##### 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 September 30, 2004 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
(State or other jurisdiction of
incorporation or organization)
    
    41-1689746
(I.R.S. Employer
Identification No.)6442 City West Parkway
Eden Prairie, Minnesota
(Address of principal executive offices)
    
    55344
(Zip Code)
 Registrants telephone number, including area code: 952-947-0000    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ The number of shares outstanding of the Registrants common stock as of
October 15, 2004 was 33,759,882 common shares.




---



##### Table of Contents



TABLE OF CONTENTS PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September
30, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004
and 2003 (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
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    25Item 3.
    
    Defaults upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    26SIGNATURES
    
    
    
    
    27Certifications
    
    
    
    
    29Schedule of Parties to Executive Employment AgreementAmendment to Amended and Restated Credit AgreementCertification of Principal Executive OfficerCertification of Principal Financial & Accounting OfficerSection 1350 Certifications




---



##### 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) September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    17,009
    
    
    $
    18,446Accounts receivable, net
    
    
    2,623
    
    
    
    1,217Inventories
    
    
    4,507
    
    
    
    4,654Prepaid expenses and other current assets.
    
    
    7,673
    
    
    
    6,977Deferred membership origination costs
    
    
    8,101
    
    
    
    7,363Deferred tax asset
    
    
    2,669
    
    
    
    5,368Income tax receivable
    
    
    4,034
    
    
    
    2,547Total current assets
    
    
    46,616
    
    
    
    46,572PROPERTY AND EQUIPMENT, net
    
    
    460,888
    
    
    
    379,193RESTRICTED CASH
    
    
    12,967
    
    
    
    10,972DEFERRED MEMBERSHIP ORIGINATION COSTS
    
    
    6,079
    
    
    
    5,942OTHER ASSETS
    
    
    12,731
    
    
    
    10,667TOTAL ASSETS
    
    $
    539,281
    
    
    $
    453,346LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt
    
    $
    32,539
    
    
    $
    18,278Accounts payable
    
    
    4,608
    
    
    
    6,171Construction accounts payable
    
    
    15,219
    
    
    
    6,522Accrued expenses
    
    
    20,023
    
    
    
    13,105Deferred revenue
    
    
    20,345
    
    
    
    17,836Total current liabilities
    
    
    92,734
    
    
    
    61,912LONG-TERM DEBT, net of current portion
    
    
    165,873
    
    
    
    214,954DEFERRED RENT LIABILITY
    
    
    3,416
    
    
    
    2,660DEFERRED INCOME TAXES
    
    
    24,002
    
    
    
    23,196DEFERRED REVENUE
    
    
    11,050
    
    
    
    11,667Total liabilities
    
    
    297,075
    
    
    
    314,389COMMITMENTS AND CONTINGENCIES (Note 7)REDEEMABLE PREFERRED STOCK:Series B redeemable preferred stock, $.02
par value; 0 and 1,000,000 shares
authorized, issued and outstanding,
respectively
    
    
    
    
    
    
    27,003Series C redeemable preferred stock, $.02
par value; 0 and 4,500,000 shares
authorized, issued and outstanding,
respectively
    
    
    
    
    
    
    56,029Series D redeemable preferred stock, $.02
par value; 0 and 2,000,000 shares
authorized, 0 and 1,946,250 shares issued
and outstanding, respectively
    
    
    
    
    
    
    23,133Total redeemable preferred stock
    
    
    
    
    
    
    106,165SHAREHOLDERS EQUITY:Undesignated preferred stock, 10,000,000
and 2,500,000 shares authorized; none
issued or outstanding
Common stock, $.02 par value, 50,000,000
shares authorized; 33,751,982 and
16,146,607 shares issued and outstanding,
respectively
    
    
    675
    
    
    
    323Additional paid-in capital
    
    
    209,583
    
    
    
    17,714Retained earnings
    
    
    31,948
    
    
    
    14,755Total shareholders equity
    
    
    242,206
    
    
    
    32,792TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    539,281
    
    
    $
    453,346
 See notes to unaudited consolidated financial statements. 3




---



##### Table of Contents



LIFE TIME FITNESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003REVENUE:Membership dues
    
    $
    52,477
    
    
    $
    42,981
    
    
    $
    152,662
    
    
    $
    125,306Enrollment fees
    
    
    5,297
    
    
    
    5,438
    
    
    
    15,332
    
    
    
    15,418In-center revenue
    
    
    18,178
    
    
    
    14,068
    
    
    
    52,836
    
    
    
    40,742Total center revenue
    
    
    75,952
    
    
    
    62,487
    
    
    
    220,830
    
    
    
    181,466Other revenue
    
    
    3,233
    
    
    
    3,540
    
    
    
    9,114
    
    
    
    8,416Total revenue
    
    
    79,185
    
    
    
    66,027
    
    
    
    229,944
    
    
    
    189,882OPERATING EXPENSES:Sports, fitness and family
recreation center operations
    
    
    42,529
    
    
    
    33,239
    
    
    
    122,048
    
    
    
    96,581Advertising and marketing
    
    
    2,838
    
    
    
    3,059
    
    
    
    9,292
    
    
    
    7,929General and administrative
    
    
    4,302
    
    
    
    3,547
    
    
    
    15,852
    
    
    
    14,145Other operating
    
    
    4,637
    
    
    
    5,465
    
    
    
    13,586
    
    
    
    12,574Depreciation and amortization
    
    
    7,489
    
    
    
    6,300
    
    
    
    21,407
    
    
    
    18,374Total operating expenses
    
    
    61,795
    
    
    
    51,610
    
    
    
    182,185
    
    
    
    149,603Income from operations
    
    
    17,390
    
    
    
    14,417
    
    
    
    47,759
    
    
    
    40,279OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (4,285
    )
    
    
    (4,850
    )
    
    
    (13,346
    )
    
    
    (14,320
    )Equity in earnings of affiliate
    
    
    257
    
    
    
    205
    
    
    
    778
    
    
    
    518Total other income (expense)
    
    
    (4,028
    )
    
    
    (4,645
    )
    
    
    (12,568
    )
    
    
    (13,802
    )INCOME BEFORE INCOME TAXES
    
    
    13,362
    
    
    
    9,772
    
    
    
    35,191
    
    
    
    26,477PROVISION FOR INCOME TAXES
    
    
    5,458
    
    
    
    4,118
    
    
    
    14,428
    
    
    
    11,157NET INCOME
    
    
    7,904
    
    
    
    5,654
    
    
    
    20,763
    
    
    
    15,320ACCRETION ON REDEEMABLE
PREFERRED STOCK
    
    
    95
    
    
    
    1,761
    
    
    
    3,570
    
    
    
    5,226NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS
    
    $
    7,809
    
    
    $
    3,893
    
    
    $
    17,193
    
    
    $
    10,094BASIC EARNINGS PER COMMON SHARE.
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.79
    
    
    $
    0.63DILUTED EARNINGS PER COMMON
SHARE
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.65
    
    
    $
    0.54WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 
BASIC
    
    
    32,533
    
    
    
    16,098
    
    
    
    21,628
    
    
    
    16,058WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 
DILUTED
    
    
    35,385
    
    
    
    28,144
    
    
    
    32,177
    
    
    
    28,381
 See notes to unaudited consolidated financial statements. 4




---



##### Table of Contents



LIFE TIME FITNESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) For the NineMonths EndedSeptember 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    20,763
    
    
    $
    15,320Adjustments to reconcile net income to cash from operating activities:Depreciation and amortization
    
    
    21,407
    
    
    
    18,374Deferred income taxes
    
    
    3,505
    
    
    
    6,727Loss on disposal of property, net
    
    
    318
    
    
    
    378Amortization of deferred financing costs
    
    
    1,137
    
    
    
    700Compensation related to stock options
    
    
    213
    
    
    
    Tax benefit from exercise of stock options
    
    
    733
    
    
    
    Changes in operating assets and liabilities
    
    
    3,936
    
    
    
    (2,217
    )Net cash provided by operating activities
    
    
    52,012
    
    
    
    39,282CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment (excluding non-cash purchases
supplementally noted below)
    
    
    (101,804
    )
    
    
    (22,837
    )Increase (decrease) in construction accounts payable
    
    
    8,698
    
    
    
    (323
    )Proceeds from sale of property
    
    
    1,249
    
    
    
    21,942Increase in other assets
    
    
    (1,761
    )
    
    
    (3,796
    )Increase in restricted cash
    
    
    (1,995
    )
    
    
    (3,048
    )Net cash used in investing activities
    
    
    (95,613
    )
    
    
    (8,062
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long term borrowings
    
    
    26,977
    
    
    
    1,661Repayments on long term borrowings
    
    
    (65,292
    )
    
    
    (11,746
    )Payments for deferred financing costs
    
    
    (1,061
    )
    
    
    (2,579
    )Proceeds from initial public offering, net of underwriting discounts and offering costs
    
    
    80,653
    
    
    
    Proceeds from exercise of options
    
    
    887
    
    
    
    149Net cash provided by (used in) financing activities
    
    
    42,164
    
    
    
    (12,515
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (1,437
    )
    
    
    18,705CASH AND CASH EQUIVALENTSBeginning of period
    
    
    18,446
    
    
    
    8,860CASH AND CASH EQUIVALENTSEnd of period
    
    $
    17,009
    
    
    $
    27,565SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash payments for interest, net of capitalized interest of $1,091 and $1,015, respectively
    
    $
    12,549
    
    
    $
    13,561Cash payments for income taxes
    
    $
    8,786
    
    
    $
    3,477SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Property and equipment purchases financed through notes payable
    
    $
    2,954
    
    
    $
    19,111Property and equipment purchases financed through capital lease obligations
    
    $
    145
    
    
    $
    7,131
 See notes to unaudited consolidated financial statements. 5




---



##### Table of Contents



LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Life Time
Fitness, Inc. (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary to fairly present
financial position, results of operations and cash flows for the periods have
been included. These interim financial statements and the related notes should be read in
conjunction with the annual financial statements and notes included in the
final prospectus relating to the Companys initial public offering, as filed
with the Securities and Exchange Commission (SEC), which includes audited
financial statements for the three fiscal years ended December 31, 2003. 2. Initial Public Offering and Capital Stock The registration statement filed in connection with the Companys initial
public offering, as filed with the SEC, was declared effective on June 29,
2004. The Companys shares began trading on the New York Stock Exchange on June
30, 2004. The Company closed this transaction and received proceeds from the
initial public offering on July 6, 2004. The initial public offering consisted
of 11,385,000 shares of common stock, including the underwriters
over-allotment option of 1,485,000 common shares. Of the shares of common stock
sold in the initial public offering, the Company sold 4,774,941 shares,
resulting in proceeds of $80,653, net of underwriting discounts and commissions
and offering expenses payable by the Company of $7,684. The Company used a
portion of the net proceeds to repay amounts outstanding under its revolving
credit facility and to repay a loan under its construction facility that the
Company used to finance the development of its center in Plano, Texas. The
Company expects to use the remaining net proceeds to finance its growth by
opening additional centers. As a result of the Companys initial public offering being declared
effective on June 29, 2004 and the closing of the transaction occurring on July
6, 2004, the Company reflected a subscription receivable of $75,420 in the
equity section of its unaudited consolidated balance sheet at June 30, 2004.
The accompanying unaudited consolidated balance sheet as of September 30, 2004
reflects the reclassification of the subscription receivable into common stock
and additional paid-in capital. 6




---



##### Table of Contents



3. Earnings per Share Basic earnings per common share (EPS) is computed by dividing net income
applicable to common shareholders by the weighted average number of shares of
common stock outstanding during each period. Diluted EPS is computed similarly
to basic EPS, except that the numerator is adjusted to add back any redeemable
preferred stock accretion and the denominator is increased for the conversion
of any dilutive common stock equivalents, such as redeemable preferred stock,
and the assumed exercise of dilutive stock options using the treasury stock
method. A reconciliation of these amounts is as follows (share amounts in
thousands): For the Three
    
    For the NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    7,904
    
    
    $
    5,654
    
    
    $
    20,763
    
    
    $
    15,320Less: accretion on redeemable
preferred stock
    
    
    95
    
    
    
    1,761
    
    
    
    3,570
    
    
    
    5,226Net income applicable to common
shareholders
    
    $
    7,809
    
    
    $
    3,893
    
    
    $
    17,193
    
    
    $
    10,094Weighted average number of common
shares outstanding  basic (a)
    
    
    32,533
    
    
    
    16,098
    
    
    
    21,628
    
    
    
    16,058Effect of dilutive stock options
    
    
    2,166
    
    
    
    1,600
    
    
    
    1,930
    
    
    
    1,305Effect of dilutive redeemable preferred
shares
    
    
    686
    
    
    
    10,446
    
    
    
    8,619
    
    
    
    11,018Weighted average number of common
shares outstanding  diluted
    
    
    35,385
    
    
    
    28,144
    
    
    
    32,177
    
    
    
    28,381Basic earnings per common share
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.79
    
    
    $
    0.63Diluted earnings per common share
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.65
    
    
    $
    0.54
  (a)
    
    As of September 30, 2004, total common shares outstanding were 33,751,982 7




---



##### Table of Contents



4. Stock-Based Compensation The Company has stock option and incentive plans for employees, directors
and consultants and accounts for these plans in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. If compensation cost for these plans had been determined consistent
with Statement of Financial Accounting Standards (SFAS) No. 123, the Companys
net income applicable to common shareholders, basic EPS and diluted EPS would
have been reduced to the following pro forma amounts: For the Three
    
    For the NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income applicable to common
shareholders  basic:As reported
    
    $
    7,809
    
    
    $
    3,893
    
    
    $
    17,193
    
    
    $
    10,094Pro forma
    
    $
    7,120
    
    
    $
    3,661
    
    
    $
    15,913
    
    
    $
    9,434Basic earnings per common share:As reported
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.79
    
    
    $
    0.63Pro forma
    
    $
    0.22
    
    
    $
    0.23
    
    
    $
    0.74
    
    
    $
    0.59Net income applicable to common
shareholders  diluted:As reported
    
    $
    7,904
    
    
    $
    5,654
    
    
    $
    20,763
    
    
    $
    15,320Pro forma
    
    $
    7,215
    
    
    $
    5,422
    
    
    $
    19,483
    
    
    $
    14,660Diluted earnings per common
share:As reported
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.65
    
    
    $
    0.54Pro forma
    
    $
    0.20
    
    
    $
    0.19
    
    
    $
    0.61
    
    
    $
    0.52
 5. Operating Segments The Companys operations are conducted mainly through its sports, fitness
and family recreation centers. The Company has aggregated the activities of its
centers into one reportable segment as none of the centers meet the
quantitative thresholds for separate disclosure under SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, and each of the
centers has similar expected economic characteristics, service and product
offerings, customers and design. The Companys chief operating decision maker
uses EBITDA as the primary measure of segment performance. For purposes of
segment financial reporting and discussion of results of operations, centers
represent the revenue and associated costs (including general and
administrative expenses) from membership dues and enrollment fees, all
in-center activities including personal training, spa, café and other
activities offered to members and non-member participants and rental income.
Included in the All Other category in the table below is operating
information related to nutritional products, media, athletic events, and a
restaurant, and expenses, including interest expense, and corporate assets
(including depreciation and amortization) not directly attributable to centers.
The accounting policies of the centers and operations classified as All Other
are the same as those described in the summary of significant accounting
policies in the annual financial statements and notes included in the final
prospectus relating to the Companys initial public offering, as filed with the
SEC. 8




---



##### Table of Contents



Financial data and reconciling information for the Companys reporting
segment to the consolidated amounts in the financial statements are as follows: Sports, Fitnessand FamilyRecreationCenters
    
    All Other
    
    Eliminations(a)
    
    ConsolidatedThree months ended September
30, 2004:Revenue
    
    $
    75,952
    
    
    $
    3,800
    
    
    $
    (567
    )
    
    $
    79,185Net income (loss)
    
    $
    8,293
    
    
    $
    (389
    )
    
    $
    
    
    
    $
    7,904Provision for income taxes
    
    
    5,956
    
    
    
    (498
    )
    
    
    
    
    
    
    5,458Interest expense, net
    
    
    3,810
    
    
    
    475
    
    
    
    
    
    
    
    4,285Depreciation and amortization
    
    
    6,063
    
    
    
    1,426
    
    
    
    
    
    
    
    7,489EBITDA
    
    $
    24,122
    
    
    $
    1,014
    
    
    $
    
    
    
    $
    25,136Total assets
    
    $
    462,886
    
    
    $
    76,395
    
    
    $
    
    
    
    $
    539,281Three months ended September
30, 2003:Revenue
    
    $
    62,487
    
    
    $
    4,089
    
    
    $
    (549
    )
    
    $
    66,027Net income (loss)
    
    $
    6,370
    
    
    $
    (716
    )
    
    $
    
    
    
    $
    5,654Provision for income taxes
    
    
    4,622
    
    
    
    (504
    )
    
    
    
    
    
    
    4,118Interest expense, net
    
    
    4,406
    
    
    
    444
    
    
    
    
    
    
    
    4,850Depreciation and amortization
    
    
    5,154
    
    
    
    1,146
    
    
    
    
    
    
    
    6,300EBITDA
    
    $
    20,552
    
    
    $
    370
    
    
    $
    
    
    
    $
    20,922Total assets
    
    $
    345,156
    
    
    $
    91,256
    
    
    $
    
    
    
    $
    436,412Nine months ended September
30, 2004:Revenue
    
    $
    220,830
    
    
    $
    10,832
    
    
    $
    (1,718
    )
    
    $
    229,944Net income (loss)
    
    $
    25,354
    
    
    $
    (4,591
    )
    
    $
    
    
    
    $
    20,763Provision for income taxes
    
    
    17,882
    
    
    
    (3,454
    )
    
    
    
    
    
    
    14,428Interest expense, net
    
    
    12,046
    
    
    
    1,300
    
    
    
    
    
    
    
    13,346Depreciation and amortization
    
    
    17,249
    
    
    
    4,158
    
    
    
    
    
    
    
    21,407EBITDA
    
    $
    72,531
    
    
    $
    (2,587
    )
    
    $
    
    
    
    $
    69,944Total assets
    
    $
    462,886
    
    
    $
    76,395
    
    
    $
    
    
    
    $
    539,281Nine months ended September
30, 2003:Revenue
    
    $
    181,466
    
    
    $
    10,213
    
    
    $
    (1,797
    )
    
    $
    189,882Net income (loss)
    
    $
    18,910
    
    
    $
    (3,590
    )
    
    $
    
    
    
    $
    15,320Provision for income taxes
    
    
    13,710
    
    
    
    (2,553
    )
    
    
    
    
    
    
    11,157Interest expense, net
    
    
    13,192
    
    
    
    1,128
    
    
    
    
    
    
    
    14,320Depreciation and amortization
    
    
    15,095
    
    
    
    3,279
    
    
    
    
    
    
    
    18,374EBITDA
    
    $
    60,907
    
    
    $
    (1,736
    )
    
    $
    
    
    
    $
    59,171Total assets
    
    $
    345,156
    
    
    $
    91,256
    
    
    $
    
    
    
    $
    436,412
  (a)
    
    Eliminations relate to the sale of the Companys nutritional products to
its owned cafes. 9




---



##### Table of Contents



6. Supplementary Cash Flow Information Changes in operating assets and liabilities, reflecting increases (decreases) in
cash, are as follows; For the Nine Months EndedSeptember 30,2004
    
    2003Accounts receivable
    
    $
    (1,406
    )
    
    $
    (805
    )Income taxes receivable
    
    
    (1,487
    )
    
    
    507Inventories
    
    
    147
    
    
    
    (764
    )Prepaids and other current assets
    
    
    (696
    )
    
    
    (1,816
    )Accounts payable
    
    
    (1,563
    )
    
    
    (20
    )Accrued expenses
    
    
    7,162
    
    
    
    1,406Deferred revenue
    
    
    1,023
    
    
    
    (1,081
    )Deferred rent
    
    
    756
    
    
    
    356$
    3,936
    
    
    $
    (2,217
    )
 7. Commitments and Contingencies Litigation The Company is engaged in legal proceedings incidental to the
normal course of business. Although the ultimate outcome of these matters
cannot be determined, management believes that the final disposition of these
proceedings will not have a material adverse effect on the consolidated
financial position or results of operations of the Company. 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion may contain forward-looking statements regarding
us and our business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause our actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those described under Factors That May Affect
Future Results in this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
of this report. We undertake no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by us in this report and in our other reports filed with the
Securities and Exchange Commission (SEC) that advise interested parties of
the risks and factors that may affect our business. The interim financial statements filed on this Form 10-Q and the
discussions contained herein should be read in conjunction with the annual
consolidated financial statements and notes included in the final prospectus
relating to our initial public offering, as filed with the SEC, which includes
audited consolidated financial statements for our three fiscal years ended
December 31, 2003. 10




---



##### Table of Contents



Overview We operate sports, fitness and family recreation centers. As of October
15, 2004, we operated 37 centers primarily in suburban locations across eight
states under the LIFE TIME FITNESS brand. We commenced operations in 1992 by
opening centers in the Minneapolis and St. Paul, Minnesota area. During this
period of initial growth, we refined the format and model of our center while
building our membership base, infrastructure and management team. We
standardized the size, design and layout of our centers, which we refer to as
our current model centers. Several of the centers that opened during our early
years have designs that differ from our current model centers. We opened six centers in 2001, five centers in 2002 and four centers in
2003. We have opened four current model centers in 2004 and plan to open two
additional centers in 2004, one of which will be a current model center.
Recently, we opened our fourth and fifth centers in the Texas market, located
in Sugar Land, near Houston, on October 1, 2004, and Flower Mound, near Dallas,
on October 8, 2004. Each of these new centers is 108,890 square feet. We plan
to open six current model centers in 2005. We compare the results of our centers based on how long the centers have
been open at the most recent measurement period. We include a center for
same-center revenue purposes beginning on the first day of the thirteenth full
calendar month of the centers operation, prior to which time we refer to the
center as a new center. As we grow our presence in existing markets by opening
new centers, we expect to attract some memberships away from other centers
already in those markets, reducing their revenue and initially lowering their
profitability. In addition, as a result of new center openings in existing
markets, and because older centers will represent an increasing proportion of
our center base over time, our same-center revenue increases may be lower in
future periods than in the past. Of the six new centers we have opened or plan
to open in each of 2004 and 2005, we expect that four will be in existing
markets in 2004 and four will be in existing markets in 2005. 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 is 36 months. Second, we generate revenue, which
we refer to as in-center revenue, at our centers from fees for personal
training, 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. Finally, 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, nutritional products
and athletic events 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 urban executive facility in
downtown Minneapolis, Minnesota. Sports, fitness and family recreation center operations expenses consist
primarily of salaries, 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,
nutritional products and athletic events businesses. General and administrative
expenses include costs relating to our centralized support functions, such as
accounting, information systems, procurement and member relations, as well as
our real estate and development team and other members of senior management.
Our other operating expenses include the costs associated with our media,
nutritional products and athletic events 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 and the number of centers we have in the
pre-opening sales and marketing phase during that period. 11




---



##### Table of Contents



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 aggregate, on
average, approximately $23.5 million, which could 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. We perform maintenance and make improvements
on our centers and equipment every year. We conduct a more thorough remodeling
project at each center approximately every five 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In recording transactions and balances resulting from business operations, we
use estimates based on the best information available. We use estimates for
such items as depreciable lives, volatility factors in determining fair value
of option grants, tax provisions and provisions for uncollectible receivables.
We also use estimates for calculating the amortization period for deferred
enrollment fee revenue and associated direct costs, which are based on the
average expected life of a membership. We revise the recorded estimates when
better information is available, facts change or we can determine actual
amounts. These revisions can affect operating results. Our critical accounting policies and use of estimates are discussed in and
should be read in conjunction with the annual consolidated financial statements
and notes included in the final prospectus relating to our initial public
offering, as filed with the SEC, which includes audited consolidated financial
statements for our three fiscal years ended December 31, 2003. 12




---



##### Table of Contents



Results of Operations The following table sets forth our statement of operations data as a
percentage of total revenues and also sets forth other financial and operating
data for the three and nine month periods ended September 30, 2004, and 2003. For the
    
    For theThree Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003RevenueCenter revenue:Membership dues
    
    
    66.2
    %
    
    
    65.1
    %
    
    
    66.4
    %
    
    
    66.0
    %Enrollment fees
    
    
    6.7
    
    
    
    8.2
    
    
    
    6.6
    
    
    
    8.1In-center revenue
    
    
    23.0
    
    
    
    21.3
    
    
    
    23.0
    
    
    
    21.5Total center revenue
    
    
    95.9
    
    
    
    94.6
    
    
    
    96.0
    
    
    
    95.6Other revenue
    
    
    4.1
    
    
    
    5.4
    
    
    
    4.0
    
    
    
    4.4Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expensesSports, fitness and family recreation
center operations
    
    
    53.7
    
    
    
    50.4
    
    
    
    53.1
    
    
    
    50.9Advertising and marketing
    
    
    3.6
    
    
    
    4.6
    
    
    
    4.0
    
    
    
    4.2General and administrative
    
    
    5.4
    
    
    
    5.4
    
    
    
    6.9
    
    
    
    7.4Other operating
    
    
    5.8
    
    
    
    8.3
    
    
    
    5.9
    
    
    
    6.6Depreciation and amortization
    
    
    9.5
    
    
    
    9.5
    
    
    
    9.3
    
    
    
    9.7Total operating expenses
    
    
    78.0
    
    
    
    78.2
    
    
    
    79.2
    
    
    
    78.8Income from operations
    
    
    22.0
    
    
    
    21.8
    
    
    
    20.8
    
    
    
    21.2Interest expense, net
    
    
    5.4
    
    
    
    7.3
    
    
    
    5.8
    
    
    
    7.5Equity in earnings of affiliate
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.2Total other income
    
    
    5.1
    
    
    
    7.0
    
    
    
    5.5
    
    
    
    7.3Income before income taxes
    
    
    16.9
    
    
    
    14.8
    
    
    
    15.3
    
    
    
    13.9Provision for income taxes
    
    
    6.9
    
    
    
    6.2
    
    
    
    6.3
    
    
    
    5.8Net income
    
    
    10.0
    %
    
    
    8.6
    %
    
    
    9.0
    %
    
    
    8.1
    %Other financial and operating data:Average revenue per membership
    
    $
    280
    
    
    $
    275
    
    
    $
    848
    
    
    $
    820Average in-center revenue per membership
    
    $
    67
    
    
    $
    62
    
    
    $
    202
    
    
    $
    183Centers open at end of period
    
    
    35
    
    
    
    30
    
    
    
    35
    
    
    
    30Number of memberships at end of period
    
    
    285,975
    
    
    
    240,784
    
    
    
    285,975
    
    
    
    240,784
 Three Months Ended September 30, 2004, Compared to Three Months Ended September
30, 2003 Total revenue.Total revenue increased $13.2 million, or 19.9%, to $79.2
million for the three months ended September 30, 2004, from $66.0 million for
the three months ended September 30, 2003. Total center revenue grew $13.5 million, or 21.5%, to $76.0 million for
the three months ended September 30, 2004, from $62.5 million for the three
months ended September 30, 2003. Same-center revenue grew 7.6% compared to the
prior year quarter. Of the $13.5 million increase in total center revenue,  
    
    70.5% was from membership dues, which increased $9.5 million, due to
increased memberships at new and existing centers.
    
    30.5% was from in-center revenue, which increased $4.1 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-center revenue growth and our focus on broadening our offerings
to our members, average in-center revenue per membership increased to $67
for the three months ended September 30, 2004, from $62 for the three
months ended September 30, 2003. 13




---



##### Table of Contents



Enrollment fees, which are deferred until a center opens and recognized on
a straight-line basis over 36 months, decreased slightly to $5.3 million for
the three months ended September 30, 2004, from $5.4 million for the three
months ended September 30, 2003. Our number of memberships (including pre-sale
memberships) increased 18.8%, to 285,975 at September 30, 2004, from 240,784 at
September 30, 2003. Enrollment fee revenue associated with new members at open
centers was offset by a decreasing amount of recognized deferred enrollment
fees as a result of our opening six new centers in 2001, five new centers in
2002, and four new centers in 2003. Other revenue decreased 8.6%, to $3.2 million for the three months ended
September 30, 2004, which was primarily due to decreased revenue generated from
sales in our nutritionals division. Sports, fitness and family recreation center operations expenses.Sports,
fitness and family recreation center operations expenses totaled $42.5 million,
or 56.0% of total center revenue (or 53.7% of total revenue), for the three
months ended September 30, 2004 compared to $33.2 million, or 53.2% of total
center revenue (or 50.4% of total revenue), for the three months ended
September 30, 2003. This $9.3 million increase primarily consisted of an
increase of $6.2 million in payroll-related costs to support increased
memberships at new and existing centers and increased expenses to support
in-center products and services, as well as having five centers in the
pre-opening sales and marketing phase during the third quarter of 2004 compared
to three centers in the pre-opening sales and marketing phase during portions
of the third quarter of 2003. Additionally, occupancy costs increased $2.5
million, including $1.2 million in expenses related to a sale-leaseback
transaction with respect to two of our current model centers that was entered
into on September 30, 2003. Advertising and marketing expenses.Advertising and marketing expenses
were $2.8 million, or 3.6% of total revenue, for the three months ended
September 30, 2004, compared to $3.1 million, or 4.6% of total revenue, for the
three months ended September 30, 2003. As a percentage of total revenue and in
aggregate dollars, these expenses decreased primarily due to more cost
effective marketing campaigns at our centers. General and administrative expenses.General and administrative expenses
were $4.3 million, or 5.4% of total revenue, for the three months ended
September 30, 2004, compared to $3.5 million, or 5.4% of total revenue, for the
three months ended September 30, 2003. This $0.8 million increase was primarily
due to increased costs to support the growth in our membership and center base
in 2004, as well as costs associated with being a publicly-held company. Other operating expenses.Other operating expenses were $4.6 million for
the three months ended September 30, 2004, compared to $5.5 million for the
three months ended September 30, 2003. This $0.9 million decrease was primarily
due to lower costs associated with our athletic events and nutritional product
businesses. Depreciation and amortization.Depreciation and amortization was $7.5
million for the three months ended September 30, 2004, compared to $6.3 million
for the three months ended September 30, 2003. This $1.2 million increase was
due primarily to depreciation on our new centers opened in the fall of 2003 and
summer of 2004. Interest expense, net.Interest expense, net of interest income, was $4.3
million for the three months ended September 30, 2004, compared to $4.8 million
for the three months ended September 30, 2003. This decrease was primarily the
result of a sale-leaseback transaction, which reduced our average debt
balances, and interest income generated from the proceeds of the initial public
offering. 14




---



##### Table of Contents



Provision for income taxes.The provision for income taxes was $5.5
million for the three months ended September 30, 2004, compared to $4.1 million
for the three months ended September 30, 2003. This $1.4 million increase was
due to an increase in income before income taxes of $3.6 million. Net income.As a result of the factors described above, net income was
$7.9 million, or 10.0% of total revenue, for the three months ended September
30, 2004, compared to $5.7 million, or 8.6% of total revenue, for the three
months ended September 30, 2003. Nine Months Ended September 30, 2004, Compared to Nine Months Ended September
30, 2003 Total revenue.Total revenue increased $40.0 million, or 21.1%, to $229.9
million for the nine months ended September 30, 2004, from $189.9 million for
the nine months ended September 30, 2003. Total center revenue grew $39.3 million, or 21.7%, to $220.8 million for
the nine months ended September 30, 2004, from $181.5 million for the nine
months ended September 30, 2003. Of the $39.3 million increase in total center
revenue,  
    
    69.5% was from membership dues, which increased $27.4 million, due to
increased memberships at new and existing centers.
    
    30.7% was from in-center revenue, which increased $12.1 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-center revenue growth and our focus on broadening our offerings
to our members, average in-center revenue per membership increased to
$848 for the nine months ended September 30, 2004, from $820 for the
nine months ended September 30, 2003. Enrollment fees, which are deferred and recognized on a straight-line
basis over 36 months, decreased slightly to $15.3 million for the nine months
ended September 30, 2004, compared to $15.4 million for the same period last
year. Our number of memberships (including pre-sale memberships) increased
18.8%, to 285,975 at September 30, 2004, from 240,784 at September 30, 2003.
Enrollment fee revenue associated with new members at open centers was offset
by a decreasing amount of recognized deferred enrollment fees as a result of
our opening six new centers in 2001, five new centers in 2002, and four new
centers in 2003. Other revenue grew $0.7 million, or 8.3%, to $9.1 million for the nine
months ended September 30, 2004, from $8.4 million for the nine months ended
September 30, 2003, which was primarily due to increased revenue generated from
advertising sales in our media division. Sports, fitness and family recreation center operations expenses.Sports,
fitness and family recreation center operations expenses were $122.0 million,
or 55.3% of total center revenue (or 53.1% of total revenue), for the nine
months ended September 30, 2004, compared to $96.6 million, or 53.2% of total
center revenue (or 50.9% of total revenue), for the nine months ended September
30, 2003. This $25.4 million increase primarily consisted of an increase of
$16.5 million in payroll-related costs to support increased memberships at new
and existing centers and increased expenses to support in-center products and
services, as well as having six centers in the pre-opening sales and marketing
phase during portions of the first nine months of 2004 compared to four centers
in the pre-opening sales and marketing phase during portions of the first nine
months of 2003. Additionally, occupancy costs increased $5.9 million, including
$3.6 million in expenses related to a sale-leaseback transaction with respect
to two of our current model centers that was entered into on September 30,
2003. Advertising and marketing expenses.Advertising and marketing expenses
were $9.3 million, or 4.0% of total revenue, for the nine months ended
September 30, 2004, compared to $7.9 million, or 4.2% of total revenue, for the
nine months ended September 30, 2003. The 15




---



##### Table of Contents



$1.4 million increase was primarily due to a national advertising campaign for our nutritional
products, including a major U.S. magazine advertising placement, and as a
result of the simultaneous pre-opening sales and marketing campaigns for
centers opening in 2004. As a percentage of total revenue, advertising and
marketing expenses decreased primarily due to more cost-effective marketing
campaigns at our centers. General and administrative expenses.General and administrative expenses
were $15.9 million, or 6.9% of total revenue, for the nine months ended
September 30, 2004, compared to $14.1 million, or 7.4% of total revenue, for
the nine months ended September 30, 2003. This $1.8 million increase was
primarily due to increased costs to support the growth in our membership and
center base in 2004, as well as costs associated with being a publicly-held
company. As a percentage of total revenue, general and administrative expenses
decreased primarily due to economies of scale achieved in shared service
functions, including member relations, information technology and procurement,
as our membership and center base expanded. Other operating expenses.Other operating expenses were $13.6 million for
the nine months ended September 30, 2004, compared to $12.6 million for the
nine months ended September 30, 2003. This $1.0 million increase was primarily
due to branding initiatives related to our media, nutritional products and
athletic events businesses. Depreciation and amortization.Depreciation and amortization was $21.4
million for the nine months ended September 30, 2004, compared to $18.4 million
for the nine months ended September 30, 2003. This $3.0 million increase was
due primarily to depreciation on our new centers opened in the fall of 2003 and
the summer of 2004. Interest expense, net.Interest expense, net of interest income, was
$13.3 million for the nine months ended September 30, 2004, compared to $14.3
million for the nine months ended September 30, 2003. This decrease was
primarily the result of a sale-leaseback transaction which reduced our average
debt balances, interest income generated from the proceeds of the initial
public offering, and our increased cash flows from operating activities
allowing us to limit our borrowing during the first nine months of 2004. Provision for income taxes.The provision for income taxes was $14.4
million for the nine months ended September 30, 2004, compared to $11.2 million
for the nine months ended September 30, 2003. This $3.2 million increase was
due to an increase in income before income taxes of $8.7 million. Net income.As a result of the factors described above, net income was
$20.8 million, or 9.0% of total revenue, for the nine months ended September
30, 2004, compared to $15.3 million, or 8.1% of total revenue, for the nine
months ended September 30, 2003. 16




---



##### Table of Contents



Liquidity and Capital Resources Liquidity Historically, we have satisfied our liquidity needs through various debt
arrangements, sales of equity to investors and cash flows from operations.
Principal liquidity needs have included the development of new sports, fitness
and family recreation centers, debt service requirements and expenditures
necessary to maintain and update our existing centers and their related fitness
equipment. We believe that we will be able to satisfy our debt service
obligations and capital expenditure requirements through 2005 with available
cash balances, including the net proceeds from the initial public offering,
cash flow from operations, our committed debt facilities, through the extension
of certain of our debt facilities, or by obtaining additional debt. We believe
that we can satisfy our longer-term debt service obligations and capital
expenditure requirements with cash flow from operations, by the extension of
the terms of or refinancing our existing debt facilities, through
sale-leaseback transactions and by continuing to raise long-term debt, although
there can be no assurance that such actions can be completed. Our business
model operates with negative working capital because we carry minimal accounts
receivable due to our ability to have monthly membership dues paid by
electronic draft and because we fund the construction of our new centers under
standard arrangements with our vendors that are paid with proceeds from
long-term debt. Operating Activities As of September 30, 2004, we had total cash and cash equivalents of $17.0
million and $13.0 million of restricted cash that served as collateral for
certain of our debt arrangements. On July 6, 2004, we received proceeds of
$80.7 million from our initial public offering, net of underwriting discounts,
commissions and offering expenses payable by us. On the same day, we utilized
$8.7 million of the net proceeds from our initial public offering along with
cash received from monthly membership dues to repay all amounts outstanding
under our revolving credit facility, with the exception a $15.0 million term
loan under the revolving credit facility. We also used $8.9 million of the net
proceeds from the offering to repay a loan under our construction facility that
we used to finance the development of our center in Plano, Texas. We expect to
use the remaining net proceeds of $63.1 million from the offering to finance
our growth by opening additional centers. Net cash provided by operating activities was $52.0 million for the nine
months ended September 30, 2004, compared to $39.3 million for the nine months
ended September 30, 2003. The increase of $12.7 million was primarily due to an
$7.3 million increase in net income adjusted for non-cash charges and increases
in cash provided by net operating assets and liabilities. Investing Activities Investing activities consist primarily of purchasing real property,
constructing new centers and purchasing new fitness equipment. In addition, we
make capital expenditures to maintain and update our existing centers. We
finance the purchase of our property and equipment by cash payments or by
financing through notes payable or capital lease obligations. For current model
centers, our investment has averaged approximately $23.5 million, which
includes the land, the building and approximately $2.5 million of exercise
equipment, furniture and fixtures. At September 30, 2004, we had purchased the real property for the five new
current model centers that we plan to open in 2004, two of which had already
opened. In addition, we had purchased the real property for four of the
current model centers we plan to open in 2005, and we had entered into
agreements to purchase real property for the development of the remaining two
current model centers that we plan to open in 2005. 17




---



##### Table of Contents



Net cash used in investing activities was $95.6 million for the nine
months ended September 30, 2004, compared to $8.1 million for the nine months
ended September 30, 2003. The increase of $87.5 million was primarily due to capital expenditures for the construction of
new centers and maintenance and updates to our existing centers. Total capital
expenditures for the nine months ended September 30, 2004, totaled $104.9
million. For the nine months ended September 30, 2004, capital expenditures for
the construction of new centers totaled $89.2 million and capital expenditures
for the maintenance and updates to our existing centers totaled $11.7 million.
Additionally, in January 2004, we purchased a jet for $4.0 million. Financing Activities Net cash provided by financing activities was $42.2 million for the nine
months ended September 30, 2004, compared to a use of $12.5 million for the
nine months ended September 30, 2003. The increase of $54.7 million was
primarily due to proceeds from sales of our shares during our initial public
offering. We have several secured credit facilities. We have a $55.0 million
revolving credit facility led by Antares Capital Corporation that expires on
June 30, 2005. Availability under this facility is determined based upon a
multiple of a variation of EBITDA as defined in the credit agreement.
Additionally, we are restricted in our borrowings and in general under the
revolving credit facility by certain financial covenants, including capital
expenditure levels and maintaining leverage ratios, fixed charge and interest
coverage ratios and a loan to value ratio. At December 31, 2003, the
outstanding balance was classified as long-term debt in the accompanying
consolidated balance sheets. As of September 30, 2004, we had $15.0 million
outstanding classified as a current-maturity of long-term debt, $8.0 million in
committed letters of credit and $32.0 million available for additional
borrowings under this facility. On July 6, 2004, we repaid $24.4 million
outstanding under this facility, using cash received from monthly membership
dues and a portion of the net proceeds from our initial public offering. We also have a $75.0 million construction credit facility led by U.S.
Bank, National Association. Pursuant to the terms of the construction credit
facility, the lending group has committed to make up to seven individual loans,
the purpose of which is to fund the construction costs related to completing
the construction of certain centers. The current commitment to lend expires on
January 1, 2006. Borrowings under this facility are limited to the lesser of
55.0% of the total land and construction cost, or 75.0% of the appraised value,
of the specific centers currently under construction and are due and payable no
later than three years from the closing date of each individual loan. As
security for the obligations owing under the construction credit facility, we
have granted mortgages on each of the specific centers that are financed by
means of the construction credit facility. Funds are available only after we
have first contributed our portion, which is approximately 45.0%, of the total
project cost to the construction of the specific project and then only for
reimbursement of project construction costs actually incurred. Interest accrues
at a rate of prime plus 0.5%. At September 30, 2004, we had no outstanding
borrowings and $75.0 million available for borrowings under this facility. On
July 6, 2004, the outstanding balance of $8.9 million was paid off with a
portion of our net proceeds from our initial public offering. We have financed 13 of our centers with Teachers Insurance and Annuity
Association of America pursuant to the terms of individual notes. The
obligations under these notes are due in full in September 2011, and are
secured by mortgages on each of the centers specifically financed, and we
maintain a letter of credit in the amount of $5.0 million in favor of the
lender. The obligations related to 10 of the notes are being amortized over a
20-year period, while the obligations related to the other three notes are
being amortized over a 15-year period. The interest rate payable under these
notes has been fixed at 8.25%. The loan documents provide that we will be in
default if our Chief Executive Officer, Mr. Akradi, ceases to be Chairman of
the Board of Directors and Chief Executive Officer for any reason other than
due to his death or incapacity or as a result of his removal pursuant to our
articles of incorporation or bylaws. As of September 30, 2004, $133.0 million
remained outstanding on the notes. 18




---



##### Table of Contents



Factors That May Affect Future Results If we are unable to identify and acquire suitable sites for new sports, fitness
and family recreation centers, our revenue growth rate and profits may be
negatively impacted. To successfully expand our business, we must identify and acquire sites
that meet the site selection criteria we have established. In addition to
finding sites with the right demographic and other measures we employ in our
selection process, we also need to evaluate the penetration of our competitors
in the market. We face significant competition from other health and fitness
center operators for sites that meet our criteria, and as a result we may lose
those sites, our competitors could copy our format or we could be forced to pay
significantly higher prices for those sites. If we are unable to identify and
acquire sites for new sports, fitness and family recreation centers, our
revenue growth rate and profits may be negatively impacted. Additionally, if
our analysis of the suitability of a site is incorrect, we may not be able to
recover our capital investment in developing and building the new center. For
example, in 2002 we recorded an asset impairment charge of $7.0 million related
to our executive facility, which is located in downtown Minneapolis, Minnesota,
and a restaurant that we operate in the same building. We may be unable to attract and retain members, which could have a negative
effect on our business. The success of our business depends on our ability to attract and retain
members, and we cannot assure you that we will be successful in our marketing
efforts or that the membership levels at our centers will not materially
decline, especially at those centers that have been in operation for an
extended period of time. All of our members can cancel their membership at any
time upon one months notice. In addition, we experience attrition and must
continually attract new members in order to maintain our membership levels.
There are numerous factors that could lead to a decline in membership levels or
that could prevent us from increasing membership at newer centers where
membership is generally not yet at a targeted capacity, including market
maturity or saturation, a decline in our ability to deliver quality service at
a competitive price, direct and indirect competition in the areas where our
centers are located, a decline in the publics interest in health and fitness,
changes in discretionary spending trends and general economic conditions. In
addition, we may decide to close a center and attempt to move members of that
center to a different center or we may have to temporarily relocate members if
a center is closed for remodeling or due to fire, earthquake or other casualty. Delays in new sports, fitness and family recreation center openings could have
a material adverse affect on our financial performance. In order to meet our objectives, it is important that we open new centers
on schedule. A significant amount of time and expenditure of capital is
required to develop and construct new centers. If we are significantly delayed
in opening new centers, our competitors may be able to open new clubs in the
same market before we open our centers. This change in the competitive
landscape could negatively impact our pre-opening sales of memberships and
increase our investment costs. In addition, delays in opening new centers could
hurt our ability to meet our growth objectives. Our ability to open new centers
on schedule depends on a number of factors, many of which are beyond our
control. These factors include:  
    
    obtaining acceptable financing for construction of new sites;
    
    obtaining entitlements, permits and licenses necessary to complete
construction of the new center on schedule;
    
    recruiting, training and retaining qualified management and other personnel;
    
    securing access to labor and materials necessary to develop and construct our centers;
    
    delays due to material shortages, labor issues, weather conditions or
other acts of god, discovery of contaminants, accidents, deaths or
injunctions; and
    
    general economic conditions. 19




---



##### Table of Contents



Our continued growth could place strains on our management, employees,
information systems and internal controls which may adversely impact our
business and the value of your investment. Over the past several years, we have experienced significant growth in our
business activities and operations, including an increase in the number of our
sports, fitness and family recreation centers. Our past expansion has placed,
and any future expansion will place, significant demands on our administrative,
operational, financial and other resources. Any failure to manage growth
effectively could seriously harm our business. To be successful, we will need
to continue to implement management information systems and improve our
operating, administrative, financial and accounting systems and controls. We
will also need to train new employees and maintain close coordination among our
executive, accounting, finance, marketing, sales and operations functions.
These processes are time-consuming and expensive, will increase management
responsibilities and will divert management attention. The opening of new centers in existing locations may negatively impact our
same-center revenue increases and our overall operating margins. We currently operate sports, fitness and family recreation centers in
eight states. As of October 15, 2004, we have opened four current model
centers in 2004 and plan to open two additional centers in 2004. Four of these
six openings in 2004 are in an existing market. With respect to existing
markets, it has been our experience that opening new centers may attract some
memberships away from other centers already operated by us in those markets and
diminish their revenues. In addition, as a result of new center openings in
existing markets, and because older centers will represent an increasing
proportion of our center base over time, our same-center revenue increases may
be lower in future periods than in the past. Another result of opening new centers is that our overall operating
margins may be lower than they have been historically. We expect both the
addition of pre-opening expenses and the lower revenue volumes characteristic
of newly-opened centers to affect our operating margins at these new centers.
We also expect certain operating costs, particularly those related to
occupancy, to be higher than in the past in some newly-entered geographic
regions. As a result of the impact of these rising costs, our total center
contribution and operating margins may be lower in future periods than they
have been in the past. Our debt levels may limit our flexibility in obtaining additional financing and
in pursuing other business opportunities. As of September 30, 2004, we had total consolidated indebtedness of $198.4
million, consisting principally of obligations under construction and term
notes that are secured by certain of our properties, borrowings under our
revolving credit facility that are secured by certain personal property,
mortgage notes that are secured by certain of our sports, fitness and family
recreation centers and obligations under capital leases. Our level of indebtedness could have important consequences to us,
including the following:  
    
    our ability to obtain additional financing, if necessary, for capital
expenditures, working capital, acquisitions or other purposes may be
impaired or such financing may not be available on favorable terms;
    
    we will need a substantial portion of our cash flow to pay the principal
of, and interest on, our indebtedness, including indebtedness that we may
incur in the future;
    
    payments on our indebtedness will reduce the funds that would otherwise
be available for our operations and future business opportunities;
    
    a substantial decrease in our cash flows from operations could make it
difficult for us to meet our debt service requirements and force us to modify our operations; 20




---



##### Table of Contents




    
    we may be more highly leveraged than our competitors, which may place us
at a competitive disadvantage;
    
    our debt level may make us more vulnerable and less flexible than our
competitors to a downturn in our business or the economy in general; and,
    
    some of our debt has a variable rate of interest, which increases our
vulnerability to interest rate fluctuations. In addition to the amount of indebtedness outstanding as of September 30,
2004, we have access to an additional $142.0 million under our credit
facilities. We also have the ability to incur new debt, subject to limitations
under our existing credit facilities and in our debt financing agreements.
Furthermore, we have 13 centers financed by Teachers Insurance and Annuity
Association of America that are subject to cross-default and cross-collateral
provisions, which would allow the lender to foreclose on each of these 13
centers if there is an event of default related to one or more of these
centers. If we incur additional debt, the risks associated with our leverage,
including our ability to service our debt, could intensify. Because of the capital-intensive nature of our business, we may have to incur
additional indebtedness or issue new equity securities and, if we are not able
to obtain additional capital, our ability to operate or expand our business may
be impaired and our operating results could be adversely affected. Our business requires significant levels of capital to finance the
development of additional sites for new sports, fitness and family recreation
centers and the construction of our centers. If cash from available sources is
insufficient, or if cash is used for unanticipated needs, we may require
additional capital sooner than anticipated. In the event that we are required
or choose to raise additional funds, we may be unable to do so on favorable
terms or at all. Furthermore, the cost of debt financing could significantly
increase, making it cost-prohibitive to borrow, which could force us to issue
new equity securities. If we issue new equity securities, existing shareholders
may experience additional dilution or the new equity securities may have
rights, preferences or privileges senior to those of existing holders of common
stock. If we cannot raise funds on acceptable terms, we may not be able to take
advantage of future opportunities or respond to competitive pressures. Any
inability to raise additional capital when required could have an adverse
effect on our business plans and operating results. The health club industry is highly competitive and our competitors may have
greater resources and name recognition than we have. We compete with other health and fitness centers, physical fitness and
recreational facilities established by local non-profit organizations,
governments, hospitals, and businesses, amenity and condominium clubs and
similar non-profit organizations, local salons, cafes and businesses offering
similar ancillary services, and, to a lesser extent, racquet, tennis and other
athletic clubs, country clubs, weight reducing salons and the home fitness
equipment industry. Competitors, which may have greater resources or greater
name recognition than we have, may compete with us to attract members in our
markets. Non-profit and government organizations in our markets may be able to
obtain land and construct centers at a lower cost than us and may be able to
collect membership fees without paying taxes, thereby allowing them to lower
their prices. This competition may limit our ability to increase membership
fees, retain members, attract new members and retain qualified personnel. Competitors could copy our business model and erode our market share, brand
recognition and profitability. We employ a business model that could allow competitors to duplicate our
successes. We cannot assure you that our competitors will not attempt to copy
our business model and that this will not erode our market share and brand
recognition and impair our growth rate and profitability. In response
to any such competitors, we may be required to decrease our membership fees,
which may reduce our operating margins and profitability. 21




---



##### Table of Contents



We have significant operations concentrated in certain geographic areas, and
any disruption in the operations of our centers in any of these areas could
harm our operating results. We currently operate multiple sports, fitness and family recreation
centers in several metropolitan areas, including 14 in the Minneapolis/St. Paul
market, seven in the Chicago market and five in the Detroit market, with
continued planned expansion in other markets. As a result, any prolonged
disruption in the operations of our centers in any of these markets, whether
due to technical difficulties, power failures or destruction or damage to the
centers as a result of a natural disaster, fire or any other reason, could harm
our operating results. In addition, our concentration in these markets
increases our exposure to adverse developments related to competition, as well
as economic and demographic changes in these areas. If we cannot retain our key personnel and hire additional highly qualified
personnel, we may not be able to successfully manage our operations and pursue
our strategic objectives. We are highly dependent on the services of our senior management team and
other key employees at both our corporate headquarters and our centers, and on
our ability to recruit, retain and motivate key personnel. Competition for such
personnel is intense, and the inability to attract and retain the additional
qualified employees required to expand our activities, or the loss of current
key employees, could materially and adversely affect us. If our founder and chief executive officer leaves our company for any reason,
it could have a material adverse effect on us. Our growth and development to date have been largely dependent upon the
services of Bahram Akradi, our Chairman of the Board of Directors, President,
Chief Executive Officer and founder. If Mr. Akradi ceases to be Chairman of the
Board of Directors and Chief Executive Officer for any reason other than due to
his death or incapacity or as a result of his removal pursuant to our articles
of incorporation or bylaws, we will be in default under the loan documents for
our 13 centers financed with Teachers Insurance and Annuity Association of
America. As a result, Mr. Akradi may be able to exert disproportionate control
over our company because of the significant consequence of his departure. We do
not have any employment or non-competition agreement with Mr. Akradi. We could be subject to claims related to health or safety risks at our sports,
fitness and family recreation centers. Use of our centers poses potential health or safety risks to members or
guests through exertion and use of our equipment, swimming pools and other
facilities and services. We cannot assure you that claims will not be asserted
against us for injury or death suffered by someone using our facilities or
services. In addition, the child care services we offer at our centers expose
us to claims related to child care. Lastly, because we construct our own
centers, we also face liability in connection with the construction of these
centers. We are subject to extensive government regulation, and changes in these
regulations could have a negative effect on our financial condition and results
of operations. Various federal and state laws and regulations govern our operations,
including:  
    
    general rules and regulations of the Federal Trade Commission, state and
local consumer protection agencies and state statutes that prescribe
certain forms and provisions of membership contracts and that govern the
advertising, sale and collection of our memberships; 22




---



##### Table of Contents




    
    state and local health regulations;
    
    federal regulation of health and nutritional products; and,
    
    regulation of rehabilitation service providers. Any changes in such laws could have a material adverse effect on our financial
condition and results of operations. We have introduced other business initiatives that may not be profitable. In addition to our sports, fitness and family recreation centers, we have
introduced other business initiatives in the areas of nutritional products,
media and athletic events in order to capitalize on our brand identity and
membership base. We have limited experience with these other initiatives and
face significant competition against established companies with more retail
experience and greater financial resources than us. We may not be able to
compete effectively against these established companies, and these other
business initiatives may not be profitable. In addition, we license from a
third party the right to use the mark LIFE TIME in connection with our
nutritional products, as well as the right to use certain ingredients of such
products. These rights may be material to marketing and distributing our
nutritional products. If these licenses are terminated for any reason, we may
no longer be able to market and distribute nutritional products under the LIFE
TIME FITNESS brand. We could be subject to claims related to our nutritional products. The nutritional products industry is currently the source of proposed
federal laws and regulations, as well as numerous lawsuits. We advertise and
offer for sale proprietary nutritional products within our centers, on the
Internet and through selected national retail channels. We cannot assure you
that there will be no claims against us regarding the ingredients in,
manufacture of or results of using our nutritional products. Furthermore, we
cannot assure you that any rights we have under indemnification provisions or
insurance policies will be sufficient to cover any losses that might result
from such claims. If it becomes necessary to protect or defend our intellectual property rights
or if we infringe on the intellectual property rights of others, we may be
required to pay royalties or fees or become involved in costly litigation. We may have disputes with third parties to enforce our intellectual
property rights, protect our trademarks, determine the validity and scope of
the proprietary rights of others or defend ourselves from claims of
infringement, invalidity or unenforceability. Such disputes may require us to
engage in litigation. We may incur substantial costs and a diversion of
resources as a result of such disputes and litigation, even if we win. In the
event that we do not win, we may have to enter into royalty or licensing
agreements, we may be prevented from using the marks within certain markets in
connection with goods and services that are material to our business or we may
be unable to prevent a third party from using our marks. We cannot assure you
that we would be able to reach an agreement on reasonable terms, if at all. In
particular, although we own an incontestable federal trademark registration for
use of the LIFE TIME FITNESS® mark in the field of health and fitness centers,
we are aware of entities in certain locations around the country that use LIFE
TIME FITNESS or a similar mark in connection with goods and services related to
health and fitness. The rights of these entities in such marks may predate our
rights. Accordingly, if we open any sports, fitness and family recreation
centers in the areas in which these parties operate, we may be required to pay
royalties or may be prevented from using the mark in such areas. Our business could be affected by acts of war or terrorism. Current world tensions could escalate, potentially leading to war or acts
of terrorism. This could have unpredictable consequences on the world economy
and on our business. 23




---



##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not believe that we have any significant risk related to interest
rate fluctuations since we have primarily fixed-rate debt. We invest our excess
cash in highly liquid short-term investments. These investments are not held
for trading or other speculative purposes. Changes in interest rates affect the
investment income we earn on our cash and cash equivalents and, therefore,
impact our cash flows and results of operations. As of December 31, 2003, and
September 30, 2004, our floating rate indebtedness was approximately $44.4
million and $22.1 million, respectively. If long-term floating interest rates
were to have increased by 100 basis points during the first nine months of
2004, our interest costs would have increased by approximately $0.2 million. If
short-term interest rates were to have increased by 100 basis points during the
first nine months of 2004, our interest income from cash equivalents would have
increased by approximately $0.1 million. These amounts are determined by
considering the impact of the hypothetical interest rates on our floating rate
indebtedness and cash equivalents balances at September 30, 2004. 
 Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in our internal control over financial
reporting identified in connection with the evaluation required by Rule
13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 24




---



##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Not applicable. 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES Not applicable. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 
 ITEM 5. OTHER INFORMATION Not applicable. 25




---



##### Table of Contents



ITEM 6. EXHIBITS Exhibits filed with this report 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 3.1 to the
Registrants Form
10-Q for the
quarter ended June
30, 2004 (File No.
001-32230)4
    
    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, 200410.1
    
    Schedule of parties to Executive
Employment Agreements
    
    Filed Electronically10.2
    
    Fourth Amendment to Second Amended
and Restated Credit Agreement dated
as of September 30, 2004, by and
among the Registrant, Antares
Capital Corporation, JP Morgan
Chase Bank, Mariner CDO 2002, Ltd.,
Merrill Lynch Capital, and M&I
Marshall & Ilsley Bank
    
    Filed Electronically31.1
    
    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
 26




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Life
Time Fitness, Inc. has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on November 4, 2004. LIFE TIME FITNESS, INC.By:
    /s/ Bahram AkradiName:
    Bahram AkradiTitle:
    Chairman of the Board of Directors, President and
Chief Executive Officer By:
    /s/ Michael R. RobinsonName:
    Michael R. RobinsonTitle:
    Executive Vice President and Chief Financial Officer  27




---



##### Table of Contents



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 3.1 to the
Registrants Form
10-Q for the
quarter ended June
30, 2004 (File No.
001-32230)4
    
    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, 200410.1
    
    Schedule of parties to Executive
Employment Agreements
    
    Filed Electronically10.2
    
    Fourth Amendment to Second Amended
and Restated Credit Agreement dated
as of September 30, 2004, by and
among the Registrant, Antares
Capital Corporation, JP Morgan
Chase Bank, Mariner CDO 2002, Ltd.,
Merrill Lynch Capital, and M&I
Marshall & Ilsley Bank
    
    Filed Electronically31.1
    
    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