##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 001-32230
 Life Time Fitness, Inc.
  Minnesota
    
    41-1689746(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)6442 City West Parkway
    
    55344Eden Prairie, Minnesota
    
    (Zip Code)(Address of principal executive offices)
 952-947-0000
 þ o
  Large Accelerated Filer þ
    
    Accelerated Filer o
    
    Non-accelerated filer o
 o þ




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TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of March 31, 2006 and December 31, 2005 (unaudited)
    
    
    3Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    16Item 1A.
    
    Risk Factors
    
    
    16Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 3.
    
    Defaults upon Senior Securities
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16Item 5.
    
    Other Information
    
    
    16Item 6.
    
    Exhibits
    
    
    16SIGNATURES
    
    
    17Certification by Principal Executive OfficerCertification by Principal Financial OfficerSection 1350 Certification




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LIFE TIME FITNESS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 (Unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,548
    
    
    $
    4,680Accounts receivable, net
    
    
    1,661
    
    
    
    4,267Inventories
    
    
    6,009
    
    
    
    5,669Prepaid expenses and other current assets
    
    
    9,514
    
    
    
    7,187Deferred membership origination costs
    
    
    10,745
    
    
    
    10,082Income tax receivable
    
    
    2,134
    
    
    
    3,510Total current assets
    
    
    32,611
    
    
    
    35,395PROPERTY AND EQUIPMENT, net
    
    
    695,771
    
    
    
    661,371RESTRICTED CASH
    
    
    2,809
    
    
    
    3,915DEFERRED MEMBERSHIP ORIGINATION COSTS
    
    
    9,259
    
    
    
    8,410OTHER ASSETS
    
    
    14,660
    
    
    
    14,369TOTAL ASSETS
    
    $
    755,110
    
    
    $
    723,460LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt
    
    $
    15,888
    
    
    $
    14,447Accounts payable
    
    
    7,151
    
    
    
    9,964Construction accounts payable
    
    
    23,989
    
    
    
    25,811Accrued expenses
    
    
    35,641
    
    
    
    27,862Deferred revenue
    
    
    26,105
    
    
    
    23,434Total current liabilities
    
    
    108,774
    
    
    
    101,518LONG-TERM DEBT, net of current portion
    
    
    257,124
    
    
    
    258,835DEFERRED RENT LIABILITY
    
    
    5,642
    
    
    
    5,492DEFERRED INCOME TAXES
    
    
    35,503
    
    
    
    35,419DEFERRED REVENUE
    
    
    15,957
    
    
    
    14,352Total liabilities
    
    
    423,000
    
    
    
    415,616COMMITMENTS AND CONTINGENCIES (Note 6)SHAREHOLDERS EQUITY:Undesignated preferred stock, 10,000,000
shares authorized; none issued or
outstanding
    
    
    
    
    
    
    Common stock, $.02 par value, 50,000,000
shares authorized; 36,121,564 and
35,570,567 shares issued and outstanding,
respectively
    
    
    723
    
    
    
    712Additional paid-in capital
    
    
    239,650
    
    
    
    228,132Deferred compensation
    
    
    0
    
    
    
    (2,306
    )Retained earnings
    
    
    91,737
    
    
    
    81,306Total shareholders equity
    
    
    332,110
    
    
    
    307,844TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    755,110
    
    
    $
    723,460
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LIFE TIME FITNESS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 For the Three Months EndedMarch 31,2006
    
    
    2005REVENUE:Membership dues
    
    $
    75,799
    
    
    $
    60,477Enrollment fees
    
    
    5,083
    
    
    
    4,684In-center revenue
    
    
    32,334
    
    
    
    22,674Total center revenue
    
    
    113,216
    
    
    
    87,835Other revenue
    
    
    2,209
    
    
    
    1,493Total revenue
    
    
    115,425
    
    
    
    89,328OPERATING EXPENSES:Center operations (including $388 and $0 related to share-based
compensation expense, respectively)
    
    
    65,093
    
    
    
    49,571Advertising and marketing
    
    
    5,839
    
    
    
    4,292General and administrative (including $822 and $28 related to
share-based compensation expense, respectively)
    
    
    8,815
    
    
    
    6,490Other operating
    
    
    2,987
    
    
    
    2,938Depreciation and amortization
    
    
    11,519
    
    
    
    8,734Total operating expenses
    
    
    94,253
    
    
    
    72,025Income from operations
    
    
    21,172
    
    
    
    17,303OTHER INCOME (EXPENSE):Interest expense, net of interest income of $69 and $59, respectively
    
    
    (4,117
    )
    
    
    (3,826
    )Equity in earnings of affiliate
    
    
    243
    
    
    
    287Total other income (expense)
    
    
    (3,874
    )
    
    
    (3,539
    )INCOME BEFORE INCOME TAXES
    
    
    17,298
    
    
    
    13,764PROVISION FOR INCOME TAXES
    
    
    6,865
    
    
    
    5,643NET INCOME
    
    $
    10,433
    
    
    $
    8,121BASIC EARNINGS PER COMMON SHARE
    
    $
    0.29
    
    
    $
    0.24DILUTED EARNINGS PER COMMON SHARE
    
    $
    0.28
    
    
    $
    0.23WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING  BASIC
    
    
    35,701
    
    
    
    33,824WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING  DILUTED
    
    
    36,752
    
    
    
    35,928
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LIFE TIME FITNESS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 For the Three Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    10,433
    
    
    $
    8,121Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    11,519
    
    
    
    8,734Deferred income taxes
    
    
    85
    
    
    
    (1,440
    )Loss on disposal of property, net
    
    
    196
    
    
    
    286Amortization of deferred financing costs
    
    
    159
    
    
    
    291Share-based compensation
    
    
    1,210
    
    
    
    28Tax benefit from exercise of stock options
    
    
    
    
    
    
    479Excess tax benefit from stock option exercises
    
    
    (5,331
    )
    
    
    Changes in operating assets and liabilities
    
    
    15,478
    
    
    
    8,438Other
    
    
    64
    
    
    
    64Net cash provided by operating activities
    
    
    33,813
    
    
    
    25,001CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (48,066
    )
    
    
    (36,995
    )Decrease in construction accounts payable
    
    
    (754
    )
    
    
    (194
    )Proceeds from sale of property
    
    
    20
    
    
    
    3,772Increase in other assets
    
    
    (455
    )
    
    
    (539
    )Decrease in restricted cash
    
    
    1,106
    
    
    
    792Net cash used in investing activities
    
    
    (48,149
    )
    
    
    (33,164
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long term borrowings
    
    
    
    
    
    
    50,328Repayments on long term borrowings
    
    
    (3,656
    )
    
    
    (48,904
    )Proceeds from revolving credit facility, net
    
    
    3,400
    
    
    
    Excess tax benefit from stock option exercises
    
    
    5,331
    
    
    
    Proceeds from exercise of stock options
    
    
    7,129
    
    
    
    577Net cash provided by financing activities
    
    
    12,204
    
    
    
    2,001DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (2,132
    )
    
    
    (6,162
    )CASH AND
CASH EQUIVALENTS  Beginning of period
    
    
    4,680
    
    
    
    10,211CASH AND
CASH EQUIVALENTS  End of period
    
    $
    2,548
    
    
    $
    4,049SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash payments for interest, including capitalized interest of
$877 and $804, respectively
    
    $
    4,558
    
    
    $
    4,147Cash payments for income taxes
    
    $
    74
    
    
    $
    115SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Issuance of restricted stock
    
    $
    105
    
    
    $
    106
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LIFE TIME FITNESS, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
   2. Share-Based Compensation
    6




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Three Months Ended March 31,2006
    
    
    2005Share-based compensation expense related to stock options
    
    $
    895
    
    
    $
    Share-based compensation expense related to restricted shares
    
    
    315
    
    
    
    28Total share-based compensation expense
    
    $
    1,210
    
    
    $
    28
  Three MonthsEndedMarch 31, 2005Net income, as reported
    
    $
    8,121Net income, pro forma
    
    $
    7,453Basic earnings per common share:As reported
    
    $
    0.24Pro forma
    
    $
    0.22Diluted earnings per common share:As reported
    
    $
    0.23Pro forma
    
    $
    0.21
  Weighted-
    
    
    Weighted-Average
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregatePrice per
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Share
    
    
    Term (in years)
    
    
    ValueOutstanding on December 31, 2005
    
    
    2,757,666
    
    
    $
    17.01Granted
    
    
    
    
    
    
    Exercised
    
    
    (548,250
    )
    
    
    13.00Canceled
    
    
    (4,000
    )
    
    
    18.50Outstanding on March 31, 2006
    
    
    2,205,416
    
    
    $
    18.01
    
    
    
    8.36
    
    
    $
    63,613,702Exercisable on March 31, 2006
    
    
    850,897
    
    
    $
    13.56
    
    
    
    7.68
    
    
    $
    28,323,057
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Three Months Ended March 31,Weighted Average Valuation Assumptions (1)
    
    2006
    
    2005Risk-free interest rate (2)
    
    
    
    
    
    
    4.0
    %Expected dividend yield
    
    
    
    
    
    
    Expected stock price volatility (3)
    
    
    
    
    
    
    44.2
    %Expected life of stock options (in years) (3)
    
    
    
    
    
    
    6.0
 
 (1)
    
    Forfeitures are estimated based on historical experience and projected employee
turnover.(2)
    
    Based on the five-year Treasury constant maturity interest rate whose term is
consistent with the expected life of our stock options.(3)
    
    We estimate the expected life and volatility of stock options based on an
average of the expected lives and volatilities assumptions reported by a peer group of
publicly traded companies.    3. Earnings per Share
  For the ThreeMonths EndedMarch 31,2006
    
    
    2005Net income
    
    $
    10,433
    
    
    $
    8,121Weighted average number of common shares outstanding  basic
    
    
    35,701
    
    
    
    33,824Effect of dilutive stock options and restricted stock awards
    
    
    1,051
    
    
    
    2,104Weighted average number of common shares outstanding  diluted
    
    
    36,752
    
    
    
    35,928Basic earnings per common share
    
    $
    0.29
    
    
    $
    0.24Diluted earnings per common share
    
    $
    0.28
    
    
    $
    0.23
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4. Operating Segments
   Centers
    
    
    All Other
    
    
    ConsolidatedThree months ended March 31, 2006:Revenue
    
    $
    113,216
    
    
    $
    2,209
    
    
    $
    115,425Net income (loss)
    
    $
    11,797
    
    
    $
    (1,364
    )
    
    $
    10,433Provision (benefit) for income taxes
    
    
    7,775
    
    
    
    (910
    )
    
    
    6,865Interest expense, net
    
    
    3,377
    
    
    
    740
    
    
    
    4,117Depreciation and amortization
    
    
    10,020
    
    
    
    1,499
    
    
    
    11,519EBITDA
    
    $
    32,969
    
    
    $
    (35
    )
    
    $
    32,934Total assets
    
    $
    667,622
    
    
    $
    87,488
    
    
    $
    755,110Three months ended March 31, 2005:Revenue
    
    $
    87,835
    
    
    $
    1,493
    
    
    $
    89,328Net income (loss)
    
    $
    9,752
    
    
    $
    (1,631
    )
    
    $
    8,121Provision (benefit) for income taxes
    
    
    6,777
    
    
    
    (1,134
    )
    
    
    5,643Interest expense, net
    
    
    3,006
    
    
    
    820
    
    
    
    3,826Depreciation and amortization
    
    
    7,220
    
    
    
    1,514
    
    
    
    8,734EBITDA
    
    $
    26,755
    
    
    $
    (431
    )
    
    $
    26,324Total assets
    
    $
    509,359
    
    
    $
    78,429
    
    
    $
    587,788
 5. Supplementary Cash Flow Information
  For the Three Months EndedMarch 31,2006
    
    
    2005Accounts receivable
    
    $
    2,606
    
    
    $
    209Income taxes receivable
    
    
    6,706
    
    
    
    4,578Inventories
    
    
    (340
    )
    
    
    194Prepaids and other current assets
    
    
    (2,327
    )
    
    
    (1,206
    )Deferred membership origination costs
    
    
    (1,512
    )
    
    
    (1,073
    )Accounts payable
    
    
    (1,860
    )
    
    
    126Accrued expenses
    
    
    7,779
    
    
    
    1,243Deferred revenue
    
    
    4,276
    
    
    
    4,142Deferred rent
    
    
    150
    
    
    
    225$
    15,478
    
    
    $
    8,438
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6. Commitments and Contingencies
 Litigation
 
 Item 2.
 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
   Overview
   10




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Experience Life
   Critical Accounting Policies and Estimates
  11




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Results of Operations
  For the Three MonthsEndedMarch 31,2006
    
    
    2005RevenueCenter revenue:Membership dues
    
    
    65.7
    %
    
    
    67.7
    %Enrollment fees
    
    
    4.4
    
    
    
    5.2In-center revenue
    
    
    28.0
    
    
    
    25.4Total center revenue
    
    
    98.1
    
    
    
    98.3Other revenue
    
    
    1.9
    
    
    
    1.7Total revenue
    
    
    100.0
    
    
    
    100.0Operating expensesCenter operations (including 0.3% and 0.0% related to
share-based
compensation expense, respectively)
    
    
    56.4
    
    
    
    55.4Advertising and marketing
    
    
    5.1
    
    
    
    4.8General and administrative (including 0.3% and 0.0% related to
share-based compensation expense, respectively)
    
    
    7.6
    
    
    
    7.3Other operating
    
    
    2.6
    
    
    
    3.3Depreciation and amortization
    
    
    10.0
    
    
    
    9.8Total operating expenses
    
    
    81.7
    
    
    
    80.6Income from operations
    
    
    18.3
    
    
    
    19.4Other income (expense)Interest expense, net
    
    
    (3.6
    )
    
    
    (4.3
    )Equity in earnings of affiliate
    
    
    0.2
    
    
    
    0.3Total other income (expense)
    
    
    (3.4
    )
    
    
    (4.0
    )Income before income taxes
    
    
    14.9
    
    
    
    15.4Provision for income taxes
    
    
    5.9
    
    
    
    6.3Net income
    
    
    9.0
    %
    
    
    9.1
    %Other financial and operating data:Average center revenue per membership
    
    $
    313
    
    
    $
    290Average in-center revenue per membership
    
    $
    89
    
    
    $
    75Centers open at end of period
    
    
    48
    
    
    
    40Number of memberships at end of period
    
    
    383,505
    
    
    
    325,362
 Three Months Ended March 31, 2006, Compared to Three Months Ended March 31, 2005
 Total revenue.
  
    
    60.2% was from membership dues, which increased $15.3 million, due to increased
memberships at new and existing centers, the introduction of junior membership programs and
increased sales of value-added memberships.
    
    38.2% was from in-center revenue, which increased $9.7 million primarily as a
result of our members increased use of our personal training, LifeCafe and LifeSpa
products and services. As a result of this in-
 12




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center revenue growth and our focus on broadening our offerings to our members, average
in-center revenue per membership increased to $89 for the three months ended March 31, 2006,
from $75 for the three months ended March 31, 2005.
    
    1.6% was from enrollment fees, which are deferred until a center opens and
recognized on a straight-line basis over 36 months. Enrollment fees increased $0.4 million
for the three months ended March 31, 2006 to $5.1 million. Our number of memberships
increased 17.9%, to 383,505 at March 31, 2006, from 325,362 at March 31, 2005.
  Center operations expenses.
 Advertising and marketing expenses.
 General and administrative expenses.
 Other operating expenses.
 Depreciation and amortization.
 Interest expense, net.
 Provision for income taxes.
 Net income.
 13




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Liquidity and Capital Resources
 Liquidity
  Operating Activities
   Investing Activities
    For the Three MonthsMarch 31,2006
    
    
    2005(In thousands)Capital expenditures for new land, building and construction
    
    $
    43,120
    
    
    $
    29,475Capital expenditures for updating existing centers and
corporate infrastructure
    
    
    4,946
    
    
    
    7,520Total capital expenditures
    
    $
    48,066
    
    
    $
    36,995
   14




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Financing Activities
      
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
  15




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibits filed with this report
 ExhibitNo.
    
    Description
    
    Method of Filing3.1
    
    Amended and Restated Articles of
Incorporation of the Registrant
    
    Incorporated by
reference to Exhibit 3.1
to the Registrants Form
10-Q for the quarter
ended June 30, 2004
(File No. 001-32230)3.2
    
    Amended and Restated Bylaws of the
Registrant
    
    Incorporated by
reference to Exhibit 3.4
to Amendment No. 2 to
the Registrants
Registration Statement
on Form S-1 (File No.
333-113764), filed with
the Commission on May
21, 20044
    
    Specimen of Common Stock Certificate
    
    Incorporated by
reference to Exhibit 4
to Amendment No. 4 to
the Registrants
Registration Statement
of Form S-1 (File No.
333-113764), filed with
the Commission on June
23, 200431.1
    
    Rule 13a-14(a)/15d-14(a)
Certification by Principal
Executive Officer
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification by Principal
Financial and Accounting Officer
    
    Filed Electronically32
    
    Section 1350 Certifications
    
    Filed Electronically
 16




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##### Table of Contents



SIGNATURES
  LIFE TIME FITNESS, INC.By:/s/ Bahram AkradiName: Bahram AkradiTitle: Chairman of the Board of Directors, President andChief Executive Officer(Principal Executive Officer and Director)By:/s/ Michael R. RobinsonName: Michael R. RobinsonTitle: Executive Vice President and Chief Financial Officer(Principal Financial Officer)By:/s/ John M. HugoName: John M. HugoTitle: Controller(Principal Accounting Officer)
 17




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INDEX TO EXHIBITS
 Exhibit No.
    
    Description
    
    Method of Filing3.1
    
    Amended and Restated Articles of
Incorporation of the Registrant
    
    Incorporated by
reference to
Exhibit 3.1 to the
Registrants Form
10-Q for the
quarter ended June
30, 2004 (File No.
001-32230)3.2
    
    Amended and Restated Bylaws of the
Registrant
    
    Incorporated by
reference to
Exhibit 3.4 to
Amendment No. 2 to
the Registrants
Registration
Statement on Form
S-1 (File No.
333-113764), filed
with the Commission
on May 21, 20044
    
    Specimen of Common Stock Certificate
    
    Incorporated by
reference to
Exhibit 4 to
Amendment No. 4 to
the Registrants
Registration
Statement of Form
S-1 (File No.
333-113764), filed
with the Commission
on June 23, 200431.1
    
    Rule 13a-14(a)/15d-14(a)
Certification by Principal
Executive Officer
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification by Principal
Financial and Accounting Officer
    
    Filed Electronically32
    
    Section 1350 Certifications
    
    Filed Electronically
 18