary media offering is our magazine, Experience Life. Other revenue also includes two
restaurants in the Minneapolis market and rental income from 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 levels, in-center businesses and our corporate 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, two restaurants 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, the number of
centers engaged in presale activities and the performance of our in-center businesses.
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 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 or add other facilities. 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