Lifetime Fitness 2013 Annual Report Download - page 58

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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taking advantage of our brand in these markets. We lease eight of the centers and acquired the property of one
center. The fair values assigned to the acquired entity were approximately $9.2 million of goodwill and the
remainder of the purchase price was related to identifiable assets.
In December 2011, we purchased the land and building of six of our existing centers we had previously leased. The
purchase was financed by borrowings from our credit facility and the assumption of a securitized commercial
mortgage-backed loan of approximately $72.1 million (see Note 4), which approximates fair value, based on an
independent assessment. Since we previously operated these centers, this was accounted for as a purchase of an asset
group. We allocated the purchase price to land and buildings acquired based on relative fair values as determined by
independent appraisals. Previously recorded deferred rent related to these properties was treated as a reduction of the
purchase price. Additionally, we reclassified unamortized leasehold improvements on these properties to the
purchased assets.
We do not present pro forma information for these acquisitions given the immateriality of their results individually
and in the aggregate to our consolidated financial statements.
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, or the inability to recover net book value over the remaining useful
life, 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 ancillary
business. The determination of whether impairment has occurred is based on an estimate of undiscounted future cash
flows directly related to that center or ancillary 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 on operating assets were deemed to have occurred during the years ended December 31, 2013, 2012 or
2011.
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.
In August 2011, we entered into an interest rate swap contract that effectively fixed the rates paid on a total of
$200.0 million of variable rate borrowings at 1.32% plus the applicable spread (which depends on our EBITDAR
leverage ratio) until June 2016. We pay 1.32% and receive LIBOR on the notional amount of $200.0 million. The
contract has been designated a cash flow hedge against interest rate volatility. Changes in the fair market value of
the swap contract are recorded in accumulated other comprehensive (loss) income, net of tax. As of December 31,
2013, the $2.3 million fair market value loss, net of tax, of the swap contract was recorded as accumulated other
comprehensive loss in the shareholders’ equity section of our consolidated balance sheets and the $3.8 million gross
fair market value of the swap contract was included in long-term debt. For information regarding the swap contract,
see Note 4.
On an ongoing basis, we assess whether the interest rate swap used in this hedging transaction is “highly effective”
in offsetting changes in the fair value or cash flow of the hedged item by comparing the current terms of the swap
and the debt to assure they continue to coincide and through an evaluation of the continued ability of the
counterparty to the swap to honor its obligations under the swap. If it is determined that the derivative is not highly
effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date
at which it was determined to be effective would be recognized in earnings. No amounts related to ineffectiveness
have been recognized in earnings for the years ended December 31, 2013, 2012 or 2011.
Goodwill — The goodwill acquired during the year ended December 31, 2013 is primarily from the acquisition of
certain athletic events as well as other smaller acquisitions. We are currently in the process of finalizing the